Speevr | Thought Leaders

Enhancing climate change resilience through self-protection, public investment, and market insurance

Between 1980 and 1999, natural disasters caused 1.2 million deaths worldwide. Since 2000, 520,000 have been caused by natural disasters. An optimist sees evidence of climate change adaptation. A realist would say that the death toll is huge and we have been lucky in recent years to avoid even greater losses. Rising global greenhouse gas emissions mean that Mother Nature will throw even harder punches. Just this summer, Germany suffered greatly from a flood, and urban flooding in China’s Zhengzhou submerged the city with 8 inches of water in one hour. Countries like India and Belgium have also faced devastating floods in the last few weeks, not to mention the wildfires ripping through Greece, Turkey, and the United States. While the levees in New Orleans provided protection against Hurricane Ida, dozens died in the Northeast from the flooding. If we fail to adapt to these shocks, we will suffer from an increased risk of deaths due to disasters, destruction of the capital stock, and a disruption in economic activity.

Matthew E. Kahn

Provost Professor of Economics and Spatial Sciences – University of Southern California

Somik V. Lall

Global Lead on Territorial Development Solutions and Lead Economist for Sustainable Development in Africa – World Bank

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Ideally, we take proactive steps in the anticipation of shocks so that natural disasters cause less risk to our lives, livelihoods, and property. Given that some damage ex post is inevitable, a resilient society has insurance mechanisms in place to help the victims rebuild their lives and their communities.
Given that global greenhouse gas emissions are likely to continue to rise in the coming decades, we must invest in resilience. We have three different adaptation strategies. We can invest in self-protection to reduce our risk exposure; this includes migrating away from areas that are prone to hazards or taking proactive steps such as putting a home on stilts to reduce risk exposure. The second is to rely on government investment in spatial protection strategies such as seawalls and levees. A third strategy would be to purchase insurance to guarantee that we receive a payment if a disaster occurs.
Figure 1. Enhancing climate change resilience through self-protection, public investment, and market insurance

Source: Authors.
Seminal research by Isaac Ehrlich and Nobel Laureate Gary Becker emphasizes the strategic interactions among these three. Extra resilience can be achieved if private self-protection and government investment are complements so that these investments reinforce each other. A property owner who puts her house on stilts in a levee-protected area has greater protection against sea level rise due to the synergies between the investments. Progress over time in civil engineering means that such new ideas can diffuse across the world. The growth of global insurance giants creates new opportunities for insurers seeking to expand in the developing world by offering policies and using their “deep pockets” to diversify their risk exposure using instruments such as catastrophe bonds. In this sense, the rise of global financial markets helps to protect more and more individuals from the ex-post losses associated with place-based climate shocks. If global insurers offer insurance buyers a good premium price on coverage, then policy buyers will invest less in self-insurance.

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Alternatively, well-intended policies could actually discourage private adaptation efforts. If an at-risk location invests in spatial protection, this could attract more people to move to the area. This dynamic can increase the population’s overall risk exposure. If the national government subsidizes disaster insurance this creates an incentive for individuals to invest less in their own self-protection. Such public insurance can also crowd out efforts by the private sector insurance industry to invest in the research to price risk and incentivize asset owners to invest in their own self-protection. Given the risks in designing new products and the required upfront fixed costs, for-profit firms will be less likely to incur these costs if they are competing with the government selling a subsidized version of the same product.
Through the lens of the Ehrlich and Becker framework, development institutions that promote economic growth help people to become more resilient. Poor people are less likely to be able to afford self-protection strategies ranging from air conditioning, high-quality housing, foods, and medicines that each help to maintain one’s health and well-being in the face of adverse shocks. Such person-based strategies provide people with the resources they need to cope with the specific climate challenges they are confronted with. As poor people grow richer, they have the resources to finance migrating to those geographic areas that offer them a higher quality of life. In this sense, person-based resilience strategies have implications for development as individuals choose where they want to live.

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Making Climate Policy Work

By Danny Cullenward and David G. Victor
2020

Any government investment in infrastructure targeted to reduce risk exposure will be place-based. A levee is built in a specific location. Even rich governments do not have the resources to build levees everywhere. This raises the issue of spatial resource allocation. Should governments use their scarce funds to protect productive, populated places or target their poor population? This question highlights that climate change will exacerbate the classic equity versus efficiency trade-off that every nation often confronts. If a nation builds infrastructure to protect its productive hubs then the economic growth that this creates can be taxed and used for redistribution. Poor people in other areas can be urged to move to productive places. Climate change will pose deep issues of how to protect poor people who seek to remain in less productive and increasingly at-risk places.
Fifty years ago, Ehrlich and Becker wrote about the trade-offs between investment in self-protection, public investment, and market insurance. While their focus was idiosyncratic risks such as a fire or burglary, their logic applies to accelerating adaptation to the systematic risks posed by climate change. The market approach to adaptation emphasizes having up-to-date information about emerging risks and providing incentives and a menu of strategies to help affected individuals, firms, and governments to cope with these risks. As climate science improves due to satellite deployment and big data processing, maximizing the synergies between the resilience channels of self-protection, self-insurance, government insurance, and market insurance will play a crucial role in determining the medium-term costs of climate change.

