Bipartisan Alliance

Macroeconomic and Welfare Costs of U.S. Fiscal Imbalances

2012-01-31T13:31:00.000-08:00

Macroeconomic and Welfare Costs of U.S. Fiscal Imbalances. By Bertrand Gruss and Jose L. Torres
IMF Working Paper No. 12/38
http://www.imf.org/external/pubs/cat/longres.aspx?sk=25691.0

Summary: In this paper we use a general equilibrium model with heterogeneous agents to assess the macroeconomic and welfare consequences in the United States of alternative fiscal policies over the medium-term. We find that failing to address the fiscal imbalances associated with current federal fiscal policies for a prolonged period would result in a significant crowding-out of private investment and a severe drag on growth. Compared to adopting a reform that gradually reduces federal debt to its pre-crisis level, postponing debt stabilization for two decades would entail a permanent output loss of about 17 percent and a welfare loss of almost 7 percent of lifetime consumption. Moreover, the long-run welfare gains from the adjustment would more than compensate the initial losses associated with the consolidation period.

The authors start the paper this way:

“History makes clear that failure to put our fiscal house in order will erode the vitality of our
economy, reduce the standard of living in the United States, and increase the risk of economic and financial instability.”
Ben S. Bernanke, 2011 Annual Conference of the Committee for a Responsible Federal Budget

Excerpts

Introduction

One of the main legacies of the Great Recession has been the sharp deterioration of public finances in most advanced economies. In the U.S., the federal debt held by the public surged from 36 percent of GDP in 2007 to around 70 percent in 2011. This rise in debt, however impressive, gets dwarfed when compared to the medium-term fiscal imbalances associated with entitlement programs and revenue-constraining measures. For example, the non-partisan Congressional Budget Office (CBO) foresees the debt held by the public to exceed 150 percent of GDP by 2030 (see Figure 1). Similarly, Batini et al. (2011) estimate that closing the federal “fiscal gap” associated with current fiscal policies would require a permanent fiscal adjustment of about 15 percent of GDP.

While the crisis brought the need to address the U.S. medium-term fiscal imbalances to the center of the policy debate, the costs they entail are not necessarily well understood. Most of the long-term fiscal projections regularly produced in the U.S. and used to guide policy discussions are derived from debt accounting exercises. A shortcoming of such approach is that relative prices and economic activity are unaffected by different fiscal policies, and that it cannot be used for welfare analysis. To overcome those limitations and contribute to the debate, in this paper we use a rational expectations general equilibrium framework to assess the medium-term macroeconomic and welfare consequences of alternative fiscal policies in the U.S. We find that failing to address the federal fiscal imbalances for a prolonged period would result in a significant crowding-out of private investment and drag on growth, entailing a permanent output loss of about 17 percent and welfare loss of almost 7 percent of lifetime consumption. Moreover, we find that the long-run welfare gains from stabilizing the federal debt at a low level more than compensate the welfare losses associated with the consolidation period. Our results also suggest that the crowding-out effects of public debt are an order of magnitude bigger than the policy mix effects: Reducing promptly the level of public debt is significantly more important for activity and welfare than differences in the size of government or the design of the tax reform.

The focus of this study is on the costs and benefits of fiscal consolidation for the U.S. over the medium-term to long-term. In this sense, we explicitly leave aside some questions on fiscal consolidation that, while very relevant for the short-run, cannot be appropriately tackled in this framework. One example is assessing the effects of back-loading the pace of consolidation in the near term—while announcing a credible medium-run adjustment—in the current context of growth below potential and nominal interest rates close to zero. A related relevant question is what mix of fiscal instruments in the near term would make fiscal consolidation less costly in such context. While interesting, these questions are beyond the scope of this paper.

The quantitative framework we use is a dynamic stochastic general equilibrium model with heterogeneous agents, and endogenous occupational choice and labor supply. In the model, ex-ante identical agents face idiosyncratic entrepreneurial ability and labor productivity shocks, and choose their occupation. Agents can become either entrepreneurs and hire other workers, or they can become workers and decide what fraction of their time to work for other entrepreneurs. In order to make a realistic analysis of the policy options, we assume that the government does not have access to lump sum taxation. Instead, the government raises distortionary taxes on labor, consumption, and income, and issues one period non-contingent bonds to finance lump sum transfers to all agents, other noninterest spending, and service its debt. Given that the core issue threatening debt sustainability in the U.S. is the explosive path of spending on entitlement programs, the heterogeneous agents assumption is crucial: Our model allows for a meaningful tradeoff between distortionary taxation and government transfers, as the latter insure households from attaining very low levels of consumption. The complexity this introduces forces us to sacrifice on some dimension: Agents in our model face individual uncertainty but have perfect foresight about future paths of fiscal instruments and prices. Allowing for uncertainty about the timing and composition of the adjustment would be interesting, but would severely increase the computational cost.

We compare model simulations from four alternative fiscal scenarios. The benchmark scenario maintains current fiscal policies for about twenty years. More precisely, in this scenario we feed the model with the spending (noninterest mandatory and discretionary) and revenue projections from CBO’s Alternative Fiscal scenario (CBO 2011)—allowing all other variables to adjust endogenously—until about 2030, when we assume that the government increases all taxes to stabilize the debt at its prevailing level. Three alternative scenarios assume, instead, the immediate adoption of fiscal reform aimed at gradually reducing the federal debt to its pre-crisis level. There are of course many possible parameterizations for such reform reflecting, among other things, different views about the desired size of the public sector and the design of the tax system. We first consider an adjustment scenario assuming the same size of government and tax structure than the benchmark one in order to disentangle the sole effect of delaying fiscal adjustment—and stabilizing the debt ratio at a high level. We then explore the effect of alternative designs for the consolidation plan by considering two alternative adjustment scenarios that incorporate spending and revenue measures proposed by the bipartisan December 2010 Bowles-Simpson Commission.

This paper is related to different strands of the macro literature on fiscal issues. First, it is related to studies using general equilibrium models to analyze the implications of fiscal consolidations. Forni et al. (2010) use perfect-foresight simulations from a two-country dynamic model to compute the macroeconomic consequences of reducing the debt to GDP ratio in Italy. Coenen et al. (2008) analyze the effects of a permanent reduction in public debt in the Euro Area using the ECB NAWM model. Clinton et al. (2010) use the IMF GIMF model to examine the macroeconomic effects of permanently reducing government fiscal deficits in several regions of the world at the same time. Davig et al. (2010) study the effects of uncertainty about when and how policy will adjust to resolve the exponential growth in entitlement spending in the U.S.

The main difference with our paper is that these works rely on representative agent models that cannot adequately capture the redistributive and insurance effects of fiscal policy. As a result, such models have by construction a positive bias towards fiscal reforms that lower transfers, reduce the debt, and eventually lower the distortions by lowering tax rates. Another unappealing feature of the representative agent models for analyzing the merits of a fiscal consolidation is that, in steady state, the equilibrium real interest rate is independent of the debt level, whereas in our model the equilibrium real interest rate is endogenously affected by the level of government debt, which is consistent with the empirical literature.

Second, the paper is related to previous work using general equilibrium models with infinitively lived heterogeneous agents, occupational choice, and borrowing constraints to analyze fiscal reforms, such as Li(2002), Meh (2005) and Kitao (2008). Differently from these papers, that impose a balanced budget every period, we focus on the effects of debt period of time we augment our model to include growth. Moreover and as in Kitao (2008), we explicitly compute the transitional dynamics after the reforms and analyze the welfare costs associated with the transition. dynamics and fiscal consolidation reforms. Also, since we focus on reforms over an extended period of time we augment our model to include growth. Moreover and as in Kitao (2008), we explicitly compute the transitional dynamics after the reforms and analyze the welfare costs associated with the transition.

Results:The long-run effects

What is the effect of delaying fiscal consolidation on...?

Capital and Labor. The high interest rates in the delay scenario imply that for those entrepreneurs that do not have enough internal funding, the cost of borrowing sufficient capital is too high for them to compensate for their income under the outside option (i.e. wage income). As a result, the share of entrepreneurs in the delay scenario is roughly one half the share under the passive adjust scenario and the aggregate capital stock is about 17 percent lower. The higher share of workers in the delay scenario implies a higher labor supply. Together with a lower labor demand (due to a lower capital stock), this leads to a real wage that is more than 19 percent lower. Total hours worked are similar in the two steady states as lower individual hours offset the higher share of workers.

Output and Consumption. The crowding-out effect of fiscal policy under the delay scenario leads to large permanent losses in output and consumption. The level of GDP is about 16 percent lower in the delay than in the passive adjust scenario and aggregate consumption is 3.5 percent lower. Moreover and as depicted in Figure 4, the wealth distribution is significantly more concentrated under the delay scenario.

Welfare. The effect of lower aggregate consumption and more concentrated wealth distribution under the delay scenario implies that welfare is significantly lower than in the passive adjust scenario. Using a consumption equivalent welfare metric we find that the average difference in steady state welfare across scenarios would be equivalent to permanently increasing consumption to each agent in the delay scenario economy by 6 percent while leaving their amount of leisure unchanged. We interpret this differential as the permanent welfare gain from stabilizing public debt at its pre-crisis level. A breakup of the welfare comparison of steady states by wealth deciles, shown in Figure 5, suggests that all agents up to the 7th deciles of the wealth distribution would be better off under fiscal consolidation.

What are the effects of alternative fiscal consolidation plans?

Capital and Output. The smaller size of government in the two active adjust scenario relative to the passive one translates into higher capital stocks and higher output, increasing the gap with the delay scenario. Regarding the tax reform, the comparison between the two active adjust scenarios reveals that distributing the higher tax pressure on all taxes, including consumption taxes, lowers distortions and results in a higher capital stock and in a growth friendlier consolidation: The difference in the output level between the delay and active (1) adjust scenario stands at 17.7 percent—while this difference is 17.1 and 15.7 percent for the active (2) adjust and passive adjust scenarios respectively.

Consumption and Welfare. While all adjust scenarios reveal a significant difference in long-run per-capita consumption and welfare with respect to postponing fiscal consolidation, the relative performance among them also favors a smaller size of government and a balanced tax reform. The difference in per-capita consumption with the delay scenario is 3.5, 5.8 and 5.4 percent respectively for the passive, active (1) and active (2) adjustment scenarios. The policy mix under the active (1) adjust scenario also ranks the best in terms of welfare, with the welfare differential with respect to the delay scenario being more than 7 percent of lifetime consumption.

Overall Welfare Cost of Delaying Fiscal Consolidation

In the long-run the average welfare in the adjust scenario is higher than in the delay scenario by 6.7 percent of lifetime consumption. However, along the transition to the new steady state the adjust scenario is characterized by a costly fiscal adjustment that entails a lower path for per capita consumption, so it might not be necessarily true that an adjustment is optimal.

To assess the overall welfare ranking of the alternative fiscal paths, we extend the analysis of section III.A. by computing, for the delay and adjust scenarios, the average expected discounted lifetime utility starting in 2011. We find that even taking into account the costs along the transition, the adjust scenario entails an average welfare gain for the economy. The infinite horizon welfare comparison suggests that consumption under the delay scenario should be raised by 0.8 percent for all agents in the economy in all periods to attain the same average utility than under the adjust scenario (while leaving leisure unchanged). A breakup of this result by wealth deciles (see Figure 9) suggests that, as in the long-run comparison, the wealthiest decile of the population is worse off under the adjust scenario. Differently from the steady state comparison, however, the first four deciles also face welfare losses in the adjust scenario.

A few elements suggest that the average welfare gain reported (0.8 percent in consumptionequivalent terms) can be considered a lower bound. First, the calibrated subjective discount factor from the model used to compute the present value of the utility paths entails a yearly discount rate of about 9.9 percent.20 With such a high discount rate, the long-run benefits from the delay scenario are heavily discounted. Using a discount rate of 3 percent, the one used by CBO for calculating the present value of future streams of revenues and outlays of the government’s trust funds, would imply a consumption-equivalent welfare gain of 5.9 percent (instead of 0.8 percent). Second, the model we are using has infinitely lived agents, so we are not explicitly accounting for the distribution of costs and benefits across generations.

Conclusions

We compare the macroeconomic and welfare effects of failing to address the fiscal imbalances in the U.S. for an extended period with those of reducing federal debt to its precrisis level and find that the stakes are quite high. Our model simulations suggest that the continuous rise in federal debt implied by current policies would have sizeable effects on the economy, even under certainty that the federal debt will be fully repaid. The model predicts that the mounting debt ratio would increase the cost of borrowing and crowd out private capital from productive activities, acting as a significant drag on growth. Compared to stabilizing federal debt at its pre-crisis level, continuation of current policies for two decades would entail a permanent output loss of around 17 percent. The associated drop in per-capita consumption, combined with the worsening of wealth concentration that the model suggests, would cause a large average welfare loss in the long-run, equivalent to about 7 percent of lifetime consumption. Our results also suggest that reducing promptly the level of public debt is significantly more important for activity and welfare than differences in the size of government or the design of the tax reform. Accordingly, even under consensus on the desirability to increase primary spending in the medium-run, it would be preferable to start from a fiscal house in order.

The model adequately captures that the fiscal consolidation needed to reduce federal debt to its pre-crisis level would be very costly. Still, extending the welfare comparison to include also the transition period suggests that a fiscal consolidation would be on average beneficial. After taking into account the short-term costs, the average welfare gain from fiscal consolidation stands at 0.8 percent of lifetime consumption.

We argue that our welfare results can be interpreted as a lower bound. This is because, first, we abstract from default so our simulations ignore the potential effect of higher public debt on the risk premium. However, as the debt crisis in Europe has revealed, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy. Considering this effect would have magnified the long-run welfare costs of stabilizing the debt ratio at a higher level. Second, the high discount rate we use in the computation of the present value of utility exacerbates the short-term costs. If we recomputed the overall welfare effects in our scenarios using a discount rate of 3 percent, the welfare gain from a consolidation would be 5.9 percent of lifetime utility, instead of 0.8 percent. An argument for considering a lower rate to compute the present value of welfare is that by assuming infinitely lived agents we are not attaching any weight to unborn agents that would be affected by the permanent costs of delaying the resolution of fiscal imbalances and do not enjoy the expansionary effects of the unsustainable policy along the transitional dynamics.

The results in this paper are not exempt from the perils inherent to any model-dependent analysis. In order to address features that we believe are crucial for the issue at hand, we needed to simplify the model on other dimensions. For example, given the current reliance of the U.S. on foreign financing, the closed economy assumption used in this paper may be questionable. However, we believe that it would also be problematic to assume that the world interest rate will remain unaffected if the U.S. continues to considerably increase its financing needs. Moreover and as mentioned before, the model ignores the effect of higher debt on the perceived probability of default, which would likely counteract the effect in our results from failing to incorporate the government’s access to foreign borrowing. The model also abstracts from nominal issues and real and nominal rigidities typically introduced in the new Keynesian models commonly used for policy analysis. However, we believe that while these features are particularly relevant for short-term cyclical considerations, they matter much less for the longer-term issues addressed in this paper.

How Risky Are Banks’ Risk Weighted Assets? Evidence from the Financial Crisis

2012-01-31T05:48:00.000-08:00

How Risky Are Banks’ Risk Weighted Assets? Evidence from the Financial Crisis. By Sonali Das & Amadou N. R. Sy
IMF Working Paper No. 12/36
http://www.imf.org/external/pubs/cat/longres.aspx?sk=25687.0

Summary: We study how investors account for the riskiness of banks’ risk-weighted assets (RWA) by examining the determinants of stock returns and market measures of risk. We find that banks with higher RWA had lower stock returns over the US and European crises. This relationship is weaker in Europe where banks can use Basel II internal risk models. For large banks, investors paid less attention to RWA and rewarded instead lower wholesale funding and better asset quality. RWA do not, in general, predict market measures of risk although there is evidence of a positive relationship before the US crisis which becomes negative afterwards.

Introduction:

“The leverage ratio - a simple ratio of capital to balance sheet assets - and the more complex riskbased requirements work well together. The leverage requirement provides a baseline level of capital to protect the safety net, while the risk-based requirement can capture additional risks that are not covered by the leverage framework. The more advanced and complex the models become, the greater the need for such a baseline. The leverage ratio ensures that a capital backstop remains even if model errors or other miscalculations impair the reliability of risk-based capital. This is a crucial consideration - particularly as we work through the implementation of Basel II standard. By restraining balance sheet growth, the leverage ratio promotes stability and resilience during difficult economic periods.”– Remarks by Sheila Bair, Chairman, Federal Deposit Insurance Corporation before the Basel Committee on Banking Supervision, Merida, Mexico, October 4, 2006.

The financial crisis that began in 2007 has exposed a number of important weaknesses in banking regulation. A key challenge is how to appropriately determine the riskiness of banks’ assets. The principle that regulatory capital requirements should be tied to the risks taken by banks was accepted internationally and formalized with the Basel I accord in 1988, and the definition of capital and measurement of risks have undergone several revisions since that time. The second Basel accord, published in 2004, recommended banks hold total regulatory capital equal to at least 8 percent of their risk-weighted assets (RWA). The recently updated Basel III guidelines emphasize higher quality forms of capital, but makes limited strides in the measurement of risks. Instead, Basel III proposes as a complementary measure, a non-riskweighted leverage ratio.

Risk weighted assets are an important element of risk-based capital ratios. Indeed, banks can increase their capital adequacy ratios in two ways: (i) by increasing the amount of regulatory capital held, which boosts the numerator of the ratio, or (ii) by decreasing risk-weighted assets, which is the denominator of the regulatory ratio. A key concern about current methods of determining risk-weighted assets is that they leave room for individual banks to “optimize” capital requirements by underestimating their risks and thus being permitted to hold lower capital. Jones (2000) discusses techniques banks can use to engage in regulatory capital arbitrage and provides evidence on the magnitude of these activities in the Unites States. Even under the Basel I system, in which particular classes of assets are assigned fixed risk-weights, the capital ratio denominator can be circumvented. Merton (1995) provides an example in which, in place of a portfolio of mortgages, a bank can hold the economic equivalent of that portfolio at a riskweight one-eighth as large. Innovations in financial products since the first Basel accord have also likely made it easier for financial institutions to manipulate their regulatory risk measure. Acharya, Schnabl, and Suarez (2010) analyze asset-backed commercial paper and find results suggesting that banks used this form of securitization to concentrate, rather than disperse, financial risks in the banking sector while reducing bank capital requirements.

In addition to concerns about underestimating the riskiness of assets, there are differences in calculation of risk weighted assets across countries that may have unintended effects on financial stability. Lord Adair Turner, chairman of the UK Financial Services Authority, warned in June that international differences in the calculation of risk-weighted assets could undermine Basel III3 and Sheila Bair, former chairman of the US Federal Deposit Insurance Corporation, added her concern that Europe and the US may be diverging in their calculation of RWA: “The risk weightings are highly variable in Europe and have led to continuing declines in capital levels, even in the recession. There's pretty strong evidence that the RWA calculation isn't working as it's supposed to.”

In this paper, we study whether equity investors find banks’ reported risk-weighted assets to be a credible measure of risk. First, did banks with lower risk-weighted assets have higher stock returns during the recent financial crisis? And second, do measures of risk based on equity market information correspond to risk-weighted assets? Demirgüç-Kunt, Detragiache, and Merrouche (2010) and Beltratti and Stulz (2010) study banks’ stock return performance during the financial crisis as well, focusing primarily on the effect of different measures of capital and bank governance, respectively. Our paper studies whether markets price bank risk as measured by RWA, to inform the debate on how best to measure the risks embedded in banks’ portfolios. Addressing the first question, we find that banks with higher RWA performed worse during the severe phase of the crisis, from July 2007 to September 2008, suggesting that equity investors did look at RWA as a determinant of banks’ stock returns in this period. This relationship is weaker in Europe where banks can use Basel II internal risk models. For large banks, investors paid less attention to RWA and rewarded instead lower wholesale funding and better asset quality.

We find as in Demirguc-Kunt, Detragiache, and Merrouche (2010) that markets do not respond to all measures of capital, but respond positively to higher quality measures – that is, capital with greater loss-absorbing potential. We also investigate the possibility of a capital-liquidity trade-off in the market assessment of banks. Our results indicate that there is indeed a capital-liquidity trade-off: (i) banks with more stable sources of short-term funding are not rewarded as highly for having higher capital, and (ii) banks with liquid assets are not rewarded as highly for having higher capital.

Regarding the relationship between RWA and stock market measures of bank risk, we find that RWA do not, in general, predict market measures of banks’ riskiness. There is evidence, however, of a positive relationship between RWA and market risk in the three years prior to the crisis, from 2004 to 2006, and this relationship becomes negative after the crisis. This could result from the large increase in market measures of risk, which reflect the volatility of a bank’s stock price, since the crisis, while banks have not adjusted their RWA to account for increased risk.

Conclusions

There has been a steady decline in the measure of asset-risk that banks report to regulators—riskweighted assets (RWA)—over the last decade. In light of this trend and other indications that banks can “optimize” their capital by under-reporting RWA in an attempt to minimize regulatory burdens, we study how equity market investors account for the riskiness of RWA by examining the determinants of stock returns and stock-market measures of risk of an international panel of banks.

Regarding banking stock returns, we find a negative relationship between RWA and stock returns over periods of financial crisis, suggesting that investors use RWA as an indicator of bank portfolio risk. Indeed, banks with higher risk-weighted assets performed worse during the severe phase of the crisis, from July 2007 to September 2008. We find a similar result when we focus on the ongoing crisis in the Europe.

Comparing regions with different regulatory structures, we find, however, that the relationship between stock returns and RWA is weaker in countries where banks have more discretion in the calculation of RWA. Specifically, in countries that had implemented Basel II before the onset of the recent financial crisis, allowing banks to use their own internal models to assess credit risks, investors look to other balance-sheet measures of risk exposure but not RWA. Our results also suggest that for large banks, investors paid less attention to the quality of capital and RWAs during the crisis and rewarded instead lower reliance on wholesale funding and better asset quality as measured by the relative size of customer deposit and non-performing loans, respectively.

We confirm results from previous studies that only capital with the greatest loss-absorbing potential matters for stock returns. In addition, we find a trade-off between capital and liquidity in terms of their positive effects on bank stock returns. The more stable a bank’s funding, the less positive the effect of higher capital on its stock return; the more liquid a bank’s assets, the less an increase in capital will increase its stock return.

When it comes to stock-market measures of risk, we find that RWA do not, in general, predict market measures of bank risk. There is evidence, however, of a break in the relationship between stock market measures of risk and RWA since the start of the crisis. Indeed, we find a positive relationship between RWA and market risk in the three years prior to the crisis, from 2004 to 2006, and this relationship becomes negative after the crisis. This could result from the large increase in market measures of risk, which reflect the volatility of a bank’s stock price, since the crisis, while banks have not adjusted their RWA to reflect increased risk.

In light of increasing risk-aversion in markets during times of crisis, the question of how market assessments of risk should be incorporated into banking regulation and supervision remains. Indeed, the asymmetry of information between banks, supervisors, and market participants regarding how risky RWA are can lead to increased uncertainty about the adequacy of bank capital, which during a financial crisis, can have damaging effects for financial stability.

Liberals and Conservatives on Padilla's Fourth Circuit appeal

2012-01-30T04:55:00.000-08:00

1 Liberals

In Padilla ruling, Fourth Circuit Court ignores U.S. international obligations.

January 24, 2012, 12:30 pm

http://compliancecampaign.wordpress.com/2012/01/24/in-padilla-ruling-fourth-circuit-court-ignores-u-s-international-obligations/

In a decision with international implications, a U.S. court has demonstrated a decided indifference to the United States’ international obligations on matters of human rights. On Monday the Fourth Circuit Court in Richmond, Va., ruled that the military policies of detention without charge and the harsh interrogation methods established by the Bush administration and continued in part by the Obama administration cannot be challenged in damage lawsuits in federal courts.

Issues raised by the case regarding the detention of terrorist suspects – in particular the treatment of Jose Padilla, a U.S. citizen held for nearly four years without charge as an “enemy combatant” – have been addressed specifically by international bodies to which the U.S. belongs, but these concerns did not factor in to the judges’ deliberations.

In dismissing the Padilla case, the court declared that under the Constitution, the making of counter-terrorism policy is entrusted solely to Congress and the President, and the courts may not “trespass” on this authority. The court therfore threw out the lawsuit brought by Padilla, who was seeking damages of one dollar from each of the defendants: Donald H. Rumsfeld, Former Secretary of Defense; Catherine T. Hanft, Former Commander Consolidated Brig; Melanie A. Marr, Former Commander Consolidated Brig; Lowell E. Jacoby, Vice Admiral, Former Director Defense Intelligence Agency; Paul Wolfowitz, Former Deputy Secretary Of Defense; William Haynes, Former General Counsel Department of Defense; Leon E. Panetta, Secretary of Defense.

Padilla had contended that he was entitled to sue the defendants because the government deprived him of other ways to seek remedies for his treatment, even under military code.

In its ruling, however, the court recognized the President’s purported absolute authority to hold terrorist suspects – even U.S. citizens – indefinitely and incommunicado as enemy combatants:

    On June 9, 2002, acting pursuant to his authority under the AUMF [2001 Authorization of Military Force], President George W. Bush issued an order to defendant Donald Rumsfeld, then Secretary of Defense, to detain Padilla as an enemy combatant, the President having determined that Padilla possessed vital intelligence and posed an ongoing threat to the national security of the United States.

    That day, Padilla was removed from civilian custody and transferred to the Naval Consolidated Brig at Charleston, South Carolina. While in military custody, Padilla claims that he was repeatedly abused, threatened with torture, deprived of basic necessities, and unjustifiably cut off from access to the outside world. Over time, these conditions were relaxed, and he was allowed monitored meetings with his attorneys.

The ruling seemed to downplay Padilla’s actual allegations though, which are not simply that he was “threatened with torture,” but in fact that he was tortured. According to his attorneys, Padilla was routinely mistreated and abused in ways designed to cause pain, anguish, depression and ultimately the loss of will to live.

“The extended torture visited upon Mr. Padilla has left him damaged, both mentally and physically,” said a court filing by Orlando do Campo, one of Padilla’s lawyers. The filing says that Padilla was subjected to sleep deprivation and extremes of heat and cold, and forced to stand for extended periods in painful “stress positions.”

His lawyers have also claimed that Padilla was forced to take LSD and PCP to act as truth serums during his interrogations.

As forensic psychiatrist Dr. Angela Hegarty, who interviewed Jose Padilla for 22 hours to determine the state of his mental health, told Democracy Now in 2007:

    What happened at the brig was essentially the destruction of a human being’s mind. That’s what happened at the brig. His personality was deconstructed and reformed.

    And essentially, like many abuse victims, whether it’s torture survivors or battered women or even children who are abused by parents, as long as the parents or the abuser is in control in their minds, essentially they identify with the primary aims of the abuser. And all abusers, whoever they are, have one absolute requirement, and that is that you keep their secret. I mean, it’s common knowledge that people who abuse children or women will say, “Look at what you made me do,” putting the blame on the victim, trying to instill guilt. “People will judge you. People will think you’re crazy if you tell them about this. You will be an enemy. You will be seen as an enemy. You will be seen as a bad person if this comes out. There will be dire and terrible consequences, not only for you.” Jose was very, very concerned that if torture allegations were made on his behalf, that somehow it would it interfere with the government’s ability to detain people at Guantanamo, and this was something he couldn’t sign onto. He was very identified with the goals of the government.

Dr. Hegarty commented specifically on the psychological effect of the prolonged isolation and sensory deprivation that Padilla was subjected to:

    This was the first time I ever met anybody who had been isolated for such an extraordinarily long period of time. I mean, the sensory deprivation studies, for example, tell us that without sleep, especially, people will develop psychotic symptoms, hallucinations, panic attacks, depression, suicidality within days. And here we had a man who had been in this situation, utterly dependent on his interrogators, who didn’t treat him all that nicely, for years. And apart from –- the only people I ever met who had such a protracted experience were people who were in detention camps overseas, that would come close, but even then they weren’t subjected to the sensory deprivation. So, yes, he was somewhat of a unique case in that regard.

Glossing over the specifics of Padilla’s four years of mistreatment, the Fourth Circuit’s decision instead treated these issues as mere policy decisions that were made expeditiously by the Executive and Legislative Branches – decisions that the Judiciary constitutionally has no say in.

The ruling makes clear the court’s opinion that the Judicial Branch has no competence to inject itself into matters that pertain to Congress’s war-making authority or the President’s powers as Commander-in-Chief, even when constitutional rights of U.S. citizens are involved:

    Special factors do counsel judicial hesitation in implying causes of action for enemy combatants held in military detention. First, the Constitution delegates authority over military affairs to Congress and to the President as Commander in Chief. It contemplates no comparable role for the judiciary. Second, judicial review of military decisions would stray from the traditional subjects of judicial competence.

The court noted that:

    Padilla’s complaint seeks quite candidly to have the judiciary review and disapprove sensitive military decisions made after extensive deliberations within the executive branch as to what the law permitted, what national security required, and how best to reconcile competing values. It takes little enough imagination to understand that a judicially devised damages action would expose past executive deliberations affecting sensitive matters of national security to the prospect of searching judicial scrutiny. It would affect future discussions as well, shadowed as they might be by the thought that those involved would face prolonged civil litigation and potential personal liability.

Further,

    This is a case in which the political branches, exercising powers explicitly assigned them by our Constitution, formulated policies with profound implications for national security. One may agree or not agree with those policies. One may debate whether they were or were not the most effective counterterrorism strategy. But the forum for such debates is not the civil cause of action pressed in the case at bar.

So, essentially, the Fourth Circuit Court in Richmond, Va., has washed the Judiciary’s hands of any responsibility in determining the constitutionality of any treatment of U.S. citizens who are designated by the Executive Branch as “enemy combatants.” Anything goes if the government calls you a terrorist, according to the court.

As Padilla’s attorney, Ben Wizner, said in a statement Monday:

    Today is a sad day for the rule of law and for those who believe that the courts should protect American citizens from torture by their own government. By dismissing this lawsuit, the appeals court handed the government a blank check to commit any abuse in the name of national security, even the brutal torture of a U.S. citizen on U.S. soil. This impunity is not only anathema to a democracy governed by laws, but contrary to history’s lesson that in times of fear our values are a strength, not a hindrance.

It could also be pointed out that since the Constitution provides that treaties entered into by the United States are “the supreme law of the land,” the court has issued the U.S. government a blank check to disregard this clause and violate international treaties at will, in particular the International Covenant on Civil and Political Rights, ratified by the United States in 1992.

As Padilla was held in military custody for nearly four years without charge or trial, it appears the U.S. has violated of Article 9 of the ICCPR, which states:

    1. Everyone has the right to liberty and security of person. No one shall be subjected to arbitrary arrest or detention. No one shall be deprived of his liberty except on such grounds and in accordance with such procedure as are established by law.

    2. Anyone who is arrested shall be informed, at the time of arrest, of the reasons for his arrest and shall be promptly informed of any charges against him.

    3. Anyone arrested or detained on a criminal charge shall be brought promptly before a judge or other officer authorized by law to exercise judicial power and shall be entitled to trial within a reasonable time or to release. It shall not be the general rule that persons awaiting trial shall be detained in custody, but release may be subject to guarantees to appear for trial, at any other stage of the judicial proceedings, and, should occasion arise, for execution of the judgement.

