Building an inclusive recovery in Latin America and the Caribbean
WASHINGTON, DC – Global poverty rose last year for the first time since 1998 as the economic fallout of the COVID-19 pandemic pushed an additional 97 million people below the international threshold of $1.90 per day. At first glance, Latin America and the Caribbean (LAC) appears to have fared relatively well: three million newly poor people as a result of the pandemic, compared to 58 million in South Asia. But poverty in LAC demands more attention than the headline statistic suggests.
Russia’s Communist Comeback
Mihail Siergiejevicz/SOPA Images/LightRocket via Getty Images
Nina L. Khrushcheva
explains why an invigorated Party has emerged as a real challenger to Vladimir Putin’s United Russia.
3
Add to Bookmarks
China’s Journey into the Unknown
PS OnPoint
WANG ZHAOAFP via Getty Images
Subscriber Exclusive
George Magnus
reviews three books examining the increasingly obvious flaws in the country’s governance model.
25
Add to Bookmarks
The Inflation Catch-Up Game
Liu JieXinhua via Getty
Mohamed A. El-Erian
urges US monetary policymakers to respond faster to higher and more persistent price growth.
5
Add to Bookmarks
The pandemic affected economic growth in LAC more significantly than in any other developing region last year, with GDP contracting by 6.5%. Although the region is expected to rebound strongly with 5.2% growth this year, the effect on the poor could be delayed, owing not only to relative vaccine shortages but also to traditionally slower declines in poverty relative to increases in per capita income. Moreover, those without access to the digital economy could experience additional erosion in future earnings from a looming learning and productivity crisis caused by some of the world’s longest lockdowns and school closures.
Even before the pandemic, most LAC countries were experiencing anemic growth and a slow transition from middle- to high-income status. COVID-19 likely will extend this “middle-income trap.” In its recently released annual country classifications by income level, the World Bank identified seven economies globally that dropped to a lower income category. Two, Panama and Belize, are in LAC. And countries in the region that remained in the same income category as last year saw greater divergence, rather than convergence, with wealthier economies. Specifically, the average upper-middle-income country in LAC moved 10.4% further away from achieving high-income country status in 2020 than in 2019, compared to the average global divergence of 3.8%.
Digging deeper into the data reveals important nuances and heterogeneity concerning pandemic-induced poverty and vulnerability in LAC, especially in terms of geographic distribution and demographic composition.
Geographically, recent World Bank findings show that Brazil’s success in mitigating the impact of COVID-19 on the poor in 2020 altered the overall regional picture. Rescue measures lifted a net 14 million people out of poverty in Brazil (measured by the $5.50 per day poverty line used to assess upper- and lower-middle-income countries). But, excluding Brazil, the largest regional economy, LAC recorded a net increase of 13.7 million new poor. Even in Brazil, policymakers must carefully balance the trade-offs between sustaining and withdrawing extraordinary liquidity support.
In terms of demographic composition, COVID-19 put an end to an impressive period of economic growth that, beginning in the early 2000s, expanded the middle class and reduced regional poverty by half. A majority of Latin Americans and Caribbeans were middle class in 2018, but the pandemic has now left the majority vulnerable.
There is a silver lining. Consistent with global trends, much of LAC’s “new poor” or “new vulnerable” appear to be better educated, more urban, and have better access to basic services relative to the existing poor. This profile should position them to regain their footing quickly as the pandemic subsides.
Subscribe to Project Syndicate
Subscribe to Project Syndicate
Enjoy unlimited access to the ideas and opinions of the world’s leading thinkers, including weekly long reads, book reviews, topical collections, and interviews; The Year Ahead annual print magazine; the complete PS archive; and more – for less than $9 a month.
Subscribe Now
With the international community’s help, LAC countries must work to ensure a sustained recovery for the poor. For starters, expanding vaccine access will give several countries the upper hand in the ongoing tug-of-war between sluggish vaccination rates and new outbreaks or variants. The region’s poor, prone to higher infection risks because they tend to be employed in informal, in-person, and close-proximity jobs, stand to benefit from such efforts.
More broadly, a vulnerability-based approach to understanding and tackling poverty is needed. The uneven distributional impact of the COVID-19 crisis has confirmed once again that, despite having partly achieved high-income or OECD status, LAC remains highly susceptible to economic shocks, from normal business cycles to extraordinary events such as pandemics and climate-related natural disasters. Because many in LAC’s middle class are one shock away from poverty or vulnerability, shielding people from such conditions is just as important as lifting people from them.
Addressing LAC’s numerous – and at times overlapping – forms of hardship and inequality requires considering all dimensions of vulnerability. Unleashing the region’s massive human potential requires a foundation of inclusive and redistributive policies. Social protection systems, combined with data-driven risk-management and prediction tools, must better target and cover new beneficiaries in need, such as unbanked populations in rural communities.