The promise of services-led development

Manufacturing-led growth has been the central development paradigm for centuries, but it is time to shift the spotlight. The share of industry in total employment across low- and middle-income countries (LMICs) has, strikingly, remained almost unchanged in recent decades (Figure 1). Rather, the share of the services sector increased from 40 percent to 50 percent between 1991 and 2018, offsetting almost the entire decline of agriculture. The most common response to this structural transformation is worries about “premature de-industrialization” and renewed calls for lower-income countries to expand manufacturing. The promise of services-led development is instead overlooked but it should not be as our new book “At Your Service? The Promise of Services-Led Development” shows.
Figure 1. Services, not industry, are driving structural transformation in LMICs

Source: “At Your Service? The Promise of Services-Led Development,” World Bank.
The growth dividend of services
Services jobs all too often conjure up images of someone selling goods on the side of the road or in a small retail shop. But this misses the diversity of opportunities with services—and the extent to which they are contributing to income gains. Much like manufacturing, ICT (information and communications technology), finance, and professional services are highly traded internationally, offshorable, and linked to other sectors. Cargo transportation and wholesale services are internationally traded because they are linked to the export and import of goods. Accommodation, food, passenger transportation, and health care are also exported as international travelers buy these services.

Gaurav Nayyar

Senior Economist, Finance, Competitiveness and Innovation – World Bank

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Mary Hallward-Driemeier

Senior Economic Adviser, Finance, Competitiveness and Innovation – World Bank

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Elwyn Davies

Economist – Firms, Entrepreneurship and Innovation Unit, World Bank

Several developing economies have leveraged these export opportunities regardless of their level of industrialization. IT and professional services account for more than half of all services exports in Costa Rica, Ghana, India, Pakistan, and the Philippines. And around 50 percent of all online freelancers that deliver services remotely are based in India, Pakistan, and Bangladesh alone. China, Costa Rica, Jordan, Turkey, and Thailand are in the top 10 health tourism destinations worldwide. Even though currently hit by the COVID-19 pandemic, tourism-related transportation and accommodation services accounted for two-thirds of services exports even in less traditional destinations, such as Rwanda, Tanzania, and Uganda.
It should not, therefore, be surprising that labor productivity growth in services has matched that of manufacturing across LMICs in many regions since the 1990s and performed particularly well in South Asia and sub-Saharan Africa. Productivity growth in services during the past three decades in LMICs has also exceeded that in high income countries, contributing to catch-up (Figure 2).
Figure 2. Labor productivity growth in services has been strong in LMICs since the 1990s

Source: “At Your Service? The Promise of Services-Led Development,” World Bank.
The power of digital technologies, intangible capital, and linkages
The challenge for LMICs is that jobs tend to be concentrated in less productive services. High-skill and productive services, such as IT and professional services employ only 5-10 percent of services workers in lower income countries, compared with 15–20 percent in high-income countries. In contrast, low-skill subsectors such as retail and personal services that have provided little by way of productivity gains employ two-thirds of services workers compared with 30 percent in high-income countries. If LMICs could increase their share of employment in more productive services to mirror that of high-income countries, productivity could increase by one-third.

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But new opportunities for scale and innovation make low-skill services more productive. For example, restaurants and hairdressers can scale up through investments in intangible capital such as marketing and software that enable branching and franchising. There are similar possibilities to achieve scale in arts and entertainment services where streaming platforms such as Netflix and YouTube are fast enabling artists to deliver their creative content to international markets remotely. Small retailers can innovate through digital apps that automate skill-intensive tasks such as inventory management and accounting. Similarly, for ridesharing drivers, the platform substitutes both map-reading skills and numeracy skills.
At the same time, high-skill, productive services such as ICT and professional services, are expanding opportunities for low-skilled workers through their linkages with other sectors. For example, when indirect exporting is included (i.e., selling to other sectors that export, such as agriculture and manufacturing), the unskilled labor content in every thousand dollars of exports of business services in the Philippines, at around $150, approximates that for ready-made garments in Bangladesh.
The importance of services for industrialization
Even though services provide growth opportunities in the absence of industrialization, they are also increasingly important in improving the competitiveness of the manufacturing sector. Services are embodied in manufactured goods as inputs, such as design, marketing, logistics, or e-commerce platforms and account for one-third of the value of gross manufactures’ exports across countries. With the advent of “smart” production processes, ICT services—as the predominant producers and users of data—will play an especially crucial role in boosting manufacturing productivity.
Services also complement industrialization through their bundling with manufactured goods, which adds value postproduction. Smartphones are increasingly combined with apps that stream music and movies where the latter constitute audiovisual services. Car manufacturers offer financial services through monthly installment payment plans. For producers of consumer durables, after-sales services, such as advertising, warranties, and equipment maintenance account for the lion’s share of total revenues.
Given the growing contribution of services to development, ignoring this agenda is no longer an option. There is a need to emphasize expanding services trade, fostering technology adoption, training workers and firms to upgrade skills, and targeting services that provide wider benefits to help ensure that services-led development is indeed in the service of development.