    4. Anyone who is deprived of his liberty by arrest or detention shall be entitled to take proceedings before a court, in order that that court may decide without delay on the lawfulness of his detention and order his release if the detention is not lawful.

By denying Padilla a right to compensation in civil courts, the Fourth Circuit appears to have also overlooked this provision of the ICCPR: “Anyone who has been the victim of unlawful arrest or detention shall have an enforceable right to compensation.”

As a party to the Covenant, the U.S. is required to submit a report to the UN Human Rights Committee every five years on its compliance with the Covenant’s provisions.

The last report submitted by the United States – in 2005 – was seven years overdue. Regarding the matter of indefinite detention, the 2005 report pointed out that the U.S. Supreme Court has stated “that the United States is entitled to detain enemy combatants, even American citizens, until the end of hostilities, in order to prevent the enemy combatants from returning to the field of battle and again taking up arms.”

The U.S. asserted that “the detention of such individuals is such a fundamental and accepted incident of war that it is part of the ‘necessary and appropriate’ force that Congress authorized the President to use against nations, organizations, or persons associated with the September 11 terrorist attacks.”

The Human Rights Committee objected to this “restrictive interpretation made by the State party of its obligations under the Covenant,” and urged the U.S. to “review its approach and interpret the Covenant in good faith, in accordance with the ordinary meaning to be given to its terms in their context, including subsequent practice, and in the light of its object and purpose.”

The HRC had particularly harsh words for the U.S.’s indefinite detention policies: “The State party [the U.S.] should ensure that its counter-terrorism measures are in full conformity with the Covenant and in particular that the legislation adopted in this context is limited to crimes that would justify being assimilated to terrorism, and the grave consequences associated with it.”

The Committee reminded the United States of its obligations under the Covenant to both prosecute those responsible for using torture or cruel, inhuman or degrading treatment, and to provide compensation to the victims of such policies:

    The State party should conduct prompt and independent investigations into all allegations concerning suspicious deaths, torture or cruel, inhuman or degrading treatment or punishment inflicted by its personnel (including commanders) as well as contract employees, in detention facilities in Guantanamo Bay, Afghanistan, Iraq and other overseas locations. The State party should ensure that those responsible are prosecuted and punished in accordance with the gravity of the crime. The State party should adopt all necessary measures to prevent the recurrence of such behaviors, in particular by providing adequate training and clear guidance to its personnel (including commanders) and contract employees, about their respective obligations and responsibilities, in line with articles 7 and 10 of the Covenant. During the course of any legal proceedings, the State party should also refrain from relying on evidence obtained by treatment incompatible with article 7. The Committee wishes to be informed about the measures taken by the State party to ensure the respect of the right to reparation for the victims.

By dismissing Padilla’s lawsuit, the Fourth Circuit Court has essentially done the opposite of what the UN Human Rights Committee has recommended to bring the U.S. in compliance with the ICCPR regarding its detention policies. The court has ensured, at least for now, that the right of reparations for the victims of U.S. detention and torture policies will remain unrecognized by the United States. It has ensured that the U.S. will remain in violation of its obligations under international law.

2 Conservatives

'Lawfare' Loses Big
The ACLU loses its nasty suit against former defense officials.
WSJ, Jan 28, 2012
http://online.wsj.com/article/SB10001424052970203718504577181191271527180.html

The guerrilla legal campaign against national security suffered a big defeat this week, and the good news deserves more attention. The victory for legal sanity came Monday when the Fourth Circuit Court of Appeals upheld a lower court decision to toss out a suit brought by aspiring terrorist Jose Padilla against a slew of Bush Administration officials.

Readers may remember that Padilla was arrested in 2002 for plotting to set off a dirty bomb on U.S. soil. He was detained as an enemy combatant, convicted in a Miami court and sentenced to 17 years in prison. But Padilla has been adopted as a legal mascot by the ACLU and the National Litigation Project at Yale Law School, which have sued far and wide alleging mistreatment and lack of due process.

Padilla may in fact have had more due process than any defendant in history. His case has been ruled on by no fewer than 10 civilian courts, and as a prisoner in the Navy brig in Charleston, South Carolina from 2002 to 2006 he received the benefit of protections under the highly disciplined U.S. Code of Military Justice. Your average bank robber should be so lucky.

But the lawyers suing for Padilla aren't interested in justice. They're practicing "lawfare," which is an effort to undermine the war on terror by making U.S. officials afraid to pursue it for fear of personal liability.

The ACLU and the rest of the legal left have failed to persuade several Congresses and two Administrations to agree to their anti-antiterror policies. So instead they're suing former officials in civilian court to harass them and damage their reputations. It's shameful stuff, and if it succeeds it would have the effect of making Pentagon officials look over their shoulder at potential lawsuits every time they had to make a difficult military or interrogation decision.

In Lebron v. Rumsfeld et al., the ACLU sued under the Supreme Court's 1971 Bivens decision, which has been interpreted as creating a right of action against the federal government. Their targets included a retinue of Pentagon officials, starting with former Secretary of Defense Donald Rumsfeld and going down to the Navy brig commander where Padilla was held. Mr. Rumsfeld doesn't have to worry about getting another job, but the ACLU wants to make lower-level officials politically radioactive so they have a difficult time getting promoted or working in any influential position.

The good news is that the Fourth Circuit's three-judge panel saw this for what it was and unanimously rejected the claims. In his 39-page opinion, the influential Judge J. Harvie Wilkinson wrote that the Constitution gives authority over military affairs to Congress and to the President as Commander in Chief, but it never created a similar role for the courts.

"It takes little enough imagination," Judge Wilkinson wrote, "to understand that a judicially devised damages action would expose past executive deliberations . . . [and] would affect future discussions as well, shadowed as they might be by the thought that those involved would face prolonged civil litigation and potential personal liability."

The decision is especially notable because one of the three judges is Clinton appointee Diana Motz, who has been a skeptic of the Bush Administration's detainee policies and has dissented from her colleagues in cases like 2003's Hamdi v. Rumsfeld.

The ACLU may appeal to all of the Fourth Circuit judges, but Judge Wilkinson's ruling is comprehensive enough that an appeal is unlikely to prevail. The judges deserve credit for understanding that the Constitution gave war powers to the political branches, not to courts. The country will be safer for it.

China's Cyber Thievery Is National Policy—And Must Be Challenged

2012-01-27T00:12:00.001-08:00

China's Cyber Thievery Is National Policy—And Must Be Challenged. By MIKE MCCONNELL, MICHAEL CHERTOFF AND WILLIAM LYNN
It is more efficient for the Chinese to steal innovations and intellectual property than to incur the cost and time of creating their own.WSJ, Jan 27, 2012
http://online.wsj.com/article/SB10001424052970203718504577178832338032176.html

Only three months ago, we would have violated U.S. secrecy laws by sharing what we write here—even though, as a former director of national intelligence, secretary of homeland security, and deputy secretary of defense, we have long known it to be true. The Chinese government has a national policy of economic espionage in cyberspace. In fact, the Chinese are the world's most active and persistent practitioners of cyber espionage today.

Evidence of China's economically devastating theft of proprietary technologies and other intellectual property from U.S. companies is growing. Only in October 2011 were details declassified in a report to Congress by the Office of the National Counterintelligence Executive. Each of us has been speaking publicly for years about the ability of cyber terrorists to cripple our critical infrastructure, including financial networks and the power grid. Now this report finally reveals what we couldn't say before: The threat of economic cyber espionage looms even more ominously.

The report is a summation of the catastrophic impact cyber espionage could have on the U.S. economy and global competitiveness over the next decade. Evidence indicates that China intends to help build its economy by intellectual-property theft rather than by innovation and investment in research and development (two strong suits of the U.S. economy). The nature of the Chinese economy offers a powerful motive to do so.

According to 2009 estimates by the United Nations, China has a population of 1.3 billion, with 468 million (about 36% of the population) living on less than $2 a day. While Chinese poverty has declined dramatically in the last 30 years, income inequality has increased, with much greater benefits going to the relatively small portion of educated people in urban areas, where about 25% of the population lives.

The bottom line is this: China has a massive, inexpensive work force ravenous for economic growth. It is much more efficient for the Chinese to steal innovations and intellectual property—the source code of advanced economies—than to incur the cost and time of creating their own. They turn those stolen ideas directly into production, creating products faster and cheaper than the U.S. and others.

Cyberspace is an ideal medium for stealing intellectual capital. Hackers can easily penetrate systems that transfer large amounts of data, while corporations and governments have a very hard time identifying specific perpetrators.

Unfortunately, it is also difficult to estimate the economic cost of these thefts to the U.S. economy. The report to Congress calls the cost "large" and notes that this includes corporate revenues, jobs, innovation and impacts to national security. Although a rigorous assessment has not been done, we think it is safe to say that "large" easily means billions of dollars and millions of jobs.

So how to protect ourselves from this economic threat? First, we must acknowledge its severity and understand that its impacts are more long-term than immediate. And we need to respond with all of the diplomatic, trade, economic and technological tools at our disposal.

The report to Congress notes that the U.S. intelligence community has improved its collaboration to better address cyber espionage in the military and national-security areas. Yet today's legislative framework severely restricts us from fully addressing domestic economic espionage. The intelligence community must gain a stronger role in collecting and analyzing this economic data and making it available to appropriate government and commercial entities.

Congress and the administration must also create the means to actively force more information-sharing. While organizations (both in government and in the private sector) claim to share information, the opposite is usually the case, and this must be actively fixed.

The U.S. also must make broader investments in education to produce many more workers with science, technology, engineering and math skills. Our country reacted to the Soviet Union's 1957 launch of Sputnik with investments in math and science education that launched the age of digital communications. Now is the time for a similar approach to build the skills our nation will need to compete in a global economy vastly different from 50 years ago.

Corporate America must do its part, too. If we are to ever understand the extent of cyber espionage, companies must be more open and aggressive about identifying, acknowledging and reporting incidents of cyber theft. Congress is considering legislation to require this, and the idea deserves support. Companies must also invest more in enhancing their employees' cyber skills; it is shocking how many cyber-security breaches result from simple human error such as coding mistakes or lost discs and laptops.

In this election year, our economy will take center stage, as will China and its role in issues such as monetary policy. If we are to protect ourselves against irreversible long-term damage, the economic issues behind cyber espionage must share some of that spotlight.

Mr. McConnell, a retired Navy vice admiral and former director of the National Security Agency (1992-96) and director of national intelligence (2007-09), is vice chairman of Booz Allen Hamilton. Mr. Chertoff, a former secretary of homeland security (2005-09), is senior counsel at Covington & Burling. Mr. Lynn has served as deputy secretary of defense (2009-11) and undersecretary of defense (1997-2001).

Sovereign Risk, Fiscal Policy, and Macroeconomic Stability

2012-01-26T12:44:00.000-08:00

Sovereign Risk, Fiscal Policy, and Macroeconomic Stability. By Giancarlo Corsetti, Keith Kuester, Andre Meier, and Gernot J. Mueller
IMF Working Paper No. 12/33
January, 2012
http://www.imf.org/external/pubs/cat/longres.aspx?sk=25681.0

Abstract

This paper analyzes the impact of strained government finances on macroeconomic stability and the transmission of fiscal policy. Using a variant of the model by Curdia and Woodford (2009), we study a “sovereign risk channel” through which sovereign default risk raises funding costs in the private sector. If monetary policy is constrained, the sovereign risk channel exacerbates indeterminacy problems: private-sector beliefs of a weakening economy may become self-fulfilling. In addition, sovereign risk amplifies the effects of negative cyclical shocks. Under those conditions, fiscal retrenchment can help curtail the risk of macroeconomic instability and, in extreme cases, even stimulate economic activity.

Conclusion

The present paper analyzes how the ”sovereign risk channel” affects macroeconomic dynamics and stabilization policy. Through this channel, rising sovereign risk drives up private-sector borrowing costs, unless higher risk premia are offset by looser monetary policy. If the central bank is constrained in counteracting higher risk premia, sovereign risk becomes a critical determinant of macroeconomic outcomes. Its implications for stabilization policy have not been fully appreciated in earlier formal analyses, although they are likely to be of great importance for many advanced economies currently facing intense fiscal strain.

Building on the model proposed by C´urdia and Woodford (2009), we show that the sovereign risk channel makes the economy (more) vulnerable to problems of indeterminacy. In particular, private-sector beliefs about a weakening economy can become self-fulfilling, driving up risk premia and choking off demand. In this environment, a procyclical fiscal stance—that is, tighter fiscal policy during economic downturns–can help to ensure determinacy.

Further, we find that sovereign risk tends to exacerbate the effects of negative cyclical shocks: recessionary episodes will be deeper the stronger the sovereign risk channel, which in our specification is a nonlinear function of public-sector indebtedness. Moreover, in deep recessions that force the central bank down to the zero lower bound (ZLB) for nominal interest rates, sovereign risk delays the exit from the ZLB, hence prolonging macroeconomic distress. The sovereign risk channel also has a significant bearing on fiscal multipliers. Specifically, the effect of government spending on aggregate output hinges on (i) the responsiveness of private-sector risk premia to indicators of fiscal strain; and (ii) the length of time during which monetary policy is expected to be constrained. Our analysis suggests that upfront fiscal retrenchment is less detrimental to economic activity (i.e., multipliers are smaller) in the presence of significant sovereign risk, as lower public deficits improve private-sector financing conditions. In relatively extreme cases where fiscal strains are severe and monetary policy is constrained for an extended period, fiscal tightening may even exert an expansionary effect. That being said, fiscal retrenchment is no miracle cure. Indeed, all our simulations feature a deep recession even if tighter fiscal policy, under the aforementioned conditions, may stimulate economic activity relative to an even bleaker baseline.

As an additional caveat, we note that our analysis has focused on fiscal multipliers under a go-it-alone policy that does not involve external financial support at below-market rates. Availability of such support could allow countries to stretch out the necessary fiscal adjustment as they benefit from lower funding costs and, possibly, positive credibility effects. Indeed, if and where announcements of future fiscal adjustment are credible, delaying some of the planned spending cuts remains a superior strategy in terms of protecting short-term growth. How countries end up dealing with the challenges summarized here may prove to be a defining feature of global economic developments over the coming years.

Bank Funding Structures and Risk: Evidence from the Global Financial Crisis

2012-01-26T09:42:00.000-08:00

Bank Funding Structures and Risk: Evidence from the Global Financial Crisis. By Francisco Vazquez and Pablo Federico
IMF Working Paper WP/12/29
http://www.imfbookstore.org/ProdDetails.asp?ID=WPIEA2012029
Jan, 2012

Summary: This paper analyzes the evolution of bank funding structures in the run up to the global financial crisis and studies the implications for financial stability, exploiting a bank-level dataset that covers about 11,000 banks in the U.S. and Europe during 2001–09. The results show that banks with weaker structural liquidity and higher leverage in the pre-crisis period were more likely to fail afterward. The likelihood of bank failure also increases with bank risk-taking. In the cross-section, the smaller domestically-oriented banks were relatively more vulnerable to liquidity risk, while the large cross-border banks were more susceptible to solvency risk due to excessive leverage. The results support the proposed Basel III regulations on structural liquidity and leverage, but suggest that emphasis should be placed on the latter, particularly for the systemically-important institutions. Macroeconomic and monetary conditions are also shown to be related with the likelihood of bank failure, providing a case for the introduction of a macro-prudential approach to banking regulation.

Introduction

The global financial crisis raised questions on the adequacy of bank risk management practices and triggered a deep revision of the regulatory and supervisory frameworks governing bank liquidity risk and capital buffers. Regulatory initiatives at the international level included, inter alia, the introduction of liquidity standards for internationally-active banks, binding leverage ratios, and a revision of capital requirements under Basel III (BCBS 2009; and BCBS 2010 a, b).2 In addition to these micro-prudential measures, academics and policymakers argued for the introduction of a complementary macro-prudential framework to help safeguard financial stability at the systemic level (Hanson, Kashyap and Stein, 2010).

This regulatory response was implicitly based on two premises. First, the view that individual bank decisions regarding the size of their liquidity and capital buffers in the run up to the crisis were not commensurate with their risk-taking—and were therefore suboptimal from the social perspective. Second, the perception that the costs of bank failures spanned beyond the interests of their direct stakeholders due, for example, to supply-side effects in credit markets, or network externalities in the financial sector (Brunnermeier, 2009).

The widespread bank failures in the U.S. and Europe at the peak of the global financial crisis provided casual support to the first premise. Still, empirical work on the connection between bank liquidity and capital buffers and their subsequent probability of failure is incipient. Background studies carried out in the context of Basel III proposals, which are based on aggregate data, concluded that stricter regulations on liquidity and leverage were likely to ameliorate the probability of systemic banking crises (BCBS, 2010b).3 In turn, studies based on micro data for U.S. banks also support the notion that banks with higher asset liquidity, stronger reliance on retail insured deposits, and larger capital buffers were less vulnerable to failure during the global financial crisis (Berger and Bouwman, 2010; Bologna, 2011). Broadly consistent results are reported in Ratnovski and Huang (2009), based on data for large banks from the OECD.

This paper makes two contributions to previous work. First, it measures structural liquidity and leverage in bank balance sheets in a way consistent with the formulations of the Net Stable Funding Ratio (NSFR), and the leverage ratio (EQUITY) proposed in Basel III. Second, it explores for systematic differences in the relationship between structural liquidity, leverage, and subsequent probability of failure across bank types. In particular, we distinguish between large, internationally-active banks (henceforth Global banks), and (typically smaller) banks that focus on their domestic retail markets (henceforth Domestic banks).

This sample partition is suitable from the financial stability perspective. Global banks are systemically important and extremely challenging to resolve, due to the complexity of their business and legal structures, and because their operations span across borders, entailing differences in bank insolvency frameworks and difficult fiscal considerations. Furthermore, the relative role of liquidity and capital buffers for bank financial soundness is likely to differ systematically across these two types of banks. All else equal, Global banks benefit from the imperfect co-movement macroeconomic and monetary conditions across geographic regions (Griffith-Jones, Segoviano, and Spratt, 2002; Garcia-Herrero and Vazquez, 2007) and may exploit their internal capital markets to reshuffle liquidity and capital between business units. In addition, Global banks tend to enjoy a more stable funding base than Domestic banks due to flight to safety, particularly during times of market distress. To the extent that these factors are incorporated in bank risk management decisions, optimal choices on structural liquidity and leverage are likely to differ across these two types of banks.

The paper exploits a bank-level dataset that covers about 11,000 U.S. and European banks during 2001-09. This sample coverage allows us to study bank dynamics leading to, and during, the global financial crisis. As a by-product, we document the evolution of structural liquidity and leverage in the pre-crisis period, and highlight some patterns across bank types to motivate further research. Contrary to expectations, the average structural liquidity in bank balance sheets in the run up to the global financial crisis (as measured by a proxy of the NSFR) was close to the target values proposed in Basel III recommendations.4 However, we find a wide dispersion in structural liquidity across banks. A mild (albeit sustained) increase in structural liquidity mismatches in the run up to the crisis was driven by banks located at the lower extreme of the distribution. Pre-crisis leverage was also widely uneven across banks, with the Global banks displaying thinner capital buffers and wider gaps between leverage ratios and Basel capital to risk-weighted assets.

In line with alleged deficiencies in bank risk management practices, we find that banks with weaker structural liquidity and banks with higher leverage ratios in the run up to the crisis were more vulnerable to failure, after controlling for their pre-crisis risk-taking. However, the average effects of stronger structural liquidity and capital buffers on the likelihood of bank failure are not large. On the other hand, there is evidence of substantial threshold effects, and the benefits of stronger buffers appear substantial for the banks located at the lower extremes of the distributions. In addition, we find systematic differences in the relative importance of liquidity and leverage for financial fragility across groups of banks. Global banks were more susceptible to failure on excessive leverage, while Domestic banks were more susceptible to failure on weak structural liquidity (i.e., excessive liquidity transformation) and overreliance on short-term wholesale funding.

In the estimations, we include bank-level controls for pre-crisis risk taking, and for countryspecific macroeconomic conditions (i.e., common to all banks incorporated in a given country). The use of controls for pre-crisis risk-taking is critical to this study. To the extent that banks perform active risk management, higher risk-taking would tend to be associated with stronger liquidity and capital buffers, introducing a bias to the results. In fact, we find that banks engaging in more aggressive risk taking in the run-up to the crisis—as measured by the rate of growth of their credit portfolios and by their pre-crisis distance to default— were more likely to fail afterward. Macroeconomic conditions in the pre-crisis period are also found to affect bank probabilities of default, suggesting that banks may have failed to internalize risks stemming from overheated economic activity and exuberant asset prices.

All in all, these results provide support to the proposed regulations on liquidity and capital, as well as to the introduction of a macro-prudential approach to bank regulation. From the financial stability perspective, however, the evidence indicates that regulations on capital— particularly for the larger banking groups—are likely to be more relevant.

Concluding remarks

Overall, the findings of this paper provide broad support to Basel III initiatives on structural liquidity and leverage, and show the complementary nature of these two areas. Banks with weaker structural liquidity and higher leverage before the global financial crisis were more vulnerable to subsequent failure. The results are driven by banks in the lower extremes of the distributions, suggesting the presence of threshold effects. In fact, the marginal stability gains associated with stronger liquidity and capital cushions do not appear to be large for the average bank, but seem substantial for the weaker institutions.

At the same time, there is evidence of systematic differences across bank types. The smaller banks were more susceptible to failure on liquidity problems, while the large cross-border banking groups typically failed on insufficient capital buffers. This difference is crucial from the financial stability perspective, and implies that regulatory and supervisory emphasis should be placed on ensuring that the capital buffers of the systemically important banks are commensurate with their risk-taking.

The evidence also indicates that bank risk-taking in the run-up to the crisis was associated with increased financial vulnerability, suggesting that bank decisions regarding the associated liquidity and capital buffers were not commensurate with the underlying risks, resulting in excessive hazard to their business continuity. Country-specific macroeconomic conditions also played a role in the likelihood of subsequent bank failure, implying that banks failed to properly internalize the associated risks in their individual decision-making processes. Thus, while more intrusive regulations entail efficiency costs, the results point to associated gains in terms of financial stability that have to be pondered. This also supports the introduction of a macro-prudential framework as a complement to traditional, microprudential approach. In this regard, further work is needed to deepen the understanding of the role of the macroeconomic environment on financial stability.

No More Résumés, Say Some Firms

2012-01-25T06:06:00.001-08:00

No More Résumés, Say Some Firms. By RACHEL EMMA SILVERMAN
WSJ, Jan 25, 2012
http://online.wsj.com/article/SB10001424052970203750404577173031991814896.html

Union Square Ventures recently posted an opening for an investment analyst.

Instead of asking for résumés, the New York venture-capital firm—which has invested in Twitter, Foursquare, Zynga and other technology companies—asked applicants to send links representing their "Web presence," such as a Twitter account or Tumblr blog. Applicants also had to submit short videos demonstrating their interest in the position.

Union Square says its process nets better-quality candidates —especially for a venture-capital operation that invests heavily in the Internet and social-media—and the firm plans to use it going forward to fill analyst positions and other jobs.

Companies are increasingly relying on social networks such as LinkedIn, video profiles and online quizzes to gauge candidates' suitability for a job. While most still request a résumé as part of the application package, some are bypassing the staid requirement altogether.

A résumé doesn't provide much depth about a candidate, says Christina Cacioppo, an associate at Union Square Ventures who blogs about the hiring process on the company's website and was herself hired after she compiled a profile comprising her personal blog, Twitter feed, LinkedIn profile, and links to social-media sites Delicious and Dopplr, which showed places where she had traveled.

StickerGiant's John Fischer, right, and interviewee Adam Thackeray shoot a video Monday. Mr. Fischer uses an online survey to screen applicants.

"We are most interested in what people are like, what they are like to work with, how they think," she says.

John Fischer, founder and owner of StickerGiant.com, a Hygiene, Colo., company that makes bumper and marketing stickers, says a résumé isn't the best way to determine whether a potential employee will be a good social fit for the company. Instead, his firm uses an online survey to help screen applicants.

Questions are tailored to the position. A current opening for an Adobe Illustrator expert asks applicants about their skills, but also asks questions such as "What is your ideal dream job?" and "What is the best job you've ever had?" Applicants have the option to attach a résumé, but it isn't required. Mr. Fischer says he started using online questionnaires several years ago, after receiving too many résumés from candidates who had no qualifications or interest. Having applicants fill out surveys is a "self-filter," he says.

A previous posting for an Internet marketing position had applicants rate their marketing and social-media skills on a scale of one to 10 and select from a list of words how friends or co-workers would describe them. Options included: high energy, type-A, laid back, perfect, creative or fun.

In times of high unemployment, bypassing résumés can also help companies winnow out candidates from a broader labor pool.

IGN Entertainment Inc., a gaming and media firm, launched a program dubbed Code Foo, in which it taught programming skills to passionate gamers with little experience, paying participants while they learned. Instead of asking for résumés, the firm posted a series of challenges on its website aimed at gauging candidates' thought processes. (One challenge: Estimate how many pennies lined side by side would span the Golden Gate Bridge.)

It also asked candidates to submit a video demonstrating their love of gaming and the firm's products.

IGN is a unit of News Corp., which also owns The Wall Street Journal.

Nearly 30 people out of about 100 applicants were picked for the six-week Code Foo program, and six were eventually hired full-time. Several of the hires were nontraditional applicants who didn't attend college or who had thin work experience.

"If we had just looked at their résumés at the moment we wouldn't have hired them," says Greg Silva, IGN's vice president of people and places. The company does require résumés for its regular job openings.

At most companies, résumés are still the first step of the recruiting process, even at supposedly nontraditional places like Google Inc., which hired about 7,000 people in 2011, after receiving some two million résumés. Google has an army of "hundreds" of recruiters who actually read every one, says Todd Carlisle, the technology firm's director of staffing.

But Dr. Carlisle says he reads résumés in an unusual way: from the bottom up.

Candidates' early work experience, hobbies, extracurricular activities or nonprofit involvement—such as painting houses to pay for college or touring with a punk rock band through Europe—often provide insight into how well an applicant would fit into the company culture, Dr. Carlisle says.

Plus, "It's the first sample of work we have of yours," he says.

Pricing of Sovereign Credit Risk: Evidence from Advanced Economies During the Financial Crisis

2012-01-24T11:22:00.000-08:00

Pricing of Sovereign Credit Risk: Evidence from Advanced Economies During the Financial Crisis. By C. Emre Alper, Lorenzo Forni and Marc Gerard

IMF Working Paper WP/12/24
January, 2012

Summary: We investigate the pricing of sovereign credit risk over the period 2008-2010 for selected advanced economies by examining two widely-used indicators: sovereign credit default swap (CDS) and relative asset swap (RAS) spreads. Cointegration analysis suggests the existence of an imperfect market arbitrage relationship between the cash (RAS) and the derivatives (CDS) markets, with price discovery taking place in the latter. Likewise, panel regressions aimed at uncovering the fundamental drivers of the two indicators show that the CDS market, although less liquid, has provided a better signal for sovereign credit risk during the period of the recent financial crisis.

IV. CONCLUDING REMARKS

This paper addressed the linkages and determinants of two widely used indicators of sovereign risk: CDS and RAS spreads. It focused on advanced economies during the recent financial crisis and the sovereign market tensions that followed. It showed strong co-movements between both series, especially for those countries that have come under significant market pressure. At the same time, arbitrage distortions have remained pervasive in the biggest economies. This suggests that the liquidity of the derivatives market is of paramount importance for CDS spreads to fully reflect sovereign credit risk. For those economies where the evidence stands in favor of a cointegration relationship, deviations from arbitrage have been long lasting, though in line with results in the literature. Also, CDS spreads were found to anticipate changes in RAS, suggesting that the derivatives market has been leading in the process of pricing sovereign credit risk. Regarding the role of fundamentals, we showed that variables related to fiscal sustainability are able to explain only a limited share of the variation of CDS spreads. Spreads seem to respond more to financial variables (such as domestic banking sector capitalization, short-term liquidity conditions, large-scale long-term bond purchases by major central banks) or purely global variables (global growth, global risk aversion, dummies for the different stages of the crisis).

These results refer to a specific group of advanced countries over a short span of time. They suggest that movements in CDS and RAS spreads need to be interpreted with caution. First, while in theory they should be strictly connected, CDS and RAS spreads do not, generally, follow the pattern suggested by the no-arbitrage condition. Moreover, they are affected by several factors, with global and financial considerations playing a dominant role, while at the same time leaving room for a large unexplained component. In general, however, CDS spreads seem to have provided better signals than RAS regarding the market assessment of sovereign risk: over the period covered by the analysis, they have led the process of price discoveries in those countries under market pressure and have been more correlated than RAS to those fundamentals that are expected to affect sovereign risk.

PDF here: http://www.imf.org/external/pubs/ft/wp/2012/wp1224.pdf

The Challenge of Public Pension Reform in Advanced and Emerging Economies

2012-01-24T09:38:00.000-08:00

The Challenge of Public Pension Reform in Advanced and Emerging Economies. Prepared by the Fiscal Affairs Department

IMF
December 28, 2011

Summary: This paper reviews past trends in public pension spending and provides projections for 27 advanced and 25 emerging economies over 2011–2050. In constructing these projections, the paper incorporates the impact of recent pension reforms and highlights the key assumptions underlying these projections and associated risks. The paper also presents reform options to address future pension spending pressures in the advanced and emerging economies. These reforms—mainly increasing retirement ages, reducing replacement rates, or increasing payroll taxes—are discussed in the context of their role in fiscal consolidation, and their implications for both equity and economic growth. In addition, the paper examines the challenge of emerging economies of expanding coverage in a fiscally sustainable manner.

Executive Summary

Public pension reform will be a key policy challenge in both advanced and emerging economies over coming decades. Many economies will need to achieve significant fiscal consolidation over the next two decades. Given high levels of taxation, particularly in advanced economies, fiscal consolidation will often need to focus on the expenditure side. As public pension spending comprises a significant share of total spending, and is projected to rise further, efforts to contain these increases will in most cases be a necessary part of fiscal consolidation packages. Pension reforms can also help avoid the need for even larger cuts in pro-growth spending, such as public investment, and help prevent the worsening of intergenerational equity caused by rising life expectancies (at a pace faster than expected) and longer periods of retirement. Finally, some pension reforms, such as increases in retirement ages, can raise potential growth. Thus, while the appropriate level of pension spending and the design of the pension system are ultimately matters of public preference, there are several potential benefits for countries that choose to undertake pension reform. Against this background, this paper provides: (i) an assessment of the main drivers underlying spending trends over recent decades; (ii) new projections for public pension spending in advanced and emerging economies over the next 20 to 40 years; (iii) an assessment of the sensitivity of the country projections to demographic and macroeconomic factors, and risks of reform reversal; and (iv) country-specific policy recommendations to respond to pension spending pressures.

