How can education be the antidote to a world prone to fracture along environmental, social, and economic fault lines?
Since 1960, the world’s population has more than doubled. Average life expectancy increased by 50 percent and income per person tripled. The share of people living in extreme poverty declined from 54 percent to 10 percent (data are available through 2018, pre-pandemic). Technology revolutionized how we communicate, how we travel, and even what we eat. For people in China and India, the changes have been especially dramatic.
This progress didn’t result from miracle—it was through investment in education, research, and development. It came because most governments dedicated themselves to the idea—framed in the Universal Declaration of Human Rights—that “everyone has a right to education.” So, even as the world’s population grew quickly, so did educational attainment, and people’s capacity to produce, build institutions, invent, and adapt (Figure 1).
Figure 1. World population (in millions) by level of education, 1960-2020
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1990
2020
Source: Wittgenstein Centre Human Capital Data Explorer Version 2.0, Wittgenstein Centre for Demography and Global Human Capital.
At the same time, we have been living hard on the planet. In 1960 about 60 percent of the earth’s surface was wilderness, and today it’s only 35 percent. The rate at which biodiversity is being lost due to human activity rivals the five mass extinctions in the earth’s history. Annual C02 emissions have quadrupled. Inequality has reached intolerable levels. And tragically, the number of armed conflicts has risen, many of which are driven by extreme ideologies or competition for resources.
Can education be the antidote to a world prone to fracture along environmental, social, and economic fault lines? Can education systems incorporate new insights into how children learn, cultivate scientific thinking, and become more inclusive of people pushed to the margins?
In considering these questions, it is important to note that investments in education have a delayed effect. Children entering school today will be fully functioning adults only 15-20 years from now. To shape the world of 2050, we need to act now.
The stakes are high. As challenges of sustainability become obvious, so does the need for better education. An increasingly large fraction of the decisions people will need to make involve science and technology. They need to “think like experts,” as Stanford University Professor Carl Wieman says, on the day-to-day issues raised by global warming, public health, and technology. Education is the first best way for people and societies to thrive.
It’s also important to note that the majority of the next generation is growing up in the most resource-constrained countries in the world. By 2050, 57 percent of the world’s youth will be in sub-Saharan Africa and South Asia. Many countries in these regions are struggling to build a qualified and motivated teaching force, create a rich learning environment in schools, and develop the infrastructure for technologies that could enhance learning.
Achieving a “rapid development scenario” for the next generation
With startling effect, Wolfgang Lutz and Claudia Reiter at the Wittgenstein Centre for Demography and Global Human Capital simulate what the world’s population might look like in 2050 under various scenarios in a human capital data explorer. In a “stalled development scenario,” where there would be very limited new investment in education and health in the poorest parts of world and high barriers to migration, world population would likely top 10 billion by 2050 (Figure 2). A substantial number of people would have no education or only a primary school education—insufficient to sustain growth and development. In a “rapid development scenario” where countries make substantial progress to meeting the Sustainable Development Goals on education and health by 2030, world population would likely be 8.6 billion by 2050. And perhaps more significantly, younger adults would be substantially better educated and prepared to face the challenges of their time. It would be a different world—one with more opportunities for people to thrive and potentially less pressure on the planet.
Figure 2. World population by level of education in 2050
Stalled development
Rapid development
Source: Wittgenstein Centre Human Capital Data Explorer Version 2.0, Wittgenstein Centre for Demography and Global Human Capital.
How do we increase the chances of achieving the rapid development scenario? A new report by the Wittgenstein Centre, commissioned by the Yidan Prize Foundation, suggests a few priorities:
Recognize that education begins before schooling. Focusing on the learning experience of early childhood can have profound and lasting impact on a child’s physical and intellectual development.
Provide at least 10-12 years of schooling for all. Primary education alone is not enough to bring a poor country out of poverty.
Employ more and better trained teachers. No other factor will increase the learning success of children more than good, motivated, and motivating teachers.
Make use of technological innovations that can help teachers provide good education almost for free, even in the most remote corners of the earth.
Encourage lifelong learning. Recognize that education does not only happen during school and job training, but that it is a lifelong necessity to help people remain physically, mentally, and economically active as they live longer lives.
In an increasingly complex and globalized world, the education of the next generation in all corners of the globe needs to be everyone’s concern. We should support education like our lives depend on it.
How to balance debt and development
The COVID-19 pandemic is, we hope, only a temporary shock to economies everywhere. The appropriate policy response to such a disruption is to borrow to cushion the impact on consumption and investment. But for many emerging markets and developing countries, borrowing could result in debt-servicing difficulties that require years of austerity to overcome. Yet, if they do not borrow, they will have to cut public spending, which could mean major health crises, children out of school, job losses, and prolonged recession.
What to do? Borrow and risk a debt crisis, or choose austerity and risk a development crisis?
In 2020, countries took very different approaches, largely linked to their income. Governments in advanced economies provided trillions of dollars of direct and indirect fiscal support, equivalent to 24 percent of GDP, while those in emerging and developing economies provided just 6 percent and 2 percent of GDP, respectively.
Because private capital markets are procyclical, the risks of debt distress are large and growing. Global foreign direct investment fell by 40 percent in 2020 and is expected to decline by another $100 billion in 2021. Greenfield investment projects and cross-border mergers and acquisitions were likewise down 50 percent last year.