How should we assess children’s learning in the COVID era?

With widening education inequality due to lost instructional time and other COVID-19 impacts, what should education system leaders do about assessment? Are we interested in what is being learned or in identifying what young people are ready to learn? Even before the pandemic struck, many students were learning little from the intended curricula, with half of 10-year-olds in low- and middle-income countries unable to read a basic text. This learning crisis has been greatly amplified during COVID-19 due to lost instructional time. How can assessment support students on their learning journey in an era when students around the world have variable access to in-class instructional time?
For example, some in the education community are arguing that a strong focus on foundational competencies such as literacy and numeracy are more essential than ever, while others see the importance of 21st century skills such as critical thinking, self-awareness, and problem-solving as taking preeminence during these challenging times. This debate has strong advocates on both sides of the issue, and central to the discussion is the role assessment can and should play in advancing children’s learning and holistic development.
On October 20, the Center for Universal Education (CUE) will host a lively discussion to address all of these issues in what will be the first in a series of three events centered around assessment. This first discussion will focus on the assessment goals that are most helpful in supporting high-quality learning for all children, and particularly for children in low- and middle-income countries. CUE will share its insights from collaborative work with six countries across Africa and Asia on assessment strategies that help foster deeper learning and engaging pedagogy in challenging contexts, while also highlighting the complexities of assessment in the era of the pandemic. Panelists will debate the merits and trade-offs of different approaches, and discuss how the pandemic is shaping the debate on assessing learning.
Viewers can submit questions via email to events@brookings.edu or via Twitter at #21CSAssessment.

COVID-19’s impact on overall health care services in Africa

In addition to directly causing the deaths of at least 200,000 people in Africa, the COVID-19 pandemic is also disrupting critical health services and undermining years of progress fighting other deadly diseases, such as human immunodeficiency virus (HIV), tuberculosis (TB), and malaria, which continue to be the leading causes of death in the region. In order to better understand the extent of this impact, a recent report by The Global Fund utilizes data from urban and rural health care facilities in 24 African countries and seven Asian nations to investigate and compare the spillover impacts of the pandemic on essential health care services for HIV, TB, and malaria.

Leo Holtz

Research Assistant – Africa Growth Initiative

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In 2020, access to health care services declined significantly throughout the world compared to 2019. The authors attribute this unprecedented decline in patient attendance to challenges facing both medical facilities and the patient community (Figure 1). For patients, the fear of contracting COVID-19 from their visit was the most cited reason for not seeking medical care. The inability to reach health care facilities due to disruptions in public transportation and stay-at-home orders was also a prominent challenge for patients looking to access health care—a problem, according to the authors, that has been more relevant for urban residents.
Figure 1. Reasons for disruption to health care services from the perspective of medical facilities and patients

Source: “The Impact of Covid-19 On HIV, TB and Malaria Services and Systems For Health: A Snapshot From 502 Health Facilities Across Africa And Asia,” The Global Fund, 2021.
For medical facilities, the focus on COVID-19 reduced access to standard health care services overall, as some facilities either reduced or stopped offering some standard medical services or were overwhelmed with treating COVID-19 patients presenting acute symptoms of respiratory infection. While noting that the reduction in overall services is detrimental to all patients’ well-being, the authors warn that hampering access to health care may specifically elevate the mortality rate of children under 5.