Pension spending is projected to rise in advanced and emerging economies by an average of 1 and 2½ percentage points of GDP over the next two and four decades, respectively, and is subject to a number of risks. During 2010–2030, increases in spending in excess of 2 percentage points of GDP are projected in nine advanced and six emerging economies. There is considerable uncertainty with respect to these projections, but risks are on the upside for a number of countries. Under a scenario where life expectancy is higher than anticipated—life expectancy projections have in the past underestimated actual increases—pension spending would be over 1 percentage point of GDP higher than projected in 2030 in five economies. Under a low labor productivity scenario, pension spending would be over ½ percentage point of GDP higher in three economies. Sizable risks are also associated with implementing enacted reforms as well as contingent fiscal risks if governments have to supplement private pensions should these fail to deliver adequate benefits.

The appropriate reform mix depends on country circumstances and preferences, although increasing retirement ages has many advantages. It is important that pension reforms do not undermine the ability of public pensions to alleviate poverty among the elderly. Raising retirement ages avoids the need for further cuts in replacement rates on top of those already legislated, and in many countries the scope for raising contributions may be limited in light of high payroll tax burdens. Longer working lives also raise potential output over time. In many advanced economies there is room for more ambitious increases in statutory retirement ages in light of continued gains in life expectancy, but this should be accompanied by measures that protect the incomes of those who cannot continue to work. In emerging Europe, one possible strategy would be to equalize retirement ages of men and women. In other emerging economies, where pension coverage is low, expansion of non-contributory “social pensions” could be considered, combined with reforms that place pension systems on sound financial footing, including raising the statutory age of retirement. Where average pensions are high relative to average wages, efforts to increase statutory ages could be complemented by reductions in the generosity of pensions. Where taxes on labor income are relatively low, increasing revenues could be considered, and all countries should strive to improve the efficiency of payroll contribution collections.

PDF here: http://www.imf.org/external/np/pp/eng/2011/122811.pdf

Are Rating Agencies Powerful? An Investigation into the Impact and Accuracy of Sovereign Ratings

2012-01-22T11:57:00.000-08:00

Are Rating Agencies Powerful? An Investigation into the Impact and Accuracy of Sovereign Ratings. By John Kiff, Sylwia Nowak, and Liliana Schumacher
IMF Working Paper WP/12/23
Jan 2012
http://www.imfbookstore.org/ProdDetails.asp?ID=WPIEA2012023

Abstract

We find that Credit Rating Agencies (CRA)’s opinions have an impact in the cost of funding of sovereign issuers and consequently ratings are a concern for financial stability. While ratings produced by the major CRAs perform reasonably well when it comes to rank ordering default risk among sovereigns, there is evidence of rating stability failure during the recent global financial crisis. These failures suggest that ratings should incorporate the obligor’s resilience to stress scenarios. The empirical evidence also supports: (i) reform initiatives to reduce the impact of CRAs’ certification services; (ii) more stringent validation requirements for ratings if they are to be used in capital regulations; and (iii) more transparency with regard to the quantitative parameters used in the rating process.

Excerpts
I. INTRODUCTION

1. Recent rating activities by the Credit Rating Agencies (CRAs) have induced some to ask whether ratings represent accurate risk assessments and to question how influential they are. The contention that ratings represent accurate default risk metrics was brought into question by the sheer volume and intensity of the multiple downgrades to U.S. mortgage-related structured finance securities in the wake of the crisis. Voices have also been raised against the timing of recent downgrades of European sovereigns amidst criticism that these downgrades promoted uncertainty in financial markets, leading to “cliff effects” and as a consequence affect their ability to funding themselves. Rating agencies have also been accused of behaving oligopolistically.

2. These criticisms are not new. CRAs’ downgrading actions have been accused before of not being timely but instead procyclical. It was argued that “the Mexican crisis of 1994-95 brought out that credit rating agencies, like almost anybody else, were reacting to events rather than anticipating them” (Reisen, 2003). During the late 1990s Asian crisis, CRAs were also blamed of downgrading East Asian countries too late and more than the worsening in these countries’ economic fundamentals justified, exacerbating the cost of borrowing.

3. The goal of this paper is to assess these concerns. We first examine CRAs’ role and whether CRAs are influential or just lag the market once new information is available and priced into fixed income securities. This is an important point. If CRAs influence the market, their opinions are important from a financial stability perspective. If they do not and just reflect information available to the market, their actions are not relevant and there is no policy concern. In this regard, we test three hypotheses regarding the services that CRAs provide to the market: information, certification and monitoring. We find evidence that CRAs’ opinions are influential and favor the information and certification role. We then attempt to determine what ratings actually measure and how accurate they are. We conclude with some policy recommendations based on these findings. This study is limited to sovereign ratings (of emerging markets and advanced economies) and covers the period January 2005-June 2010.

4. Our analysis of the interaction between the market and CRAs indicates that ratings have information value beyond the information already publicly available to the market. Specifically, the following results were evident:
An event study shows that negative credit warnings (i.e., “reviews,” “watches,” and “outlooks”) have a significant impact on CDS spreads. This evidence is also supported by a Granger-causality test that finds that negative credit warnings Granger-cause changes in CDS spreads. These findings are consistent with the view that rating agencies do provide additional information to the markets, in addition to what is publicly available and used by markets to price fixed income securities.
Although upgrades and downgrades in general do not have a significant impact on CDS spreads, upgrades and downgrades in and out of investment grade categories are statistically significant. This supports the view that the certification services provided by rating agencies do matter and likely create a purely liquidity effect (e.g. purchases and sales of assets forced by regulations or other formal mandates and not based on the additional information already in the market).
We do not find evidence in favor of the most important testable implication of the monitoring services theory. The impact of downgrades preceded by an outlook review in the same direction is not statistically significant.
From an informational point of view, the market appears to discriminate more than rating agencies among different kinds of issuers—in particular at lower rating grades and during crisis periods. This finding may indicate that ratings need to incorporate more granularity and leads to the second question of what ratings measure and how accurate they are.
A common element among ratings by the major CRAs is that they represent a rank ordering of credit risk. This ordering is based on qualitative and quantitative inputs such as default probabilities, expected losses, and downgrade risk. However, there is no oneto- one mapping between any of these quantitative measures of credit risk and credit ratings. There is also no disclosure of the quantitative parameters that characterize each rating grade. For this reason, validation tests undertaken by outsiders can only apply to the ability of ratings to differentiate potential defaulters and non defaulters, but not to estimating cardinal measures such as default probabilities.
The point highlighted above implies that—in spite of playing a similar role to internal ratings in the Basel II internal ratings-based (IRB) approach—ratings produced by the CRAs are subject to lower validation standards than are the banks using the IRB approach. In the Basel II IRB approach, financial institutions use measures of default probabilities (PD), losses given default (LGD) and exposure at default (EAD) to produce their internal ratings and are subject to calibration tests. Although validation is foremost the responsibility of banks, both bank risk managers and bank supervisors need to develop a thorough understanding of validation methods in evaluating whether banks’ rating systems comply with the operating standards set forth by Basel II.
Ratings produced by the major CRAs perform reasonably well when it comes to rank ordering default risk among sovereigns, i.e. defaults tend to take place among the lowest rated issuers. Accuracy ratios (AR) indicate that agencies are more successful at sorting out potential defaulters among sovereign issuers (average ARs in the 80 to 90 percent range) than among corporate and structured finance issuers (average ARs in the 63 to 87 percent range), the latter ones having suffered a strong deterioration over the global financial crisis. For all classes of products though, the ARs indicate that sovereign rating accuracy deteriorates as the evaluation horizon increases.
In general, long-term credit transition matrices show that higher ratings are more stable than lower ones, and tend to remain unchanged. But this was not the case during the global crisis period, when there has been a tendency to see heavier downgrade activity among higher-rated sovereigns than among lower-rated ones. There has been evidence of significant rating failure (defined here as three or more rating changes in one year) during the recent global financial crisis, although less than in the Asian crisis.

IV. SOME POLICY RECOMMENDATIONS

Based on the evidence of the impact of the CRA’s certification services, the removal of the excessive reliance of regulations on ratings is warranted. This will not affect the information value of ratings—that appears to work mostly through outlook reviews—and will help lessen the additional liquidity impact due to the need to meet regulations, reducing potential cliff effects.

To the extent that ratings continue to play a significant role in regulations, an issue arises as to whether CRAs should be more transparent about the quantitative measures they calibrate in the rating process (PDs, LGD, and stability assumptions), how these measures are mapped into ratings, and whether the final ratings can be used to infer the parameters used to obtain these measures. This is particularly relevant in the use of external ratings by banks employing the standardized approach in Basel II since internal ratings systems are subject to rigorous back testing.

Moreover, recent heavy downgrade activity suggests that ratings should embed the notion that risk is a forward looking dimension conditional on the macroeconomic scenario. In this regard, ratings should be better tied to macroeconomic conditions, including their resilience to stress scenarios.

PDF here: http://www.imf.org/external/pubs/ft/wp/2012/wp1223.pdf

Oil-price shocks have had substantial and statistically significant effects during the last 25 years

2012-01-19T14:14:00.000-08:00

Measuring Oil-Price Shocks Using Market-Based Information. By Tao Wu & Michele Cavallo
IMF Working Paper No. 12/19
January 01, 2012
http://www.imfbookstore.org/ProdDetails.asp?ID=WPIEA2012019

Summary

We study the effects of oil-price shocks on the U.S. economy combining narrative and quantitative approaches. After examining daily oil-related events since 1984, we classify them into various event types. We then develop measures of exogenous shocks that avoid endogeneity and predictability concerns. Estimation results indicate that oil-price shocks have had substantial and statistically significant effects during the last 25 years. In contrast, traditional VAR approaches imply much weaker and insignificant effects for the same period. This discrepancy stems from the inability of VARs to separate exogenous oil-supply shocks from endogenous oil-price fluctuations driven by changes in oil demand.

Excerpts:

I. INTRODUCTION

The relationship between oil-price shocks and the macroeconomy has attracted extensive scrutiny by economists over the past three decades. The literature, however, has not reached a consensus on how these shocks affect the economy, or by how much. A large number of studies have relied on vector autoregression (VAR) approaches to identify exogenous oilprice shocks and estimate their effects. Nevertheless, estimation results generally have not provided compelling support for the conventional-wisdom view that following a positive oilprice shock, real GDP declines and the overall price level increases. In addition, the estimated relationship is often unstable over time. This is why, after a careful examination of various approaches, Bernanke, Gertler, and Watson (1997) conclude that “finding a measure of oil price shocks that ‘works’ in a VAR context is not straightforward. It is also true that the estimated impacts of these measures on output and prices can be quite unstable over different samples.”

Traditional VAR-based measures of oil-price shocks exhibit two recurrent weaknesses: endogeneity and predictability. With regard to the first one, VAR approaches often cannot separate oil-price movements driven by exogenous shocks from those reflecting endogenous responses to other kinds of structural shocks. For instance, the oil price increases that occurred over the 2002–2008 period were viewed by many as the result of “an expanding world economy driven by gains in productivity” (The Wall Street Journal, August 11, 2006). The occurrence of such endogenous movements will undoubtedly lead to biased estimates of the effects of oil shocks.

On the other hand, part of the observed oil price changes might have been anticipated by private agents well in advance. Therefore, they can hardly be considered as “shocks.” Most measures of oil-price shocks in the literature are constructed using only spot oil prices. However, when the market senses any substantial supply-demand imbalances in the future, changes in the spot prices may not fully reflect such imbalances. A number of authors (e.g., Wu and McCallum, 2005; Chinn, LeBlanc, and Coibon, 2005) have found that oil futures prices are indeed quite powerful in predicting spot oil price movements, indicating that at least a portion of such movements may have been anticipated at least a few months in advance. Both these concerns underscore the need to pursue a different approach to obtain more reliable measures of exogenous oil-price shocks.

In this paper, we combine narrative and quantitative approaches to develop new measures of exogenous oil-price shocks that avoid the endogeneity and predictability concerns. We begin by identifying the events that have driven oil-price fluctuations on a daily basis from 1984 to 2007. To achieve this goal, we first collect information from daily oil-market commentaries published in a number of oil-industry trade journals, such as Oil Daily, Oil & Gas Journal, and Monthly Energy Chronology. This leads to the construction of a database that identifies the oil-related events that have occurred each day since January 1984. We then classify these daily events into a number of different event types based on their specific features, such as weather changes in the U.S., military actions in the Middle East, OPEC announcements on oil production, U.S. oil inventory announcements, etc. (see Table 1). Next, for each event type we construct a measure of oil-price shocks by running oil-price forecasting equations on a daily basis. Finally, shock series from exogenous oil events are selected and aggregated into a single measure of exogenous oil-price shocks. By construction, these shock measures should be free of endogeneity and predictability problems, and statistical tests are also conducted to confirm their exogeneity. For robustness, we also provide a number of alternative definitions of exogenous oil-price shocks and construct corresponding shock measures for each one of them.

We employ our new, market-information based measures to study the responses of U.S. output, consumer prices, and monetary policy to exogenous oil-price shocks. We also compare the estimated responses with those obtained following two traditional VAR-based identification strategies that are very popular in the literature. Estimation results reveal substantial and statistically significant output and price responses to exogenous oil-price shocks identified by our market-based methodology. In contrast, responses implied by the VAR-based approaches are much weaker, statistically insignificant, and unstable over time. Moreover, we find that following a demand-driven oil-price shock, real GDP increases and the price level declines. This finding is consistent with scenarios in which oil-price fluctuations are endogenous responses to changes in the level of economic activity rather than reflecting exogenous oil shocks. We argue that traditional VAR-based approaches cannot separate the effects of these two kinds of shocks and consequently lead to biased estimates of the dynamic responses.

Our approach is similar in spirit to the narrative approach pursued in a number of existing studies. Romer and Romer (2004, 2010) adopt it in their analyses of monetary policy and tax shocks, Alexopoulos (2011) and Alexopoulos and Cohen (2009) in the context of technology shocks, and Ramey (2009) in her analysis of government spending shocks. With regard to oil-price shocks, several earlier studies have tried to isolate some geopolitical events associated with abrupt oil-price increases and examine their effects on the U.S. economy. Hamilton (1983, 1985) identifies a number of “oil-price episodes” before 1981, mainly Middle East tensions, and concludes that such oil shocks had effectively contributed to postwar recessions in the U.S. Hoover and Perez (1994) revise Hamilton’s (1983) quarterly dummies into a monthly dummy series and find that oil shocks had led to declines in U.S. industrial production. Bernanke, Gertler, and Watson (1997) construct a quantitative measure, weighting Hoover and Perez’s dummy variable by the log change in the producer price index for crude oil, yet they were not able to find statistically significant macroeconomic responses to oil shocks in a VAR setting. Hamilton (2003) identifies five military conflicts during the postwar period and reexamines the effects of the associated oil shocks on U.S. GDP growth. Finally, Kilian (2008) also analyzes six geopolitical events since 1973, five in the Middle East and one in Venezuela, and examines their effects on the U.S. economy. Our study contributes to the literature by constructing a database of all oil-related events on a daily basis. This allows us to identify all kinds of oil shocks and conduct a more comprehensive analysis than earlier studies. Extracting the “unpredictable” component of oil-price fluctuations using an oil futures price-based forecasting model represents another novelty of our work.

More recently, Kilian (2009) has also used information from the oil market to disentangle different kinds of oil-price shocks. In particular, he has constructed an index of global real economic activity, including it in a tri-variate VAR, along with data on world oil production and real oil prices. Using a recursive ordering of these variables, he recovers an oil-supply shock, a global aggregate demand-driven shock, and an oil market-specific demand shock. Although his approach is completely different from ours, the effects on the U.S. economy of all three kinds of structural shocks estimated in his work are quite close to our empirical estimates. This, in turn, corroborates the validity of our approach. We present detailed evidence in subsequent sections.

Our study is also related to the ongoing debate about how the real effects of oil-price shocks have changed over time. For instance, VAR studies, such as those of Hooker (1996) and Blanchard and Galí (2009), have usually found a much weaker and statistically insignificant relationship between their identified oil-price shocks and real GDP growth in the U.S. and other developed economies during the last two to three decades. These results are often cited as evidence suggesting that the U.S. economy has become less volatile and more insulated from external shocks, the result of better economic policy, a lack of large adverse shocks, or a smaller degree of energy dependence (e.g., a more efficient use of energy resources and a larger share of service sector in the U.S. economy), all contributing to a “Great Moderation” starting in the first half of the 1980s. Although we do not challenge this general characterization of the “Great Moderation,” our estimation results reveal a substantial and significant adverse effect of exogenous oil shocks on the U.S. economy, even during the last two and a half decades. Results from VAR studies, in particular the time variation in coefficient estimates, may simply reflect an inadequate identification strategy.

V. CONCLUDING REMARKS

This paper combines narrative and quantitative approaches to examine the dynamic effects of oil-price shocks on the U.S. economy. To correctly identify exogenous oil shocks, we first collect oil-market related information from a number of oil-industry trade journals, and compile a database identifying all the events that have affected the global oil market on a daily basis since 1984. Based on such information, we are able to isolate events that are exogenous to the U.S. economy and construct corresponding measures of exogenous oil-price shocks. Furthermore, shock magnitudes are calculated by running a real-time oil-price forecasting model incorporating oil futures prices. These procedures help alleviate the endogeneity and predictability problems that have pestered the traditional VAR identification strategies in the literature.

One contribution of our work is the thorough examination of all kinds of oil-related events in the past two and a half decades, more comprehensive than just focusing on geopolitical or military events, as most of the earlier literature has done so far. Moreover, in constructing the database, we have preserved as much primitive information on the oil-market developments as possible, with the hope of facilitating possible future studies by other researchers on the nature and implications of these events.

After deriving our measures of various kinds of oil shocks, we go on to examine their dynamic macroeconomic effects. We find that exogenous oil-price shocks have had substantial and statistically significant effects on the U.S. economy during the past two and a half decades. In contrast, traditional VAR identification strategies imply a substantially weaker and insignificant real effect for the same period. Further analysis reveals that this discrepancy is likely to stem from the inability of VAR-based approaches to separate exogenous oil-supply shocks from endogenous oil-price fluctuations driven by changes in oil demand. Notably, our study also suggests that the U.S. economy may not have become as insulated from oil shocks during the last two and a half decades as earlier studies have suggested. To examine fully how the oil price-macroeconomy relationship has evolved during the whole postwar period, a thorough study along the same narrative and quantitative approach for the period prior to the “Great Moderation” is called for. This will be the topic for future research.

Volatility, rather than abundance per se, drives the "resource curse" paradox

2012-01-18T03:08:00.000-08:00

Commodity Price Volatility and the Sources of Growth. By Tiago V. de V. Cavalcanti, Kamiar Mohaddes, and Mehdi Raissi
IMF Working Paper No. 12/12
http://www.imfbookstore.org/ProdDetails.asp?ID=WPIEA2012012

Summary

This paper studies the impact of the level and volatility of the commodity terms of trade on economic growth, as well as on the three main growth channels: total factor productivity, physical capital accumulation, and human capital acquisition. We use the standard system GMM approach as well as a cross-sectionally augmented version of the pooled mean group (CPMG) methodology of Pesaran et al. (1999) for estimation. The latter takes account of cross-country heterogeneity and cross-sectional dependence, while the former controls for biases associated with simultaneity and unobserved country-specific effects. Using both annual data for 1970-2007 and five-year non-overlapping observations, we find that while commodity terms of trade growth enhances real output per capita, volatility exerts a negative impact on economic growth operating mainly through lower accumulation of physical capital. Our results indicate that the negative growth effects of commodity terms of trade volatility offset the positive impact of commodity booms; and export diversification of primary commodity abundant countries contribute to faster growth. Therefore, we argue that volatility, rather than abundance per se, drives the "resource curse" paradox.

Excerpts

I. INTRODUCTION

Finally, while the resource curse hypothesis predicts a negative effect of commodity booms on long-run growth, our empirical findings (in line with the results reported in Cavalcanti et al. (2011a) and elsewhere in the literature) show quite the contrary: a higher level of commodity terms of trade significantly raises growth. Therefore, we argue that it is volatility, rather than abundance per se, that drives the "resource curse" paradox. Indeed, our results confirm that the negative growth effects of CTOT volatility offset the positive impact of commodity booms on real GDP per capita.

VI. CONCLUDING REMARKS

This paper examined empirically the effects of commodity price booms and terms of trade volatility on GDP per capita growth and its sources using two econometric techniques. First, we employed a system GMM dynamic panel estimator to deal with the problems of simultaneity and omitted variables bias, derived from unobserved country-specific effects. Second, we created an annual panel dataset to exploit the time-series nature of the data and used a cross-sectionally augmented pooled mean group (PMG) estimator to account for both cross-country heterogeneity and cross-sectional dependence which arise from unobserved common factors. The maintained hypothesis was that commodity terms of trade volatility affects output growth negatively, operating mainly through the capital accumulation channel. This hypothesis is shown to be largely validated by our time series panel data method, as well as by the system GMM technique used, suggesting the importance of volatility in explaining the under-performance of primary commodity abundant countries.

While the resource curse hypothesis postulates a negative effect of resource abundance (proxied by commodity booms) on output growth, the empirical results presented in this paper show the contrary: commodity terms of trade growth seems to have affected primary-product exporters positively. Since the negative impact of CTOT volatility on GDP per capita is larger than the growth-enhancing effects of commodity booms, we argue that volatility, rather than abundance per se, drives the resource curse paradox.

An important contribution of our paper was to stress the importance of the overall negative impact of CTOT volatility on economic growth, and to investigate the channels through which this effect operates. We illustrated that commodity price uncertainty mainly lowers the accumulation of physical capital. The GMM results also implied that CTOT volatility adversely affects human capital formation. However, this latter effect was not robust when we used an alternate GARCH methodology to calculate CTOT volatility. Therefore, an important research and policy agenda is to determine how countries can offset the negative effects of commodity price uncertainty on physical and human capital investment.

Another notable aspect of our results was to show the asymmetric effects of commodity terms of trade volatility on GDP per capita growth in the two country groups considered. While CTOT instability created a significant negative effect on output growth in the sample of 62 primary product exporters, in the case of the remaining 56 countries (or even in the full sample of 118 countries) the same pattern was not observed. One explanation for this observation is that the latter group of countries, with more diversified export structure, were better able to insure against price volatility than a sample of primary product exporters. Finally, we offered some empirical evidence on growth-enhancing effects of export diversification, especially for countries whose GDP is highly dependent on revenues from just a handful of primary products.

The empirical results presented here have strong policy implications. Improvements in the conduct of macroeconomic policy, better management of resource income volatility through sovereign wealth funds (SWF) as well as stabilization funds, a suitable exchange rate regime, and export diversification can all have beneficial growth effects. Moreover, recent academic research has placed emphasis on institutional reform. By establishing the right institutions, one can ensure the proper conduct of macroeconomic policy and better use of resource income revenues, thereby increasing the potential for growth. We await better data on institutional quality to test this hypothesis. Clearly, fully articulated structural models are needed to properly investigate the channels through which the negative growth effects of volatility could be attenuated. This remains an important challenge for future research.

CPSS-IOSCO's Requirements for OTC derivatives data reporting and aggregation: final report

2012-01-17T23:16:00.001-08:00

Requirements for OTC derivatives data reporting and aggregation: CPSS-IOSCO publishes final report
January 17, 2012
http://www.bis.org/press/p120117.htm

The Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) have published their final report on the OTC derivatives data that should be collected, stored and disseminated by trade repositories (TRs).

The committees support the view that TRs, by collecting such data centrally, would provide authorities and the public with better and more timely information on OTC derivatives. This would make markets more transparent, help to prevent market abuse, and promote financial stability.

The final report reflects public comments received in response to a consultative version of the report published in August 2011. Following the consultation exercise, the report was expanded to elaborate on the description of possible options to address data gaps.

The report was also updated to reflect recent international developments in data reporting and aggregation requirements stemming from the Legal Entity Identifier (LEI) workshop in September 2011 and other efforts under the auspices of the Financial Stability Board (FSB), in support of a request by the G20 at the Cannes Summit, to advance the development of a global LEI.

As the report indicates, some questions remain regarding how best to address current data gaps and define authorities' access to TRs. As requested by the G20, two internationally coordinated working groups will address these questions in the coming year. The FSB will establish an ad hoc group of experts to further consider means of filling current data gaps, while the CPSS and IOSCO will establish a joint group to examine authorities' access to trade repositories.

Report Background

The report addresses Recommendation 19 in the October 2010 report of the FSB, Implementing OTC derivatives market reforms, which called on the CPSS and IOSCO to consult with the authorities and the OTC Derivatives Regulators Forum in developing:

(i) minimum data reporting requirements and standardised formats, and

(ii) the methodology and mechanism for data aggregation on a global basis. A final report is due by the end of 2011.

The requirements and data formats will apply both to market participants reporting to TRs and to TRs reporting to the public and to regulators. The report also finds that certain information currently not supported by TRs would be helpful in assessing systemic risk and financial stability, and discusses options for bridging these gaps.

Issues relating to data access for the authorities and reporting entities are discussed, including methods and tools that could provide the authorities with better access to data. Public dissemination of data, it is noted, promotes the understanding of OTC derivatives markets by all stakeholders, underpins investor protection, and facilitates the exercise of market discipline.

The report also covers the mechanisms and tools that the authorities will need for the purpose of aggregating OTC derivatives data.

Notes to editors

This report was originally published in August 2011 as a consultative report.
The CPSS serves as a forum for central banks in their efforts to monitor and analyse developments in payment and settlement arrangements as well as in cross-border and multicurrency settlement schemes. The CPSS secretariat is hosted by the Bank of International Settlements (BIS).
IOSCO is an international policy forum for securities regulators. The Technical Committee, a specialised working committee established by IOSCO's Executive Committee, comprises 18 agencies that regulate some of the world's larger, more developed and internationalised markets. Its objective is to review major regulatory issues related to international securities and futures transactions and to coordinate practical responses to these concerns.
Both committees are recognised as international standard-setting bodies by the Financial Stability Board (www.financialstabilityboard.org)

The sustainability of pension schemes

2012-01-07T08:00:00.000-08:00

The sustainability of pension schemes, by Srichander Ramaswamy
BIS Working Papers No 368
http://www.bis.org/publ/work368.htm

Abstract

Poor financial market returns and low long-term real interest rates in recent years have created challenges for the sponsors of defined benefit pension schemes. At the same time, lower payroll tax revenues in a period of high unemployment, and rising fiscal deficits in many advanced economies as economic activity has fallen, are also testing the sustainability of pay-as-you-go public pension schemes. Amendments to pension accounting rules that require corporations to regularly report the valuation differences between their defined benefit pension assets and plan liabilities on their balance sheet have made investors more aware of the pension risk exposure for the sponsors of such schemes. This paper sheds light on what effects these developments are having on the design of occupational pension schemes, and also provides some estimates for the post-employment benefits that could be delivered by these schemes under different sets of assumptions. The paper concludes by providing some policy perspectives.

8 Summary and policy issues (edited)

A weak macroeconomic environment and unusually low real interest rates in many countries have put the funding challenges faced by occupational and public pension schemes in the spotlight. This paper took a simple actuarial model to quantify how the cost of funding DB pension schemes increase as the real rate of return in asset markets falls. If real returns on pension assets are assumed to be lower by 0.5% compared to their historical averages, service costs of DB schemes would be 15% higher than in the past for the same benefit payments. Converting final salary pension schemes to career average schemes (and not altering the percentages applied) would lower pensions by 20–25% assuming that real wages grow at the rate of 1–1.5% per annum.

Declining mortality rates will put further upward pressure on the contribution rates needed to fund these schemes. When the expected increases in longevity are priced into the actuarial model for computing the service cost, this cost is likely to be 10% higher than estimates presented in the paper. Increasing longevity as well as demographic changes that point to a rise in the old-age dependency ratio poses challenges to the sustainability of PAYG schemes. The projected increase in old-age dependency ratio suggests that in many countries the contributions to PAYG schemes have to increase by 20% from current levels in 2020 to pay pensions. But as PAYG schemes that service current pensions from employee contributions and taxes do not report the contractual pension liabilities, estimating the funding shortfalls these schemes might face going forward is a challenge.

In contrast to PAYG schemes and some funded public pension schemes, occupational DB schemes have to comply with accounting standards to report the market value of their pension liabilities and the assets that back them so that potential funding shortfalls faced by these schemes can be quantified. Unusually low real interest rates and poor financial market returns in the past decade have had an adverse impact on the coverage ratio of these schemes through the valuation effects on liabilities and lower returns on pension assets. Estimates of the coverage ratio of occupational DB schemes based on these returns would point to a funding deficit of 10 to 20 per cent against their pension liabilities. The size of any deficit that eventually materialises over the long lives of these schemes, however, would depend on future returns – which are unknown.

For occupational DB schemes that face large funding shortfalls, employer contributions will have to rise to improve the coverage ratio of these schemes. At the same time, increasing longevity and falling real yields against the backdrop of a weak macroeconomic environment are raising the service costs of DB schemes and adding to the upward pressures on required contribution rates. Recent amendments to pension accounting standards, which require companies to provide more disclosures in their financial statements on the risks the DB scheme poses to the entity and to report the net gains or losses from their DB pension plans on their balance sheet, are likely to accelerate the shift out of occupational DB plans into DC plans. This is because DC plans limit the contractual liabilities of employers to the contribution rates to be paid for the current service period of the employee.

A progressive shift from DB to DC schemes can have material implications for post-employment benefits because it exposes employees to the investment risks on the pension assets. In addition to this risk, beneficiaries of DC plans will also be exposed to the principal risk factors that determine annuity payments, namely level of real interest rates and the projections of mortality rates into the future when the actual annuity payments will be made. Using a simple model to estimate the retirement income from DC schemes, the numerical results presented in Table 2 showed that when contributions to DC schemes are 18% of salaries over a 30-year period and the returns net of administrative expenses on plan assets are 2% higher than the rate at which wages grow, post-employment benefits from a DC scheme would roughly be 43% of the final salary. The excess return assumption of 2% is based on the following input variables in the model to compute retirement income for DC plans: real yield on long-term bonds is 2%; equity risk premium over the returns on long-term government bonds is 3%; plan assets have an equal share of bonds and equities; administrative expenses are 0.5% of plan assets; and the annual real wage growth rate is 1.25%.

The quantitative analysis presented in this paper provides some insights on the possible trade-offs that may be available for public policy on the design of sustainable pension schemes. For example, the internal rate of return on the notional assets of PAYG schemes will be approximately equal to the rate of real GDP growth of the local economy, which is expected to be 2% or lower in advanced economies. The actuarial model showed that service cost of a pension scheme will be high when the rate of return on the pension assets is low. A funded public pension scheme, on the other hand, will be able to raise the level of return on pension fund assets by investing them in higher growth markets. Estimates using the actuarial model suggest that a 50 basis points increase in real returns lowers the service cost of the pension scheme by 15%. Funded pension schemes therefore offer the prospect of lowering service costs and to be able to better align the pension benefits offered by these schemes to the contribution rates received.

Public policy may also be needed to develop efficient markets for pricing annuity risk as occupational DC plans become the preferred post-employment benefit scheme offered by employers. Efficient markets for pricing annuities will in turn depend on how the market for managing and hedging longevity risk develops. As more employers progressively shift towards DC schemes for providing post-employment benefits, regulatory policies might be needed to restrict the range of permissible investment options available for plan assets to avoid unintended risks being taken by the plan beneficiaries, and to set mandatory minimum contribution rates for participating in DC schemes. Finally, considering that plan beneficiaries in DC schemes are exposed to interest rate risk at the time of converting plan assets into an annuity, the pros and cons of providing insurance policies that guarantee a minimum real yield at which these assets can be converted into an annuity will have to be examined.