As countries begin to rethink their medium- to long-term economic strategies, policymakers should work closely with the private sector to facilitate and broaden access to the resources needed to generate resilient, self-sustaining growth, such as digital connectivity, education, high-quality and formal employment, and credit. Continued technical and financial assistance from multilateral organizations like the World Bank can play an important role in supporting this process.
Finally, LAC policymakers across the political spectrum should take stock of the rapidly evolving sentiments in society. The pandemic has aggravated popular frustration and polarization, and a number of key elections are on the horizon. In several countries, reaching a consensus on the path forward could be difficult. The stakes are high: not only accelerating an inclusive regional recovery, but also safeguarding the conditions for continuous macro- and micro-improvements in the post-pandemic future.
Cautious optimism on the road to Glasgow
At the beginning of the summer, I noted how the climate-change narrative had changed in recent years, thanks to tremendous technological progress that has made green energy more competitive and often less costly than older carbon-based technologies. This is certainly true for new power investments, although for a while it will still be cheaper to produce electricity from older assets with sunk costs than to build new green plants. But in the medium term, I argued, “the new win-win story” implies that “national gains and commercial profit can now drive progress” toward a green transformation.
Kemal Derviş
Senior Fellow – Global Economy and Development
Twitter
@Kemal_Dervis
The climate debate is thus no longer only about the costs of mitigation and how to share them in an equitable and politically feasible way. Instead, as Nicholas Stern has said in his report to the G7, “the transition to a zero-emissions and climate-resilient world provides the greatest economic, business, and commercial opportunity of our time.”
With the crucial United Nations climate-change summit (COP26) in Glasgow less than three weeks away, the positive developments in green energy certainly provide grounds for optimism. But an important caveat is in order.
It would be easy but incorrect to interpret the recent advances in green technologies as making emissions reduction less of a global public good (GPG). This GPG is measured by reductions in atmospheric greenhouse-gas concentrations due to human activity. Less accumulation of these gases due to mitigation efforts remains a pure GPG: the benefits are non-rival and not excludable. Technological changes do not alter that fact. The “addition” to the GPG is the lowering of total greenhouse-gas concentrations due to a country’s own mitigation, and a given amount of mitigation anywhere will produce the same global benefit. At the same time, the net benefit of an isolated mitigation action—the difference between its benefits and its costs—will vary across countries. In the past, technological constraints meant the net benefit in terms of GDP was negative. It is quickly becoming positive for many countries, making a green transformation increasingly feasible.
Related Content
Op-Ed
The new climate narrative
Kemal Derviş
Monday, June 7, 2021
Op-Ed
The decarbonization paradox
Kemal Derviş and Sebastian Strauss
Thursday, February 18, 2021
Op-Ed
The carbon price conundrum
Kemal Derviş
Wednesday, August 11, 2021
The point is necessary to bear in mind because the recent report by the Intergovernmental Panel on Climate Change made clear that the aggregate result of countries following their own most profitable development strategies would not provide enough global mitigation to limit climate change to an acceptable level. The damage and risks associated with global warming have become greater and more imminent, with broader and more volatile effects. In particular, the frequency and severity of extreme weather events directly linked to climate change has increased substantially. Moreover, the imminence of the threat means that frontloading mitigation—including earlier decommissioning of old power plants, among many other measures—is crucial.
If every country chose its preferred development strategy, the resulting non-cooperative outcome would result in unacceptably risky levels of emissions. The incentive problem has not disappeared. Yes, in many countries, technology will increasingly allow positive economic gains from mitigation. But these countries will still not have the incentive to mitigate with the same intensity and urgency that they would if the global benefits were part of their cost-benefit calculation.
So, while the emergence of net national economic benefits from emissions-reduction efforts is certainly a welcome development, an optimal global solution will require more and earlier mitigation than would result if each country responded only to its own incentives. In fact, the latest IPCC report suggests that the gap between the sum of national strategies and a globally optimal approach may even have increased.
The IPCC report should temper the optimism fueled by recognition of green energy’s profitability. It should foster broad acceptance of the need for multilateral efforts to provide sufficient incentives for climate-change mitigation, and to mobilize financial resources to enable all countries to make large green investments that are profitable in the long term. As for incentives, some form of carbon pricing is a powerful spur, and together with regulations—such as banning the production of cars powered by internal combustion engines after a certain date—can set expectations and drive the necessary shift in investments.
Fortunately, an important feature of the new climate narrative—not related to the economic cost-benefit analysis concerning mitigation—should facilitate the cooperative solutions that are still needed. This is the stronger support for ambitious climate policies, rooted in ethical considerations, from civil society around the world.
For many, the preservation of the planet as we know it, including its species and biodiversity, is a near-absolute ethical imperative. A lot of people in green movements in developed countries not only support frontloaded mitigation at home but also seem ready to commit some of their income to finance the green transition in poorer countries.
We don’t know exactly how many would be willing to give up how much, but climate ethics has become a significant political force, particularly among young people. This should help make possible the ambitious climate policies required, including the mobilization of resources for developing countries in support of early mitigation measures.