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Because COVID-19 remains the dominant focus of medical practitioners, international donor organizations, and governments, The Global Fund posits that this shift in focus to COVID-19 resulted in a reduction of “general health communication campaigns … [that] encourage people to seek out health care.” As a consequence, testing and treatment of diseases like HIV/AIDS, TB, and malaria have dipped.
More specifically, regarding HIV, the authors argue that the interruptions in testing and treatment of the disease, paired with prospective patients’ increased wariness in seeking medical care, may have heightened the risk of individuals unknowingly spreading it. Although Asia experienced the most severe disruptions to HIV health care services, the significant declines in preventive health care services for HIV in Africa pose particularly devastating consequences for the region, as it accounts for 67 percent of the global population living with HIV/AIDS
Figure 2. Impact of COVID-19 on HIV treatment referrals (left) and testing (right)

Note: The line graph describes service delivery for the same period in 2020 (left Y axis).The gray blocks represent the number of COVID-19 cases diagnosed per surveyed facilities (right Y axis).
Source: “The Impact of Covid-19 On HIV, TB and Malaria Services and Systems for Health: A Snapshot From 502 Health Facilities Across Africa And Asia,” The Global Fund, 2021.
The global death rate from malaria has declined 60 percent since 2000, but Africa still accounts for 94 percent of the world’s annual malaria cases and deaths. Importantly, the reduction of malaria treatment in Africa (Figure 4), where the disease is endemic, poses a serious threat to large numbers of susceptible Africans—especially children under the age of 5, who comprise the vast majority of annual malaria deaths.
Figure 4. Impact of COVID-19 on malaria diagnosis (left) and treatment (right)

Note: The line graph describes service delivery for the same period in 2020 (left y-axis).The gray blocks represent the number of COVID-19 cases diagnosed per surveyed facilities (right y-axis).
Source: “The Impact of Covid-19 On HIV, TB and Malaria Services and Systems for Health: A Snapshot From 502 Health Facilities Across Africa And Asia,” The Global Fund, 2021.
The authors warn that the disruption to critical health care services poses a serious threat to undiagnosed individuals, their local communities, and global health security. The risk that undiagnosed individuals will infect others with HIV or TB—or succumb to malaria without pursuing treatment—is now much higher than before the pandemic. Moreover, the authors warn that the pandemic has effectively derailed years of progress in reducing the disease burden in Africa and the rest of the developing world. In response to these challenges, The Global Fund recommends health care facilities implement adaptive measures to reduce the volume of visits to clinics and improve health services delivery. Such actions include providing long-term drug prescriptions to ensure uninterrupted access to medication, door-to-door decentralized distribution of long-lasting insecticidal nets, and incorporating TB screening in digital health screenings for COVID-19.
For more on supporting health care systems in Africa, read Africa CDC Director Dr. John Nkengasong’s Foresight Africa 2021 essay, “Building a new public health order for Africa—and a new approach to financing it.” For more on innovative and technological solutions to complex health care challenges, see AGI Senior Fellow Landry Signé’s recent paper, “Strategies for effective health care for Africa in the Fourth Industrial Revolution.”

Greg Wright

Property tax compliance in Tanzania: Can nudges help?

Abstract
Low- and middle-income countries around the world struggle with low tax compliance together with limited capacity to enforce compliance. This paper reports the results of a randomly rolled out text-message campaign aimed at promoting compliance among landowners in Dar es Salaam, Tanzania. Landowners were effectively randomly assigned to one of four groups designed to test different aspects of tax morale. They either received a simple text-message reminder to pay their tax (a test of salience), a message highlighting the connection between taxes and public services (reciprocity), a message communicating that non-compliers were not contributing to local or national development (social pressure), or no message (control). Recipients of any message were 11 percent (or 1.2 percentage points) more likely to pay any property tax by the end of the study period. Across treatments, simple reminders and reciprocity messages delivered similar gains in payment rates, whereas social pressure messages delivered lower gains in payment rates. Actual payment amounts were highest for reciprocity messages. The average estimated benefit-cost ratio across treatments is 20:1 due to the low cost of the intervention, with higher cost-effectiveness for reciprocity messages.
Download the working paper

Industries without smokestacks in Tunisia: Creating jobs in tourism and ICT

Tunisia, like many African countries, is facing an influx of young people into its workforce, but the country doesn’t have enough jobs to absorb them. Recent research, though, reveals that there might actually be great potential and even a comparative advantage for job creation in Tunisia in “industries without smokestacks” (IWOSS). IWOSS are sectors that share much in common with manufacturing, especially their tradability and tendency to absorb large numbers of low-skilled workers. Examples of IWOSS include agro-industry, horticulture, tourism, and some information and communication technology (ICT)-based services.

Through an adequate management of these sectors, job creation and export development could allow the creation of new areas of comparative advantage and have a positive impact on other sectors as well. As Tunisia’s economic growth rate has lowered to 2 percent in the period from 2012 to 2019 (according to the Central Bank of Tunisia), we must consider new strategies and other policy improvements to reverse this trend and boost job creation in the country.
The challenges in this area are spread over several fronts. The Tunisian labor market suffers from a mismatch between labor demand and supply, as well as a strong imbalance linked to the gender gap. This phenomenon mainly concerns women, young people, and graduates (European Training Foundation, 2019). The latter are often excluded from the labor market due to a mismatch of skills required to enter the job market, despite their acquisition of qualifications and degrees.