BCBS: Application of own credit risk adjustments to derivatives - consultative document

2011-12-21T23:24:00.000-08:00

Application of own credit risk adjustments to derivatives - Basel Committee consultative document
December 21, 2011
http://www.bis.org/press/p111221.htm

The Basel Committee today issued a consultative document on the application of own credit risk adjustments to derivatives.

The Basel III rules seek to ensure that a deterioration in a bank's own creditworthiness does not at the same time lead to an increase in its common equity as a result of a reduction in the value of the bank's liabilities. Paragraph 75 of the Basel III rules requires a bank to "[d]erecognise in the calculation of Common Equity Tier 1, all unrealised gains and losses that have resulted from changes in the fair value of liabilities that are due to changes in the bank's own credit risk".

The application of paragraph 75 to fair valued derivatives is not straightforward since their valuations depend on a range of factors other than the bank's own creditworthiness. The consultative paper proposes that debit valuation adjustments (DVAs) for over-the-counter derivatives and securities financing transactions should be fully deducted in the calculation of Common Equity Tier 1. It briefly reviews other options for applying the underlying concept of paragraph 75 to these products and the reasons these alternatives were not supported by the Basel Committee.

The Basel Committee welcomes comments on all aspects of this consultative document by Friday 17 February 2012. Comments should be sent to baselcommittee@bis.org. Alternatively, comments may be submitted to the following address: Basel Committee on Banking Supervision, Bank for International Settlements, Centralbahnplatz 2, 4002 Basel, Switzerland. All comments may be published on the BIS website unless a commenter specifically requests confidential treatment.

Summary (http://www.bis.org/publ/bcbs214.htm, edited):

A deterioration in a bank's own creditworthiness can lead to an increase in the bank's common equity as a result of a reduction in the value of its liabilities. The Basel III rules seek to prevent this. Paragraph 75 of the Basel III rules requires a bank to "[d]erecognise in the calculation of Common Equity Tier 1, all unrealised gains and losses that have resulted from changes in the fair value of liabilities that are due to changes in the bank's own credit risk". The application of paragraph 75 to fair valued derivatives is not straightforward since their valuations depend on a range of factors other than the bank's own creditworthiness. The consultative paper proposes that debit valuation adjustments (DVAs) for over-the-counter derivatives and securities financing transactions should be fully deducted in the calculation of Common Equity Tier 1. It briefly reviews other options for applying the underlying concept of paragraph 75 to these products and the reasons these alternatives were not supported by the Basel Committee.

PDF: http://www.bis.org/publ/bcbs214.pdf

2011: A Year of Important Pharmacological Advances for Patients

2011-12-21T15:05:00.001-08:00

2011: A Year of Important Pharmacological Advances for Patients
December 21, 2011
http://www.innovation.org/index.cfm/NewsCenter/Newsletters?NID=193

New advances in biopharmaceuticals came as welcome good news for U.S. patients. In recent years, despite increasing investments in R&D, fewer medicines have recieved approval, reminding us just how difficult drug discovery is. But in 2011 there were more new medicines approved than in recent years and these approvals represented important advances in many areas.

The Food and Drug Administration reported in November that in fiscal year 2011 (10/1/10–9/30/11) there were 35 new medicines approved,[i] among the highest in the last decade. According to the FDA report, "few years have seen as many important advances for patients." The final tally of medicines approved in calendar year 2011 waits to be seen but it is clear that 2011 has been a great year for advancing the fight on many disease fronts. Below is information on some of the treatments highlighted in the FDA report.

Cancer: With improvements in early detection and a steady stream of new and enhanced treatments cancer can be more effectively managed and even beaten. Two new personalized medicines for lung cancer and melanoma now provide effective options for patients with tumors expressing certain genetic markers.[ii] The personalized melanoma treatment and another new melanoma medicine became the first new approvals for the disease in 13 years. Read about continued efforts to improve cancer treatment and the 887 medicines currently in development.

Rare Diseases: An estimated 25-30 million Americans suffer from rare or "orphan" diseases, which are often among the most devastating to patients and complex for researchers.[iii] However, advances in science have allowed us to hone in on the causes of many rare diseases and translate those findings into new treatments. Between January 1st and December 7th 2011, eleven new medicines to treat rare diseases were made available to patients for diseases such as the genetic defect congenital Factor XIII deficiency, several cancers, and scorpion poisoning.[iv] A record 460 new medicines are in clinical trials or awaiting FDA review.[v] Read more about the ongoing commitment to improve treatment for rare diseases.

Lupus: Lupus is a serious and potentially fatal autoimmune disease that attacks healthy organs and tissues of the body. For the approximately 300,000 to 1.5 million lupus sufferers in the U.S. the last approved drug came in 1955. This year a newly approved medicine ended that drought with a new approach to treating lupus. Read more about medicines in development for autoimmune diseases.

Hepatitis C: Hepatitis C is a chronic viral disease that affects the liver and can lead liver cancer and liver failure. It affects approximately 3 million people in the United States. Two new medicines approved this year are the first in a new class and offer a greater chance of cure for some patients compared with existing therapies. For more information on medicines in development for infectious diseases, click here.

This is only a partial list of the many advances approved in 2011, for a more complete listing visit www.FDA.org.

Looking ahead to 2012, biomedical research continues to draw us in new directions and helps us to better understand the cause and progression of disease. Coupled with innovative approaches at the bench and in the clinic, we can better prevent, detect, and treat disease to save and improve lives.

References
[i]US Food and Drug Administration, FY2011 Innovative Drug Approvals, (November 2011) http://www.fda.gov/AboutFDA/ReportsManualsForms/Reports/ucm276385.htm

[ii]US Food and Drug Administration, FY2011 Innovative Drug Approvals, (November 2011) http://www.fda.gov/AboutFDA/ReportsManualsForms/Reports/ucm276385.htm

[iii]PhRMA, Orphan Drugs in Development for Rare Diseases (February 2011) http://www.phrma.org/sites/default/files/878/rarediseases2011.pdf

[iv]US Food and Drug Administration, CDER New Drug Review: 2011 Update (December 2011) http://www.fda.gov/downloads/AboutFDA/CentersOffices/OfficeofMedicalProductsandTobacco/CDER/UCM282984.pdf

[v]PhRMA, Orphan Drugs in Development for Rare Diseases (February 2011) http://www.phrma.org/sites/default/files/878/rarediseases2011.pdf

BCBS: revised "Core principles for effective banking supervision" - consultative paper

2011-12-21T00:22:00.000-08:00

Consultative paper on revised "Core principles for effective banking supervision" issued by the Basel Committee
December 20, 2011
http://www.bis.org/press/p111220.htm

The Basel Committee on Banking Supervision today issued for public comment its revised "Core principles for effective banking supervision" [http://www.bis.org/publ/bcbs213.htm].

The consultative paper updates the Committee's 2006 "Core principles for effective banking supervision" [http://www.bis.org/publ/bcbs129.htm] and the associated "Core principles methodology" [http://www.bis.org/publ/bcbs130.htm], and merges the two documents into one. The Core Principles have also been re-ordered, highlighting the difference between what supervisors do themselves and what they expect banks to do: Principles 1 to 13 address supervisory powers, responsibilities and functions, focusing on effective risk-based supervision, and the need for early intervention and timely supervisory actions. Principles 14 to 29 cover supervisory expectations of banks, emphasising the importance of good corporate governance and risk management, as well as compliance with supervisory standards.

Among other things, the revision of the Core Principles builds on the lessons of the last financial crisis. The Core Principles have been enhanced to strengthen supervisory practices and risk management. In addition, the revised Core Principles respond to several key trends and developments that emerged during the last few years of market turmoil: the need for greater intensity and resources to deal effectively with systemically important banks; the importance of applying a system-wide, macro perspective to the microprudential supervision of banks to assist in identifying, analysing and taking pre-emptive action to address systemic risk; and the increasing focus on effective crisis management, recovery and resolution measures in reducing both the probability and impact of a bank failure.

Ms Sabine Lautenschläger, Co-chair of the Core Principles Group and Vice-President of the Deutsche Bundesbank, noted that "the revised Core Principles contribute to the broader ongoing effort by the Basel Committee to raise the bar for banking supervision in the post-crisis era". She added that "the Committee has achieved a lot in terms of rule-making over the past five years and this work will be instrumental in firmly entrenching many of the supervisory lessons and regulatory developments since the Core Principles were last revised".

The latest revision ensures the continued relevance of the Core Principles in providing a benchmark for supervisory practices that will withstand the test of time and changing environments. The total number of Core Principles has increased from 25 to 29; 36 new essential and additional criteria have been introduced and another 33 additional criteria have been upgraded to essential criteria that represent minimum baseline requirements for all countries.

The Core Principles are the de facto framework of minimum standards for sound supervisory practices and are universally applicable. The Committee believes that implementation of the revised Core Principles by all countries will be a significant step towards improving financial stability domestically and internationally, and provide a good basis for further development of effective supervisory systems.

"With the advent of various policy measures for addressing both bank-specific and broader systemic risks, the key challenge in this revision of the Core Principles has been to uphold their relevance for different jurisdictions and banking systems," stated Ms Teo Swee Lian, Co-chair of the Core Principles Group and Deputy Managing Director of the Monetary Authority of Singapore. "As highlighted in the paper, a proportionate approach achieves this through advocating risk-based supervision and supervisory expectations that are commensurate with a bank's risk profile and systemic importance."

The revised Core Principles represented the collective efforts between the Basel Committee and other banking supervisors from around the world, as well as the International Monetary Fund and the World Bank.

For information purposes, a document comparing the 2006 assessment methodology with the revised version has also been posted. This document is provided to facilitate a direct comparison between the two versions of assessment criteria.

The Basel Committee welcomes comments on the revised Core Principles. Comments should be submitted by Tuesday 20 March 2012 by email to: baselcommittee@bis.org. Alternatively, comments may be sent by post to the Secretariat of the Basel Committee on Banking Supervision, Bank for International Settlements, CH-4002 Basel, Switzerland. All comments may be published on the Bank for International Settlements's website unless a commenter specifically requests confidential treatment.

PDF: http://www.bis.org/publ/bcbs213.pdf (84 pages)

BCBS: Proposed regulatory capital disclosure requirements

2011-12-20T00:00:00.000-08:00

Proposed regulatory capital disclosure requirements issued by the Basel Committee

December 19, 2011

http://www.bis.org/press/p111219a.htm

The Basel Committee on Banking Supervision today published for consultation a set of requirements for banks to disclose the composition of their regulatory capital. These aim to improve the transparency and comparability of banks' capital bases, including on a cross border basis.

During the financial crisis, market participants and supervisors attempted to undertake detailed assessments of the capital positions of banks and make cross jurisdictional comparisons. These efforts were often hampered by insufficiently detailed disclosure and a lack of consistency in reporting between banks and across jurisdictions. A lack of clarity on the quality of capital may have contributed to uncertainty during the financial crisis.

In addition to improving the quality and level of required capital, Basel III established certain high level disclosure requirements to improve transparency of regulatory capital and enhance market discipline. The Basel Committee noted that it would issue more detailed Pillar 3 disclosure requirements in 2011. Today's publication sets out these detailed requirements for consultation.

The Basel Committee welcomes comments on the proposed consultative document. Comments should be submitted by Friday 17 February 2012 by email to: baselcommittee@bis.org. Alternatively, comments may be sent by post to the Secretariat of the Basel Committee on Banking Supervision, Bank for International Settlements, CH-4002 Basel, Switzerland. All comments may be published on the Bank for International Settlements's website unless a commenter specifically requests confidential treatment.

Joint Forum: Consultative paper on "Principles for the supervision of financial conglomerates"

2011-12-19T23:49:00.000-08:00

Consultative paper on "Principles for the supervision of financial conglomerates" released by the Joint Forum
December 19, 2011

The Joint Forum released today a consultative paper on Principles for the Supervision of Financial Conglomerates.

The proposed principles, which revise the Joint Forum's 1999 principles, provide national authorities, standard setters and supervisors with a set of internationally agreed principles that support consistent and effective supervision of financial conglomerates and in particular those financial conglomerates that are active across borders.

Mr Tony D'Aloisio, Chairman of the Joint Forum, stated that "these principles should, over time, help strengthen the global financial system through more effective and consistent oversight and supervision of financial conglomerates notably including risks arising from unregulated financial activities and entities".

The financial crisis that began in 2007 exposed situations in which regulatory requirements and oversight did not fully capture all the activities of financial conglomerates or fully consider the impact and cost that these activities may pose to the financial system. The principles issued today address complexities and gaps resulting from cross-sectoral activities with a scope of application based on a revised and broader definition of a financial conglomerate.

The proposed principles are organised into five sections and expand on and supplement the 1999 Principles in a number of ways:

Supervisory powers and authority

The principles are directed to both policy makers and supervisors highlighting the need for a clear legal framework that provides supervisors with the necessary powers, authority and resources to perform, with independence and in coordination with other supervisors, comprehensive group-wide supervision.

Supervisory responsibility

The principles reaffirm the importance of supervisory cooperation, coordination and information exchange. They clarify the importance of identifying a group-level supervisor whose responsibility is to focus on group-level supervision and the facilitation of coordination between relevant supervisors. New principles have been included which relate to the role and responsibilities of supervisors in implementing minimum prudential standards, monitoring and supervising activities of financial conglomerates and taking corrective action as appropriate.

Corporate governance

The principles reaffirm the importance of fit and proper principles and also provide, through a series of new principles, guidance for supervisors intended to ensure the existence of a robust corporate governance framework for financial conglomerates. These new principles relate to the structure of the financial conglomerate, the responsibilities of the board and senior management, the treatment of conflicts of interest and remuneration policy.

Capital adequacy and liquidity

The principles highlight the role of supervisors in assessing capital adequacy on a group basis, taking into account unregulated entities and activities and the risks they pose to regulated entities. They include new principles on group-wide capital management. The principles also provide guidance on internal capital planning processes that rely on sound board and management decisions, incorporate stressed scenario outcomes, and are subject to adequate internal controls. A new principle on liquidity assessment and management is also introduced - providing guidance for supervisors intended to ensure that financial conglomerates properly measure and manage liquidity risk.

Risk management

The principles set out the need for a financial conglomerate to have a comprehensive risk management framework to manage and report group-wide risk concentrations and intra-group transactions and exposures. Greater emphasis is placed on the financial conglomerate's ability to measure, manage and report all material risks to which it is exposed, including those stemming from unregulated entities and activities. The principles focus on group-wide risk management culture and appropriate tolerance levels; addressing risks associated with new business areas and outsourcing; group-wide stress-tests and scenario analyses for the prudent aggregation of risks; bringing off-balance sheet activities within the scope of group-wide supervision.

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The consultative report is available on the websites of the Bank for International Settlements (www.bis.org), IOSCO (www.iosco.org) and the IAIS (www.iaisweb.org). Comments on this consultative report should be submitted by Friday 16 March 2012 either by email to baselcommittee@bis.org or by post to the Secretariat of the Joint Forum (BCBS Secretariat), Bank for International Settlements, CH-4002 Basel, Switzerland. All comments may be published on the websites of the Bank for International Settlements, IOSCO (www.iosco.org) and the IAIS (www.iaisweb.org) unless a commenter specifically requests confidential treatment.

Link to this press release: http://www.bis.org/press/p111219b.htm
Link to the PDF: http://www.bis.org/publ/joint27.pdf

Bank Competition and Financial Stability: A General Equilibrium Exposition

2011-12-16T09:39:00.000-08:00

Bank Competition and Financial Stability: A General Equilibrium Exposition. By Gianni De Nicolo' & Marcella Lucchetta
IMF Working Paper No. 11/295
Dec 16, 2011

Summary: We study versions of a general equilibrium banking model with moral hazard under either constant or increasing returns to scale of the intermediation technology used by banks to screen and/or monitor borrowers. If the intermediation technology exhibits increasing returns to scale, or it is relatively efficient, then perfect competition is optimal and supports the lowest feasible level of bank risk. Conversely, if the intermediation technology exhibits constant returns to scale, or is relatively inefficient, then imperfect competition and intermediate levels of bank risks are optimal. These results are empirically relevant and carry significant implications for financial policy.

Excerpts:

The theoretical literature offers contrasting results on the relationship between bank competition and financial stability. Yet these results arise from models with three important limitations: they are partial equilibrium set-ups; there is no special role for banks as institutions endowed with some comparative advantage in screening and/or monitoring borrowers; and bank risk is not determined jointly by the borrower and the bank. This paper contributes to overcome these limitations. A more general assessment of the relationship between bank competition, financial stability and welfare is not only important per se, but it is also essential to evaluate whether “granting” banks the ability of earning rents may reduce their risk-taking incentives.

We study the relationship between bank competition, financial stability and welfare in versions of a general equilibrium banking model with moral hazard, where the choice of “systematic” risk by either banks or firms is unobservable. In our set-up, risk-neutral agents specialize in production at the start date, choosing to become entrepreneurs, bankers, or depositors, and at a later date they make their financing and investment decisions. In this risk-neutral world, the welfare criterion is total surplus, defined as total output net of effort costs. We consider two versions of the model. In the first version, called “basic”, the bank is a coalition of entrepreneurs that are financed by depositors. In the second version, called “extended”, the “firm” is a coalition of entrepreneurs that is financed by the “bank”, which is a coalition of bankers financed by depositors. The firm, the bank and depositors can be also viewed as representing the business sector, the banking sector and the household sector.

In both versions, we consider two specifications of the bank’s screening and/or monitoring technology, called the “intermediation technology”. In the first specification, the intermediation technology exhibits constant returns to scale: the effort cost of screening and/or monitoring is proportional to the size of investment. In the second specification, this technology exhibits increasing returns to scale: the effort cost of screening and/or monitoring is independent of investment size. This second specification captures in a simple form the essential role of banks in economizing on monitoring and screening costs identified by a well-known literature briefly reviewed below.

In the basic model the bank chooses (systematic) risk, this choice is unobservable to outsiders, and there is competition in the deposit market only, indexed by the opportunity costs of depositors to invest in the bank. The results of this model differ strikingly depending on whether the intermediation technology exhibits constant or increasing returns to scale. Under constant returns to scale, as competition in the deposit market increases, bank risk increases, bank capital declines, and welfare is maximized for some intermediate degree of competition. Thus, perfect deposit market competition is sub-optimal, as it entails excessive bank risk-taking and sub-optimally low levels of bank capitalization. However, allocating large shares of surplus (or rents) to banks is not optimal either, as it results in sub-optimally low levels of bank-risk taking and excessive bank capitalization.

When the intermediation technology exhibits increasing returns to scale, however, results are totally reversed: as competition increases, bank risk declines, capitalization increases, perfect deposit market competition is optimal, and the lowest feasible level of bank risk is best. This reversal is simply explained as follows. As competition increases, a ceteris paribus increase in the cost of funding induces the bank to take on more risk. But at the same time the increase in the supply of funds to the bank reduces the costs of the intermediation technology owing to increasing returns to scale: this offsets the negative impact of higher funding costs on bank’s expected profits, inducing the bank to take on less risk. This result is remarkable for two reasons: it is obtained under a standard assumption about the bank’s intermediation technology, and without modeling loan market competition. Thus, introducing loan market competition, as in Boyd and De Nicolo’ (2005), is not necessary—albeit it may be sufficient—to yield a positive relationship between bank competition and financial stability.

The extended model depicts the more realistic case in which there is competition in both lending and deposit markets, bank risk is jointly determined by borrowers and banks, and setting up the intermediation technology entails set-up costs. Here, bank competition is indexed by the opportunity costs of depositors to invest in the bank, and the opportunity costs of the firm to be financed by the bank. In this model, the relationship between bank competition, financial stability, and welfare becomes complex in a substantial economic sense, since double-sided competition determines how total surplus, whose size is endogenous, is shared by three sets of agents, rather than two, as in the basic model. When the degree of competition in lending and deposit markets differs, we illustrate several results suggestive of a rich comparative statics, which in some cases overturn simple conjectures on the relationship between bank risk, firm risk and capital.

Focusing on changes of competition in both loan and deposit markets, we obtain the following main results. If the bank intermediation technology is relatively inefficient, as defined as one that entails high monitoring and screening costs but relatively low set-up costs, then a level of competition lower than perfect competition is optimal, corresponding to an “intermediate” optimal levels of bank risk. However, if the bank intermediation technology is relatively efficient, defined as one that entails low monitoring and screening costs but relatively large set-up costs, then perfect competition is optimal, and the optimal level of bank risk turns out to be the lowest attainable. Notably, these results are independent of whether the intermediation technology exhibits constant or increasing returns to scale in screening and/or monitoring effort.

We discuss below the empirical relevance of some of our results. Furthermore, we believe these results throw a new light on the important policy question regarding the desirability of supporting bank profits, or banks’ “charter value”, with some “rents” in order to guarantee financial stability: what seems to matter are not necessarily rents per se, but what are their sources and how banks might exploit them.

Conclusions:

We studied versions of a general equilibrium banking model with moral hazard in which the bank’s intermediation technology exhibits either constant or increasing returns to scale. In the basic version of the model under constant returns of the intermediation technology we showed that as deposit market competition increases, bank risk increases, capitalization declines, and “intermediate” degreed of deposit market competition and bank risk are best..The result that the lowest attainable level of bank risk is not optimal echoes Allen and Gale’s (2004b) result that a positive degree of financial ”instability” can be a necessary condition for optimality. Yet, the efficiency of the intermediation technology matters. If this technology exhibits increasing returns to scale, then the implications of this model for bank risk, capitalization and welfare are totally reversed: as competition increases, bank risk declines, capitalization increases, perfect deposit market competition and the lowest attainable level of bank risk are optimal.

Subsequently, we studied the more realistic version of the model where there is competition in both lending and deposit markets and bank risk is determined jointly by the bank and the firm. The key results of the extended model pertain to the role of the efficiency of the intermediation technology in relationship to the level of competition in both lending and deposit markets. We showed that independently of whether the intermediation technology exhibits constant or increasing returns, perfect competition and the lowest attainable level of bank risk are optimal if the bank intermediation technology is relatively efficient. When such technology is relatively inefficient, however, perfect competition is suboptimal, and intermediates levels of competition and bank risk are best.

The theoretical results or our study are empirically relevant. Several studies present evidence consistent with a positive relationship between bank competition and financial stability. Jayaratne and Strahan (1998) find that branch deregulation resulted in a sharp decrease in loan losses. Restrictions on banks’ entry and activity have been found to be negatively associated with some measures of bank stability by Barth, Caprio and Levine (2004), Beck (2006a and 2006b), and Schaeck et al. (2009). Furthermore, Cetorelli and Gambera (2001) and Cetorelli and Strahan (2006) find that banks with market power erect an important financial barrier to entry to the detriment of the entrepreneurial sector of the economy, leading to long-term declines in a country’s growth prospect. Lastly, Corbae and D’Erasmo (2011) present a detailed quantitative study of the U.S. banking industry based on a dynamic calibrated version of Boyd and De Nicolo’ (2005) model, finding evidence of a positive association between competition and financial stability. It is apparent that these results are consistent with the predictions of the basic model with increasing returns, and those of the extended model in which banks use relatively efficient intermediation technologies.

Under a policy viewpoint, we believe that our results provide an important insight with regard to the question of whether supporting bank profits with some rents—or, in a dynamic context, supporting banks’ charter values—is a desirable public policy option. A substantial portion of the literature and the policy debate maintains that preserving bank profitability through rents enhancing bank profitability—or banks’ charter values—may be desirable, as it induces banks to take on less risk. As we have shown, however, this argument ignores how these rents are generated, or how they may be eventually used once granted.

Our results suggest that supporting bank profitability (or charter values) with rents that are independent of bank’s actions aimed at improving efficiency may be unwarranted. If rents accrue independently of banks’ efforts to adopt more efficient intermediation technologies and, more generally, to provide better intermediation services, then rents are suboptimal and do not guarantee banking system stability. In this light, competitive pressures may be an effective incentive for banks to adopt more efficient intermediation technologies. In a competitive environment, rents would need to be earned by investing in technologies that provide banks a comparative advantage in providing intermediation services, rather than been derived from some market power enjoyed “freely”.

Source: http://www.imf.org/external/pubs/cat/longres.aspx?sk=25439.0

BCBS: The internal audit function in banks - consultative document

2011-12-03T05:52:00.001-08:00

The internal audit function in banks - consultative document
The Basel Committee on Banking Supervision, December 2, 2011

The Basel Committee on Banking Supervision is issuing this revised supervisory guidance for assessing the effectiveness of the internal audit function in banks, which forms part of the Committee's ongoing efforts to address bank supervisory issues and enhance supervision through guidance that encourages sound practices within banks. The document replaces the 2001 document Internal audit in banks and the supervisor's relationship with auditors. It takes into account developments in supervisory practices and in banking organisations and incorporates lessons drawn from the recent financial crisis.

The document builds on the Committee's Principles for Enhancing Corporate Governance [http://www.bis.org/publ/bcbs176.htm] which require banks to have an internal audit function with sufficient authority, stature, independence, resources and access to the board of directors. Independent, competent and qualified internal auditors are vital to sound corporate governance.

As a strong internal control framework including an independent, effective internal audit function is part of sound corporate governance. Banking supervisors must be satisfied as to the effectiveness of a bank's internal audit function, that effective policies and practices are followed and that management takes appropriate corrective action in response to internal control weaknesses identified by internal auditors. An effective internal audit function provides vital assurance to a bank's board of directors and senior management (and bank supervisors) as to the quality of the bank's internal control system. In doing so, the function helps reduce the risk of loss and reputational damage to the bank.

The document is based on 20 principles, organised in three sections: A) Supervisory expectations relevant to the internal audit function, B) The relationship of the supervisory authority with the internal audit function, and C) Supervisory assessment of the internal audit function. This approach seeks to promote a strong internal audit function within banking organisations and addresses supervisory expectations for the internal audit function and the supervisory assessment of that function. It also encourages bank internal auditors to comply with and to contribute to the development of national and international professional standards, such as those issued by The Institute of Internal Auditors, and it promotes due consideration of prudential issues in the development of internal audit standards and practices. An annex to the consultative document details responsiblities of a bank's audit committee.

The Basel Committee welcomes comments on the proposed consultative document. Comments should be submitted by Friday 2 March 2012 by email to: baselcommittee@bis.org. Alternatively, comments may be sent by post to the Secretariat of the Basel Committee on Banking Supervision, Bank for International Settlements, CH-4002 Basel, Switzerland. All comments may be published on the Bank for International Settlements's website unless a commenter specifically requests confidential treatment.

You can download the PDF from here: http://www.bis.org/publ/bcbs210.htm

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Press release: Banks' internal audit function - consultative paper issued by the Basel Committee
December 2, 2011
http://www.bis.org/press/p111202.htm

The Basel Committee on Banking Supervision issued today a consultative paper on The internal audit function in banks.

The objective of the proposed guidance, which revises the Committee's 2001 document Internal Audit in Banks and the Supervisor's Relationship with Auditors, is to help supervisors assess the effectiveness of a bank's internal audit function. The guidance reflects developments in supervisory and banking practices and incorporates lessons drawn from the financial crisis.

The proposed guidance is built around a set of principles that seek to promote a strong internal audit function within banks. The principles cover supervisory expectations related to the internal audit function as well as the supervisory assessment of that function. The principles also review the relationship between a supervisory authority and a bank's internal audit function.

The Basel Committee welcomes comments on the proposed consultative documents. Comments should be submitted by Friday, 2 March 2012 by email to: baselcommittee@bis.org. Alternatively, comments may be sent by post to the Secretariat of the Basel Committee on Banking Supervision, Bank for International Settlements, CH-4002 Basel, Switzerland. All comments may be published on the Bank for International Settlements's website unless a commenter specifically requests confidential treatment.

The Committee is now in the process of developing supervisory guidance on external audit. This guidance will build on existing Basel Committee guidance on this topic, including The relationship between bank supervisors and external auditors (2002) and External audit quality and banking supervision (2008). The Committee expects to publish a consultative version of its external audit guidance in 2012.

Over 900 Biotechnology Medicines in Development, Targeting More than 100 Diseases

2011-11-30T08:29:00.001-08:00

Over 900 Biotechnology Medicines in Development, Targeting More than 100 Diseases
September 14, 2011
http://www.innovation.org/index.cfm/FutureOfInnovation/NewMedicinesinDevelopment/Biotechnology_Medicines

Biotechnology has opened the door to the discovery and development of new types of human therapeutics. Advancements in both cellular and molecular biology have allowed scientists to identify and develop a host of new products. These cutting-edge medicines provide significant clinical benefits, and in many cases, address therapeutic categories where no effective treatment previously existed.

Innovative, targeted therapies offer enormous potential to address unmet medical needs of patients with cancer, HIV/AIDS, and many other serious diseases. These medicines also hold the potential to help us meet the challenge of rising healthcare costs by avoiding treatment complications and making sure each patient gets the most effective care possible.

Approved biotechnology medicines already treat or help prevent heart attacks, stroke, multiple sclerosis, leukemia, hepatitis, congestive heart failure, lymphoma, kidney cancer, cystic fibrosis, and other diseases. These medicines use many different approaches to treat disease as do medicines currently in the pipeline.

America's biopharmaceutical research companies have 901 biotechnology medicines and vaccines in development to target more than 100 debilitating and life- threatening diseases, such as cancer, arthritis and diabetes, according to a new report [http://www.phrma.org/sites/default/files/1776/biotech2011.pdf] by the Pharmaceutical Research and Manufacturers of America (PhRMA). The medicines in development—all in either clinical trials or under Food and Drug Administration review—include 353 for cancer and related conditions, 187 for infectious diseases, 69 for autoimmune diseases and 59 for cardiovascular diseases.

The biotechnology medicines now in development make use of these and other state-of- the-art approaches. For example:

•A genetically-modified virus-based vaccine to treat melanoma.
•A monoclonal antibody for the treatment of cancer and asthma.
•An antisense medicine for the treatment of cancer.
•A recombinant fusion protein to treat age-related macular degeneration.

SELECTED BIOTECHNOLOGY MEDICINES IN DEVELOPMENT

Autoimmune Diseases: Autoimmunity is the underlying cause of more than 100 serious, chronic illnesses, targeting women 75 percent of the time. Autoimmune diseases have been cited in the top 10 leading causes of all deaths among U.S. women age 65 and younger, representing the fourth largest cause of disability among women in the United States.

Blood Disorders: Hemophilia affects 1 in 5,000 male births. About 400 babies are born with hemophilia each year. Currently, the number of people with hemophilia in the United States is estimated to be about 20,000, based on expected births and deaths since 1994.

Sickle cell disease is an inherited disease that affects more than 80,000 people in the United States, 98 percent of whom are of African descent.

Von Willebrand disease, the most common inherited bleeding condition, affects males and females about equally and is present in up to 1 percent of the U.S. population.

Cancer: Cancer is the second leading cause of death by disease in the United States—1 of every 4 deaths—exceeded only by heart disease. This year nearly 1.6 million new cancer cases will be diagnosed, 78 percent of which will be for individuals ages 55 and older.