In an age shaped by the reemergence of populist nationalism, green internationalism may provide an increasingly influential counterweight. The COP26 gathering will provide a telling indication of its current strength.
US economic statecraft adrift as China seeks to join mega Asian trade deal
China’s decision to formally seek to join the Comprehensive and Progressive Trans-pacific Partnership (CPTPP), the world’s most important Asian trade deal, presents the U.S. with an enormous set of economic and diplomatic challenges. China joining CPTPP would deal a significant blow to U.S. economic statecraft and further strengthen Chinese leadership in the Indo-Pacific. Taiwan’s recent announcement that it also wants to join CPTPP further complicates the picture.
The CPTPP is what was left of the original U.S.-led 12 nation deal the Trans-pacific Partnership (TPP) that was a priority under Presidents Bush and Obama, but which President Trump pulled the U.S. out of in his first week in office.
Since the APEC CEO Summit in November last year, China had indicated its interest in joining CPTPP. Yet, this apparent interest was greeted with skepticism around China’s ability to undertake the economic reforms required to meet the high CPTPP standards, such as more competition for state-owned enterprises, freer flows of data across borders, and curbs on China’s industrial subsidies.
Yet, it is increasingly clear that China’s request to join CPTPP needs to be taken seriously and may happen sooner than expected. For one, China is the largest export market for nine of the current 11 CPTPP countries. Second, it may be less difficult than generally thought for China to meet many CPTPP standards. China could also lean into to the agreements broad exceptions to justify non-compliance. Where China has justified trade restrictions as being about national security, there is also a very broad national security carve out that China could rely on.
Second, in order for many developing countries such as Vietnam to join the agreement, full compliance with various rules needed to be delayed as these governments undertook domestic reforms. This sets the precedence for China to argue that where it is unable to meet CPTPP standards today, similar flexibilities should be extended to China and not delay it becoming a party to the agreement.
Related Content
A key question for many governments will be whether they can be convinced of China’s eventual compliance with the CPTPP. The Australian trade minister when asked about China joining the CPTPP noted the need for China to demonstrate a track record of compliance with trade agreements. This speaks not only to China’s recent restrictions on Australia’s exports that are inconsistent with the China-Australia FTA, but also well-documented ways China has avoided its WTO commitments.
The announcement by the U.K. earlier this year of its interest to join the CPTPP likely hastened China’s decision to join. In part as U.K. membership in CPTPP would be another bulwark and hurdle to China joining, and it is harder for CPTPP governments to seriously negotiate U.K. accession, and to then not do the same for China. Taiwan’s request this week to also join the CPTPP will complicate the accession process, as China will oppose Taiwan joining as being at odds with its One-China policy.
So now the U.S. is faced with a flipped script—as China readies to join the CPTPP, it is left on the outside, still unsure how to show leadership on trade in the Indo-Pacific.
Should China succeed in joining CPTPP, this will foreclose the U.S. rejoining the agreement. The U.S. then having to negotiate with China to join the CPTPP is an irony that would be too much to bear. Indeed, re-engagement by the U.S. on trade in the Indo-Pacific region will require the U.S. to start the process again. However, after Trump’s withdrawal from CPTPP, getting other governments to agree to again make high standard trade commitments with the U.S. will be a big lift. In addition, with China party to CPTPP, the economic impact on China of a new U.S.-led trade agreement that excluded China would be significantly diminished. Indeed, China joining CPTPP will for the foreseeable future undercut the effectiveness of U.S. trade policy as a tool for achieving U.S.’ strategic goals with respect to China.
As President Biden made clear in his speech to the U.N. General Assembly this week, the U.S. needs to lead a collation of countries to counter China’s strategic challenges. To do this, the U.S. will need to continuously show up, lead and demonstrate consistency of purpose. This will require a renewed economic engagement strategy for the Indo-Pacific. The U.S. no longer has the luxury of spending precious political capital getting other countries to join a major international economic initiative like CPTPP and then decide to withdraw because it makes for good domestic politics. Leaving CPTPP was costly and China’s decision to join CPTPP has raised the stakes even higher.
A new proposal for the G-20 to strengthen the global financial safety net
By Brahima Sangafowa Coulibaly and Eswar Prasad Undoubtedly, the economic recovery from the COVID-19 pandemic will dominate the agenda for the G20 Summit in Rome in late October. The summit also presents an opportunity to lay the foundation for a more robust and resilient global financial system. The creation of a new global liquidity insurance […]
Biden’s two types of mulilateralism
In April, U.S. President Joe Biden gathered 40 world leaders for a virtual summit on tackling the climate crisis. They included representatives of major emitting countries, such as Russian President Vladimir Putin and Chinese President Xi Jinping, as well as heads of states that are particularly vulnerable to the effects of climate change. Civil-society and business leaders also took part. Biden and many other attendees announced more ambitious climate policies ahead of the United Nations climate change summit (COP26) in November.