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Thus, our research proposes a way out of youth unemployment through an analysis of the Tunisian economy since the 1960s, including forecasts following the COVID-19 crisis, with the aim of providing an alternative perspective that looks beyond conventional “smokestacks” manufacturing and builds on strengths to find room for improvement in industrial policy, including nontraditional agriculture or services.
Why are IWOSS so important?
This study aims to show how the job creation, combined with the identification of the skills required to work in a given field, might have a concrete impact in decreasing youth unemployment. The impact of IWOSS on the Tunisian economy emerged as early as the 1980s, when the market shifted toward this new economic sector, which represented 44 percent of Tunisia’s GDP on average between 2015 and 2019.
Furthermore, through a comparative approach with other activities, we find that the growth in value added by activity sector indicates the relative importance of IWOSS sectors—especially the tourism sector, followed by the transport and financial sectors—to the Tunisian economy. Because of their particular potential for growth in the Tunisian context, we examined the specific IWOSS subsectors of tourism, financial services, and ICTs, and found that, generally, their contributions to the Tunisian economy result in a better capacity to resist and adapt to structural shocks.
Table 1. Growth in added values by activity sectors at prices of the previous year (annual change in %)

Source: Table from Mouley, and Elbeshbishi, (2021). “Addressing youth unemployment through industries without smokestacks: A Tunisia case study.” The Brookings Institution.
Recommendations
The COVID-19 crisis had an undeniable impact on all sectors of the Tunisian economy—especially tourism—though agriculture, fisheries, and ICT suffered least. Given the widespread damage on top of the already high youth unemployment rate, a multistakeholder response is essential for creating jobs for young Tunisians. In order to unearth the employment generation capacity of IWOSS sectors, key constraints that inhibit the growth of these sectors have to be addressed. In short:

Tourism. Tunisia still needs some crucial enablers like political stability, public-private partnerships, and the development of promotional campaigns that further enhance Tunisian culture, traditions, and national heritage to make the tourism industry even more prosperous. Building infrastructure, especially improving transport and communications for tourism, would also have a positive impact on other sectors such as agriculture and construction.
Information and communications technology. For the purpose of enabling greater development of the ICT sector, policymakers should commit to enhancing social inclusion and making high-quality ICT training and education accessible. Such interventions could lead to the development of e-Administration and encourage investments in the ICT industry to create jobs. The “Digital Tunisia” and “Smart Tunisia” programs provide a clear strategy to this end.
Financial services. Policymakers should aggressively encourage a transition to digital tools, promote digital payments, and support the development of further technological innovation.

In the end, we find that the ICT, financial services, and tourism sectors can be critical for addressing the country’s jobless growth challenges, if interventions like improved infrastructure, better access to long-term financing, and enhanced digitization, among others, can be implemented.

USAID’s local staff are an overlooked resource to advance locally led development

Last week’s House Foreign Affairs Committee Hearing on locally led development highlighted the bipartisan consensus about its numerous benefits. Subcommittee chairman Rep. Joaquin Castro (D-TX) noted that each of the last four administrations has advanced this vital foreign aid reform because “evidence indicates that working with local partners improves the effectiveness and sustainability of our foreign assistance programs.” Ranking Member Rep. Nicole Malliotakis (R-NY) concurred saying, “until we support meaningful local ownership of local challenges and build the capacity of local organizations to solve these problems themselves, our foreign assistance will not have lasting impact.”

In other recent Congressional hearings, USAID Administrator Samantha Power has repeatedly called for the U.S. Agency for International Development to advance locally led development. “In order for us to get the most out of our programs” she said, “we need to increase local partnerships and address staffing shortfalls,” calling the push toward locally led development “the essence of whether the development we do is going to be sustained over time.” In March, Power struck a similar chord, “effective development is driven by those on the ground with local knowledge and expertise.”
In her July testimony, Power identified USAID’s massive shortage of contracting officers (COs) and agreement officers (AOs) as a critical problem standing in the way of more locally led development. She said each USAID CO “has managed over 65 million dollars annually over the past four years—more than four times the workload of their colleagues at the Department of Defense.” Given such a heavy workload, it may be understandable that some USAID staff would choose the path of less resistance, leading them back to USAID’s traditional U.S.-based implementing partners. In fact, in 2017 USAID found that just 25 of its U.S.-based implementing partners received fully 60 percent of its funding, reducing competition and innovation. Power also explained that, according to the latest data, just 5.6 percent of funding went to USAID’s local partners. Yet, however understandable this procurement shortcut may be, it is leading to U.S. foreign assistance investments that too frequently have no local roots and which essentially evaporate into thin air, as the recent headlines from countries like Afghanistan and Haiti demonstrate all too clearly.