Cardiovascular Diseases (CVD): CVD claims more lives each year than cancer, chronic lower respiratory diseases, and accidents combined. More than 82 million American adults—greater than one in three—had one or more types of CVD. Of that total, 40.4 million were estimated to be age 60 and older.

Diabetes: In the United States, 25.8 million people, or 8.3 percent of the population, have diabetes. An estimated 18.8 million have been diagnosed, but 7 million people are not aware that they have the disease. Another 79 million have pre-diabetes. Diabetes is the seventh leading cause of death in the United States.

Genetic Disorders: There are more than 6,000 known genetic disorders. Approximately 4 million babies are born each year, and about 3 percent-4 percent will be born with a genetic disease or major birth defect. More than 20 percent of infant deaths are caused by birth defects or genetic conditions (e.g., congenital heart defects, abnormalities of the nervous system, or chromosomal abnormalities).

Alzheimer’s Disease: In 2010 there were an estimated 454,000 new cases of Alzheimer’s disease. In 2008, Alzheimer’s was reported as the underlying cause of death for 82,476 people. Almost two-thirds of all Americans living with Alzheimer’s are women.

Parkinson's Disease: This disease has been reported to affect approximately 1 percent of Americans over age 50, but unrecognized early symptoms of the disease may be present in as many as 10 percent of those over age 60. Parkinson's disease is more prevalent in men than in women by a ratio of three to two.

Asthma: An estimated 39.9 million Americans have been diagnosed with asthma by a health professional within their lifetime. Females traditionally have consistently higher rates of asthma than males. African Americans are also more likely to be diagnosed with asthma over their lifetime.

Skin Diseases: More than 100 million Americans—one-third of the U.S. population—are afflicted with skin diseases.

Has the global banking system become more fragile over time?

2011-11-22T13:26:00.001-08:00

Has the global banking system become more fragile over time? By Deniz Anginer & Asli Demirguc-Kunt
http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2011/11/08/000158349_20111108124433/Rendered/PDF/WPS5849.pdf

Abstract: This paper examines time-series and cross-country variations in default risk co-dependence in the global banking system. The authors construct a default risk measure for all publicly traded banks using the Merton contingent claim model, and examine the evolution of the correlation structure of default risk for more than 1,800 banks in more than 60 countries. They find that there has been a significant increase in default risk co-dependence over the three-year period leading to the financial crisis. They also find that countries that are more integrated, and that have liberalized financial systems and weak banking supervision, have higher co-dependence in their banking sector. The results support an increase in scope for international supervisory co-operation, as well as capital charges for "too-connected-to-fail" institutions that can impose significant externalities.

Excerpts:

Introduction

The last decade has seen a tremendous transformation in the global financial sector. Globalization, innovations in communications technology and de-regulation have led to significant growth of financial institutions around the world. These trends had positive economic benefits and have led to increased productivity, increased capital flows, lower borrowing costs, and better price discovery and risk diversification. But the same trends have also led to greater linkages across financial institutions around the world as well as an increase in exposure of these institutions to common sources of risk. The recent financial crisis has demonstrated that financial institutions around the world are highly inter-connected and that vulnerabilities in one market can easily spread to other markets outside of national boundaries.

In this paper we examine whether the global trends described above have led to an increase in co-dependence in default risk of commercial banks around the world. The growing expansion of financial institutions beyond national boundaries over the past decade has resulted in these institutions competing in increasingly similar markets, exposing them to common sources of market and credit risk. During the same period, rapid development of new financial instruments has created new channels of inter-dependency across these institutions. Both increased interconnections and common exposure to risk makes the banking sector more vulnerable to economic, liquidity and information shocks. There is substantial theoretical literature that models the various channels through which such shocks can culminate in a systemic banking crisis (see for instance Bhattacharya and Gale 1987, Allen and Gale 2000, Diamond and Rajan 2005; and focusing on the recent crisis, Brunnermeier 2009, Danielsson, Shin, and Zigrand 2009, Battiston et al. 2009 among others.) To examine whether the global banking sector has become more interdependent and more fragile to shocks, we construct a default risk measure for all publicly traded banks using the Merton (1974) contingent claim model. We compute weekly time series of default probabilities for over 1,800 banks in over 60 countries and examine the evolution of the correlation structure of default risk over the 1998 – 2010 time period.

Our empirical findings show that there has been a substantial increase in co-dependence in default risk of publicly traded banks starting around the beginning of 2004 leading up to the global financial crisis starting in the summer of 2007. Although we observe an overall trend towards convergence in default risk globally, this trend has been much stronger for North American and European banks. We also find that increase in co-dependence has been higher for banks that are larger (with greater than 50 billion in assets). We also examine variation in co-dependence across countries. We find that countries that are more integrated, have liberalized financial systems and weak banking supervision have higher co-dependence in their banking sector.

Increased co-dependence in credit risk in the banking sector has important implications for capital regulations. In the aftermath of the sub-prime crisis of 2007/08, there has been renewed interest in macro-prudential regulation and supervision of the financial system. There has also been a growing consensus to adjust capital requirements to better reflect an individual bank‟s contribution to the risk of the financial system as a whole (Brunnermeier, Crockett, Goodhart, Persaud, and Shin 2009, Financial Stability Forum 2009a, 2009b). Recently a number of papers have tried to measure and quantify systemic risk inherent in the global banking sector. Adrian and Brunnermeier (2009), Huang, Zhou, and Zhou (2009), Chan-Lau and Gravelle (2005), Avesani et al. (2006), and Elsinger and Lehar (2008), use a portfolio credit risk approach to compute the contribution of an individual bank to the risk of a portfolio of banks. Our paper is related to this strand of literature, but our focus is not on quantifying systemic risk of large financial institutions but rather to examine time series trends for a large cross-section of banks. A number of papers have examined the correlation structure of equity returns of a subsample of banks. De Nicolo and Kwast (2002) find rising correlations between bank stock returns in the U.S. from 1988 and 1999. Schuler (2002) find similar results for Europe using a sample from 1980 to 2001. Hawkesby, Marsh and Stevens (2005) analyze co-movements in equity returns for a set of US and European large complex financial institutions using several statistical techniques and find a high degree of commonality. This paper is also related to the literature that studies contagion in financial markets (see among others Forbes and Rigobon 2002, Kee-Hong Bae and Stulz 2003) and also the literature that examines the impact of globalization on convergence of asset prices (Bekeart and Wang 2009, Longin and Solnik 1995, Bekaert and Harvey 2000, and Bekaert, Hodrick and Zhang 2009).

This paper differs from the existing literature in three respects. First, our empirical analyses cast a wider net than the existing literature which focuses only in a particular region or a country and covers a shorter time period. Second we examine time series trends in co-dependence and test for structural changes over time. Finally, we examine cross-country differences in co-dependence and link the differences to measures of financial and economic openness and regulatory frameworks in different countries.

Policymakers may be able to draw important implications from our analysis. Co-dependence in bank default risk has important consequences for systemic stability. We find increasing co-dependence in banks located in different national jurisdictions. Although we do find that strong banking supervision tends to reduce co-dependence in a given country, our results call for banking supervisory co-operation at a global level. This is especially true for larger banks which have grown more interconnected over the past decade.

President Obama can't win by running a constructive campaign, and he won't be able to govern if he does win a second term

2011-11-22T07:18:00.001-08:00

The Hillary Moment. By Patrick H Caddell & Douglas E Schoen
President Obama can't win by running a constructive campaign, and he won't be able to govern if he does win a second term.
http://online.wsj.com/article/SB10001424052970203611404577041950781477944.html

When Harry Truman and Lyndon Johnson accepted the reality that they could not effectively govern the nation if they sought re-election to the White House, both men took the moral high ground and decided against running for a new term as president. President Obama is facing a similar reality—and he must reach the same conclusion.

He should abandon his candidacy for re-election in favor of a clear alternative, one capable not only of saving the Democratic Party, but more important, of governing effectively and in a way that preserves the most important of the president's accomplishments. He should step aside for the one candidate who would become, by acclamation, the nominee of the Democratic Party: Secretary of State Hillary Clinton.

Never before has there been such an obvious potential successor—one who has been a loyal and effective member of the president's administration, who has the stature to take on the office, and who is the only leader capable of uniting the country around a bipartisan economic and foreign policy.

Certainly, Mr. Obama could still win re-election in 2012. Even with his all-time low job approval ratings (and even worse ratings on handling the economy) the president could eke out a victory in November. But the kind of campaign required for the president's political survival would make it almost impossible for him to govern—not only during the campaign, but throughout a second term.

Put simply, it seems that the White House has concluded that if the president cannot run on his record, he will need to wage the most negative campaign in history to stand any chance. With his job approval ratings below 45% overall and below 40% on the economy, the president cannot affirmatively make the case that voters are better off now than they were four years ago. He—like everyone else—knows that they are worse off.

President Obama is now neck and neck with a generic Republican challenger in the latest Real Clear Politics 2012 General Election Average (43.8%-43.%). Meanwhile, voters disapprove of the president's performance 49%-41% in the most recent Gallup survey, and 63% of voters disapprove of his handling of the economy, according to the most recent CNN/ORC poll.

Consequently, he has to make the case that the Republicans, who have garnered even lower ratings in the polls for their unwillingness to compromise and settle for gridlock, represent a more risky and dangerous choice than the current administration—an argument he's clearly begun to articulate.

One year ago in these pages, we warned that if President Obama continued down his overly partisan road, the nation would be "guaranteed two years of political gridlock at a time when we can ill afford it." The result has been exactly as we predicted: stalemate in Washington, fights over the debt ceiling, an inability to tackle the debt and deficit, and paralysis exacerbating market turmoil and economic decline.

If President Obama were to withdraw, he would put great pressure on the Republicans to come to the table and negotiate—especially if the president singularly focused in the way we have suggested on the economy, job creation, and debt and deficit reduction. By taking himself out of the campaign, he would change the dynamic from who is more to blame—George W. Bush or Barack Obama?—to a more constructive dialogue about our nation's future.

Even though Mrs. Clinton has expressed no interest in running, and we have no information to suggest that she is running any sort of stealth campaign, it is clear that she commands majority support throughout the country. A CNN/ORC poll released in late September had Mrs. Clinton's approval rating at an all-time high of 69%—even better than when she was the nation's first lady. Meanwhile, a Time Magazine poll shows that Mrs. Clinton is favored over former Massachusetts Gov. Mitt Romney by 17 points (55%-38%), and Texas Gov. Rick Perry by 26 points (58%-32%).

But this is about more than electoral politics. Not only is Mrs. Clinton better positioned to win in 2012 than Mr. Obama, but she is better positioned to govern if she does. Given her strong public support, she has the ability to step above partisan politics, reach out to Republicans, change the dialogue, and break the gridlock in Washington.

President Bill Clinton reached a historic agreement with the Republicans in 1997 that led to a balanced budget. Were Mrs. Clinton to become the Democratic nominee, her argument would almost certainly have to be about reconciliation and about an overarching deal to rein in the federal deficit. She will understand implicitly the need to draw up a bipartisan plan with elements similar to her husband's in the mid-to-late '90s—entitlement reform, reform of the Defense Department, reining in spending, all the while working to preserve the country's social safety net.

Having unique experience in government as first lady, senator and now as Secretary of State, Mrs. Clinton is more qualified than any presidential candidate in recent memory, including her husband. Her election would arguably be as historic an event as the election of President Obama in 2008.

By going down the re-election road and into partisan mode, the president has effectively guaranteed that the remainder of his term will be marred by the resentment and division that have eroded our national identity, common purpose, and most of all, our economic strength. If he continues on this course it is certain that the 2012 campaign will exacerbate the divisions in our country and weaken our national identity to such a degree that the scorched-earth campaign that President George W. Bush ran in the 2002 midterms and the 2004 presidential election will pale in comparison.

We write as patriots and Democrats—concerned about the fate of our party and, most of all, our country. We do not write as people who have been in contact with Mrs. Clinton or her political operation. Nor would we expect to be directly involved in any Clinton campaign.

If President Obama is not willing to seize the moral high ground and step aside, then the two Democratic leaders in Congress, Sen. Harry Reid and Rep. Nancy Pelosi, must urge the president not to seek re-election—for the good of the party and most of all for the good of the country. And they must present the only clear alternative—Hillary Clinton.

Mr. Caddell served as a pollster for President Jimmy Carter. Mr. Schoen, who served as a pollster for President Bill Clinton, is author of "Hopelessly Divided: The New Crisis in American Politics and What It Means for 2012 and Beyond," forthcoming from Rowman and Littlefield.

How Coca-Cola Manages 90 Emerging Markets

2011-11-17T23:22:00.001-08:00

How Coca-Cola Manages 90 Emerging Markets, by William J. Holstein
The world’s largest beverage company has delegated major decision making to individual markets, but it maintains its global brand strategy through collaborative practices.
November 7, 2011
http://www.strategy-business.com/article/00093?pg=all

Ahmet C. Bozer, president of the Coca-Cola Company’s Eurasia and Africa Group, has spent his career demonstrating how a large international company can build a strategy and structure itself to compete in emerging markets. Coca-Cola is one of the most globally active international companies, deriving 80 percent of its sales from outside the U.S., and it is therefore one of the most experienced in tackling emerging markets, including Egypt and Pakistan, where political tension renders the business environment uncertain and Coca-Cola’s strategy has proven resilient.

Bozer, who was born and raised in Turkey, has worked for Coca-Cola since 1990 in various capacities, including operations and finance, as well as leading the Coca-Cola bottling company in Turkey. He is currently based in Istanbul, where he oversees 90 markets, ranging geographically from India and South Asia through the Middle East and all of Africa, across Turkey and the Caucasus into the countries of the former Soviet Union. This territory accounted for 16 percent of Coke’s sales last year, for a retail value of US$10 billion, and Bozer expects that number to grow rapidly during the next decade. Like four other regional presidents, Bozer reports directly to Coca-Cola Chairman and CEO Muhtar Kent in Atlanta, Ga. Bozer sat down with us at the Coca-Cola offices in New York.

S+B: Your late CEO Roberto Goizueta charged the company to “think global, act local” in its strategy. How do you accomplish this?

BOZER: I wish it was as easy as repeating the slogan. The key for international companies is finding the right mix of global and local in their operations. The Coca-Cola brand is global, but it must be locally relevant. We may be giving the same happiness message, the same brand architecture may be communicated, but it has to be done differently in each country.

S+B: Your structure has strong regional managers such as yourself, but headquarters in Atlanta maintains global responsibility for sales, finance, and marketing — and for specific product lines like water or juices. How do you manage this?

BOZER: We are a franchise system. Our bottlers are primarily local. In Turkey, for example, we have a Turkish bottler. So the effectiveness of our company depends on the effectiveness of our relationships with the bottlers and our brands. To manage franchise relationships, you have to have a geographic orientation. Therefore our organization is primarily geographic. Globally, we have five operating groups: North America, Latin America, Europe, Eurasia and Africa, and Pacific.

At the same time, the juice business requires a different organizational structure than the sparkling beverages business. The raw material costs are high and fluctuate a lot, and there are opportunities to innovate more quickly; we may introduce four or five new variants of a juice in a given year. Thus, there is a matrix. A functional group in Atlanta is in charge of juices worldwide, but they work through the geographic organizations.

We are still evolving in finding the best local and global combination that works for us. When it comes to franchise relations with the bottlers, that is local. We have to make decisions in the local context with the right speed. Quality standards are both local (we adhere to all local government safety regulations) and global (we have our own global, rigorous, quality control standards). But we take advantage of our global properties and collaborate as a global team, bringing the best resources to bear on a specific issue.

S+B: How do you manage disagreements between the field and headquarters?

BOZER: We have been working on it for many years. We all understand that nothing is as black-and-white as we’d like. Let’s say I’m hiring a function leader. I am the ultimate decision maker, but I know that any function leader must operate as part of the global team. He or she must be able to collaborate globally, and the global organization has to be comfortable with that candidate. This is where maturity is important. We emphasize a collaborative process because it makes the decision better. But our culture is purely focused on making the right choice, rather than defining my turf versus your turf. That allows us to make these decisions quickly.

S+B: How do you manage the dramatic variations in cultures and politics among your 90 markets?

BOZER: It’s not as difficult as it might seem. I have six business units, based in South Africa, Kenya, Turkey, Russia, India, and Dubai. And I have a functional team in Istanbul with finance, marketing, and strategy capabilities. The functional team works as part of the global team to come up with strategic plans for each market. We share those with the business units, and we expect them to enrich [the plans] and add value to them by adapting them to their own needs.
Russia might say, “Well, iced tea is a big category here, so here’s how we are going to compete [with that product].” There is a clear thread of consistency among all the regions; we stay connected to the global team in Atlanta through the finance and marketing communities.

S+B: What do you see as the greatest opportunity in your 90 markets?

BOZER: If you project the demographics of today into 2020, you will find that about half of the favorable changes will be located in Eurasia and Africa: new entrants into the middle class, an increase in the number of teenagers, urbanization. A few of these countries have very high per capita consumption of our beverages. South Africa is about 250 drinks per year per person, which is above the global average. Turkey is higher than 150. But when you take those relatively well-developed markets out and look at India, Pakistan, sub-Saharan Africa, Russia, and central Asia, those markets have very low per capita consumption — for the whole industry. In India, just 4 or 5 percent of the beverages consumed are packaged. People drink tap water, tea, and dairy; vendors squeeze juice on the street. When people start having a bit more money and a middle class emerges, demand for packaged beverages will increase.
In that context, our strategy is not very complicated. We know how to grow “Brand Coke.” It’s about locally relevant brand building with consumers — the right pricing and packaging, with small packs, large packs, or take-home packs. We place new coolers in the market and invest in people, putting “feet on the street,” and activate outlets one by one. At the same time, there is a flourishing juice business and a flourishing water business, and in some of our markets, teas and energy drinks are developing.

S+B: How do you make yourself “locally relevant?”

BOZER: We have very strong consumer marketing teams. We invest a lot in understanding the psyche of the local consumer. In Egypt, during the Arab Spring [uprisings], our marketing people were able to tap into the psyche of the public — especially the teenagers. We understood that despite the uncertainty they were going through, they wanted to create a bright future. Our brand promise is happiness and optimism. Our team quickly put together some excellent consumer communication with the message that if everybody came together, the Egyptian people could build a better future. That message was delivered in a wonderful ad in which the skies over Tahrir Square in Cairo are quite overcast and dark, but people get together and throw ropes to the clouds and start pulling the ropes. The clouds open up and the sun appears. That type of communication resonated extremely well. We tapped into the feelings and emotions that were most relevant to the Egyptian people.
We try to do this kind of thing everywhere. We have good marketers in each country who have access into consumer insight data, and who work with very good agencies, while at the same time working with robust global processes.

S+B: Doesn’t political and social upheaval create a problem for you?

BOZER: Not really. I was in Pakistan recently. When you read the papers and watch television, you hear about terrorism, earthquakes, floods, and sectarian violence. It’s all negative. But we’ve been there for more than 50 years and we have not experienced any problems in running our business. In fact, our business is thriving there. Over the past four years, we have been growing extremely well. The same holds true for the Arab Spring countries.
In our external environment, we may have many headwinds, but we sell simple moments of pleasure that get consumed a million times a day, and that business continues to be vibrant. It’s a very simple product. Yes, growth slows when you go through major political changes, but things settle down and life goes back to normal. Then you start building from there.

S+B: You have a tremendous variation in the type and sophistication of bottlers you work with, ranging from a giant like SABMiller in South Africa to mom-and-pop-type bottlers in other markets. How do you adapt to their different styles and capabilities?

BOZER: This is the bread and butter of our business: being effective with our partnerships. Our partners may be multi-country bottlers, or they may operate within a single country. They may be public or private. In some countries we work with multiple bottlers. We have all kinds of relationships.

With each one, we first establish a shared vision. We have a one-page road map that portrays a very clear destination for 2020, a clear framework about our strategic pillars and metrics. That road map is actually prepared with our bottlers. It guides all our business planning.
Then it comes to capability. Does the bottler have the capability to execute these plans with us?

At the end of the day, we’re trying to create value for the overall system of the Coca-Cola Company and its bottlers, not just ourselves. Otherwise, the system won’t be sustainable in terms of our results.

One of the best examples is our bottler in Turkey, which I used to run. The bottler was built by the Coca-Cola Company and sold to a local shareholder who now owns a majority. It’s a public company with a market value of more than €2.5 billion (US$3.5 billion). It has great alignment with the Coca-Cola Company. It is now 10 times the size of when it started in 1994. This model really works.

S+B: How do you support your partners? Do you train them or lend them money?

BOZER: It depends on the needs of the bottler. The bottlers that operate in multiple countries tend not to need our help. But there might be some emerging area of knowledge — for example, about how to do better category management, in which case we have centers of excellence that the bottlers can access. We have websites where they can download best practices or get our help in building their capabilities. We sometimes support bottlers financially as well, if we are aligned on a fairly aggressive growth plan and want to invest in marketing to build the brands with more intensity. And let’s not forget, we own about 30 percent of our bottlers around the world.

S+B: How do you allow a local bottler and local business unit to differentiate the mix of products they offer?

BOZER: We don’t work in a way whereby every time a business unit wants to launch a product, they have to get my approval. Instead, we share the strategic framework. We have strategy discussions and business plan discussions, and we have other guidelines and rules.
For example, it is understood within the group that I want to know your top three priorities. If you want to launch a new product, but you need to take away [resources] from one of those core priorities to launch that product, then you shouldn’t do it. And if your bottler doesn’t have the capabilities to handle that product, you shouldn’t launch it. But if you can figure out how to do all of that in a way that still funds your core, if you have followed the right process, and if you are in the right marketplace with the right capabilities on the marketing side, then by all means go ahead.

We have Maaza juice in India, for example. The local team wanted to launch a Maaza milkshake, which is a wonderful mango dairy product. Dairy is a very relevant category in India, and Maaza milkshakes were received extremely well by consumers. My group function heads and the global function heads contributed to this by supporting the local team. This is not a bureaucratic approval–based system. Of course, there are approvals, but once the strategy and business plan are approved, local teams can execute.

S+B: Have you had much reverse innovation, in which a local group comes up with an idea that you take to other markets?

BOZER: Yes. One innovation that came out of India is the solar-powered coolers. We’re looking to expand that to other markets. There’s great engineering talent in India. Another product that shows promise is Minute Maid’s Pulpy, an orange juice with pulp that did extremely well in China. We expanded it into many countries. We have also taken communications elsewhere. Turkey, for example, had a very successful Ramadan communication to celebrate the holy month in Muslim countries. We took that to other Muslim countries in our group.

S+B: How do you recruit the talent you need?

BOZER: We look for critical experiences and functional competencies. And we ask about candidates: Do they represent the values of the company? We’re about optimism. A pessimistic person wouldn’t work out.
The nationality and gender don’t really matter. On my group leadership team of 18 people, I have 12 nationalities represented, including individuals from Zimbabwe, Scotland, the United States, Turkey, South Africa, India, Croatia, and elsewhere.
The most important competency is leadership. It takes very strong leadership to be able to explain the environment, establish a vision, and rally the troops. Command and control, in most cases, does not work. If you try to control everything, the system won’t work.

CGFS: The macrofinancial implications of alternative configurations for access to central counterparties in OTC derivatives markets

2011-11-17T23:16:00.001-08:00

November 17, 2011

The Committee on the Global Financial System (CGFS) has today released a report on The macrofinancial implications of alternative configurations for access to central counterparties in OTC derivatives markets. It was prepared by a study group chaired by Timothy Lane of the Bank of Canada.

Various alternative access arrangements are under consideration for the central clearing of OTC derivatives trades. Several jurisdictions are exploring the establishment of domestic central counterparties (CCPs) and the possible benefits of establishing links between them.

The conditions under which market participants obtain access to central clearing could have important implications for financial stability and efficiency. The report concludes that:

expanding direct access to CCPs may reduce the concentration of risk in the largest global dealers. As direct access is broadened, it is essential that CCPs' risk management procedures be adapted appropriately to ensure their continued effectiveness;
both large global and smaller regional or domestic CCPs will probably play a role in meeting G20 commitments. In both cases, developing and adopting international standards will be essential to avoid regulatory arbitrage and promote effective cross-border monitoring of infrastructure and participants; and
CCPs and authorities should consider enhancements where needed to strengthen the safety and efficiency of indirect clearing that comply with international standards. Effective segregation, as well as portability of positions and collateral belonging to a direct clearer's clients, will be needed to realise the benefits of systemic risk reduction.

CGFS Chairman Mark Carney, in presenting the report, said that it "provides relevant and timely input to international initiatives related to CCP access arrangements and configurations."

Algeria: structural and other reasons for regime stability

2011-11-15T23:27:00.001-08:00

Kal writes:

Richard Phelps argues that Algeria has not seen a popular uprising this year on broad structural lines (‘An Algerian Exception?‘ CMEC Blog): ‘Algerian regime does not have an identifiable leader with whom political power truly lies’.

[...]

And the government has focused its strategy toward them based on this reality and avoided the provocative showings of ‘symbolic’ violence that gave fuel to protest movements in Tunisia and Libya and Syria and Egypt (part of this is owed to the government’s relationships with the private media as well). Official and unofficial media has not covered demonstrations extensively to the extent that protesters in one city would necessarily be aware of those in another. The massive showing of ‘force’ at the February demonstrations — which were quite small, using barely a few thousand people if that — was a show of bodies more than anything else, and while protesters were manhandled and some beaten few or none were shot or killed in the way their counterparts elsewhere in the Arab world were. The government issued reforms, after long deliberations, and statements of intent to reform on a range of issues. It acted quickly to buy off organizers and potential participants or to contain and frustrate them rather than making public ‘examples’ of children or attempting to use overwhelming and direct force. The ‘crackdowns’ on protesters in Algeria this year were in large measure qualitatively different from those elsewhere, as were the demonstrations themselves.

Structurally it is important to understand that Algeria’s politics do operate in a diffuse manner, that power is spread through regional and professional and bureaucratic networks which often compete with one another but are also sometimes dependent on one another. (One might quibble with any comparison of the Algerian presidency to the power of any single office in Lebanon or to even its strongest Lebanese za’im; the perception and reality of the president’s power in Algeria is an interesting thing to follow and to try an gage at any one time but the presidency has frequently overwhelmed the military under Bouteflika.) The business class and the military officers and the technocrats and local notables intersect and it would be difficult to ‘purge’ the government as the Tunisians are now trying to do and it would also be difficult to make removing Bouteflika in a coup appear to Algerians as a symbolic act with and the armed forces a trusted ‘care taker’ of some transition process (let alone a ‘savior’) as the Egyptian Army did with Mubarak, since Algerians are generally more cynical and probably distrust their military and opposition more than their cousins in the rest of the region. It is also important to understand the field in which these various networks and factions (‘clans’) interact, overlap and struggle; it involves a great deal of both external and internal opacity and risk. There are enormous uncertainties involved. Longtime Algeria hand John Entelis wrote in September that change of some kind would wind up taking place in Algeria, if only so that the country’s elite could keep its own interests, and that ’[w]hether this process develops peacefully or violently is ultimately in the hands of le pouvoir’.

But structural reasons are not the only ones Algeria has not seen an uprising. The Algerian military and political class has dealt with uprisings and transitions before and probably had a better idea of how to deal with such problems technically given its experience in the 1988-1990 period and the youth uprising in 2001 and the tens of thousands of youth riots which have struck the country in the last decade. In other words, it is important to recognize that the Algerian regime — like its counterparts elsewhere — made choices this year.

Read the whole post at http://themoornextdoor.wordpress.com/2011/11/16/exceptions-agency-structure/

IMF Calls for Further Reforms in China’s Financial System

2011-11-14T23:08:00.001-08:00

IMF Calls for Further Reforms in China’s Financial System
Press Release No. 11/409
November 14, 2011

http://www.imf.org/external/np/sec/pr/2011/pr11409.htm

China’s financial system is robust overall, but faces a steady build-up in vulnerabilities. While significant progress has been made towards developing a more commercially-oriented financial sector, and supervision and regulation are being strengthened, risks stem from the growing complexity of the system and the uncertainties surrounding the global economy. Further reforms are needed to support financial stability and encourage strong and balanced growth, the International Monetary Fund (IMF) says in its first formal evaluation of China’s financial sector published today.

The IMF’s first Financial Sector Assessment Program (FSAP) review of China was carried out jointly with the World Bank. China is one of 25 systemically important countries that have agreed to mandatory assessments at least once every five years. The FSAPs are part of the IMF’s activities in financial surveillance and the monitoring of the international monetary system.

“China’s banks and financial sector are healthy, but there are vulnerabilities that should be addressed by the authorities,” says Jonathan Fiechter, deputy director of the IMF’s Monetary and Capital Markets Department and the head of the IMF team that conducted the FSAP. “While the existing structure fosters high savings and high levels of liquidity, it also creates the risk of capital misallocation and the formation of bubbles, especially in real estate. The cost of such distortions will only rise over time, so the sooner these distortions are addressed the better.”

Risks
According to the FSAP report, China’s financial sector is confronting several near-term risks: deterioration in loan quality due to rapid credit expansion; growing disintermediation by shadow banks and off-balance sheet exposures; a downturn in real estate prices; and the uncertainties of the global economic scenario. Medium-term vulnerabilities are also building and could impair the needed reorientation of the financial system to support the country’s future growth. Moving along this path will pose additional risks, so priority must be given to establishing the institutional and operational preconditions that are crucial for a wide-ranging financial reform agenda.

The main areas of reform should include:

Steps to broaden financial markets and services, and developing diversified modalities of financial intermediation that would foster healthy competition among banks;
A reorientation of the role of government away from using the banking system to carry out broad government policy goals and to allow lending decisions to be based on commercial goals;
Expansion of the use of market-based monetary policy instruments, using interest rates as the main instrument to govern credit expansion, rather than administrative measures;
An upgrading of the financial infrastructure and legal frameworks, including strengthening the payments and settlement systems, as well as consumer protection and expansion of financial literacy.

The Chinese authorities have begun to move on many of its recommendations, and the IMF stands ready to provide technical cooperation in areas relating to strengthening the financial stability framework in China.

Stress Tests
Stress tests conducted jointly by the Fund and Chinese authorities of the country’s largest 17 commercial banks indicate that most of them appear to be resilient to isolated shocks, which include: a sharp deterioration in asset quality (including a correction in the real estate markets), shifts in the yield curve, and changes in the exchange rate. If several of these risks were to occur at the same time, however, the banking system could be severely impacted, the report warns.

About the FSAP
The Financial Sector Assessment Program, established in 1999, is an in-depth analysis of a country’s financial sector. The IMF conducts mandatory FSAPs for the 25 jurisdictions with systemically important financial sectors, and any member countries that request it. Assessments in developing and emerging market countries are conducted jointly with the World Bank. FSAPs include two components: a financial stability assessment, which is the responsibility of the Fund; and, in developing and emerging market countries, a financial development assessment, conducted by the World Bank.

To assess the stability of the financial sector, IMF teams examine the soundness of the banking and other financial sectors; rate the quality of bank, insurance, and capital market supervision against accepted international standards; and evaluate the ability of supervisors, policymakers, and financial safety nets to respond effectively to a systemic crisis. While FSAPs do not evaluate the health of individual financial institutions and cannot predict or prevent financial crises, they identify the main vulnerabilities that could trigger one.