What to do? Borrow and risk a debt crisis, or choose austerity and risk a development crisis?
Half of all low-income countries were in debt distress or at high risk before the pandemic, according to the International Monetary Fund, and six have defaulted in the past year. In addition, 36 developing countries have had their sovereign credit rating downgraded by one of the three major ratings agencies, and 28 others have had their outlook downgraded. While many middle-income countries have returned to international bond markets since the pandemic began, only two Sub-Saharan African countries (Ivory Coast and Benin) have accessed the market.
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The risks of widespread development distress are also growing. The IMF estimates that low-income countries need $450 billion through 2025 to respond to the pandemic and accelerate sustainable investments. Total investment in developing countries (excluding China) fell by 10 percent in 2020, and is likely to remain below 2019 levels this year and next. And if growth slows, creditworthiness will deteriorate, making debt distress even more likely.
The debt dimension
Preventing this vicious circle will require policymakers to address two collective-action problems that markets cannot resolve on their own. First, they must ensure that private creditors’ procyclical behavior does not trigger liquidity problems and debt crises. Most developing countries, especially middle-income countries, were growing fairly well before the pandemic, with stable long-term debt dynamics. If they can refinance their debt on reasonable terms, they should be able to avoid default. This will require additional financing from official and private creditors.
In May 2020, the G-20 paused bilateral debt-service payments by World Bank International Development Association (IDA) countries under the Debt Service Suspension Initiative (DSSI), which has been extended until the end of 2021. The DSSI has so far deferred $6 billion in debt-service payments—resources that developing countries have used to advance economic recovery and procure COVID-19 vaccines and personal protective equipment.
But given the pandemic’s ongoing nature, and the time needed to roll out mass vaccination campaigns in developing countries, this is not enough. The G-20 should expand DSSI eligibility to all vulnerable countries, including small island developing states and tourism-dependent economies. Middle-income countries account for the bulk of developing-country debt service due in 2021-22, but have had access to only limited fiscal support until now.
Because debt crises typically reflect poor government spending decisions, debt programs are often accompanied by a temporary lending pause. But this time is different, because most countries are suffering from a short-term liquidity squeeze rather than a long-term solvency problem. The World Bank and the IMF need to ensure that the macro framework and their own lending to DSSI countries supports strong increases in public investment in the near term.
Some have called for larger-scale debt restructuring and relief efforts, including swaps of debt for investments related to achieving climate objectives or the Sustainable Development Goals. The G-20 has agreed to a common framework for debt treatment, with three countries (Chad, Ethiopia, and Zambia) requesting relief thus far. Such efforts must transparently link debt relief to incremental investments in health, climate, or SDG projects, in order to connect the debt crisis with larger development financing needs.
Investment imperatives
This points to the second collective-action challenge: providing developing countries with sufficient fiscal space to tackle the pandemic and embark on the sustainable investments needed to build green, resilient, and inclusive economies.
Even before COVID-19, the world was not on track to achieve the SDGs and meet the targets set by the 2015 Paris climate agreement. In 2021, the international community needs to devise a sound program of public investments, based on country-specific needs and current spending levels, in order to jump-start recovery efforts and enable longer-term progress on the 2030 Agenda for Sustainable Development.
Several financing proposals are on the table. Developing countries have received $150 billion in COVID-19-specific funding from the major multilateral development banks (MDBs), and another $100 billion in ongoing project financing. But much more is needed. G-20 finance ministers support an early conclusion of the World Bank’s IDA20 replenishment, as well as a new $650 billion allocation of special drawing rights (SDRs, the IMF’s reserve asset).
Because new SDRs would be distributed based on existing IMF quotas, which reflect countries’ relative economic importance, the bulk of them would go to advanced economies. There are thus concurrent proposals for a reallocation mechanism so that countries with excess SDRs can lend them to others in need of additional liquidity. The IMF’s Poverty Reduction and Growth Trust (PRGT), which has been used for this purpose before, is a potential vehicle. But because only low-income countries are eligible for PRGT funds, there would need to be other efforts to expand lending to middle-income countries.
Beyond one-off proposals designed to address immediate short-term financing difficulties, policymakers need to establish an international financing system that can support much higher levels of public investment in the medium term. MDBs are the natural vehicles for providing this finance, because they can offer better terms with longer maturities than other lenders, and they can combine loans with grants and technical assistance.
Moreover, the MDBs could increase lending by $750 billion to $1.3 trillion by making greater use of callable capital and tolerating more risk. They could also do more to mobilize private capital, both by using their guarantee authority and by developing platforms for blended financing in specific sectors. But these institutions need a strong push from major shareholders to be more ambitious.
Developing countries need financing for public-health spending, vaccine rollouts, and green investments. Much of it (except in the case of the poorest countries) will have to come in the form of debt, but this is getting more expensive for many. Given the need to avoid the debt-development trade-off, mobilizing additional development finance, especially for middle-income economies, and linking it transparently to sustainable investments are thus urgent challenges.
In 2020, policymakers focused on domestic recovery efforts. In 2021, they must invest in global collective action to avert a vicious cycle of debt and development distress.
City playbook for advancing the SDGs
This “City Playbook for Advancing the SDGs” compiles a series of how-to briefs and case studies on advancing sustainable development and social progress locally. These short, digestible, and practical briefs are written by city government officials for other city officials, based on their direct experience.