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This nonlocal approach and its negative consequences are recognized by the agency and USAID has already made several attempts to increase implementation through local actors. For example, since 2009, initiatives like Local Solutions, the Local Systems Framework, and the Journey to Self-Reliance, Local Works, the New Partnerships Initiative (NPI), and USAID’s Acquisition and Assistance Strategy have all taken steps in the right direction. Yet the vast majority of USAID’s funding still does not flow through local actors because USAID has not changed its ways of doing business through vigorous procurement reform and the requisite staffing levels of COs and AOs to implement it.
Hitting precisely on these points, in July, Sen. Chris Coons (D-DE), chairman of the Senate appropriations subcommittee that oversees USAID’s budget (SFOPs), asked Powers what she considered to be a potential strategy for “increasing the localization of our assistance programs” and how additional staff would ensure U.S. funds better support local partner-led initiatives. Coons added, “I look forward to working with you on tackling USAID’s procurement processes and the challenges in terms of both regulations and staffing.” On the House side, SFOPs chairwoman Barbara Lee’s FY22 bill, which has already passed the House, also clearly supports the growth of locally led development, requiring USAID to report to Congress on funding for programs “implemented directly by local and national NGO entities” and also on how USAID plans to increase these resources in the future.
This recognition by top decisionmakers on the Hill and the administration is very encouraging. Finally, the wonky problem of USAID’s business practices has come to light as perhaps the single largest barrier to advancing locally led development. There is urgency to more effectively use U.S. foreign aid, and thankfully, a major part of the solution Power, Coons, and Lee are seeking is already working at USAID and has already proven its mettle in response to the COVID crisis—USAID’s local staff.

When USAID’s foreign service officers (FSOs) were evacuated at the start of the COVID-19 pandemic, then Administrator Mark Green, delegated authority to USAID’s local staff, mainly foreign service nationals (FSNs), to continue the work of USAID without their American supervisors. The FSNs were given special temporary authority to sign contracts and obligate funds on behalf of the U.S. government; that is, to act as COs and AOs. By making this delegation of authority permanent, Administrator Power could quickly and significantly increase USAID’s cadre of COs and AOs, opening the door to much greater progress on locally led development. Doing so would also allow the agency to more fully benefit from the local contacts of these very valuable local professionals, who USAID staff regularly refer to as “the backbone of the agency.”
This idea is supported by the Modernizing Foreign Assistance Network (MFAN), which called on appropriators to “evaluate the continuation of the expanded management and supervisory roles of Foreign Service Nationals during USAID’s COVID-19 response.” Similarly, the USAID Alumni Association has called for USAID to “accelerate efforts to enhance the roles and responsibilities of Foreign Service National (FSN) employees in USAID’s field missions. This should include responsibilities for program management.” In addition, recently acting USAID Administrator Gloria Steele has also endorsed the idea of local staff having warrants to act as COs and AOs, saying “they stay with USAID, they are retained … so having them keep their warrants will help solve a number of problems at once and is a win-win.”
Quickly increasing the number of USAID COs and AOs by extending or reinstating the warrants of well-qualified and experienced FSNs is well within the authorities of the administrator. To do so most effectively, USAID should be able to increase the salaries for qualified FSNs (enable them to become a grade 12 or 13) in line with the increased responsibilities, authorities, and accountabilities that holding a warrant entails. A clear set of norms to reflect on bias or perceived conflicts of interest in the local context should also be put in place. Then, USAID should also open a pathway for more FSNs to become CO/AOs by having them work under the supervision of FSOs who would then recommend they receive a warrant to sign contracts and agreements.
These steps would also help USAID advance its commitments to diversity, equity, and inclusion (DEI), and professional recognition and fairness. Retired FSNs have been vocal about their subordinate position within USAID, and while some mission directors have created FSN senior advisor positions in the front office, USAID’s overall unwillingness to recognize them as fully-capable professionals takes its toll. Former FSNs like Jamal al Jibiri, detailed their reasons for frustration, noting that when American officials arrived at post and met with the FSNs: “They would always have this one line about ‘we would be nothing without you guys; if it wasn’t for you nothing would operate; it’s you guys who run everything so we really need you guys and appreciate you.’” The former Jordanian FSN continued to explain why these statements were so defeating. “If there was a real appreciation for the FSNs,” he said, “it would be reflected in how we are compensated and how we’re seen, but to tell us that everything would fall apart without us, but not to take that into consideration when you’re looking at compensating us or looking at rewarding us, then it’s meaningless.” Unfortunately, many similar accounts can be found in the archives of the Oral History Program of the Association for Diplomatic Studies and Training (ADST).
In this regard, part of the solution to USAID’s critical CO/AO shortage has the potential to advance both locally led development and the effort to decolonize USAID’s staffing model. USAID leaders should carefully consider this opportunity to reduce a major obstacle to achieving the agency’s goals on locally led development. Hill leaders who favor locally led development and DEI should also support this innovation by USAID. The FSNs’ decades of professional contributions and the positive experience of their mission leadership during COVID-19 show that they are ready to do more.