In September 2010, the IMF made financial stability assessments under the FSAP a mandatory part of IMF surveillance every five years for jurisdictions deemed systemically important based on the size of the financial sector and their global interconnectedness. The countries affected by this decision are: Australia, Austria, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, Italy, Japan, India, Ireland, Luxembourg, Mexico, the Netherlands, Russia, Singapore, South Korea, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.

For more information on FSAPs, see Press Release No. 10/357

CGFS: Global liquidity - concept, measurement and policy implications

2011-11-14T00:01:00.001-08:00

Global liquidity - concept, measurement and policy implications
CGFS Publications No 45
November 2011

Abstract

Global liquidity has become a key focus of international policy debates over recent years. This reflects the view that global liquidity and its drivers are of major importance for international financial stability. The concept of global liquidity, however continues to be used in a variety of ways and this ambiguity can lead to unfounded and potentially destabilising policy initiatives.

This report analyses global liquidity from a financial stability perspective, using two distinct liquidity concepts. One is official liquidity, which can be used to settle claims through monetary authorities and is ultimately provided by central banks. The other concept is private (or private sector) liquidity, which is created to a large degree through cross-border operations of banks and other financial institutions.

Understanding the determinants of private liquidity is of particular importance. As many financial institutions provide liquidity both domestically and in other countries, globally, private liquidity is linked to the dynamics of gross international capital flows, including cross-border banking or portfolio movements. This international component of liquidity can be a potential source of instability because of its own dynamics or because it amplifies cyclical movements in domestic financial conditions and intensifies domestic imbalances.

Policy responses to global liquidity call for a consistent framework that considers all phases of global liquidity cycles, countering both surges and shortages. Measures to prevent unsustainable booms in private liquidity are linked with micro- and macroprudential policies as well as the financial reform agenda. Country-specific or regional liquidity shocks, in turn, may effectively be addressed through self-insurance in the form of precautionary foreign exchange reserves holdings and existing arrangements which essentially redistribute liquidity. However, truly global liquidity shocks necessitate direct interventions in amounts large enough to break downward liquidity spirals. Only central banks have this ability.

Download PDF file at http://www.bis.org/publ/cgfs45.htm or ask us for the PDF file.

Global systemically important banks: Assessment methodology and the additional loss absorbency requirement

2011-11-05T06:58:00.000-07:00

Global systemically important banks (G-SIBs): Assessment methodology and the additional loss absorbency requirement
Nov 04, 2011

The rules text sets out the Basel Committee's framework on the assessment methodology for global systemic importance, the magnitude of additional loss absorbency that global systemically important banks (G-SIBs) should have and the arrangements by which the requirement will be phased in. The cover note to the rules text sets out the Committee's summary and evaluation of the public comments received on the July 2011 consultative document. The rules text was finalised following a careful review of the public comments received. The work of the Basel Committee forms part of a broader effort by the Financial Stability Board to reduce the moral hazard of global systemically important institutions.

The rationale for the policy measures set out in the rules text is to deal with the cross-border negative externalities created by G-SIBs which current regulatory policies do not fully address. The measures will enhance the going-concern loss absorbency of G-SIBs and reduce the probability of their failure.

The assessment methodology for G-SIBs is based on an indicator-based approach and comprises five broad categories: size, interconnectedness, lack of readily available substitutes or financial institution infrastructure, global (cross-jurisdictional) activity and complexity.

The additional loss absorbency requirements will range from 1% to 2.5% Common Equity Tier 1 (CET1) depending on a bank's systemic importance with an empty bucket of 3.5% CET1 as a means to discourage banks from becoming even more systemically important.

The higher loss absorbency requirements will be introduced in parallel with the Basel III capital conservation and countercyclical buffers, ie between 1 January 2016 and year end 2018 becoming fully effective on 1 January 2019.

Rules text (PDF, 32 pages, 185 kb)
Cover note (PDF, 15 pages, 75 kb)

Some Root Causes of the Arab Revolution: Rising Literacy and a Shrinking Birth Rate (due to the first)

2011-11-03T13:50:00.000-07:00

A Look at the Root Causes of the Arab Revolution. Spiegel interview with Emannuel Todd
http://www.spiegel.de/international/world/0,1518,763537,00.html
May 20, 2011

Rising Literacy and a Shrinking Birth Rate

Excerpts:

SPIEGEL: Aren't poverty or affluence also crucial? Tunisia, Syria, Egypt and Yemen don't have bubbling oil revenues.

Todd: Of course, one can placate the people with bread and money, but only for a while. Revolutions usually erupt during phases of cultural growth and economic downturn. For me, as a demographer, the key variable is not the per capita gross domestic product but the literacy rate. The British historian Lawrence Stone pointed out this relationship in his study of the English revolution in the 16th and 17th centuries. He saw the critical threshold at 40 to 60 percent.

SPIEGEL: Well, most young Arabs can now read and write, but how is the birth rate actually developing? The population in Arab countries is extremely young, with half of its citizens younger than 25.

Todd: Yes, but that's because the previous generation had so many children. In the meantime, however, the birth rate is falling dramatically in some cases. It has fallen by half in the Arab world in just one generation, from 7.5 children per woman in 1975 to 3.5 in 2005. The birth rate among female university graduates is just below 2.1, the level needed to maintain a population. Tunisia now has a birth rate similar to that of France. In Morocco, Algeria, Libya and Egypt, it has dropped below the magic threshold of three children per woman. This means that young adults constitute the majority of the population and, unlike their fathers and mothers, they can read and write, and they also practice contraception. But they suffer from unemployment and social frustration. It isn't surprising that unrest was inevitable in this part of world.

[...]

SPIEGEL: Why has it taken so long for the values of the modern age to reach the Islamic world? After all, the golden age of Arab civilization ended in the 13th century.

Todd: There is a simple explanation, which has the benefit of also being applicable to northern India and China, that is, to three completely differently religious communities: Islam, Hinduism and Confucianism. It has to do with the structure of the traditional family in these regions, with its debasement and with the disenfranchisement of women. And in Mesopotamia, for example, it extends well into the pre-Islamic world. Mohammed, the founder of Islam, granted women far more rights than they have had in most Arab societies to this day.

SPIEGEL: Does that mean that the Arabs conformed to older local circumstances and spread them across the entire Middle East?

Todd: Yes. The patrilinear, patrilocal system, in which only male succession is considered valid and newlyweds, preferably cousins in the ideal Arab marriage, live under the roof and authority of the father, inhibits all social progress. The disenfranchisement of women deprives them of the ability to raise their children in a progressive, dynamic fashion. Society calcifies and, in a sense, falls asleep. The powers of the individual cannot develop. The bourgeois achievement of marriage for love, and the free choice of one's partner, replaced the hierarchies of honor in Europe in the 19th century and reinforced the desire for freedom.

SPIEGEL: Is female emancipation the prerequisite for modernization in the Arab world?

Todd: It's in full swing. The headscarf debate is missing the point. The number of marriages between cousins is dropping just as spectacularly as the birth rate, thereby blasting away a barrier. The free individual or active citizen can enter the public arena. When more than 90 percent of young people can read and write and have a modicum of education, no traditional authoritarian regime will last for long. Have you noticed how many women are marching along in the protests? Even in Yemen, the most backward country in the Arab world, thousands of women were among the protesters.

SPIEGEL: The family is the private sphere par excellence. Why do changes in its structure necessarily spread to the political sphere?

Todd: The relationship between those at the top and those at the bottom is changing. When the authority of fathers begins to falter, political power generally collapses, as well. This is because the system of the patrilinear, endogamous extended family has been reproduced within the leadership of nations. The family patriarch as head of state places his sons and other male relatives in positions of power. Political dynasties develop, as in the case of the senior and junior Assad in Syria. Corruption flourishes because the clan runs things for its own benefit. The state is of course privatized as a family business. The power of obedience is based on a combination of loyalty, repression and political economics.

h/t ‘A Convergence of Civilizations’, http://themoornextdoor.wordpress.com/2011/11/02/a-convergence-of-civilizations

Francis Fukuyama said very much this same thing in 1999, The Great Disruption. I don't know if he did it independently.

University studies crowdsourcing for intelligence

2011-11-03T13:41:00.000-07:00

University studies crowdsourcing for intelligence
http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2011/10/18/national/a005635D94.DTL&type=printable
Oct 18. 2011

FAIRFAX, Va. (AP)
--
Maybe you've got a hunch Kim Jong Il's regime in North Korea has seen its final days, or that the Ebola virus will re-emerge somewhere in the world in the next year.

Your educated guess may be just as good as an expert's opinion. Statistics have long shown that large crowds of average people frequently make better predictions about unknown events, when their disparate guesses are averaged out, than any individual scholar — a phenomenon known as the wisdom of crowds.

Now the nation's intelligence community, with the help of university researchers and regular folks around the country, is studying ways to harness and improve the wisdom of crowds. The research could one day arm policymakers with information gathered by some of the same methods that power Wikipedia and social media.

In a project that is part competition and part research study, George Mason professors Charles Twardy and Kathryn Laskey are assembling a team on the Internet of more than 500 forecasters who make educated guesses about a series of world events, on everything from disease outbreaks to agricultural trends to political patterns.

They are competing with four other teams led by professors at several universities. Each differs in its approach, but all are studying how crowdsourcing can be used.

At stake is grant money provided by the Intelligence Advanced Research Projects Activity, part of the Office of the Director of National Intelligence, which heads up the nation's intelligence community.

Put simply, crowdsourcing occurs when a task is assigned to a wide audience rather than a specific expert or group of experts. The online encyclopedia Wikipedia is one of the most prominent examples — anyone can write or edit an entry. Over time, the crowds refine and improve the product. Crowdsourcing can range from a simple question blasted to a person's Twitter followers to amateur programmers fine-tuning open-source software.

IARPA spokeswoman Cherreka Montgomery said her project's goal is to develop methods to refine and improve on crowdsourcing in a way that would be useful to intelligence analysts.
"It's all about strengthening the capabilities of our intelligence analysts," Montgomery said.

And if analysts can use crowdsourcing to better determine the likelihood of seemingly unpredictable world events, those analysts can help policymakers be prepared and develop smarter responses. In a hypothetical example, a crowd-powered prediction about the breakout of popular uprisings in the Middle East could influence what goes in a dossier given to decision-makers at the highest levels.

The program at George Mason is called DAGGRE, short for Decomposition-based Aggregation. The researchers have used blog postings, Twitter and other means to get the word out about their project to potential participants. No specialized background is required, though a college degree is preferred.

The project seeks to break down various world events into their component parts. The stability of Kim Jong Il's regime in North Korea provides an example. One forecaster might base his prediction based solely on political factors. But what if the political experts could be guided by health experts, who might observe that Kim's medical condition is flagging?

The DAGGRE participants key their answers into forms on the project's website, and also supply information at the outset about their education and what areas they have expertise in. The scholars overseeing the project will then seek to break down the variables that influence a forecaster's prediction, and use the data in a way that people with disparate knowledge bases can help guide each other to the most accurate forecast.

Military and intelligence researchers have long studied ways to improve the ability to predict the future. In 2003, the Defense Advanced Research Projects Agency launched research to see whether a terrorist attack could be predicted by allowing speculative trading in a financial market, in which people would make money on a futures contract if they bet on a terrorist attack occurring within a designated time frame. The theory was that a spike in the market could serve as a trip wire that an attack was under way. But some found the idea ghoulish, and others objected to the notion that a terrorist could conceivably profit by carrying out an attack, and the research was halted.

Laskey said George Mason's research bears some fundamental similarities with the discontinued DARPA research, with the crucial difference that nobody participating in George Mason's project can profit from making accurate predictions. But participants who make accurate predictions are rewarded with a point system, and there is a leaderboard of sorts for participants to measure their success. Some can also choose to receive a small stipend for their time, but it's not tied to how they answer questions.

Another team, led by psychologists at the University of California and the University of Pennsylvania who are focused on asking questions in ways that minimize experts' overconfidence and misjudgment, said Don Moore, a professor at Cal-Berkeley.

"Small wording changes in a question can have a huge effect" on how a person answers, Moore said.

Twardy said the George Mason study has already drawn more than 500 participants, but only about half are actively participating. The study continues to recruit people as some participants drop out over the four-year course of the study.

Participants come from all walks of life. While Twardy said he'd love to have, say, agronomists, on his team to help forecast European polices and responses to mad cow diseases and the cattle trade, the overriding principle is that people from various backgrounds can contribute to the crowd's collective wisdom, so participation is not restricted by fields of expertise.

George Mason received a $2.2 million grant from IARPA to conduct the study. If the team remains in the competition for the full four years — weaker teams are at risk of being discontinued — the grant will be increased to $8.2 million.

Twardy expects to publish the results of his research and hopes it will ultimately help world leaders make more informed choices when they confront global crises.

"At some level, you cannot predict the future," Twardy said. "But you can do a lot better than just asking an expert."

Towards Effective Macroprudential Policy Frameworks: An Assessment of Stylized Institutional Models

2011-11-02T04:06:00.001-07:00

Towards Effective Macroprudential Policy Frameworks: An Assessment of Stylized Institutional Models. Authors: Nier, Erlend; Osinski, Jacek; Jácome, Luis Ignacio; Madrid, Pamela
IMF Working Paper No. 11/250
November 01, 2011

Summary: A number of countries are reviewing their institutional arrangements for financial stability to support the development of a macroprudential policy function. In some cases, this involves a rethink of the appropriate institutional boundaries between central banks and financial regulatory agencies, or the setting up of dedicated policymaking committees. In others, efforts are underway to enhance cooperation within the existing institutional structure. Against this background, this paper provides basic guidance for the design of effective arrangements, in a manner that can provide a framework for country-specific advice. After reviewing briefly the main institutional elements of existing and emerging macroprudential policy frameworks across countries, the paper identifies stylized institutional models based on key features that distinguish institutional arrangements. It develops criteria to assess the effectiveness of models, examines the strengths and weaknesses of models against these criteria, and explores ways to improve existing setups. The paper finally distills lessons and sets out desired principles for effective macroprudential policy arrangements.

NieretaliiIMF-TowardsEffectiveMacroprudentialPolicyFrameworks-AnAssessmentofStylizedInstitutionalModelsNov2011.pdf

What drives the global land rush?

2011-11-01T09:03:00.000-07:00

What drives the global land rush? Authors: Arezki, Rabah; Deininger, Klaus; Selod, Harris
IMF Working Paper No. 11/251

Summary: This paper studies the determinants of foreign land acquisition for large-scale agriculture. To do so, gravity models are estimated using data on bilateral investment relationships, together with newly constructed indicators of agro-ecological suitability in areas with low population density as well as indicators of land rights security. Results confirm the central role of agro-ecological potential as a pull factor. In contrast to the literature on foreign investment in general, the quality of the business climate is insignificant whereas weak land governance and tenure security for current users make countries more attractive for investors. Implications for policy are discussed.

Introduction

After decades of stagnant or declining commodity prices when agriculture was considered a ‘sunset industry’, recent increases in the level and volatility of commodity prices and the resulting demand for land have taken many observers by surprise. This phenomenon has been accompanied by a rising interest in acquiring agricultural land by investors, including sovereign wealth and private equity funds, agricultural producers, and key players from the food and agri-business industry. Investors’ motivations include economic considerations, mistrust in markets and concern about political stability, or speculation on future demand for food and fiber, or future payment for environmental services including for carbon sequestration. Some stakeholders, including many host-country governments, welcome such investment as an opportunity to overcome decades of under-investment in the sector, create employment, and leapfrog and take advantage of recent technological development. Others denounce it as a ”land grab” (Zoomers 2010). They point to the irony of envisaging large exports of food from countries which in some cases depend on regular food aid. It is noted that specific projects’ speculative nature, questionable economic basis, or lack of consultation and compensation of local people calls for a global response (De Schutter 2011). In a context of diametrically opposite perceptions, the objective of the present paper is to provide greater clarity on the numbers involved and the factors driving such investment. This is done by quantifying demand for land deals, and exploring the determinants of foreign land acquisition for large-scale agriculture using data on bilateral investment relationships. This work is an important first step to assess potential long-term impacts and discuss policy implications.

The analysis of large-scale land deals is relevant for a number of key development issues. One such issue is the debate on the most appropriate structure of agricultural production. The exceptionally large poverty elasticity of growth in smallholder agriculture (de Janvry and Sadoulet 2010, Loayza and Raddatz 2010) that is reflected in rapid recent poverty reduction in Asian economies such as China, and the fact that the majority of poor are still located in rural areas led observers to highlight the importance of a smallholder structure for poverty reduction (Lipton 2009, World Bank 2007). At the same time, disillusion with the limited success of smallholder-based efforts to improve productivity in sub-Saharan Africa (Collier 2008) and apparent export competitiveness of “mega-farms” in Latin America or Eastern Europe during the 2007/8 global food crisis have led to renewed questions about whether, despite a mixed record, large scale agriculture can be a path out of poverty and to development.

Whatever the envisaged scenario, renewed pressure on land raises the issue of whether there is sufficient competition and transparency to ensure that land owners or users are able to either transfer their land at a fair price or hold on to it as opposed to having it taken away without their consent and in what may be perceived an unfair deal. This resonates with recent contributions to the literature that suggest that resource abundance can contribute to more broad-based development only if well-governed institutions to manage these resources exist (Oechslin 2010). This is borne out by empirical evidence both across countries (Cabrales and Hauk 2011) and within more specific country contexts where resource booms may have fuelled widespread rent-seeking and corruption (Bhattacharyya and Hodler 2010) or even violence (Angrist and Kugler 2008) rather than economic development.

To better understand this phenomenon and its potential impact, an empirical analysis of the factors driving transnational land acquisition is needed. To this end, we constructed a global database with country-level information on both foreign demand for land and implemented projects as documented in international and local press reports. We complement it with country-specific assessments of the amount of potentially suitable land and other relevant variables. We then use bilateral investment relationships from the database to estimate gravity models that can help identify determinants of foreign land acquisition. Results confirm the central role of agro-ecological potential as a pull factor but suggest that, in contrast to what is found for foreign investment more generally, rule of law and good governance have no effect on the number of land-related investment. Moreover, and counterintuitively, we find that countries where governance of the land sector and tenure security are weak have been most attractive for investors. This finding, which resonates with concerns articulated by parts of civil society, suggests that, to minimize the risk that such investments fail to produce benefits for local populations , the micro-level and project-based approach that has dominated the global debate so far will need to be complemented with an emphasis and determined action to improve land governance, transparency and global monitoring. The paper is organized as follows. Section 2 puts recent land demand into broader context, highlighting the importance of governance in attracting investments. It draws on an analysis of how foreign direct investment (FDI) is treated in the macro-literature to suggest a methodological approach, and outlines how we address specific data needs. Section 3 presents our cross-sectional data on land demand, outlines the econometric approach, and briefly discusses relevant descriptive statistics. Key econometric results in section 4 support the importance of food import demand as motivations for countries to seek out land abroad (‘push factors’) and of agro-ecological suitability as key determinants for the choice of destination (‘pull factors’). They also highlight the extent to which weak land governance seems to encourage rather than discourage transnational demand for land. Section 5 concludes by highlighting a number of implications for policy.

Buy the paper here: http://www.imfbookstore.org/ProdDetails.asp?ID=WPIEA2011251

The Strategic Implications of Closer Indonesia-China Relations

2011-10-27T06:26:00.000-07:00

Growing Convergence, Greater Consequence: The Strategic Implications of Closer Indonesia-China Relations. By Greta Nabbs-Keller. Security Challenges Journal. Volume 7, Number 3 (Spring 2011), pp. 23-42. http://www.securitychallenges.org.au/TOCs/vol7no3.html

Indonesia’s relationship with China has been characterised by a history of enmity, but residual concerns belie increasing economic and foreign policy convergence boosted by the positive effects of democratisation on Indonesia’s perceptions of the Chinese. This article will argue that the growing convergence of interests between Indonesia and China is a positive development for Australia. China’s rise has provided the engine of growth for Southeast Asia’s largest economy and has increasingly cemented Indonesia’s importance in the ASEAN-centred regional order. For Australia, it means a stronger, stable, and more prosperous neighbour next door with natural ‘antibodies’ against Chinese assertiveness.

Excerpts (edited):

In a 2008 book on the rise of Asia and the transformation of geopolitics, William Overholt, the Director of Rand Corporation’s Centre for Asia Pacific Policy, made the following argument about Indonesia:

A reviving Indonesia, with its vast territory, large population, and determination to lead the region, still zealously guards against any hint of emergent Chinese hegemony. Even more than other countries in the region, Indonesia has powerful antibodies to any hint of strong Chinese assertion.

It was Overholt’s contention that although the US “had lost stature in Southeast Asia … [this] did not presage Chinese dominance”. Overholt is absolutely correct about Indonesia’s wariness of China and indeed relations have been characterised traditionally by high political drama and a history of enmity. But residual Indonesian concerns about China are only part of the story. They belie ever closer economic and foreign policy convergence boosted by the positive effects of democratisation on Indonesia’s perceptions of the Chinese. Relations between East Asia’s two largest states have undergone a remarkable transformation in the period of Indonesia’s democratisation, with significant implications for the broader security and prosperity of the Indo-Pacific region.

The article will argue that the growing convergence of interests between Indonesia and China evident over the last decade is a positive development for Australia. China’s rise has provided the engine of growth for Southeast Asia’s largest economy and has increasingly cemented Indonesia’s importance in the Association of South East Asian Nations (ASEAN)-centred regional order. For Australia, it means a stronger, stable, and more prosperous neighbour next door with Overholt’s natural antibodies against Chinese assertiveness. Although Indonesia’s relationship with China remains characterised by dichotomous elements—friendship versus residual distrust, economic complementarity versus competition—Indonesia has sought to maximise the opportunities inherent in China’s rise, whilst continuing to hedge against the strategic uncertainties posed by China.

Greta Nabbs-Keller is a PhD candidate at Griffith Asia Institute researching the impact of democratisation on Indonesia’s foreign policy. Her broader research interests include Indonesian civil-military relations and Australian regional foreign policy. Before joining Griffith University, Greta worked for the Department of Defence in Canberra and Jakarta.

IMF: Outlook for Mideast, with Oil-Importing Countries Facing Continued Economic Pressures

2011-10-26T00:02:00.000-07:00

IMF Sees Varied Outlook for Mideast, with Oil-Importing Countries Facing Continued Economic Pressures
Press Release No. 11/378
October 26, 2011

Excerpts:

The economic outlook for countries across the Middle East and North Africa region varies markedly, with the oil-exporters seeing a mild pickup in growth in 2011 on the back of higher oil prices, and the oil-importers experiencing a dramatic slowdown, the IMF says in its latest assessment of the region. The IMF’s Regional Economic Outlook for the Middle East and Central Asia, released today, projects growth in the Middle East and North Africa region, including Afghanistan and Pakistan, at 3.9 percent in 2011, down from 4.4 percent in 2010.

The region’s oil-exporting countries (excluding Libya)—Algeria, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, Sudan, the United Arab Emirates, and Yemen—are forecast to expand by 4.9 percent in 2011, thanks to higher oil prices and oil production. But growth among the region’s oil importers—Afghanistan, Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Syria, and Tunisia—will register just under 2 percent (see table).

“Since the beginning of this year, a deterioration in the international economic outlook and the buildup of domestic social pressures have resulted in an economic slowdown in many of the region’s oil-importing countries. But we should not lose sight that the ongoing historical transformation holds the promise of improved living standards and a more prosperous future for the people in the region,” Masood Ahmed, Director of the IMF’s Middle East and Central Asia Department, said at the launch conference of the report in Dubai today.

Higher oil prices benefiting oil exporters

Economic activity in the region’s oil-exporting countries has clearly improved, bolstered by continued high energy prices. This expansion is driven by the high level of activity in the countries of the Gulf Cooperation Council (GCC), where growth is projected at 7 percent in 2011, the report shows. Several countries—Saudi Arabia in particular—have stepped up oil production temporarily in response to higher oil prices and shortfalls in production from Libya. “The decision to increase oil production in the wake of disruptions in Libya was an essential contribution toward global energy market stability and enhanced activity,” Mr. Ahmed noted.

Increased oil revenues have created additional room for government spending in the GCC. Several countries announced spending programs early in the year, covering a wide spectrum of measures, such as subsidies, wages, and capital expenditure. At current projected oil prices and levels of production, revenue gains will more than offset the high levels of public spending. In 2011, the oil exporters’ combined external current account balance is expected to increase from $202 billion to $334 billion (excluding Libya), and from $163 billion to $279 billion for the GCC.

But fiscal vulnerability has also increased substantially, as break-even oil prices have risen steadily and are now approaching observed oil prices (see Chart 1). “Oil-exporting countries have understandably increased fiscal spending to address social needs. Looking forward, the widening of non-oil fiscal deficits makes many countries more vulnerable to swings in oil prices, at a time when the world economy is facing heightened risks,” Mr. Ahmed added.

[http://www.imf.org/external/images/pr11378a.gif]

Turning to the financial sector, the report sees a continued gradual recovery. GCC banks in particular, which showed considerable resilience during the global crisis, are now registering capital adequacy ratios in excess of 15 percent, with nonperforming loans below 10 percent. But private-sector credit growth remains cautious.

Looking ahead, the IMF’s assessment foresees a moderation in growth for the region’s oil exporters to about 4 percent in 2012, and notes that these countries also face some downside risks. The most immediate would be the impact of a sharp slowdown in Europe and the United States. Global oil demand could contract substantially, possibly leading to a sustained drop in oil prices. Other risks include further regional unrest and an economic downturn in key trading partners, such as India and China.

Meeting social needs, restoring confidence key priorities for oil importers
As for the region’s oil-importing countries, the political and economic transformations occurring in several of them are advancing slowly and are expected to extend well into 2012. Together with a worsening economic outlook in Europe and globally, the region is seeing a sharp drop in investment and tourism activity. As a result, the recovery in 2012 is expected to be weaker than anticipated, with growth projected at just over 3 percent, according to the IMF report.

“Undoubtedly, the year ahead will be challenging for many countries, with continued political uncertainty, a deteriorating global economic outlook, and higher financing costs impeding a quick economic recovery. Measures aimed at restoring confidence and fostering more inclusive growth will help countries enhance activity and ultimately address the needs of the population,” Mr. Ahmed said.

In response to growing social unrest, the economic downturn, and higher commodity prices, governments in the region have significantly expanded subsidies and transfers. The cost of this social spending remains high, exceeding 10 percent of GDP in Egypt and more than 5 percent of GDP in most other countries. As a result, oil importers’ fiscal deficits are widening by about 1.5 percent of GDP in 2010–11 (see Chart 2).

[http://www.imf.org/external/images/pr11378b.gif]

In the near term, such spending measures are appropriate to lessen the impact of the downturn. But from an efficiency and equity standpoint, it is better for governments to gradually replace universal subsidies with social safety nets that are targeted at the less well-off part of the population, the IMF report states. Resources can then be used for critical investments in infrastructure and education and for supporting much-needed reforms.

Meeting the rising demands of the population will not be easy, the report notes—particularly as most countries have already used their fiscal and international reserve buffers to respond to deteriorating economic conditions in the wake of the Arab Spring, and have less room left to respond to future shocks. Regional partners and the broader international community can facilitate this transition through financing and greater market access for exports.

Conflict has taken a massive human toll in addition to its enormous economic costs in Libya, Syria, and Yemen. The immediate priority for these countries is to avoid further humanitarian crisis and, post conflict, to pursue an agenda of reconstruction and reform.

See tables of selected economic indicators for Middle East, North Africa, Afghanistan, and Pakistan (MENAP) at http://www.imf.org/external/np/sec/pr/2011/pr11378.htm

Under Sec for Internt'l Affairs Lael Brainard Testimony on the U.S.-China Economic Relationship

2011-10-25T11:55:00.000-07:00

Under Secretary for International Affairs Dr. Lael Brainard Testimony Before the House Committee on Ways and Means on the U.S.-China Economic Relationship

http://www.treasury.gov/press-center/press-releases/Pages/tg1336.aspx

Oct 25, 2011

Chairman Camp, Ranking Member Levin, distinguished members of the Committee, thank you for the opportunity to testify today on our economic relationship with China.

Challenges and Opportunities
Since the outset, President Obama has placed a high priority on pursuing a more balanced and fair economic relationship with China. This is central to our goal of doubling exports in five years and supporting several million U.S. jobs. And, indeed, since 2009, U.S. exports to China have grown by 61 percent, nearly twice as fast as our exports to the rest of the world. Despite this progress, the playing field is still uneven. To secure the future for our children, the Administration will continue working hard to get the economic relationship right.

China needs to take action at an accelerated rate, so that the potential of our relationship translates into real near-term benefits for our companies and workers. China’s leaders understand that China must shift to domestic consumption-led growth, provide a secure environment for the protection and enforcement of intellectual property rights, level the playing field between state-owned and private enterprises—domestic and foreign, and liberalize the exchange rate and financial markets. China needs to take these actions to sustain its own growth, as well as to address the concerns of its trade partners. On these issues, we have actively pressed China to accelerate the pace of reform in order to achieve more balanced growth and create fairer competition, and there has been some progress, but there are strong interests within China that favor a go-slow approach.

In the wake of the financial crisis, with American households saving more and demand weak in Europe and Japan, our exports increasingly will be directed at the fast-growing emerging markets if we are to create the good jobs with good wages that we need to grow our economy. For the next decade, China is expected to be the biggest source of demand growth in the global economy. The International Monetary Fund (IMF) forecasts that China’s growth will average 9.4 percent per year over the next five years, and the Organization of Economic Cooperation and Development (OECD) estimates that China’s share of global imports will increase from six percent in 2008, to over nine percent in 2012. This is a market opportunity that we must seize.

Foreign investment also is playing an increasingly important role in supporting jobs in the United States, and we expect this trend to continue. In 2009, majority-owned U.S. affiliates of foreign companies were an important contributor to U.S. economic activity, employing approximately five percent of the U.S. private workforce and 17 percent in the U.S. manufacturing sector. In the decade ahead, China will be a fast-growing source of foreign direct investment among major economies. Indeed, the stock of Chinese foreign investment in the United States more than doubled last year alone. Protecting national security is always our first concern, but where Chinese investment does not affect national security, we should welcome it. To create jobs here at home, it matters whether Chinese investment ultimately ends up in Anhui province, Argentina, or Alabama.

In order to derive a better balance of benefits from trade and investment opportunities with China, we need to see progress on three key challenges. First, in many sectors in which the United States is competitive globally, China must address a range of discriminatory policies, including those that favor domestic state-owned enterprises through barriers to foreign goods, services, and investment, as well as the provision of subsidies and preferential access to raw materials, land, credit, and government procurement. Second, rampant theft of intellectual property in China lowers the return to investments in research and development and innovation that represent a fundamental source of our country’s national competitive edge. Third, China must shift to a pattern of growth that can be sustained, drawing on home-grown demand rather than excessive dependence on exports. This requires that China bring its exchange rate into alignment with market fundamentals.

China’s Reforms
China’s current headline growth rate may look enviable right now, but China will face daunting challenges in coming years. We have a tremendous stake in ensuring that China deals with those challenges in a way that fundamentally reorients its growth pattern through greater balance and fairer competition.