This playbook responds to significant appetite expressed by city leaders for capturing and sharing the “how” of innovations and practices to achieve the Sustainable Development Goals (SDGs) locally. These briefs come from cities participating in the Brookings SDG Leadership Cities community of practice and others to elevate innovations or processes with concrete positive outcomes for equity and sustainability. These best practices and tools help disseminate recommendations to a wider range of communities and stakeholders eager to play a pivotal role in achieving the 2030 Agenda.
Co-edited by Anthony F. Pipa and Max Bouchet, these briefs are published in collaboration with the global learning platform for government innovators apolitical.co. We intend to add content to this collection on a rolling basis throughout 2021 and 2022.
If you’re using this playbook to apply an innovation locally or have questions or suggestions, please fill out this short survey.
This playbook is part of the Local Leadership on the Sustainable Development Goals project.
How should the G-7 respond to China’s BRI?
When the leaders of G-7 countries met in Carbis Bay last month, they announced a new Build Back Better World (B3W) plan to support infrastructure projects in low- and middle-income countries and respond to China’s Belt and Road Initiative.
There are few details of exactly how the B3W partnership will work, and there are questions about whether focusing on infrastructure is the best way for the United States and its partners to counter China on the global stage. In this episode, Howard W. French joins David Dollar to discuss the challenges B3W will face and why the West would be better off competing in areas where it already has relative advantages.
Read more
Leave Infrastructure to China and Compete Where the West Has More to Offer
Is a Belated Western Rival to China’s Belt and Road Too Late?
Seven years into China’s Belt and Road
Understanding China’s Belt and Road infrastructure projects in Africa
Howard W. French
Professor – Columbia Journalism School
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David Dollar
Senior Fellow – Foreign Policy, Global Economy and Development, John L. Thornton China Center
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Africa in the news: Eswatini protests, upgrades to Rwanda’s health system, and energy and environment updates
Eswatini citizens protest for democracy
On Tuesday, June 29, SABC News reported that King Mswati III had fled Eswatini for South Africa, amid protests for democracy throughout the country. However, as of this writing, the location of King Mswati III of Eswatini remains unclear, as the government denies that the king has left the country: Following the allegations, the government of Eswatini tweeted: “His Majesty King Mswati III is in the country and continues to lead in working with the government to advance the Kingdom’s goals.”
The ongoing pro-democracy protests started in May following the death of law student Thabani Nkomonye allegedly at the hands of the police. Protesters are demanding democratic reforms and accuse the king of repression. In Mazini, the country’s largest city, there have been reports of protesters barricading roads and setting fires at businesses owned or linked to the royal family. In response, on Tuesday, the government of Eswatini imposed a dusk-to-dawn curfew. The military and police were also deployed, which resulted in violent clashes between authorities and protesters. According to Amnesty International, political activism has been consistently suppressed in the Kingdom of Eswatini—the last absolute monarchy on the African continent—due to repressive laws in the country. These laws include the 1938 Sedition and Subversive Activities Act (SSA Act) and 2008 Suppression of Terrorism Act (STA). Political parties were banned in 1973. Moreover, the current status of political parties is unclear under the 2006 constitution.
The controversial King Mswati III has been in power since 1986, and many Africa experts have criticized him in the past for his extravagant lifestyle. See, for example, former AGI Director Mwangi S. Kimenyi’s 2012 commentary, “The Human Development Cost of the King of Swaziland’s Lifestyle and his ‘Bevy’ of Wives.”
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Rwanda receives EU funding to bolster vaccine production capacity
On Thursday, Rwanda and the European Union (EU) signed a $3.6 million deal to assist the East African country in upgrading its laboratory capacity, acquiring modern laboratory equipment, and attracting investors to manufacture mRNA COVID-19 vaccines. The deal also earmarks funding to bolster the Rwanda Food and Drug Administration’s quality control capacity for medical products, specifically enabling the country’s medical regulator to qualify for World Health Organization (WHO) certification. The WHO certification, a necessary qualification for producing vaccines, will also build investor confidence in Rwanda’s manufacturing and regulatory capacity. The Rwanda-EU deal follows a joint EU-G-20 Global Health Summit initiative to allocate $1.1 billion in funding for African vaccine manufacturing capacity, as well as improvements in health technology and vaccine access.
In other Rwanda news, on Thursday, the country’s legislature legalized the use of medical cannabis. The new ministerial order outlines the legal criterion for growing, processing, importing, exporting, researching, and using cannabis for medical purposes. The Rwandan government anticipates the new high-value agriculture and agro-processing sector will generate substantial employment opportunities and export revenue. The Africa Regional Hemp and Cannabis Report in 2018 valued Africa’s cannabis market at $37.8 billion and estimates that the continent accounts for 11 percent of the world’s legal cannabis market. Recreational consumption of the drug remains illegal.
Nigeria passes oil-industry reform bill, and South Korea signs energy agreement with AfDB
On Thursday, July 1, the Nigerian Senate passed an oil-industry reform bill aimed at overhauling nearly every aspect of oil and gas production in the country. The bill has now passed both chambers but still awaits being signed into law by President Muhammadu Buhari.