The risks of US-EU divergence on corporate sustainability disclosure

Sustainability disclosure is in vogue, with more than 80 percent of major global companies reporting on some aspects of their social and environmental impacts. This is partly driven by growing calls for transparency by civil society organizations and environmental, social, and governance (ESG) investors, who are demanding detailed and verified corporate sustainability information. ESG investments—assets that fulfill certain minimum social and environmental criteria—grew by more than 40 percent in 2020 in the U.S., and currently make up one-third of all assets under management. However, the process of classifying financial assets as ESG is unregulated in the U.S. Moreover, the data required to assess if ESG assets have achieved a positive social and environmental impact is often missing, incomplete, unreliable, or unstandardized.

The U.S. and the EU are pursuing different trajectories in regulating ESG investing and sustainability disclosures. The U.S. is following a laissez-faire approach with sustainable investing and disclosure being guided by voluntary, private-sector-led processes, protocols, and guidelines. Compliance is driven by peer pressure and the competitive drive to build an image as a sustainable, accountable business. In the absence of regulatory intervention, institutional investors that manage index funds—in particular BlackRock, Vanguard, and Mainstreet—have stepped in to take state-like roles by putting pressure on corporations to address systematic risks like climate change.
These voluntary mechanisms, however, have been criticized for being inadequate. Corporations are routinely accused of “greenwashing” their sustainability reports by overstating their positive environmental and social impact and downplaying negative ones. In the absence of detailed, verified information, asset managers can fall prey to greenwashing and classify securities of unsustainable companies as ESG assets. This leaves ESG investors with little assurance, legal or otherwise, that their money has been put to the intended use.
The EU priming for a green future
The EU, on the other hand, is following a systematic and centralized approach toward climate transition and sustainability disclosure. Its regulatory regime is underpinned by the European Climate Law that legally endorses the EU’s commitment to meet the Paris agreement. To achieve climate neutrality by 2050, the continental body has introduced a slew of regulatory measures that will accelerate capital allocation toward green investments.
One of these is the Corporate Sustainability Reporting Directive (CSRD) that was introduced in April 2021. It upgrades the 2014 nonfinancial reporting directive and seeks to improve the coverage and reliability of sustainability reporting. When the law comes into effect in 2023, the CSRD is expected to increase the number of European and Europe-based companies that disclose sustainability information by fourfold, to 49,000 in total.