China has had remarkable success in lifting hundreds of millions of its citizens out of poverty. But it has come at some cost, including large-scale environmental degradation and an economy that spends much more on investment than goods and services for its people. Chinese leaders understand that, with per capita income of around one-tenth of that of the United States in 2011,[1] and per capita household spending less than one-twentieth of that in the United States, the way China grew in the last two decades will not get them to the next stage of development. Instead, China will face what economists call the “middle income trap.”

China’s excessive dependence on growth driven by exports to advanced economies and investment will need to change. During the 2008-2009 global crisis, China was able to sustain growth through a massive credit-fueled investment boom. This will leave a financial hangover for years. China risks repeating the experience of other fast growing Asian economies that experienced sharp falls in growth soon after their investment-to-gross domestic product (GDP) ratios peaked. With investment reaching an all-time high of almost 48 percent of GDP, however, China’s peak is higher than other Asian economies.

China already is seeing rapidly slowing labor force growth, and the number of workers in China soon will be on the decline. While China maintains many advantages, a study by KPMG concluded that rising labor costs in China are shifting a rising market share of light manufactured goods to other producers in Asia.[2] A recent study by the Boston Consulting Group similarly concluded that China’s cost advantage is rapidly eroding.[3]

In the face of overinvestment and rising wages, China will need to move up the value chain. But China’s weak protection and enforcement of intellectual property rights threaten to retard the development of Chinese innovation and Chinese brands.

And the adjustment process – whether to greater consumption-led growth, higher value services, or innovation-intensive activities – is hampered by China’s continued excessive reliance on administrative controls, such as credit quotas to maintain price stability and intervention to temper exchange rate adjustment, that are subject to political determinations and thus leave policy making behind the curve. These controls are reflected in a financial system that fails to offer Chinese households financial assets that keeps up with inflation, let alone economic growth, and starves China’s most innovative firms and sectors of capital, despite massive domestic savings, while also depriving foreign competitors of the opportunity to offer a full range of products and services. Relying more on market-based prices, such as exchange and interest rates that facilitate adjustment to changing conditions, would make China’s growth more resilient, and avoid an excessive build-up of foreign exchange reserves.

For sustained growth, China wants greater access to U.S. technologies and high-tech dual use exports, to make progress on bilateral investment, and wants their exports to be accorded the same terms of access as exports from other market economies. We are willing to make progress on these issues, but our ability to move will depend in part on how much progress we see from China on issues that are important to us.

U.S. Engagement and Enforcement
We have worked tirelessly across the Administration to pursue a tight set of priorities with China – using the Strategic and Economic Dialogue (S&ED), as well as the Joint Commission on Commerce and Trade (JCCT). And since many other countries share our concerns, we also pursue these issues through multilateral channels, such as the G-20, the IMF, and the World Trade Organization (WTO), which are critical complements to our bilateral engagement. To advance our goals, whether it is faster appreciation of the exchange rate or reduced barriers to U.S. exports, we need to work smartly with our partners around the world and with China. And when engagement proves insufficient, this Administration will continue to be more aggressive than any of its predecessors in using all appropriate tools to address the particular problem, such as going after China’s unfair trade practices by taking China to the WTO and vigorously applying U.S. trade remedy laws.

While we face substantial challenges, and our job is far from finished, we have made important progress towards leveling the playing field and making the bilateral relationship more beneficial for American companies and workers. China’s trade surplus has declined from 7.7 percent of GDP in 2008, to 3.9 percent in 2010, and has declined further in the first half of this year compared to the same period last year, though an important part of the decline was due to slower growth in China’s export markets. In both its latest Five-Year Plan and the recent S&ED, China committed to targets to promote consumption-led growth, including raising household incomes, increasing minimum wages, and increasing services relative to GDP.

On the exchange rate, since China resumed exchange rate adjustment in June 2010, the renminbi has appreciated about seven percent against the U.S. dollar and about ten percent taking into account China’s higher rate of inflation relative to inflation in the United States. China’s currency has appreciated nearly forty percent against the dollar over the past five years in real terms. But the continued rapid pace of foreign reserve accumulation and the ongoing decline in the share of Chinese consumption in GDP indicate that the real exchange rate of the renminbi remains misaligned despite recent movement, and a faster pace of appreciation is needed.

Renminbi appreciation on its own will not erase our trade deficit. But allowing the exchange rate to adjust fully to reflect market forces is the most powerful near-term tool available to the Chinese government to achieve two of its top economic goals: combating inflation and shifting the composition of demand towards domestic consumption. By contrast, persistent misalignment holds back the rebalancing in demand needed to sustain the global recovery both in China and the world, and gives rise to substantial international concerns and ultimately to trade frictions. Further, emerging markets that compete with China resist appreciation of their own currencies to maintain their competitiveness vis-à-vis China.

At the G-20 earlier this month, surplus emerging markets such as China committed to accelerate the rebalancing of demand towards domestic consumption, and to move toward more market-determined exchange rates through greater exchange rate flexibility.

We also are making progress on our bilateral trade and investment priorities, in close collaboration with the Office of the U.S. Trade Representative and the Department of Commerce. At the most recent S&ED, after commitments made during the January state visit of President Hu and the prior December JCCT, China pledged to rescind all of its government procurement indigenous innovation catalogues, including by provincial and municipal governments. So far, the Central government has repealed four key measures that underpinned the indigenous innovation product accreditation system, and a number of local governments have taken positive steps. China also pledged to increase inspections of government computers to ensure that agencies use legitimate software, and to improve its high-level government coordination and leadership mechanisms to enhance long-term protection and enforcement of intellectual property rights. And last year, China met its S&ED pledge to raise the threshold for central government review of foreign investments from $100 to $300 million, leaving more foreign investment approvals to the mayors and governors who better understand the benefits of foreign direct investment.

Reforming and opening up China’s financial sector also remains a key priority. This not only would provide Chinese households with savings and insurance products to meet their financial goals without having to save so much of their income, but also would level the playing field with China’s state-owned enterprises for access to credit. We will continue pushing hard to address market access barriers in China’s financial sector, and we are seeing modest signs of progress. China now allows foreign banks to underwrite corporate bonds and is creating more opportunities for our financial services firms to manage investments in China as well as manage Chinese investments abroad. At the most recent S&ED, China committed to allow foreign firms to sell mutual funds, provide custody services, and sell mandatory auto liability insurance.

In short, while we will stand up to unfair and discriminatory practices and demand change, we will continue to engage with and encourage China as it pursues its reforms. And to meet this generational challenge, we must continue to work to strengthen the multilateral system that governs trade and finance, and not turn away from it. I believe this is the best way to promote American interests.

Thank you.

References
[1] September 2011 IMF World Economic Outlook Database, using market exchange rates.

[2] KPMG International, Product Sourcing in Asia Pacific 2011, pp. 7-9.

[3] Boston Consulting Group, Made in America, Again, August 2011, p. 5.

Are businesses run by women less productive than businesses run by men?

2011-10-25T00:18:00.000-07:00

Where You Work: How Does Gender Matter?
Mary Hallward-Driemeier
Oct 2011

Are businesses run by women less productive than businesses run by men? If we perform a very simple comparison of the average productivity of female and male-owned enterprises, we might answer “yes”. But if we look a bit more closely at the data, a large part of this gap is explained by the fact that women and men are doing different things. If you compare women and men in the same sectors and in similar types of enterprises, the gap shrinks dramatically. Where you work is more important than gender in accounting for the observed productivity gap.

Using data on over 9000 registered enterprises from 32 countries in Sub-Saharan Africa, we see a productivity gap of 6 percent. However, controlling for sector, size and capital intensity, the gap disappears (see chart 1). If we include unregistered firms in the analysis, the unconditional productivity gap widens, as women are disproportionately in the informal sector where productivity is even lower. Nevertheless, the same pattern holds: there is little gender performance gap between similar enterprises.

Chart 1: The Gender Gap in Average Firm Labor
Controlling for enterprise characteristics removes the gender gap in productivity (registered firms in 32 Sub-Saharan African countries)

Once comparing like with like, the finding of no or few significant differences between female and male entrepreneurs in performance is encouraging. It confirms that Sub-Saharan Africa has considerable hidden growth potential in its women, and that tapping that potential—including improving women’s choices of where to be active economically—can make a real contribution to the region’s growth.

A similar story emerges when we look at the obstacles faced by men’s and women’s businesses. Once the characteristics of the enterprise are controlled for, gender differences in obstacles are generally not significant. Access to electricity is a constraint, particularly for smaller and medium firms, and issues of skills and regulations for larger firms, regardless of the gender of the entrepreneur. There are, however, two exceptions that have a direct gender angle. First, women report having a harder time accessing credit. This is not only due to their running smaller firms (which itself may be a result of this constraint), women often have less access to collateral. This is correlated with a country’s gender gaps in formal property rights and practical constraints in accessing justice (this topic will be elaborated in an upcoming blog).

Second, women often face greater difficulties in dealing with government authorities. They may be expected to pay higher amounts to get things done, may be less likely to get things done even having paid – and the ‘payment’ sought may not only be monetary. Indeed, over a quarter of respondents, male and female, reported that they had heard of sexual favors being requested to obtain licenses, receive credit or in dealing with the tax authorities.

If where you work rather than gender is associated with performance and the main constraints to firm growth, policy makers need to understand why the observed gender patterns of entrepreneurship persist. One of the most significant predictors of whether an entrepreneur joins the formal or informal sector and the size of their enterprises is education. What we find is that across sectors, there are large gaps in education, but few gender education gaps within a sector. Women and men in the formal sector have very similar educational backgrounds, likewise in the informal sector (see Chart 2). However, where gender comes in is that women have fewer years of education, helping explain why fewer women are in the formal sector.

Chart 2: Education varies more by formal/informal sector than by gender

To expand women’s opportunities, more women need to be able to shift where they work. Tackling underlying disparities in access to human capital and assets are key to these efforts. With the same backgrounds, women are able to run the same types of firms as men with equal results.

See full story: https://blogs.worldbank.org/allaboutfinance/where-you-work-how-does-gender-matter to view full story.

The Case Against Global-Warming Skepticism

2011-10-21T06:01:00.001-07:00

The Case Against Global-Warming Skepticism. By Richard A Muller
There were good reasons for doubt, until now.
http://online.wsj.com/article/SB10001424052970204422404576594872796327348.html
WSJ, Oct 21, 2011

Are you a global warming skeptic? There are plenty of good reasons why you might be.

As many as 757 stations in the United States recorded net surface-temperature cooling over the past century. Many are concentrated in the southeast, where some people attribute tornadoes and hurricanes to warming.

The temperature-station quality is largely awful. The most important stations in the U.S. are included in the Department of Energy's Historical Climatology Network. A careful survey of these stations by a team led by meteorologist Anthony Watts showed that 70% of these stations have such poor siting that, by the U.S. government's own measure, they result in temperature uncertainties of between two and five degrees Celsius or more. We do not know how much worse are the stations in the developing world.

Using data from all these poor stations, the U.N.'s Intergovernmental Panel on Climate Change estimates an average global 0.64ºC temperature rise in the past 50 years, "most" of which the IPCC says is due to humans. Yet the margin of error for the stations is at least three times larger than the estimated warming.

We know that cities show anomalous warming, caused by energy use and building materials; asphalt, for instance, absorbs more sunlight than do trees. Tokyo's temperature rose about 2ºC in the last 50 years. Could that rise, and increases in other urban areas, have been unreasonably included in the global estimates? That warming may be real, but it has nothing to do with the greenhouse effect and can't be addressed by carbon dioxide reduction.

Moreover, the three major temperature analysis groups (the U.S.'s NASA and National Oceanic and Atmospheric Administration, and the U.K.'s Met Office and Climatic Research Unit) analyze only a small fraction of the available data, primarily from stations that have long records. There's a logic to that practice, but it could lead to selection bias. For instance, older stations were often built outside of cities but today are surrounded by buildings. These groups today use data from about 2,000 stations, down from roughly 6,000 in 1970, raising even more questions about their selections.

On top of that, stations have moved, instruments have changed and local environments have evolved. Analysis groups try to compensate for all this by homogenizing the data, though there are plenty of arguments to be had over how best to homogenize long-running data taken from around the world in varying conditions. These adjustments often result in corrections of several tenths of one degree Celsius, significant fractions of the warming attributed to humans.

And that's just the surface-temperature record. What about the rest? The number of named hurricanes has been on the rise for years, but that's in part a result of better detection technologies (satellites and buoys) that find storms in remote regions. The number of hurricanes hitting the U.S., even more intense Category 4 and 5 storms, has been gradually decreasing since 1850. The number of detected tornadoes has been increasing, possibly because radar technology has improved, but the number that touch down and cause damage has been decreasing. Meanwhile, the short-term variability in U.S. surface temperatures has been decreasing since 1800, suggesting a more stable climate.

Without good answers to all these complaints, global-warming skepticism seems sensible. But now let me explain why you should not be a skeptic, at least not any longer.

Over the last two years, the Berkeley Earth Surface Temperature Project has looked deeply at all the issues raised above. I chaired our group, which just submitted four detailed papers on our results to peer-reviewed journals. We have now posted these papers online at www.BerkeleyEarth.org to solicit even more scrutiny.

Our work covers only land temperature—not the oceans—but that's where warming appears to be the greatest. Robert Rohde, our chief scientist, obtained more than 1.6 billion measurements from more than 39,000 temperature stations around the world. Many of the records were short in duration, and to use them Mr. Rohde and a team of esteemed scientists and statisticians developed a new analytical approach that let us incorporate fragments of records. By using data from virtually all the available stations, we avoided data-selection bias. Rather than try to correct for the discontinuities in the records, we simply sliced the records where the data cut off, thereby creating two records from one.

We discovered that about one-third of the world's temperature stations have recorded cooling temperatures, and about two-thirds have recorded warming. The two-to-one ratio reflects global warming. The changes at the locations that showed warming were typically between 1-2ºC, much greater than the IPCC's average of 0.64ºC.

To study urban-heating bias in temperature records, we used satellite determinations that subdivided the world into urban and rural areas. We then conducted a temperature analysis based solely on "very rural" locations, distant from urban ones. The result showed a temperature increase similar to that found by other groups. Only 0.5% of the globe is urbanized, so it makes sense that even a 2ºC rise in urban regions would contribute negligibly to the global average.

What about poor station quality? Again, our statistical methods allowed us to analyze the U.S. temperature record separately for stations with good or acceptable rankings, and those with poor rankings (the U.S. is the only place in the world that ranks its temperature stations). Remarkably, the poorly ranked stations showed no greater temperature increases than the better ones. The mostly likely explanation is that while low-quality stations may give incorrect absolute temperatures, they still accurately track temperature changes.

When we began our study, we felt that skeptics had raised legitimate issues, and we didn't know what we'd find. Our results turned out to be close to those published by prior groups. We think that means that those groups had truly been very careful in their work, despite their inability to convince some skeptics of that. They managed to avoid bias in their data selection, homogenization and other corrections.

Global warming is real. Perhaps our results will help cool this portion of the climate debate. How much of the warming is due to humans and what will be the likely effects? We made no independent assessment of that.

Mr. Muller is a professor of physics at the University of California, Berkeley, and the author of "Physics for Future Presidents" (W.W. Norton & Co., 2008).

BCBS: Basel III definition of capital - Frequently asked questions

2011-10-20T23:02:00.001-07:00

BCBS: Basel III definition of capital - Frequently asked questions
Oct 20, 2011

The Basel Committee on Banking Supervision has received a number of interpretation questions related to the December 2010 publication of the Basel III regulatory frameworks for capital and liquidity and the 13 January 2011 press release on the loss absorbency of capital at the point of non-viability. To help ensure a consistent global implementation of Basel III, the Committee will continue to review frequently asked questions and to periodically publish answers along with any technical elaboration of the rules text and interpretative guidance that may be necessary.

The frequently asked questions (FAQs) published in this document correspond to the definition of capital sections of the Basel III rules text. These FAQs are in addition to the first set of FAQs published in July 2011. The questions and answers are grouped according to the relevant paragraphs of the rules text. FAQs that have been added since the publication of the first version of this document are shaded yellow; the earlier July 2011 FAQs that have been revised are shaded red.

Contents

Paragraphs 52-53 (Criteria for Common Equity Tier 1)
Paragraphs 54-56 (Criteria for Additional Tier 1 capital)
Paragraphs 60-61 (Provisions)
Paragraphs 62-65 (Minority interest and other capital that is issued out of consolidated subsidiaries that is held by third parties)
Paragraphs 67-68 (Goodwill and other intangibles)
Paragraphs 69-70 (Deferred tax assets)
Paragraphs 76-77 (Defined benefit pension fund assets and liabilities)
Paragraphs 79-85 (Investments in the capital of banking financial and insurance entities)
Paragraphs 94-96 (Transitional arrangements)
Press release 13 January 2011 (Loss absorbency at the point of non-viability)
General questions

http://www.bis.org/publ/bcbs204.htm

Rapid Credit Growth: Boon or Boom-Bust?

2011-10-20T13:53:00.000-07:00

Rapid Credit Growth: Boon or Boom-Bust? By Selim Elekdag & Yiqun Wu
IMF Working Paper No. 11/241
October 01, 2011
http://www.imfbookstore.org/IMFORG/WPIEA2011241

Summary: Episodes of rapid credit growth, especially credit booms, tend to end abruptly, typically in the form of financial crises. This paper presents the findings of a comprehensive event study focusing on 99 credit booms. Loose monetary policy stances seem to have contributed to the build-up of credit booms across both advanced and emerging economies. In particular, domestic policy rates were below trend during the pre-peak phase of credit booms and likely fuelled macroeconomic and financial imbalances. For emerging economies, while credit booms are associated with episodes of large capital inflows, international interest rates (a proxy for global liquidity) are virtually flat during these periods. Therefore, although external factors such as global liquidity conditions matter, and possibly increasingly so over time, domestic factors (especially monetary policy) also appear to be important drivers of real credit growth across emerging economies.

Executive Summary

This paper is motivated by rapid credit growth across many emerging economies, particularly those in Asia. It presents the results of a comprehensive event study which identifies 99 credit booms, of which 39 and 60 originated in advanced and emerging economies, respectively. Episodes of excessive credit growth—credit booms—lead to growing financial imbalances, and tend to end abruptly, often in the form of financial crises. In particular, relative to booms in other emerging economies, credit booms in emerging Asia were associated with a higher incidence of crises historically.

Three other main conclusions include the following:

First, as credit booms build, they are jointly associated with deteriorating bank and corporate balance sheet soundness, and symptoms of overheating including: large capital inflows (including less stable bank flows), widening current account deficits, buoyant asset prices, and strong domestic demand.

Second, while credit booms are associated with episodes of large capital inflows, international interest rates (a proxy for global liquidity), are virtually flat during these periods, which suggests the important role of domestic factors in driving credit growth across emerging economies. This may reflect, in part, that capital inflows are being channeled into other asset classes including real estate, equity, and corporate bonds, for example.

Third, loose macroeconomic policy stances seem to have contributed to the build-up of credit booms. In particular, this seems to be the case for monetary policy across both advanced and emerging economies. For emerging economies, while international interest rates were essentially flat, domestic policy rates were below trend during the pre-peak phase of credit booms. Therefore, although external factors such as global liquidity conditions matter, and possibly increasingly so over time, domestic factors (especially monetary policy) also appear to be important drivers of real credit growth across emerging economies including those in Asia.

Chellaney: Hydro-control turning China into dreaded hydra?

2011-10-20T01:37:00.001-07:00

THE WATER HEGEMON

Hydro-control turning China into dreaded hydra? By Brahma Chellaney
Bangkok Post, Oct 18, 2011 at 12:00 AM
With Beijing controlling the sources of Asia's most important rivers, water has increasingly become a new political divide in China's relations with neighbours like India, Russia, Kazakhstan, Nepal and the Mekong River countries.

http://www.bangkokpost.com/opinion/opinion/261849/hydro-control-turning-china-into-dreaded-hydra

International discussion about China's rise has focused on its increasing trade muscle, growing maritime ambitions, and expanding capacity to project military power. One critical issue, however, usually escapes attention: China's rise as a hydro-hegemon with no modern historical parallel.

The Mekong River, whose water level last March dropped to only 33 centimetres, the lowest in 50 years. People living downriver in Thailand, Laos and Cambodia attributed the fall in water level to newly constructed dams in China.

No other country has ever managed to assume such unchallenged riparian pre-eminence on a continent by controlling the headwaters of multiple international rivers and manipulating their cross-border flows. China, the world's biggest dam builder _ with slightly more than half of the approximately 50,000 large dams on the planet _ is rapidly accumulating leverage against its neighbours by undertaking massive hydro-engineering projects on transnational rivers.

Asia's water map fundamentally changed after the 1949 Communist victory in China. Most of Asia's important international rivers originate in territories that were forcibly annexed to the People's Republic of China. The Tibetan Plateau, for example, is the world's largest freshwater repository and the source of Asia's greatest rivers, including those that are the lifeblood for mainland China and South and Southeast Asia. Other such Chinese territories contain the headwaters of rivers like the Irtysh, Illy and Amur, which flow to Russia and Central Asia.

This makes China the source of cross-border water flows to the largest number of countries in the world. Yet China rejects the very notion of water sharing or institutionalised cooperation with downriver countries. Whereas riparian neighbours in Southeast and South Asia are bound by water pacts that they have negotiated between themselves, China does not have a single water treaty with any co-riparian country. Indeed, having its cake and eating it, China is a dialogue partner but not a member of the Mekong River Commission, underscoring its intent not to abide by the Mekong basin community's rules or take on any legal obligations.

Worse, while promoting multilateralism on the world stage, China has given the cold shoulder to multilateral cooperation among river-basin states. The lower-Mekong countries, for example, view China's strategy as an attempt to "divide and conquer". Although China publicly favours bilateral initiatives over multilateral institutions in addressing water issues, it has not shown any real enthusiasm for meaningful bilateral action. As a result, water has increasingly become a new political divide in the country's relations with neighbours like India, Russia, Kazakhstan, and Nepal.

China deflects attention from its refusal to share water, or to enter into institutionalised cooperation to manage common rivers sustainably, by flaunting the accords that it has signed on sharing flow statistics with riparian neighbours. These are not agreements to cooperate on shared resources, but rather commercial accords to sell hydrological data that other upstream countries provide free to downriver states.

In fact, by shifting its frenzied dam building from internal rivers to international rivers, China is now locked in water disputes with almost all co-riparian states. Those disputes are bound to worsen, given China's new focus on erecting mega-dams, best symbolised by its latest addition on the Mekong _ the 4,200-megawatt Xiaowan Dam, which dwarfs Paris's Eiffel Tower in height _ and a 38,000-megawatt dam planned on the Brahmaputra at Metog, close to the disputed border with India. The Metog Dam will be twice as large as the 18,300-megawatt Three Gorges Dam, currently the world's largest, construction of which uprooted at least 1.7 million Chinese.

In addition, China has identified another mega-dam site on the Brahmaputra at Daduqia, which, like Metog, is to harness the force of a nearly 3,000-metre drop in the river's height as it takes a sharp southerly turn from the Himalayan range into India, forming the world's longest and steepest canyon. The Brahmaputra Canyon _ twice as deep as the Grand Canyon in the United States _ holds Asia's greatest untapped water reserves.

The countries likely to bear the brunt of such massive diversion of waters are those located farthest downstream on rivers like the Brahmaputra and Mekong _ Bangladesh, whose very future is threatened by climate and environmental change, and Vietnam, a rice bowl of Asia. China's water appropriations from the Illy River threaten to turn Kazakhstan's Lake Balkhash into another Aral Sea, which has shrunk to less than half its original size.

In addition, China has planned the "Great Western Route", the proposed third leg of the Great South-North Water Diversion Project _ the most ambitious inter-river and inter-basin transfer programme ever conceived _ whose first two legs, involving internal rivers in China's ethnic Han heartland, are scheduled to be completed within three years.

The Great Western Route, centred on the Tibetan Plateau, is designed to divert waters, including from international rivers, to the Yellow River, the main river of water-stressed northern China, which also originates in Tibet.

With its industry now dominating the global hydropower-equipment market, China has also emerged as the largest dam builder overseas. From Pakistani-held Kashmir to Burma's troubled Kachin and Shan states, China has widened its dam building to disputed or insurgency-torn areas, despite local backlashes.

For example, units of the People's Liberation Army are engaged in dam and other strategic projects in the restive, Shia-majority region of Gilgit-Baltistan in Pakistan-held Kashmir. And China's dam building inside Burma to generate power for export to Chinese provinces has contributed to renewed bloody fighting recently, ending a 17-year ceasefire between the Kachin Independence Army and the Burmese government.

As with its territorial and maritime disputes with India, Vietnam, Japan and others, China is seeking to disrupt the status quo on international river flows. Persuading it to halt further unilateral appropriation of shared waters has thus become pivotal to Asian peace and stability. Otherwise, China is likely to emerge as the master of Asia's water taps, thereby acquiring tremendous leverage over its neighbours' behaviour.

Brahma Chellaney is Professor of Strategic Studies at the Centre for Policy Research and the author of "Water: Asia's New Battleground." Project Syndicate, 2011.

Making Banks Safer: Can Volcker and Vickers Do It?

2011-10-17T05:54:00.000-07:00

Making Banks Safer: Can Volcker and Vickers Do It?
Authors: Chow, Julian T.S. ; Surti, Jay
IMF Working Paper
October 01, 2011

Summary: This paper assesses proposals to redefine the scope of activities of systemically important financial institutions. Alongside reform of prudential regulation and oversight, these have been offered as solutions to the too-important-to-fail problem. It is argued that while the more radical of these proposals such as narrow utility banking do not adequately address key policy objectives, two concrete policy measures - the Volcker Rule in the United States and retail ring-fencing in the United Kingdom - are more promising while still entailing significant implementation challenges. A risk factor common to all the measures is the potential for activities identified as too risky for retail banks to migrate to the unregulated parts of the financial system. Since this could lead to accumulation of systemic risk if left unchecked, it appears unlikely that any structural engineering will lessen the policing burden on prudential authorities and on the banks.

Section I, Why redefine scope?

The business of banking involves leveraged intermediation managed by people subject to limited liability and, typically, to profit sharing contracts. This combination is well-known to generate incentives for risk-taking that may be excessive from the perspective of bank creditors. Creditor guarantees such as deposit insurance are known to exacerbate this incentive problem because they weaken creditors’ incentive to monitor and discipline management.

These issues are magnified in the case of systemically important financial institutions (SIFIs). Owing to their size, interconnectedness, or complexity, the negative externalities emanating from financial distress at SIFIs makes them a source of systemic risk, leading to them being perceived to be too-important-to-fail (TITF). Consequently, the market implicitly—and often correctly—assumes that apart from explicit deposit insurance, creditor guarantees of a much wider nature would be extended when such firms are threatened by imminent failure.

This serves to weaken the mitigating force of market discipline. Prior to the crisis, the high likelihood of public support assumed in a distress situation contributed to the ability of SIFIs to carry thinner capital buffers at lower cost, acquire complex business models, and accumulate systemic risk. This trend was reinforced by the diversification premier attributed to universal banks by market participants and prudential authorities, enabling them to integrate the provision of retail, investment, and wholesale banking services without erecting the necessary firewalls there-between. These developments resulted in networks of financial interconnections within and across internationally active SIFIs that proved to be difficult, time consuming and costly to unravel. This made it seemingly less costly, during the crisis, to allocate tax payer resources to preventing SIFI failures than to allowing them, with subsequent resolution and restructuring of their businesses.

Diversification of business lines could serve to better protect a universal bank against idiosyncratic shocks that adversely impact individual lines of business. At the same time, the free flow of capital and liquidity and the associated growth in intra-group exposures would also increase the likelihood of intra-firm contagion in the event of an exogenous shock. Unlike investment banking clients, retail banking customers typically have few options other than their banks for conducting vital financial transactions. Ensuring business continuity of services to such clients, therefore, serves a clear and important social welfare objective. But, complex business models and high levels of intra-group exposures present a barrier to quickly spinning off the retail parts of a universal bank which can ensure such business continuity.

Restricting the scope of a regulated bank’s business activities could, therefore, serve a number of important policy objectives. From a financial stability perspective, it could limit contagion within and across firms. From the perspective of consumer protection, it could ensure a more efficient provision of assurance of the continuity of retail banking services. And, by more credibly restricting the ambit of tax-payer funded creditor guarantees to depositors it could furnish these benefits more efficiently and cheaply from a social cost perspective.

Accordingly, the official response to the crisis has, besides recognizing the need for strengthened regulation and oversight of SIFIs, also included complementary proposals to redesign and refocus their business activities. A number of concrete proposals have been made, including:

Narrow Utility Banking—essentially a reversion of deposit-funded banks into traditional payment function outfits with lending (and investment banking) being carried out by independent finance companies funded by non-deposit means.
The Volcker Rule—prohibiting banks from carrying out certain types of investment banking activities if they are to continue to seek deposit funding and to retain banking licenses.
A Retail Ring-fence—that, while not prohibiting banking groups from providing both retail and wholesale banking services, mandates legal subsidiarization of certain retail activities, prohibits this subsidiary from undertaking other businesses and risks, and establishes minimum capital and liquidity standards for it on a solo basis. While not limiting capital and liquidity benefits to the retail subsidiary from other affiliates when necessary, the ring-fence limits capital and liquidity transfers in the opposite direction, to non-ring-fenced affiliates. Such functional subsidiarization could enable continuation of retail operations under distress or failure of a SIFI’s other businesses.

This paper focuses on the motivation, content, operational challenges, and potential costs of these proposals to narrow the scope of banking business. The more radical proposals discussed under the narrow banking umbrella involve strict limits on what retail banks’ permissible activities ought to be and could entail significant dead-weight costs if implemented as recommended. By contrast, the design and motivation for the Volcker rule and retail ring-fence are more precisely targeted at the problems arising from the integrated business models used by SIFIs before the crisis.

The challenge facing these latter proposals lies in the feasibility and cost of their implementation. In the case of the Volcker rule, for example, it will be challenging for prudential authorities to tell apart permissible activities (market making and underwriting) from prohibited ones (proprietary trading) when assessing banks’ exposures to securities markets. Similar difficulties will be faced by supervisors assessing the nature of and purpose of hedging tools and contracts utilized by ring-fenced banks. This presents policy makers with a dilemma. Should they invest the financial cost and time towards gathering more contemporaneous information in order to create better filters and limit loopholes? Or, if this is viewed as being too costly or simply inefficient, should they move to outright prohibition of all activities related to securities markets?

The danger with the second option lies in generating incentives to push risk taking beyond the borders of the regulated financial system. If there are indeed no direct financial linkages between retail financial firms and such shadow banking entities, such risk taking may cease being a problem of regulation. However, systemic risk will continue to accumulate in the shadow banks, and since the participants in the regulated and shadow systems are the same, or are, in general linked, a crisis in that sector will continue to exercise a contagion impact on the regulated banking sector.

http://www.imfbookstore.org/IMFORG/WPIEA2011236

Global Poverty Estimates: A Sensitivity Analysis

2011-10-13T12:24:00.000-07:00

Global Poverty Estimates: A Sensitivity Analysis. By Shatakshee Dhongde & Camelia Minoiu
IMF Working Paper
Oct 13, 2011

Summary: Current estimates of global poverty vary substantially across studies. In this paper we undertake a novel sensitivity analysis to highlight the importance of methodological choices in estimating global poverty. We measure global poverty using different data sources, parametric and nonparametric estimation methods, and multiple poverty lines. Our results indicate that estimates of global poverty vary significantly when they are based alternately on data from household surveys versus national accounts but are relatively consistent across different estimation methods. The decline in poverty over the past decade is found to be robust across methodological choices.