The Petroleum Industry Bill (PIB) has been under debate for nearly two decades and, according to the Senate president’s spokesman, is a “landmark feat,” meant to provide new fiscal incentives, as well as simplify taxes and royalties for oil companies working in Nigeria. The PIB also aims to help local underdeveloped communities dealing with environmental damage from oil production by allotting communities hosting an oil facility 3 percent of the facility’s operating budget. A report by Financial Derivatives Company Limited argues that this bill can save Nigeria over $15 billion annually as it might again attract past potential investors that instead have approached other countries.
In other energy news, on Tuesday, the Korean Ministry of Economy and Finance and the Export-Import Bank of Korea signed a $600 million agreement with the African Development Bank to co-finance various energy projects throughout Africa. The agreement was arranged through the Korea-Africa Energy Investment Framework pact and will direct funding toward the generation, transmission, and distribution of renewable energy. Specific projects within the agreement focus on deploying off-grid, mini-grid, and solar home systems in an effort to accelerate rural electrification. The Korean Ministry of Economy and Finance stated that the agreement “is expected to help African countries transition to green energy while simultaneously improving access to energy.”
Meanwhile, as Ghana’s capital Accra battles extensive plastic pollution, a plastic manufacturing firm called Nelplast has begun building homes with bricks made out of plastic. Since their debut in 2019, plastic bricks serve as a more durable and affordable alternative to cement. The company aims to utilize discarded plastic—particularly plastic bags, which were blamed for causing a flood by clogging the city’s storm drains in 2015. According to Nelson Boateng, CEO of Nelplast, the new prototype house built from plastic can address Ghana’s housing deficit, allowing low-income earners to have affordable housing. Notably, the effort also provides employment opportunities for women: About 98 percent of Nelplast’s employees are women.
Middle-class lifestyles start with $ 10 per person and day
For the first time in history, more than half the world’s population belongs to the middle class, freed from the spectre of poverty. Although Covid-19 has temporarily slowed the expansion of the middle class, Homi Kharas of the Washington-based Brookings Institution expects it to continue growing once the world economy recovers. He assessed matters in a D+C/E+Z interview.
What defines the middle class? Is this mainly an economic grouping, or is the definition broader than that?We need to differentiate between a definition and a measurement. The middle class is defined as a group of people which, while diverse, shares common features. Middle-class people share values of hard work, thrift meritocracy and individual responsibility. They are far enough away from the poverty line to be able to make choices to maximise their satisfaction and prospects. Unlike poor people who face day-to-day subsistence and have few options and unlike rich people who can generally buy whatever they want, middle-class people make economically based choices. They aim not just for material consumption, but also for enjoying life, appreciating leisure and art and beauty. While this definition is fairly loose, if we want to talk about the evolution of this group we need some kind of measurement. The most common measurement metric is an expenditure range. We use expenditure rather than income because expenditure is a more accurate measure of standard of living. Think of college students: they earn little or no money, yet they are independent, certainly not poor, and can borrow money and spend it. Expenditure is a much better measure of their material wellbeing than income. We originally chose an expenditure range of $ 10 to $ 100 per person per day, using 2005 purchasing power parity (PPP) dollars, to measure the middle class. The metric later shifted to $ 11 to $ 110 per person per day using 2011 PPP dollars, but it is the same in terms of purchasing power. You want a metric that is constant, so that you can compare expenditures across countries and across time.
Where does this specific range come from?The basic idea of this range is to set the lower end at the level where people have money left over for discretionary spending and are not in danger of falling into poverty. The upper end is set where people no longer have to give much thought to trade-offs in their spending. This particular range has historical origins. But interestingly, the same range – or its equivalent in local currencies – appears at different points in history and at different places in the world. The earliest middle-class group consisted of clerks in Victorian England who were hired by banks to facilitate factory owners’ purchases of machinery during the industrial revolution. They earned the equivalent of about $ 10 per person per day in 2005 PPP dollars. Similarly, when the UK first introduced an income tax, the authorities wanted to tax only people with middle-class living standards and above. They set the minimum income level at which the tax was levied at the equivalent of $ 10 per person per day in 2005 PPP dollars. Again, in Latin America policymakers looked into the income or expenditure level at which a person would have a reasonable chance of not falling into poverty over a three year period. That turned out to be the equivalent of $ 10 per person per day in 2005 PPP dollars. The poverty line in the US was also set at around that range. In India, too, a national commission established a benchmark for the middle class. It turned out to be the equivalent of $ 10 per person per day. The lower end is the number that says, “you are not considered poor if you have at least this amount.” Having a range also permits us to make comparisons across geography and across time. We are able to trace the development of the middle class from the 19th century to today.
The composition of what people buy was totally different in the 19th century compared to today. And price levels differ widely among countries today. How do statisticians account for these differences when making comparisons?The amount of money needed for material wellbeing has stayed the same, once one takes currency differences into account. Of course the basket of consumption items differs from country to country. But essentially, all people buy food, clothes, housing and transport. Once they reach middle class, they also consider buying vacations and entertainment. The basics of what people need have remained the same. As for price differences across countries, there are global studies that compare the prices of goods and services. The International Comparison Programme collects prices for a selection of essential goods and services, and these data are used to create an index that enables comparisons.