On December 9-10, Biden will fulfill a preelection promise by hosting another virtual gathering, dubbed a Summit for Democracy. Although details have yet to be released, the meeting will focus on “defending against authoritarianism, fighting corruption, and promoting respect for human rights.” Biden will again invite leaders from government, civil society, and the private sector.
But the objectives of the two summits exemplify sharply different aspects of multilateral cooperation. Reducing greenhouse-gas emissions to combat climate change is the archetypal global public good (GPG), resulting in benefits that are both nonrival and nonexcludable. Their accrual to one country does not diminish the benefit to others, and no one can be excluded from them once they are provided.
This typically gives rise to a free-rider problem, because every country has an incentive to minimize its own costs for providing the GPG and instead rely on others’ contributions. Recently, new technologies enabling net economic benefits from a green transformation have reduced but not eliminated the problem. Global cooperation is thus still needed to address it.
Democracy and human rights, by contrast, are not GPGs so defined, although they may generate positive externalities because their benefits are enjoyed almost solely by the citizens of the countries practicing them. Achieving the objectives of Biden’s democracy summit will thus depend much more on common values than cooperation to limit climate change does.
Whereas cooperation on GPGs can proceed pragmatically with global participation, cooperation based on values and beliefs involves the challenge of determining which governments may qualify. Putin and Xi presumably will not be invited in December, because they not only practice but also proclaim values different from those of liberal democracies.
Related Content
Values-based multilateralism is both easier and more difficult than multilateralism based on interests. It is easier because there is likely to be more trust among actors sharing basic values. But it is more difficult because potential material gains may remain out of reach, owing to ideological competition and lack of trust vis-à-vis those not sharing similar values.
The December democracy summit will thus face the key difficulty for liberal values-based multilateralism: who exactly should be present? When Biden announced his firm intention to organize such a gathering earlier this year, Javier Solana eloquently outlined the difficulties, to which I also drew attention in an essay last year.
Keeping the participant list short and including only governments fully committed to and practicing liberal democracy—albeit with some failures to protect human rights, as is the case in the United States itself—would antagonize many borderline cases and offend fewer democratic allies. But if the list is too long and resembles a catalog of U.S. allies or governments that America hopes to enlist in an effort to contain China, then the summit and Biden’s promise to promote democracy will lose their credibility. Hard choices will be unavoidable.
Biden should keep the tent large while emphasizing that the summit’s objective is not to create a new formal alliance of democracies. Instead, the aim should be to discuss with whomever is willing how to contain autocratic tendencies that exist everywhere, how to protect human and minority rights that often are violated even in countries formally committed to upholding them, and how to fight the universal problem of corruption.
Focusing on these three issues, and on individual and common commitments to actions that would be reviewed at a follow-up summit next year, now seems to be the Biden administration’s strategy. If there is plenty of self-criticism at the summit, the presence of illiberal leaders—including those who call themselves democrats but seem committed only to majoritarian, winner-take-all governance—may not be so offensive. The participants, including the U.S., will be encouraged to listen and to learn from experience, not to lecture each other. And the prospect of a second summit could give governments an incentive to make improvements.
A gathering along these lines could strengthen the values-driven part of multilateralism, and the soft power of the world’s democracies. The criticism that it will accentuate the rivalry between leading autocratic and democratic powers is misplaced, because such competition is inevitable in the years ahead. In many areas, including climate action and pandemic control, cooperation can and should prevail. But for believers in values such as those enshrined in the Universal Declaration of Human Rights, upholding their political-freedom component is as essential as enhancing material welfare. Competition with autocracy is not just unavoidable, but welcome.
The two dimensions of multilateralism projected by Biden’s climate and democracy summits are not contradictory. The first meeting sought to enhance the provision of a crucial GPG, while the second aims to promote values deemed universal.
The West’s failures in Afghanistan and Iraq should remind us that forced regime change and top-down nation-building do not belong on a democracy-promotion agenda. But leading by example, learning from best practice, and peacefully promoting human rights certainly do. Biden’s democracy summit could thus send a powerful message that deeply held values regarding human dignity and freedom have their place alongside economic and security interests in the way democracies approach international affairs.
Africa must produce its own vaccines
WASHINGTON, DC – During the pandemic, wealthy countries led the way in rapidly developing and producing COVID-19 vaccines. The same countries then bought up and administered those vaccines to their own populations, and have even ordered boosters for already-vaccinated people. Meanwhile, many developing countries have not been able to deliver even one dose to most of their populations.
What Difference Did 9/11 Make?
Graham Barclay/BWP Media/Getty Images
Joseph S. Nye, Jr.
argues that the damage done by al-Qaeda pales in comparison to the damage America did to itself.
1
Add to Bookmarks
Green National Accounting
PS OnPoint
David McNew/Getty Images
Subscriber Exclusive
William D. Nordhaus
explains how to capture the economic effects of negative environmental externalities.