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The CSRD proposal applies the “double materiality” principle, requiring companies to disclose information that is material for the enterprise as well as for its societal stakeholders and/or the environment. For example, it requires companies to disclose the extent to which their activities are compatible with the goal of limiting global warming to 1.5 degrees Celsius. Importantly, the directive requires companies to seek “limited” assurance by third-party auditors.
The directive is also unique for requiring companies to report their sustainability performance using EU-wide disclosure standards. The European Financial Reporting Advisory Group (EFRAG), a private association with strong links with the European Commission, has been tasked with the difficult job of developing these disclosure standards. EFRAG intends to build on existing, third-party sustainability reporting standards and has initiated a collaboration with the Global Reporting Initiative (GRI), currently the most widely used reporting standard globally.
Alongside a similar sustainability disclosure law that regulates processes of ESG investing in financial institutions, the CSRD is expected to significantly improve transparency in European capital markets. These measures are also likely to increase the adoption of sustainability goals and targets among European corporations, further widening the existing disclosure gap between EU-based and U.S.-based corporations.
A change of heart at the SEC
Until recently, American regulators have been reluctant to mandate sustainability disclosure. At a recent Brookings webinar, Securities Exchanges Commission (SEC) Commissioner Hester Peirce offered the rationale why ESG rule-making is beyond the mandate of the SEC, reflecting the longstanding view among Republican commissioners at the SEC. Her long list of justifications includes some plausible ones, such as the broad and elastic nature of the ESG concept that would make it ill-suited as a domain of disclosure rule-making. Others were highly slanted, such as the contention that ESG disclosure could drive financial instability by leading to excessive allocation of capital to supposedly green technologies. This is ironic because the lack of ESG disclosure mandate is not slowing down the rapid growth of ESG investments; it is only making the process opaque and ineffective, making stock market volatilities more rather than less likely. In fact, the EU’s key justification for sustainability disclosure is preventing systemic risks that threaten financial stability.
The SEC, which now has a 3-2 Democratic majority and a Biden-appointed chairman, has of late shown keenness to play a more active regulatory role. In May 2020, its Investor Advisory Committee provided recommendations that urged the commission to set up mandatory reporting requirements on ESG issues. In December 2020, an ESG subcommittee issued a preliminary recommendation that called for the adoption of mandatory standards for disclosing material ESG risks. The recommendation, however, called for limited disclosure covering a narrow range of metrics tailored by industry, in a manner similar to the standards of the Sustainability Accounting Standards Board, while warning against the “highly prescriptive” standards that were purportedly adopted by the EU. In March 2021, the commission solicited public input on climate change disclosures, which revealed strong demand for mandatory sustainability disclosure.
Divergent disclosure laws
The SEC is thus set to adopt mandatory ESG disclosure rules, perhaps as early as October 2021. These rules, however, are likely to depart from the EU’s approach in a number of ways. First, an SEC regulation will target only publicly listed companies; the EU’s CSRD, on the other hand, covers large unlisted firms as well. Second, the SEC will mandate disclosure of a narrow range of outcomes related to climate risk and human capital, while the EU will mandate disclosure of a broader set of sustainability outcomes, including indirect outcomes through the value chain and relevant corporate strategies and processes. Third, given capacity constraints, the SEC will likely adopt less comprehensive, third-party disclosure standards as opposed to developing its own comprehensive standards as the EU intends to do. Facing pressure from Republican lawmakers and interest groups, the SEC’s measures are also likely to be timid, focusing only on protecting (ESG) investors through the narrow lens of financial materiality.

By comparison, the relatively wide coverage of the EU’s new disclosure law (CSRD) will lead to significant improvements in data availability. The use of uniform disclosure standards will also ensure that companies provide more detailed and comprehensive sustainability information. It is, however, less obvious how the directive will improve data quality and reliability. The requirement for limited assurance will reduce the most overt forms of greenwashing but is unlikely to eliminate disclosure of data with dubious quality. For example, such an assurance is unlikely to guarantee that a company used the most recent or robust method for assessing its carbon footprint.
The EU’s law is also unlikely to address the lack of standardization, which is to a degree inherent to ESG metrics. Sustainability disclosure will contain significant company-specific, qualitative data, including retrospective and forward-looking statements that are hard to quantify. The EU’s reporting standards will give managers significant discretion on what to disclose and how, and they impose different requirements for companies that differ by sector and size. More nuanced and detailed sustainability disclosure is more valuable to individual (ESG) investors though, at a macro level, this increases the cost of standardizing, comparing, and verifying the reported data. The search for the “holy grail” of the ideal ESG index will thus continue, hampered by the difficulty to converge on what categories of ESG are universally relevant, how to define their scope, which sets of metrics to use, and how to weigh and aggregate them.
A missed opportunity for coordination?
In both the EU and U.S., the move toward greater corporate transparency will help improve the existing power imbalance between shareholders and stakeholders. The lack of verified disclosure today discourages corporations from reporting unsavory business practices that have devastating societal and environmental impact. Greater transparency, stronger regulatory oversight, and more robust third-party ESG assessment can lead to better public understanding of the positive and negative externalities that corporations create, allowing the market to reward “good” ones and penalize “bad” ones. At the same time, given significant informational asymmetries and inevitable loopholes in principles-based disclosure standards, the tendency of corporations to understate their negative externalities is likely to persist, making greenwashing largely inescapable in the foreseeable future.
These challenges are further exacerbated by the lack of coordination to develop globally acceptable disclosure standards. Conflicting regulatory regimes between the U.S. and EU will harm trade and investment flows across the Atlantic and potentially globally. Frictions are already emerging in the context of the EU’s forthcoming carbon border adjustment mechanism, which will impose tariffs on imports from countries without carbon taxes. In the end, coordination at a global scale is needed to regulate corporate sustainability in a manner that does not sand the wheels of the global trading system.

G-20 support for improved infrastructure project cycles in Africa

Priyadarshi DashResearch and Information System for Developing Countries (RIS)Paulo EstevesBRICS Policy Center
Rob Floyd African Center for Economic Transformation (ACET)
Arthur MinsatDevelopment Center, Organization for Economic Co-operation and Development (OECD)
Aloysius Uche Ordu SAfrica Growth Initiative, Brookings Institution
Cobus van Staden South Africa Institute of International Affairs (SAIIA)