In 2017 you forecasted that by 2022, 170 million people would join the middle class every year. Is that still your expectation, despite the pandemic?Well, what has changed temporarily is the rate of growth of the middle class. After a brief slowdown due toCovid-19, I think the growth trend will pick up again and will hold over time. Covid-19 has probably set back the growth of the middle class by two to three years. Nonetheless, we still have more than half of the people on earth in the middle class or richer. According to the World Bank, about 50 % of the world population have a purchasing power of $ 5,50 or more, not $ 10. Yes, but its numbers do not reflect full per capita spending in each country. For example, in India, the Bank relies on household surveys that only capture one-third of total spending in the national accounts. My methodology is, I believe, better because it makes an adjustment for such gaps. The important point is that, in 1820 the middle class was only about one percent of the world’s population, and now, 200 years later, it represents the majority of the world’s population. That is an extraordinary development, which at its root has been caused by technology, and technological development continues apace. So today you still have hundreds of millions of people joining the middle class every year, mostly in Asia. You see big advances in education and life expectancy for these people. They work hard and have the ability to make a better life for themselves and their families. Covid-19 will probably actually shrink the middle class in 2020. We expect about 120 million people to fall out of the middle class in 2020 compared to 2019. Also, we expect that about 170 million fewer people will have joined the middle class in 2020 compared to what might have been the case without Corona. So in all, Covid-19 might be responsible for something close to 300 million people not being in the middle class in 2020 compared to what might have been without Covid-19. However, that effect will disappear fairly quickly. Hopefully by 2021 or 2022 the middle class will be back on the same growth trajectory as before. This group has been squeezed, but it will bounce back.
What are the political implications of the global growth of the middle class?Generally, middle-class people try to ensure that their government delivers for them. They tend to strive for independence, so they favour private property, saving for the future and maximising personal choices. The middle class also favours government provision of health and education. It aims for economic safety and therefore pushes for social protections such as pensions and labour rights. The middle class champions women’s rights; the earliest suffragettes were from the middle class. The middle class also usually favours free trade, which broadens consumers’ choices. The first political victory for the middle class was the repeal of the Corn Laws in 19th century England. Those laws imposed tariffs on imported grain which kept prices high, thereby favouring landowners at the expense of consumers. The middle class fought hard to get those laws repealed.
What differences are emerging within the middle class?Today we are seeing a bit of a fracturing of the middle class. The Covid-19 pandemic highlighted the division between the part of the middle class which is college educated and able to work remotely, and the part that is blue collar and cannot work from home. The interests of these two segments are starting to diverge. Certainly they are having different lived experiences. For example in the United States, the blue-collar segment has seen a higher incidence of alcohol and drug poisoning and suicides, the so-called deaths of despair. Among this small group we also see increases in illness, reported physical pain, mental ill health and reduced life expectancy.
Is this divergence within the middle class starting to cast doubt on using the term “middle class” to describe everyone falling within in a broad range of expenditure?It could be that the interests of those with college educations and those without are quite different. So some now argue that education level should become a metric for measuring the middle class. I would prefer to keep the broader definition but come up with a different way to describe the lifestyles of different segments of the middle class. The divergence in lived experience may turn out to be temporary. It could be that right now some people have opportunities in the digital economy that others don’t have, but that in 10 or 15 years everyone will have these opportunities. This is a technology phenomenon. A new technology tends to benefit certain people first, before the benefits are spread throughout society. Consider the introduction of electricity: at first it was only for the wealthy, and now it is part of the middle-class lifestyle.
The middle classes are growing faster in poor countries than in rich ones. Is that disparity fuelling resentment among some parts of the middle class in advanced countries?There is a level of saturation of the middle classes in developed countries, which helps to explain why the growth of the middle classes there is slower than the growth in low-income countries. The growth of the middle class in one place has been associated historically with more opportunities for the middle class in other places. The Marshall Plan in Europe helped the middle class in Europe, but also in the United States. As markets grow, everyone benefits. This is one of the great features of economics as opposed to politics. In economics, when your neighbour is better off, then you are better off. In politics, when your neighbour is better off, you might not be better off. Politics is more a zero-sum game than economics. The great hope is that this will be recognised. So for example, if you are in a developed country and your pension fund holds stock in Apple, you have to understand that when Apple profits from its sales in China and India that this also benefits you as an indirect shareholder. All the big brands are big brands because they can sell to billions of people in the global middle class. I could easily argue that a great part of the expansion of housing, higher education, health care, finance, insurance and many other services in the developed world is linked to the ability to build on the prosperity that has taken place because of trade with developing countries. Certainly with trade and with technological development there are transition costs. It is hard to say how long a transition will take and how politics will evolve. This points to the central fact that paying more attention to transition costs, including adapting to new technologies, is vital in a rapidly changing world.
Homi Kharas is a senior fellow and deputy director in the Global Economy and Development Programme at the Brookings Institution in Washington, DC.[email protected]
Putdate 20 June 11:40 am Frankfurt time: We only asked the question about why the World Bank’s estimate of global per-capita incomes diverges from the one of the Brookings institution yesterday, when the interview had already been posted. Homi Kharas responded fast.
Protecting forests: Are early warning systems effective?
Forests play an indispensable role in bolstering biodiversity, supporting a stable climate, and providing sustainable livelihoods. Yet, the earth is rapidly losing its forests. In the last 30 years, the world has lost 180 million hectares of forest—greater than the total area of Libya. Forests, especially tropical rainforests, are often cleared by illegal operators to acquire open land for large-scale farming and mining operations, which poses a serious threat to global efforts to reduce deforestation.