14
Add to Bookmarks
How to Give Away a Million Dollars
Jean-Christophe Pratt/Construction Photography/Avalon/Getty Images
Peter Singer
explains why he is giving away the prize money he just won and how he chose the recipients.
3
Add to Bookmarks
Africa, in particular, is struggling with limited access to COVID-19 vaccines. As of August 31, African countries had administered 94 million doses to the continent’s population of nearly 1.4 billion, with a total supply of 134.5 million. By contrast, the United States – with a total population of 332 million – has administered over 375 million vaccine doses.
This disparity partly reflects the fact that most African countries are not able to produce the vaccines needed to protect their populations against not only COVID-19, but also the myriad other diseases that plague the continent. Africa is home to only four local drug substance vaccine manufacturers – two more are in development – and two “fill-and-finish” facilities that rely on imported vaccine substances to produce distributable doses. Supply-chain disruptions during the COVID-19 pandemic showed just how risky this dependence on imports of critical medical supplies can be.
Africa is almost totally dependent on vaccine imports, producing just 1% of the vaccines it administers. So far during the pandemic, African countries have received most of their COVID-19 vaccine doses through either bilateral agreements or the COVID-19 Vaccine Global Access (COVAX) facility, an initiative launched last year by the World Health Organization and Gavi, the Vaccine Alliance. COVAX aims to provide vaccines for 20% of people in low- and middle-income countries.
But while initiatives like COVAX are clearly needed to fulfill Africa’s short-term needs, they will do little to improve the continent’s capacity to provide crucial vaccines for itself in the future. That is why the Mastercard Foundation has pledged $1.3 billion to support local manufacturing and distribution of COVID-19 vaccines, through a partnership with the Africa Centers for Disease Control and Prevention.
The program, which will include a focus on human-capital development, aligns with the African Union (AU) and the Africa CDC’s Partnerships for African Vaccine Manufacturing (PAVM) initiative. Launched this past April, PAVM aims to establish five vaccine research and manufacturing hubs on the continent over the next 10-15 years, and increase the share of vaccines produced locally for use on the continent to as much as 60% within the next 20 years. The European Union, in collaboration with the International Finance Corporation, France, Germany, and the United States, has announced plans to invest €1 billion ($1.2 billion) in the hub-development project.
Subscribe to Project Syndicate
Subscribe to Project Syndicate
Enjoy unlimited access to the ideas and opinions of the world’s leading thinkers, including weekly long reads, book reviews, topical collections, and interviews; The Year Ahead annual print magazine; the complete PS archive; and more – for less than $9 a month.
Subscribe Now
Developing Africa’s vaccine-manufacturing capabilities will not only help the continent to cope with future unexpected crises; it will also enable countries to improve the provision of existing vaccines. According to the Anadolu Agency, in 2019 an estimated 19.8 million children worldwide did not receive the measles vaccine through routine immunization coverage; the majority of those children live in Africa.
Moreover, these efforts will place Africa on a much stronger footing to meet demand for future public-health solutions. For example, vaccines for Lassa fever – an acute viral hemorrhagic illness that is endemic in eight countries in West Africa – are currently in the development phase. Researchers are also getting closer to developing an effective and affordable vaccine for malaria. In 2019, 94% of malaria cases and deaths occurred in Sub-Saharan Africa.
Yet vaccines are only one part of a long list of pharmaceutical products to which African countries often struggle to secure access. In 2015, 1.6 million Africans died from malaria, tuberculosis, or HIV/AIDS – all preventable or treatable diseases – because of chronic drug shortages.
Fortunately, there are also initiatives focused on dismantling barriers to pharmaceutical manufacturing in Africa. In 2012, the AU Development Agency (AUDA-NEPAD) published the Pharmaceutical Manufacturing Plan for Africa (PMPA), which proposes technical solutions to many of the challenges facing the pharmaceutical manufacturing industry. The implementation of the African Continental Free Trade Area (AfCFTA), by enabling the creation of economies of scale, should support progress on realizing the PMPA.
As the PMPA notes, the African Medicines Regulatory Harmonization (AMRH) program, established by AUDA-NEPAD in 2009 to address regulatory weaknesses affecting Africa’s pharmaceutical industry, is also critical to its success. The program’s achievements so far include the AU Model Law on Medical Products Regulation, the African Medical Devices Forum, and progress toward an African Medicines Agency.
The AMRH program is supported by a number of international organizations, including the AU, the WHO, Gavi, and the Bill and Melinda Gates Foundation. Multilateral institutions like the AU and the United Nations Industrial Development Organization are also working with the Federation of African Pharmaceutical Manufacturers Associations, which was launched in 2013 by a group of regional associations to advance the AMRH’s mission.
Multilateral institutions and initiatives must do even more to close the implementation gap and accelerate the development of Africa’s pharmaceutical industry. This means, for example, supporting capacity-building, knowledge transfer, and cross-sector coordination; backing rigorous implementation of the AfCFTA; mobilizing financial resources from international financial institutions and development banks; and cross-country collaboration to strengthen human capital.
Such efforts received a boost during the pandemic. African leaders and multilateral organizations alike must make the most of this momentum to ensure that when the next crisis arrives, Africa is ready.
The COVID boom we could do without
Before Covid-19, the value of mergers and acquisitions in Australia hit its peak during the global financial crisis. More than $348 billion of deals were made in a single year as struggling companies were snapped up by their rivals.
The trend has shown no signs of declining since the pandemic set in, with the 2020 figure topping $372 billion. Correcting for inflation, the annual value of mergers and acquisitions each year in Australia is a whopping eight times bigger than it was back in 1990.
Should we be worried? Mergers and acquisitions have benefits and costs, and if the former are greater than the latter then they should be welcomed. But a growing body of research shows that their benefits, while large in theory, are not so big in practice. The costs, on the other hand, appear to be bigger and more persistent than ever.
Mergers and acquisitions have two main benefits. Bigger businesses benefit from economies of scale: their size and improved efficiencies mean they can produce more goods and services at a lower cost, boosting productivity. And bigger businesses can generate greater economies of scope, saving on costs a bit like a petrol station that also sells milk.
Mergers are an easy way for a business to gain these benefits by expanding into new markets, new locations and even new countries. They allow a business to expand from retail into wholesale, from wholesale into manufacturing, and from manufacturing into distribution and logistics. They can also be a way to save a failing business.
But mergers can create problems, and many of them relate to competition. When competing firms merge, we lose a competitor. This is not necessarily a problem if lots of other competitors exist or if new ones can enter the market quickly. But when a merger reduces competition, it causes all the things we are struggling with in Australia: high mark-ups, low wages growth, low investment and low innovation, all contributing to greater inequality.
Problems can arise even when a merger doesn’t involve competing firms. When mergers result in a business becoming vertically integrated, new competitors find it hard to compete with an incumbent that has its own manufacturing, wholesale, retail and distribution networks. When mergers allow businesses to sell bundled products or services, it becomes harder for customers to change from one supplier to another, reducing competition.
The most common argument in favour of mergers and acquisitions is a fallacious one: that Australia needs big businesses to compete internationally. Most of Australia’s economy isn’t “trade exposed,” and even the parts that are exposed to international competition don’t benefit from being allowed to become dominant — and often inefficient — in the Australian market.
The reason our athletes won so many medals in Tokyo isn’t that they were wrapped in cotton wool back home. They did well because they’ve spent many years competing fiercely against other Australians. The same is true for businesses. Allowing them to get big and lazy at home doesn’t make them more competitive overseas; indeed, it makes them less competitive. Competitiveness overseas first requires competitiveness at home.
The productivity benefits of mergers may also be overstated. Bruce Blonigen at the University of Oregon and Justin Pierce at the US Federal Reserve used detailed firm-level data to study the impact of mergers and acquisitions on productivity and market power across all US manufacturing industries. They found that mergers were associated with increases in average price mark-ups but did little to boost productivity.
The two economists also found little evidence of other claimed efficiency gains from mergers, such as reallocation of activity across plants and scale efficiencies in non-productive units of the firm.
Some studies question whether mergers provide much value to the acquiring company, too. Recent studies found that companies that make lots of small acquisitions tend to increase in value while big, one-off mega-deals tend to be riskier. Mergers might also be bad news for startups. The Economist reported that the FAANGs — Facebook, Amazon, Apple, Netflix and Google — are surrounded by a “kill zone” in which companies are either acquired or quashed.
Mike Driscoll, a partner at investment firm Data Collective, says that technology conferences increasingly “send shock waves of fear through entrepreneurs… Venture capitalists attend to see which of their companies are going to get killed next.” This has made some venture capitalists more reluctant to invest in customer-focused startups.
So what, if anything, should we do about the Covid boom in mergers and acquisitions?
As a first step, we should be more cautious about mergers in industries where there are already too few competitors. More than half of Australia’s markets are concentrated — meaning the four biggest firms control a third of the market or more. Mergers in these industries should logically attract more scrutiny than mergers in less-concentrated industries. Imposing a public interest test on mergers in concentrated industries, having more post-merger reviews, and making more firm-level data available for public scrutiny would lead to better decision-making.
Such measures are important because mergers are hard, if not impossible, to reverse. It would be unwise to allow a one-off pandemic to result in long-term structural changes that weaken the competitiveness of Australia’s markets. This would worsen all the economic problems we have been struggling with for decades.
Covid-19 will have many long-term consequences for Australia. Weakened competition shouldn’t be one of them. •
Markets don’t reward sustainable borrowers. Here’s a solution.