Early detection is a critical element of deforestation control efforts. Artificial satellites have played a crucial role here. Using regularly updated optical satellite data, such as LANDSAT, which captures the reflection of sunlight from the ground surface, several early warning systems (EWS) for deforestation have been launched since the 2000s to provide timely information on forest changes for regulators and civil society groups. EWS are now widely used in tropical countries to monitor forest protection. The Global Land Analysis and Discovery (GLAD) laboratory in the Department of Geographical Sciences at the University of Maryland maintains one EWS with publicly available deforestation data. Unfortunately, there is a severe drawback to optical satellite data. As we discuss in our chapter in the forthcoming book “Breakthrough: The Promise of Frontier Technologies for Sustainable Development,” detecting deforestation by optical satellites is substantially harder during the rainy season when cloud coverage is high. This is a serious problem because most of the illegal destruction takes place during the rainy season in the Brazilian Amazon to avoid detection, according to the Brazilian regulatory agency for illegal deforestation.
One solution is to use “radar eyes” in place of “optical eyes.” Radar satellites capture the image of the earth’s surface by catching the reflection of radar waves that the satellite itself generates. These waves can penetrate thick clouds, allowing researchers to identify whether trees exist on land regardless of cloud coverage. Japan’s ALOS-2 radar satellite, for example, can detect 1.5 to 10 times more deforestation than optical satellites during the rainy season in the Amazon area (November to March). Building on these technological advances, a new EWS called JJ-FAST (JICA-JAXA Forest Early Warning System in the Tropics), utilizing the ALOS-2 radar data, was launched in 2016 to provide data on deforestation in tropical countries.
While radar-based EWS can capture deforestation more timely and accurately during the rainy season, has it reduced tropical deforestation? To answer this question, we look at data from the Brazilian Amazon, the only county to date which has used radar-based EWS for deforestation monitoring. We hope that the quantitative evidence provided here will motivate other countries to employ this method to help combat deforestation.
Figure 1 conceptualizes how radar satellite EWS can help prevent deforestation. Suppose there are two forest areas of similar size in the Amazon. In the last three months, say February to April, Area 1 and Area 2 had the same amount of deforestation, measured by area, according to optical data (GLAD). However, images provided by radar data (JJ-FAST) indicate that Area 1 had more extensive deforestation than Area 2. When forest agencies analyze the data, Area 1 is likely to attract more attention, which means that the illegal operators in Area 1 face a higher probability of arrest, incentivizing illegal operators to stop logging and escape. As a result, the deforestation of Area 1 should be smaller in May. Therefore, if radar-based EWS reduces deforestation, there should be a negative correlation between the amount of deforestation detected by radar (JJ-FAST) and deforestation in the subsequent months.
Figure 1. Early warning systems and legal enforcement
Source: Authors
Our data comes from three raster images covering the Brazilian Amazon in 2019—monthly radar data (JJ-FAST), monthly optical data (GLAD), and average monthly cloud cover.
Figure 2.1. GLAD Alerts raster image
Figure 2.2. JJ-FAST raster image
Note: Two images above show the raster data of deforestation by GLAD and JJ-FAST for the same part of the Amazon in February 2019 (rainy season). Cells with darker colors contain larger detected deforestations.Source: Authors
To investigate whether we can observe a statistically significant negative correlation between the deforestation detected by radar satellite and the deforestation in the following month(s), we estimate the following equation using OLS (ordinary least squares):
Where Yjt is the deforestation area in cell j in month t, reported by GLAD. JJjs is the deforestation detected by the JJ-FAST in the month of s in cell j. GLADjs is the deforestation recorded by GLAD. CLOUDjt is the cloud coverage. Our coefficient of interest is β, which is the correlation between JJ-FAST’s deforestation during three preceding months of t and Yjt. If β is negative and statistically significant, this means that the cells with higher deforestation recorded by JJ-FAST in the past three months have systematically lowered the deforestation record in the current month.
Table 1 reports the results. In sum, we observe that JJ-FAST monitoring significantly reduces deforestation in the Brazilian Amazon. The first column shows the results of the OLS estimation. As expected, the estimate on the effect of cloud coverage, δ, is negative and significant, indicating that higher cloud coverage is associated with a lower record of deforestation by GLAD. The estimate of β implies that a 1 km2 increase in deforestation, as detected by JJ-FAST, in the preceding three months reduces deforestation in the current month by 0.024 km2. To confirm the robustness of these results, we also report fixed effects results at the cell in the second column. With the fixed-effect estimation, the magnitude of the impact of JJ-FAST increases to 0.120.
Our quantitative investigation suggests that radar based EWS effectively reduces deforestation in the Brazilian Amazon. Although further analysis using data from other geographies is needed, our results highlight the important role new technologies can play in protecting global public goods.
Capturing Africa’s insurance potential for shared prosperity
Among the drivers of economic growth and development in emerging countries, insurance is often overlooked in favor of flashier sectors like technology or infrastructure. In fact, though, insurance is a behind-the-scenes factor driving growth at all levels of society, from family life to massive infrastructure projects to technology development. As discussed in my new report, expanding Africa’s lucrative insurance market may be key to creating inclusive prosperity in the region.