The weight of research shows that businesses and households with good environmental credentials are also better borrowers. They are less likely to default on their loans and less likely to be late on their repayments.In a well-functioning market where these broader social and economic benefits were properly priced, these borrowers would get lower interest rates. When these loans were securitised and sold on, the bonds would be more favourably priced because the underlying asset was stronger and safer.The PBoC is co-operating with the European Union to achieve convergence of green investment taxonomies across the two markets.
The carbon price conundrum
With less than three months until the United Nations climate change summit (COP26) in Glasgow in November, formal and informal discussions and pre-negotiations are now in full swing. A new U.S. administration recognizes the urgency of the situation, and there is much broader political support globally for ambitious climate policies. The world still has a chance to limit global warming to below 2 degrees Celsius compared to preindustrial levels.
But as a major new assessment from the Intergovernmental Panel on Climate Change shows, the race between climate change and emissions reductions remains tight. Limiting the damage already done will require the use of all available tools and broad global participation. As two recent carbon-pricing-related proposals demonstrate, however, there remain important differences between approaches to reach those goals.
The 2015 COP21 summit in Paris did not seek a binding international treaty that would impose policies on countries. Accordingly, the approach enshrined in the Paris climate agreement allowed for countries to declare their own voluntary emissions-reduction goals—Nationally Determined Contributions—and climate policies, with the understanding that these would become more ambitious over time.
And yet, the European Union has now proposed a carbon border adjustment mechanism (CBAM) that represents a departure from the voluntary spirit of the Paris accord. The new mechanism, part of a package of climate measures announced in mid-July, would impose the equivalent of tariffs on imports from countries where producers pay a carbon price below that of the EU’s, set either directly or through an emissions trading system (ETS).
Though the proposal is silent on regulatory measures that have an equivalent effect, it is reasonable to assume that the EU would be open to accepting them if they are ambitious enough. Such acceptance would be particularly important to avoid conflict with the United States, where regulations will likely continue to be the main part of climate policies.
At first, the EU’s CBAM would cover imports of relatively simple products—electricity, iron and steel, cement, aluminum, and some fertilizers—but it would be extended to other goods that would involve more complex value chains over time. Importers would have to buy CBAM certificates (reflecting carbon content) that would cost what the EU’s ETS permits cost domestic producers, thus effectively imposing the EU’s carbon price on exporters in countries subject to the CBAM.
Related Content
The EU would apply the CBAM irrespective of the exporting country’s per capita income, and without regard for the principle generally agreed in Paris that developing countries need more time to adopt higher carbon prices or their equivalent. It is pushing ahead despite the fact that most developing countries cannot readily mobilize the large upfront financing necessary for large green investments.
Another recent proposal comes from senior staff at the International Monetary Fund, which envisions international carbon price floors (ICPFs), differentiated by national income levels. While the authors do not frame ICPFs explicitly as an alternative to CBAMs, they argue that agreed minimum but differentiated carbon prices would reduce the pressure for border-adjustment schemes and be more in keeping with the voluntary spirit of the Paris agreement.
An ICPF arrangement could at first involve just a few large emitters. For example, according to the IMF, if a “climate club” of just six participants could agree on minimum prices of $75 per ton of carbon dioxide for the U.S., Canada, the EU, and the United Kingdom as high-income countries, $50 per ton for China as a high middle-income country, and $25 per ton for India as a low middle-income one, this, in addition to current policies, “could help achieve a 23% reduction in global emissions below baseline by 2030.”
Although the EU’s CBAM and the ICPFs could operate simultaneously, the former requires the calculation of the carbon intensity of specific products. So, exporters from a country that is party to an ICPF agreement would still have to acquire the CBAM certificates, unless the EU were to exempt that country from its border-adjustment scheme on the basis of a “high enough” ICPF. But this would raise issues at the World Trade Organization, as it would imply different carbon border taxes, and thus different trade policies, for different countries.
A “new” climate-related CBAM exemption for low-income countries probably could be negotiated at the WTO, but a similar provision for middle-income countries such as China or India would face firm opposition from advanced economies. Yet, without such an exemption, the EU’s CBAM (or similar border measures by others such as the U.S.) will continue to trigger strong objections from middle- and lower-middle-income countries and could endanger a consensual global accord at the Glasgow summit.
In contrast, the IMF’s general approach has a chance of gaining universal support. An ICPF arrangement would face no WTO-related barriers, because it does not involve trade or trade-related policies, and joining the “club” would be voluntary and could take place at different times.
But the six-member example above is only illustrative—as the IMF acknowledges—and we should not let its simplicity deceive us. While the principle of ICPFs could be broadly appealing, specific income-related prices or equivalent policies would still have to be negotiated.
It is not at all obvious, for example, whether India would agree to a price floor of $25 per ton of CO2, or whether that price would be acceptable to the U.S. and the EU. Although some countries might adopt them, ICPFs should rather be interpreted as shorthand for a package of climate policies where the level and timing of ambition differ according to a country’s stage of development.
Ultimately, a universal agreement in Glasgow will require advanced economies to accept national differences in climate ambition. China’s commitments—given the level of the country’s emissions and its technological and economic capacity—will of course be crucial to achieving a satisfactory global accord.
As the carbon-pricing debate continues, rich countries may think the threat of CBAMs gives them useful leverage. But they should focus more on helping to mobilize the finance that most developing countries need for the green transformation. This would likely be a more effective way to shift the emphasis to the great opportunities arising from new technologies and achieve crucial global climate goals, while preserving the chance of a “whole of humanity” accord on this planetary challenge.
The changing map of economics
The International Economic Association’s triennial World Congress has long been one of the most important global gatherings of economists, owing to its success in bringing together researchers and policymakers from the poorest to the wealthiest corners of the world. The 19th edition of the event earlier this month, albeit held via Zoom instead of in person, was no exception.
One recurring theme of this year’s Congress was that the global economy and capitalism are at a crossroads. While the COVID-19 crisis was the immediate impetus for this view, other major shifts—from climate change and the rise of digital technology to the changing nature of labor markets—have been increasingly salient. The pandemic has merely accelerated these shifts or thrown them into sharper relief.
COVID-19 has forced us into one kind of “learning by doing,” an idea that the Nobel laureate economist Kenneth J. Arrow, who emphasized that much learning “is the product of experience,” developed in the abstract a long time ago. We have learned to give lectures and hold conferences by Zoom, and to make complex decisions in meetings conducted via Webex. People have suddenly realized that they had been spending more time than necessary in the office, and that they can do much of their work from home. And we have learned to shop at home, too, via digital platforms.
Economists and society as a whole must confront profound intellectual and moral challenges in order to come to grips with the changing world.
As a result, demand for office and retail space will fall, even after the pandemic. And because more people will have the freedom to work remotely, property prices will gradually rise where they were previously low and fall where they were high, leading to greater leveling.
On the other hand, salary disparities will increase, because the labor market will tend to be more of a common pool with heightened competition for talent. Most important, globalization, after some initial stumbles, will accelerate, with rapid growth in cross-country outsourcing. This is likely to have a significant effect on labor markets, national politics, and the nature of conflict.
Understanding this new world will require major breakthroughs in economic thinking. Economics normally proceeds by contesting the explicit assumptions and axioms on which theory is built. But all scientific disciplines also have hidden assumptions that are so deeply embedded that we do not state them explicitly and often forget they exist. In their celebrated research in the 1950s that provided a formal structure for understanding Adam Smith’s idea of the “invisible hand,” for example, Arrow and fellow Nobel laureate Gérard Debreu showed the many assumptions that were needed for Smith’s conjecture to be valid.
There were other assumptions that were taken for granted—simply part of the woodwork of economics—including the symmetry of knowledge among buyers and sellers. One of the biggest breakthroughs of modern economics was the insight that knowledge is often asymmetric, and that this asymmetry can shatter the invisible hand. This breakthrough earned Joseph E. Stiglitz, George Akerlof, and Michael Spence the 2001 Nobel prize in economics, and led to new forms of regulation that made the modern economy possible. We owe many of our regulations concerning quality control and product standards to this breakthrough, which showed definitively that the market’s invisible hand cannot ensure standards when information is asymmetric.
It remains to be seen what form the economics profession’s new intellectual discoveries will take and what regulations we will need to apply them. What is clear is that the strain humanity has imposed on the environment means growth as we currently know it cannot be sustained. But that does not mean we have to learn to live with lower growth. In fact, I believe future growth will be faster than we have seen thus far.
The lower-growth camp’s mistake stems from a common misunderstanding of GDP or national income. A higher GDP is often taken to indicate more wasteful consumption and consumerism of the kind we are indulging in now. But that need not—and now must not—be the case.
The consumption of more art, music, and learning, as well as better health and greater longevity, are all components of GDP, and are, or can be, environmentally friendly. Reforming our regulatory system can foster rapid GDP growth—but with the content of GDP changing dramatically, and with a disproportionate amount of human labor directed to creative activities. The nature of reform for the new world is a big topic, but policymakers will need to focus on curricula that nurture creativity, because routine work will increasingly be automated; shift consumption away from environmentally wasteful goods; and redistribute wealth radically to lessen inequalities.
My recent research on group morality, however, highlights a caveat that we must address. When discussing matters like climate change and current global inequities, we urge people to be other-regarding. In other words, they should not be concerned solely about their own well-being but also consider the welfare of the current poor and future generations who will be affected by our decisions.
But as moral philosophers have long known, group morality is a problematic concept. I have recently tried to address the “Samaritan’s Curse,” whereby a future generation can end up being hurt when all individuals today take its well-being into consideration. This problem, like the prisoner’s dilemma but in the moral domain, can potentially defeat our best intentions.
So, the road ahead will not be easy. Economists and society as a whole must confront profound intellectual and moral challenges in order to come to grips with the changing world. But humans have done it before. One can only hope that our intelligence and resolve enable us to do it again.