Notably, increased penetration rates for insurance throughout African markets are directly connected to Africa’s overall development: Indeed, as Das, Davies, and Podpiera (2003) show, insurance can have positive effects on growth through six mechanisms: improving financial stability for businesses and households; mobilizing savings for public and private investment; reducing pressure on the government to provide public goods such as pensions; encouraging trade and entrepreneurship; mitigating risks and enhanced diversification; and improving social living standards. Other scholars have identified insurance premium thresholds associated with positive economic growth in Africa. Studies of Rwanda’s Universal Health Coverage (UHC) found that increased enrollment was accompanied by higher utilization of health facilities as well a higher presence of skilled-birth attendants.
Expanding Africa’s lucrative insurance market may be key to creating inclusive prosperity in the region.
Despite these advantages, Africa’s aggregate insurance penetration rate in 2019 was only 2.78 percent, compared to the global average insurance penetration rate of 7.23 percent. With increased entry, participation, and expansion from traditional insurance companies and new microinsurance companies (as well as reinsurance companies), the potential for growth across the continent is immense. Recent disruptive events—including an increasing number of natural disasters, political upheavals, and economic disruptions from current and future pandemics—will continue to increase demand and foster rapid growth throughout this sector, particularly of digital insurance platforms.
What does Africa’s insurance market look like now?
The insurance sector is comprised of three subcategories: life insurance, nonlife insurance, and reinsurance. African countries have grown in each of these market segments at varying paces, following their own diverse growth patterns. For example, South Africa’s market is dominated by life insurance premiums, while other countries, like Kenya, Nigeria, and Tunisia, have a much higher volume of nonlife insurance premiums than life ones.
These patterns are suggestive of future trends and point to vast, untapped markets for companies seeking to deliver insurance products that are both affordable and well suited to the mass market. Indeed, just five countries house about 84 percent of the estimated $68.15 billion total value of the continent’s insurance market. South Africa is the leader with about 70 percent of the total market share, followed by Morocco, Kenya, Egypt, and Nigeria. In most other African markets, though, the penetration rate remains below 2 percent.
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More specifically, life insurance market penetration has been slow because of the demand for specialized risk-management capacities and heavy investment in security and information gathering, which has left the sector fragmented and dependent on foreign investment. Five countries (South Africa, Morocco, Namibia, Kenya, and Egypt) comprise 92 percent of the life insurance market on the continent. Although McKinsey expressed concern about South Africa’s life insurance market losing ground given the COVID-19 crisis, low market penetration combined with expected increased consumer and business spending by 2030 will continue to create plenty of opportunities in less developed markets across the continent.
Key to the sector’s growth and expansion is the region’s rapidly growing middle class, who can particularly find greater household stability with life insurance. As this segment of the population becomes increasingly aware of the value insurance provides to their households and businesses, they will be more inclined to spend more of their disposable incomes on insurance: In fact, according to an Ernst and Young 2016 survey of African insurance companies, increased earnings in households and businesses were the leading driver of increased insurance premiums.
The pandemic affords an opportunity in the form of consolidation: Unsustainable and inefficient players may be forced out of the market, facilitating innovation, healthy competition among thriving companies, and better coverage. Other experts suggest that commercial insurance for businesses will outpace the growth of individual insurance coverage over the next year, partly because of increasing reinsurance rates. The pandemic has also accelerated the digitalization of local insurance companies, opening the door for a more accessible and inclusive insurance industry in the long term, which could be fostered by a conducive policy environment.
Technology adoption and innovation are the keys to growth in the African insurance industry. Microinsurance could also change the name of the game, as it can reach Africa’s rising middle class through small-scale, low-cost, low-risk products. MicroEnsure, which partners with telecommunications firms, is an example of a successful microfinance venture that offers basic health and life insurance coverage through a free add-on to customers’ existing mobile phone services. Furthermore, micro-health insurance products like Jamii have also entered the market, bringing affordable coverage to low-income populations. Similarly, health financing has been radically changed by mobile and online platforms: M-Tiba facilitates digital management of both public and private health insurance policies through partnerships with governments and providers.
Policy recommendations for managing risks
Recognizing the role the insurance market can play in development, African governments are also working to improve the regulatory climate for insurance investors. Diversification, partnership, and cross-collaboration among insurers and banks is the foundation required to create economies of scale and increase revenues for both sectors. These partnerships, coupled with accelerated digitization to online and mobile platforms, have the potential to increase cost efficiencies and profit margins throughout Africa’s insurance sector—completely transforming the insurance industry.
Africa’s underdeveloped insurance market represents an opportunity both for players in the insurance sector and for African societies in general.
While opportunities abound, there are also risks and challenges for the industry to overcome, including COVID-19 and future pandemics; a decentralized cross-country market with regulatory barriers; gaps in regulatory enforcement; a shortage of technical human capital; low demand for insurance; and market volatility. Thankfully, investment mitigation strategies can help overcome these hurdles: For example, companies will need to invest in both human capital (training and developing qualified staff) and information technologies, adapt to trends in the market, and pursue innovative strategies. Partnerships between companies need to be focused on improving product differentiation, working with government to fill regulatory gaps and barriers, and increasing product awareness in the marketplace.
Africa’s underdeveloped insurance market represents an opportunity both for players in the insurance sector and for African societies in general. The first credible and convenient insurance providers will reap enormous rewards as this sector develops—becoming pioneers in the region. Moreover, African households and businesses can benefit from the reduced risks and increased stability that insurance products can provide.
Dirty money in offshore banks
Billions of dollars and other currencies are in tax havens outside the owner’s country of origin, allowing individuals and corporations to evade taxation by their home governments. Since many of these offshore accounts are secret, it’s difficult to trace what’s legal and what is not. In new research, Brookings expert Matthew Collin, a David M. Rubenstein Fellow in Global Economy and Development, examines a leaked dataset from a bank in the Isle of Man to find some interesting discoveries about who owns these accounts. In this conversation, Collin discusses his findings and some policy ideas to address the problem of dirty money. Also on this episode, Governance Studies Senior Fellow Sarah Binder talks about what’s happening in Congress, with a look at five things you need to know about the road ahead for President Biden’s infrastructure plans in Congress. You can also listen to this audio segment on SoundCloud.
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What lies beneath: Evidence from leaked account data on how elites use offshore banking
Matthew Collin
Wednesday, May 5, 2021
Future Development
The hacker, the tax haven, and what $200 million in offshore deposits can tell us about the fight against illicit wealth
Matthew Collin
Wednesday, May 5, 2021
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Remittances: One more thing that economists failed at predicting during COVID-19
Remittances—the flow of capital from immigrants to their families and friends back home—are a crucial source of income for many countries, representing over 20 percent of the GDP in nations such as Tonga, Tajikistan, Haiti, Honduras, and El Salvador, among others. As of 2019, remittances reached an unprecedented level of about $550 billion, becoming the largest financial flow in the world, surpassing official development assistance (ODA).
Hence, when COVID-19 became a global pandemic in the second quarter of 2020, policymakers worried about the resilience of remittance flows. The World Bank projected that remittances would drop by nearly 20 percent, falling by over $100 billion in 2020 compared to 2019. The intuition was clear. The largest remittance-sending country in the world is the United States (sending over $70 billion as of 2019), whose economy was predicted to shrink significantly due to reduced mobility as people, businesses, and policies responded to COVID-19. Many immigrants working in service industries were especially hard hit so it was logical to project a sharp decline in remittance flows.
Turns out, however, the unexpected happened. We now know that the global flow of remittances during 2020 reached about $540 billion, about 2 percent short of the 2019 record high. Remittance inflows into Latin America and the Caribbean actually grew by about 6.5 percent in 2020. While they dropped in other regions (namely, East Asia and the Pacific, Europe and Central Asia, and sub-Saharan Africa), the overall dynamics defied expectations. It turns out that remittances were (and perhaps will continue to be) an extremely resilient flow.
The global flow of remittances during 2020 reached about $540 billion, about 2 percent short of the 2019 record high.
How can we make sense, ex post, of this yet another failed prediction by economists? Well, we certainly will need some more data to understand what exactly happened. But here I offer a few possible explanations, hoping more in-depth research will disentangle between them in the not-so-distant future.
First, there is probably a lot of heterogeneity among the type of immigrants sending remittances, particularly in cases where outflows grew. Immigrants are a very diverse group of people. And while remittance outflows might have decreased among immigrants more vulnerable to the economic downturn, they probably increased among immigrants that have a steadier source of income.
But, why would remittances increase (as opposed to remaining steady) at times when it is difficult for everyone? This is where human resilience and empathy enter the equation. In the U.S., for instance, the economic recovery is an unexpectedly quick one, whereas it was clear from the beginning that in the developing world COVID-19 would hit emerging markets especially hard. Thus, it is likely that immigrants living in the U.S. decided to make an extra effort to send some more funds to their friends and families to make sure they will have extra income in the uncertain times ahead. In other words, by foreseeing that the economic downturn would be relatively worse in their home countries, immigrants stepped up to make sure their families would be financially more comfortable. In fact, economic research on remittances finds evidence that these flows—as opposed to foreign investment, for instance—are countercyclical for the country of origin of the immigrant. In other words, when times are hard in the home country, immigrants would send more funds to make sure their families and friends back home have enough funds to thrive during the downturn.
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Second, evidence suggests that many immigrants were able to dip into their savings to continue to support their families abroad—even for immigrants that faced difficulties in terms of their employment. Several pieces of empirical work (reviewed here) show that many immigrants accumulate savings which they typically use to invest if and when they return.
Third, while it is clear that for many immigrants in the U.S. things became really difficult economically (health-wise, too, as minorities had a higher morbidity rate than the average American), immigrants are also thought to be very resilient people given their risk-taking behavior. Early on, immigrants in the U.S., alongside other minorities, were a driving force of the lockdown economy, as many of them were working in fundamental occupations. Many immigrants, knowing that returning to their home countries was not an option during the pandemic—and in many cases without any guarantees that they could count on government assistance—would respond to hardships by finding creative ways to remain employed, like switching industries or occupations or working extra hours. All in order to support their families, including those left behind. It is this resilience of immigrants that makes them such an asset to host countries in general.
Thus, even if it is too early to understand the insights that a more rigorous analysis using data would give us to explain how during a global recession remittances stayed pretty much untouched, just the fact that it happened suggests that humanity and resilience are at the core of this phenomenon.