Introduction
Global poverty monitoring has been brought to the forefront of the international policy arena with the adoption of the Millennium Development Goals (MDG) by the United Nations. The first MDG proposes reducing global poverty by the year 2015 and is stated as “halving the proportion of people with an income level below $1/day between 1990 and 2015” (United Nations, 2000). Progress towards attaining this MDG is monitored using global poverty estimates published by the World Bank and a number of independent scholars. The process is not only expensive (Moss, 2010) but also mired with conceptual, methodological, and datarelated problems (Klasen, 2009).

Current estimates of global poverty proposed in the literature differ in magnitude as well as in the rate of change in poverty. Consider, for instance, Chen and Ravallion (2010) and Pinkovskiy and Sala-i-Martin (2009)—two studies that estimate global poverty using the international poverty line of $1/day (see Figure 1). Chen and Ravallion (2010) estimate that in 2005 nearly 26 percent of the population in the developing countries was poor, and the global poverty count fell by 520 million individuals since 1981. By contrast, Pinkovskiy and Sala-i-Martin (2009) estimate poverty to have been ten times lower in 2005, which implies a reduction of almost 350 million individuals since 1981. Although there is general agreement that global poverty has declined over the years, the estimated level of poverty and rate of poverty decline vary substantially across studies.

This paper aims to contribute to the debate on global poverty not by providing a new set of estimates, but by addressing two important questions. First, we ask why estimates from different studies differ so much. As we unravel the various assumptions made by researchers, we show that global poverty estimates are simply not comparable across studies. For instance, they differ in terms of underlying data sources, number of countries included, welfare metric, adjustments to mean incomes, and statistical methods employed to estimate the income distribution. Given this variety of methodological choices, we arrive at our second question: Can we assess the impact of different approaches on the resulting poverty estimates? Since global poverty estimation requires making multiple assumptions simultaneously, we aim to isolate and assess separately the relative importance of each such assumption by undertaking a novel sensitivity analysis.

An important hurdle in estimating long-term trends in global poverty is the lack of high-quality, consistent survey data. The poor are those individuals whose income is less than or equal to some threshold set by the poverty line. If countries had complete information on every individual’s income then with an agreed-upon global poverty line, identifying the poor would be a straightforward exercise. However, there are severe data limitations.

Data on income is typically collected through household surveys (HS) of nationally representative samples. However, survey data are often available for periods far apart and suffer from a number of inconsistencies (regarding sampling and interviewing techniques, definitions of variables, and coverage) that render them incomparable across countries. Nonetheless, they are the sole source of information on the relative distribution of incomes in a country—that is, the shares of national income possessed by different population groups (quintiles, deciles). HS also provide estimates of mean income/consumption which are used to scale the income shares to obtain mean incomes by population group. A more readilyaccessible and consistently-recorded source of information are national account statistics (NAS) which also provide aggregate income or consumption estimates and are available for most countries on a yearly basis.

A key methodological choice in estimating global poverty is whether to use data on mean income/consumption from HS or NAS or whether to combine data from the two sources. Some studies in the literature analyzed the sources of discrepancies between the levels and growth rates of income/consumption data from HS and NAS (Ravallion, 2003; Deaton, 2005). However these studies did not measure the precise effect of using HS and NAS data on global poverty levels and trends. In order to determine how sensitive global poverty estimates are to alternate data sources, we estimate global poverty by anchoring relative distributions alternately to HS and NAS estimates of mean income and consumption. This is our first sensitivity exercise.

The second sensitivity exercise concerns the choice of statistical method used to estimate income distributions from grouped data, that is, data on mean income or consumption for population groups (quintiles, deciles). We estimate global poverty by estimating each country’s distribution using different methods. These include the General Quadratic (GQ) and the Beta Lorenz curve, and the lognormal and Singh-Maddala functional forms for the income density function.2 In addition to these parametric specifications, we also consider the nonparametric kernel density method whose performance we assess in conjunction with four different bandwidths—a parameter that controls the smoothness of the income distribution.

As a benchmark, we follow the World Bank methodology to the extent possible and estimate global poverty in 1995 and 2005—the latest year for which data is available for many countries. Data on the relative distribution of income across population deciles is collected for 65 countries from the World Bank’s poverty monitoring website PovcalNet. Our sample covers more than 70 percent of the total world population and includes all countries for which both HS and NAS data are available in both years. Global poverty is estimated using international poverty lines ranging from $1/day to $2.5/day to provide further insight into how methodological choices impact poverty rates at different income cutoffs.

Our results are twofold. First, a large share of the variation in estimated poverty levels and trends can be attributed to the choice between HS and NAS as the source of data. Global poverty estimates vary not only in terms of the proportion of the poor, and correspondingly the number of poor, but also in terms of the rates of decline in poverty. Poverty estimates based on HS and NAS do not tend to converge in higher income countries. Second, the choice of statistical method used to estimate the income distribution affects poverty levels to a lesser extent. A comparison of poverty estimates across parametric and nonparametric techniques reveals that the commonly used lognormal specification consistently underestimates poverty levels. While there is little doubt that the proportion of poor declined between 1995 and 2005, our results underscore the fact that global poverty counts are highly sensitive to methodological approach.

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Personalized Therapies Mark Significant Leap Forward in Fight Against Cancer

2011-10-12T14:26:00.000-07:00

Personalized Therapies Mark Significant Leap Forward in Fight Against Cancer

http://www.innovation.org/index.cfm/NewsCenter/Newsletters/Newsletters?NID=191

October 12, 2011

This year marks the 40th anniversary of the signing of the National Cancer Act of 1971. Indeed, the 12 million cancer survivors living in the U.S. today attest to the significant progress in cancer prevention and treatment we have made over the past decades. Despite the remarkable advances we have made there are still more than 550,000 men and woman who lose their battle to cancer each year.

Recently released scientific data demonstrate that the collective commitment to cancer research is unwavering and our knowledge of the biology of cancer and ability to treat it continues to expand. One promising trend in cancer research: drug developers are harnessing an improved understanding of the molecular basis of many types of cancer to develop therapies uniquely targeted to these pathways.

For example, a newly approved drug for lung cancer called crizotinib is targeted to a mutation in a gene called anaplastic lymphoma kinase, or ALK. Mutations in the ALK gene are found in approximately 5% of patients with non-small-cell lung cancer. In data presented at this year’s meeting of the American Society of Clinical Oncology (ASCO), 54% of patients who received crizotinib were still alive after two years compared to just 12% in a control group. Crizotinib received fast-track review by the U.S. Food and Drug Administration (FDA) and was approved in August ahead of the six-month priority review schedule.

Dramatic advances are being made in the treatment of the skin cancer melanoma as well. More than 60 drugs are currently in development for the disease and this year two new medicines have been approved – the first approvals for the disease in 13 years. The first, ipilimumab, was approved in March and was the first treatment ever approved by FDA to show a survival benefit for patients with metastatic melanoma. In August the second, a new personalized medicine called vemurafenib, was approved to treat this deadliest form of skin cancer. This drug, which is taken orally, selectively inhibits a mutated form of the BRAF kinase gene. The mutated gene is associated with increased tumor aggressiveness, decreased survival, and is found in approximately half of all malignant melanomas. Recently reported clinical trials results demonstrate that the medicine reduces the risk of death by 63% percent.

Personalized medicine holds great potential beyond these two select examples in lung cancer and melanoma. MD Anderson Cancer Center recently reported on the results of a large-scale clinical trial examining the effect of matching targeted therapies with specific gene mutations across many cancer types. According to the results of the study, patients who received a targeted therapy demonstrated a 27% response rate compared to 5% for those whose therapy was not matched. This clinical trial marks the largest examination of a personalized approach to cancer care to date, and as principal investigator Apostolia-Maria Tsimberidou, M.D., Ph.D. concludes, "This study suggests that a personalized approach is needed to improve clinical outcomes for patients with cancer."

As these and many other studies illustrate, a dramatic transformation in cancer diagnosis and treatment is underway. Therapies targeted to the genetic and molecular underpinnings of disease are being developed, and patient outcomes are improving as a result. The studies highlighted above only begin to scratch the surface of the remarkable potential of personalized, targeted therapies, but are an indication of the great reward of years of research and investment, as well as great promise for continued innovation in the years to come.

The future of politics will be decided in Asia, and the US will be right at the center of the action

2011-10-11T12:26:00.000-07:00

America's Pacific Century. By Secretary of State Hillary R. Clinton
November Issue of Foreign Policy Magazine
http://www.state.gov/secretary/rm/2011/10/175216.htm
The future of politics will be decided in Asia, not Afghanistan or Iraq, and the United States will be right at the center of the action.

October 11, 2011

As the war in Iraq winds down and America begins to withdraw its forces from Afghanistan, the United States stands at a pivot point. Over the last 10 years, we have allocated immense resources to those two theaters. In the next 10 years, we need to be smart and systematic about where we invest time and energy, so that we put ourselves in the best position to sustain our leadership, secure our interests, and advance our values. One of the most important tasks of American statecraft over the next decade will therefore be to lock in a substantially increased investment -- diplomatic, economic, strategic, and otherwise -- in the Asia-Pacific region.

The Asia-Pacific has become a key driver of global politics. Stretching from the Indian subcontinent to the western shores of the Americas, the region spans two oceans -- the Pacific and the Indian -- that are increasingly linked by shipping and strategy. It boasts almost half the world's population. It includes many of the key engines of the global economy, as well as the largest emitters of greenhouse gases. It is home to several of our key allies and important emerging powers like China, India, and Indonesia.

At a time when the region is building a more mature security and economic architecture to promote stability and prosperity, U.S. commitment there is essential. It will help build that architecture and pay dividends for continued American leadership well into this century, just as our post-World War II commitment to building a comprehensive and lasting transatlantic network of institutions and relationships has paid off many times over -- and continues to do so. The time has come for the United States to make similar investments as a Pacific power, a strategic course set by President Barack Obama from the outset of his administration and one that is already yielding benefits.

With Iraq and Afghanistan still in transition and serious economic challenges in our own country, there are those on the American political scene who are calling for us not to reposition, but to come home. They seek a downsizing of our foreign engagement in favor of our pressing domestic priorities. These impulses are understandable, but they are misguided. Those who say that we can no longer afford to engage with the world have it exactly backward -- we cannot afford not to. From opening new markets for American businesses to curbing nuclear proliferation to keeping the sea lanes free for commerce and navigation, our work abroad holds the key to our prosperity and security at home. For more than six decades, the United States has resisted the gravitational pull of these "come home" debates and the implicit zero-sum logic of these arguments. We must do so again.

Beyond our borders, people are also wondering about America's intentions -- our willingness to remain engaged and to lead. In Asia, they ask whether we are really there to stay, whether we are likely to be distracted again by events elsewhere, whether we can make -- and keep -- credible economic and strategic commitments, and whether we can back those commitments with action. The answer is: We can, and we will.

Harnessing Asia's growth and dynamism is central to American economic and strategic interests and a key priority for President Obama. Open markets in Asia provide the United States with unprecedented opportunities for investment, trade, and access to cutting-edge technology. Our economic recovery at home will depend on exports and the ability of American firms to tap into the vast and growing consumer base of Asia. Strategically, maintaining peace and security across the Asia-Pacific is increasingly crucial to global progress, whether through defending freedom of navigation in the South China Sea, countering the proliferation efforts of North Korea, or ensuring transparency in the military activities of the region's key players.

Just as Asia is critical to America's future, an engaged America is vital to Asia's future. The region is eager for our leadership and our business -- perhaps more so than at any time in modern history. We are the only power with a network of strong alliances in the region, no territorial ambitions, and a long record of providing for the common good. Along with our allies, we have underwritten regional security for decades -- patrolling Asia's sea lanes and preserving stability -- and that in turn has helped create the conditions for growth. We have helped integrate billions of people across the region into the global economy by spurring economic productivity, social empowerment, and greater people-to-people links. We are a major trade and investment partner, a source of innovation that benefits workers and businesses on both sides of the Pacific, a host to 350,000 Asian students every year, a champion of open markets, and an advocate for universal human rights.

President Obama has led a multifaceted and persistent effort to embrace fully our irreplaceable role in the Pacific, spanning the entire U.S. government. It has often been a quiet effort. A lot of our work has not been on the front pages, both because of its nature -- long-term investment is less exciting than immediate crises -- and because of competing headlines in other parts of the world.

As secretary of state, I broke with tradition and embarked on my first official overseas trip to Asia. In my seven trips since, I have had the privilege to see firsthand the rapid transformations taking place in the region, underscoring how much the future of the United States is intimately intertwined with the future of the Asia-Pacific. A strategic turn to the region fits logically into our overall global effort to secure and sustain America's global leadership. The success of this turn requires maintaining and advancing a bipartisan consensus on the importance of the Asia-Pacific to our national interests; we seek to build upon a strong tradition of engagement by presidents and secretaries of state of both parties across many decades. It also requires smart execution of a coherent regional strategy that accounts for the global implications of our choices.

WHAT DOES THAT regional strategy look like? For starters, it calls for a sustained commitment to what I have called "forward-deployed" diplomacy. That means continuing to dispatch the full range of our diplomatic assets -- including our highest-ranking officials, our development experts, our interagency teams, and our permanent assets -- to every country and corner of the Asia-Pacific region. Our strategy will have to keep accounting for and adapting to the rapid and dramatic shifts playing out across Asia. With this in mind, our work will proceed along six key lines of action: strengthening bilateral security alliances; deepening our working relationships with emerging powers, including with China; engaging with regional multilateral institutions; expanding trade and investment; forging a broad-based military presence; and advancing democracy and human rights.

By virtue of our unique geography, the United States is both an Atlantic and a Pacific power. We are proud of our European partnerships and all that they deliver. Our challenge now is to build a web of partnerships and institutions across the Pacific that is as durable and as consistent with American interests and values as the web we have built across the Atlantic. That is the touchstone of our efforts in all these areas.

Our treaty alliances with Japan, South Korea, Australia, the Philippines, and Thailand are the fulcrum for our strategic turn to the Asia-Pacific. They have underwritten regional peace and security for more than half a century, shaping the environment for the region's remarkable economic ascent. They leverage our regional presence and enhance our regional leadership at a time of evolving security challenges.

As successful as these alliances have been, we can't afford simply to sustain them -- we need to update them for a changing world. In this effort, the Obama administration is guided by three core principles. First, we have to maintain political consensus on the core objectives of our alliances. Second, we have to ensure that our alliances are nimble and adaptive so that they can successfully address new challenges and seize new opportunities. Third, we have to guarantee that the defense capabilities and communications infrastructure of our alliances are operationally and materially capable of deterring provocation from the full spectrum of state and nonstate actors.

The alliance with Japan, the cornerstone of peace and stability in the region, demonstrates how the Obama administration is giving these principles life. We share a common vision of a stable regional order with clear rules of the road -- from freedom of navigation to open markets and fair competition. We have agreed to a new arrangement, including a contribution from the Japanese government of more than $5 billion, to ensure the continued enduring presence of American forces in Japan, while expanding joint intelligence, surveillance, and reconnaissance activities to deter and react quickly to regional security challenges, as well as information sharing to address cyberthreats. We have concluded an Open Skies agreement that will enhance access for businesses and people-to-people ties, launched a strategic dialogue on the Asia-Pacific, and been working hand in hand as the two largest donor countries in Afghanistan.

Similarly, our alliance with South Korea has become stronger and more operationally integrated, and we continue to develop our combined capabilities to deter and respond to North Korean provocations. We have agreed on a plan to ensure successful transition of operational control during wartime and anticipate successful passage of the Korea-U.S. Free Trade Agreement. And our alliance has gone global, through our work together in the G-20 and the Nuclear Security Summit and through our common efforts in Haiti and Afghanistan.

We are also expanding our alliance with Australia from a Pacific partnership to an Indo-Pacific one, and indeed a global partnership. From cybersecurity to Afghanistan to the Arab Awakening to strengthening regional architecture in the Asia-Pacific, Australia's counsel and commitment have been indispensable. And in Southeast Asia, we are renewing and strengthening our alliances with the Philippines and Thailand, increasing, for example, the number of ship visits to the Philippines and working to ensure the successful training of Filipino counterterrorism forces through our Joint Special Operations Task Force in Mindanao. In Thailand -- our oldest treaty partner in Asia -- we are working to establish a hub of regional humanitarian and disaster relief efforts in the region.

AS WE UPDATE our alliances for new demands, we are also building new partnerships to help solve shared problems. Our outreach to China, India, Indonesia, Singapore, New Zealand, Malaysia, Mongolia, Vietnam, Brunei, and the Pacific Island countries is all part of a broader effort to ensure a more comprehensive approach to American strategy and engagement in the region. We are asking these emerging partners to join us in shaping and participating in a rules-based regional and global order.

One of the most prominent of these emerging partners is, of course, China. Like so many other countries before it, China has prospered as part of the open and rules-based system that the United States helped to build and works to sustain. And today, China represents one of the most challenging and consequential bilateral relationships the United States has ever had to manage. This calls for careful, steady, dynamic stewardship, an approach to China on our part that is grounded in reality, focused on results, and true to our principles and interests.

We all know that fears and misperceptions linger on both sides of the Pacific. Some in our country see China's progress as a threat to the United States; some in China worry that America seeks to constrain China's growth. We reject both those views. The fact is that a thriving America is good for China and a thriving China is good for America. We both have much more to gain from cooperation than from conflict. But you cannot build a relationship on aspirations alone. It is up to both of us to more consistently translate positive words into effective cooperation -- and, crucially, to meet our respective global responsibilities and obligations. These are the things that will determine whether our relationship delivers on its potential in the years to come. We also have to be honest about our differences. We will address them firmly and decisively as we pursue the urgent work we have to do together. And we have to avoid unrealistic expectations.

Over the last two-and-a-half years, one of my top priorities has been to identify and expand areas of common interest, to work with China to build mutual trust, and to encourage China's active efforts in global problem-solving. This is why Treasury Secretary Timothy Geithner and I launched the Strategic and Economic Dialogue, the most intensive and expansive talks ever between our governments, bringing together dozens of agencies from both sides to discuss our most pressing bilateral issues, from security to energy to human rights.

We are also working to increase transparency and reduce the risk of miscalculation or miscues between our militaries. The United States and the international community have watched China's efforts to modernize and expand its military, and we have sought clarity as to its intentions. Both sides would benefit from sustained and substantive military-to-military engagement that increases transparency. So we look to Beijing to overcome its reluctance at times and join us in forging a durable military-to-military dialogue. And we need to work together to strengthen the Strategic Security Dialogue, which brings together military and civilian leaders to discuss sensitive issues like maritime security and cybersecurity.

As we build trust together, we are committed to working with China to address critical regional and global security issues. This is why I have met so frequently -- often in informal settings -- with my Chinese counterparts, State Councilor Dai Bingguo and Foreign Minister Yang Jiechi, for candid discussions about important challenges like North Korea, Afghanistan, Pakistan, Iran, and developments in the South China Sea.

On the economic front, the United States and China need to work together to ensure strong, sustained, and balanced future global growth. In the aftermath of the global financial crisis, the United States and China worked effectively through the G-20 to help pull the global economy back from the brink. We have to build on that cooperation. U.S. firms want fair opportunities to export to China's growing markets, which can be important sources of jobs here in the United States, as well as assurances that the $50 billion of American capital invested in China will create a strong foundation for new market and investment opportunities that will support global competitiveness. At the same time, Chinese firms want to be able to buy more high-tech products from the United States, make more investments here, and be accorded the same terms of access that market economies enjoy. We can work together on these objectives, but China still needs to take important steps toward reform. In particular, we are working with China to end unfair discrimination against U.S. and other foreign companies or against their innovative technologies, remove preferences for domestic firms, and end measures that disadvantage or appropriate foreign intellectual property. And we look to China to take steps to allow its currency to appreciate more rapidly, both against the dollar and against the currencies of its other major trading partners. Such reforms, we believe, would not only benefit both our countries (indeed, they would support the goals of China's own five-year plan, which calls for more domestic-led growth), but also contribute to global economic balance, predictability, and broader prosperity.

Of course, we have made very clear, publicly and privately, our serious concerns about human rights. And when we see reports of public-interest lawyers, writers, artists, and others who are detained or disappeared, the United States speaks up, both publicly and privately, with our concerns about human rights. We make the case to our Chinese colleagues that a deep respect for international law and a more open political system would provide China with a foundation for far greater stability and growth -- and increase the confidence of China's partners. Without them, China is placing unnecessary limitations on its own development.

At the end of the day, there is no handbook for the evolving U.S.-China relationship. But the stakes are much too high for us to fail. As we proceed, we will continue to embed our relationship with China in a broader regional framework of security alliances, economic networks, and social connections.

Among key emerging powers with which we will work closely are India and Indonesia, two of the most dynamic and significant democratic powers of Asia, and both countries with which the Obama administration has pursued broader, deeper, and more purposeful relationships. The stretch of sea from the Indian Ocean through the Strait of Malacca to the Pacific contains the world's most vibrant trade and energy routes. Together, India and Indonesia already account for almost a quarter of the world's population. They are key drivers of the global economy, important partners for the United States, and increasingly central contributors to peace and security in the region. And their importance is likely to grow in the years ahead.

President Obama told the Indian parliament last year that the relationship between India and America will be one of the defining partnerships of the 21st century, rooted in common values and interests. There are still obstacles to overcome and questions to answer on both sides, but the United States is making a strategic bet on India's future -- that India's greater role on the world stage will enhance peace and security, that opening India's markets to the world will pave the way to greater regional and global prosperity, that Indian advances in science and technology will improve lives and advance human knowledge everywhere, and that India's vibrant, pluralistic democracy will produce measurable results and improvements for its citizens and inspire others to follow a similar path of openness and tolerance. So the Obama administration has expanded our bilateral partnership; actively supported India's Look East efforts, including through a new trilateral dialogue with India and Japan; and outlined a new vision for a more economically integrated and politically stable South and Central Asia, with India as a linchpin.

We are also forging a new partnership with Indonesia, the world's third-largest democracy, the world's most populous Muslim nation, and a member of the G-20. We have resumed joint training of Indonesian special forces units and signed a number of agreements on health, educational exchanges, science and technology, and defense. And this year, at the invitation of the Indonesian government, President Obama will inaugurate American participation in the East Asia Summit. But there is still some distance to travel -- we have to work together to overcome bureaucratic impediments, lingering historical suspicions, and some gaps in understanding each other's perspectives and interests.

EVEN AS WE strengthen these bilateral relationships, we have emphasized the importance of multilateral cooperation, for we believe that addressing complex transnational challenges of the sort now faced by Asia requires a set of institutions capable of mustering collective action. And a more robust and coherent regional architecture in Asia would reinforce the system of rules and responsibilities, from protecting intellectual property to ensuring freedom of navigation, that form the basis of an effective international order. In multilateral settings, responsible behavior is rewarded with legitimacy and respect, and we can work together to hold accountable those who undermine peace, stability, and prosperity.

So the United States has moved to fully engage the region's multilateral institutions, such as the Association of Southeast Asian Nations (ASEAN) and the Asia-Pacific Economic Cooperation (APEC) forum, mindful that our work with regional institutions supplements and does not supplant our bilateral ties. There is a demand from the region that America play an active role in the agenda-setting of these institutions -- and it is in our interests as well that they be effective and responsive.

That is why President Obama will participate in the East Asia Summit for the first time in November. To pave the way, the United States has opened a new U.S. Mission to ASEAN in Jakarta and signed the Treaty of Amity and Cooperation with ASEAN. Our focus on developing a more results-oriented agenda has been instrumental in efforts to address disputes in the South China Sea. In 2010, at the ASEAN Regional Forum in Hanoi, the United States helped shape a regionwide effort to protect unfettered access to and passage through the South China Sea, and to uphold the key international rules for defining territorial claims in the South China Sea's waters. Given that half the world's merchant tonnage flows through this body of water, this was a consequential undertaking. And over the past year, we have made strides in protecting our vital interests in stability and freedom of navigation and have paved the way for sustained multilateral diplomacy among the many parties with claims in the South China Sea, seeking to ensure disputes are settled peacefully and in accordance with established principles of international law.

We have also worked to strengthen APEC as a serious leaders-level institution focused on advancing economic integration and trade linkages across the Pacific. After last year's bold call by the group for a free trade area of the Asia-Pacific, President Obama will host the 2011 APEC Leaders' Meeting in Hawaii this November. We are committed to cementing APEC as the Asia-Pacific's premier regional economic institution, setting the economic agenda in a way that brings together advanced and emerging economies to promote open trade and investment, as well as to build capacity and enhance regulatory regimes. APEC and its work help expand U.S. exports and create and support high-quality jobs in the United States, while fostering growth throughout the region. APEC also provides a key vehicle to drive a broad agenda to unlock the economic growth potential that women represent. In this regard, the United States is committed to working with our partners on ambitious steps to accelerate the arrival of the Participation Age, where every individual, regardless of gender or other characteristics, is a contributing and valued member of the global marketplace.

In addition to our commitment to these broader multilateral institutions, we have worked hard to create and launch a number of "minilateral" meetings, small groupings of interested states to tackle specific challenges, such as the Lower Mekong Initiative we launched to support education, health, and environmental programs in Cambodia, Laos, Thailand, and Vietnam, and the Pacific Islands Forum, where we are working to support its members as they confront challenges from climate change to overfishing to freedom of navigation. We are also starting to pursue new trilateral opportunities with countries as diverse as Mongolia, Indonesia, Japan, Kazakhstan, and South Korea. And we are setting our sights as well on enhancing coordination and engagement among the three giants of the Asia-Pacific: China, India, and the United States.

In all these different ways, we are seeking to shape and participate in a responsive, flexible, and effective regional architecture -- and ensure it connects to a broader global architecture that not only protects international stability and commerce but also advances our values.

OUR EMPHASIS ON the economic work of APEC is in keeping with our broader commitment to elevate economic statecraft as a pillar of American foreign policy. Increasingly, economic progress depends on strong diplomatic ties, and diplomatic progress depends on strong economic ties. And naturally, a focus on promoting American prosperity means a greater focus on trade and economic openness in the Asia-Pacific. The region already generates more than half of global output and nearly half of global trade. As we strive to meet President Obama's goal of doubling exports by 2015, we are looking for opportunities to do even more business in Asia. Last year, American exports to the Pacific Rim totaled $320 billion, supporting 850,000 American jobs. So there is much that favors us as we think through this repositioning.

When I talk to my Asian counterparts, one theme consistently stands out: They still want America to be an engaged and creative partner in the region's flourishing trade and financial interactions. And as I talk with business leaders across our own nation, I hear how important it is for the United States to expand our exports and our investment opportunities in Asia's dynamic markets.

Last March in APEC meetings in Washington, and again in Hong Kong in July, I laid out four attributes that I believe characterize healthy economic competition: open, free, transparent, and fair. Through our engagement in the Asia-Pacific, we are helping to give shape to these principles and showing the world their value.

We are pursuing new cutting-edge trade deals that raise the standards for fair competition even as they open new markets. For instance, the Korea-U.S. Free Trade Agreement will eliminate tariffs on 95 percent of U.S. consumer and industrial exports within five years and support an estimated 70,000 American jobs. Its tariff reductions alone could increase exports of American goods by more than $10 billion and help South Korea's economy grow by 6 percent. It will level the playing field for U.S. auto companies and workers. So, whether you are an American manufacturer of machinery or a South Korean chemicals exporter, this deal lowers the barriers that keep you from reaching new customers.

We are also making progress on the Trans-Pacific Partnership (TPP), which will bring together economies from across the Pacific -- developed and developing alike -- into a single trading community. Our goal is to create not just more growth, but better growth. We believe trade agreements need to include strong protections for workers, the environment, intellectual property, and innovation. They should also promote the free flow of information technology and the spread of green technology, as well as the coherence of our regulatory system and the efficiency of supply chains. Ultimately, our progress will be measured by the quality of people's lives -- whether men and women can work in dignity, earn a decent wage, raise healthy families, educate their children, and take hold of the opportunities to improve their own and the next generation's fortunes. Our hope is that a TPP agreement with high standards can serve as a benchmark for future agreements -- and grow to serve as a platform for broader regional interaction and eventually a free trade area of the Asia-Pacific.

Achieving balance in our trade relationships requires a two-way commitment. That's the nature of balance -- it can't be unilaterally imposed. So we are working through APEC, the G-20, and our bilateral relationships to advocate for more open markets, fewer restrictions on exports, more transparency, and an overall commitment to fairness. American businesses and workers need to have confidence that they are operating on a level playing field, with predictable rules on everything from intellectual property to indigenous innovation.

ASIA'S REMARKABLE ECONOMIC growth over the past decade and its potential for continued growth in the future depend on the security and stability that has long been guaranteed by the U.S. military, including more than 50,000 American servicemen and servicewomen serving in Japan and South Korea. The challenges of today's rapidly changing region -- from territorial and maritime disputes to new threats to freedom of navigation to the heightened impact of natural disasters -- require that the United States pursue a more geographically distributed, operationally resilient, and politically sustainable force posture.

We are modernizing our basing arrangements with traditional allies in Northeast Asia -- and our commitment on this is rock solid -- while enhancing our presence in Southeast Asia and into the Indian Ocean. For example, the United States will be deploying littoral combat ships to Singapore, and we are examining other ways to increase opportunities for our two militaries to train and operate together. And the United States and Australia agreed this year to explore a greater American military presence in Australia to enhance opportunities for more joint training and exercises. We are also looking at how we can increase our operational access in Southeast Asia and the Indian Ocean region and deepen our contacts with allies and partners.

How we translate the growing connection between the Indian and Pacific oceans into an operational concept is a question that we need to answer if we are to adapt to new challenges in the region. Against this backdrop, a more broadly distributed military presence across the region will provide vital advantages. The United States will be better positioned to support humanitarian missions; equally important, working with more allies and partners will provide a more robust bulwark against threats or efforts to undermine regional peace and stability.

But even more than our military might or the size of our economy, our most potent asset as a nation is the power of our values -- in particular, our steadfast support for democracy and human rights. This speaks to our deepest national character and is at the heart of our foreign policy, including our strategic turn to the Asia-Pacific region.

As we deepen our engagement with partners with whom we disagree on these issues, we will continue to urge them to embrace reforms that would improve governance, protect human rights, and advance political freedoms. We have made it clear, for example, to Vietnam that our ambition to develop a strategic partnership requires that it take steps to further protect human rights and advance political freedoms. Or consider Burma, where we are determined to seek accountability for human rights violations. We are closely following developments in Nay Pyi Taw and the increasing interactions between Aung San Suu Kyi and the government leadership. We have underscored to the government that it must release political prisoners, advance political freedoms and human rights, and break from the policies of the past. As for North Korea, the regime in Pyongyang has shown persistent disregard for the rights of its people, and we continue to speak out forcefully against the threats it poses to the region and beyond.

We cannot and do not aspire to impose our system on other countries, but we do believe that certain values are universal -- that people in every nation in the world, including in Asia, cherish them -- and that they are intrinsic to stable, peaceful, and prosperous countries. Ultimately, it is up to the people of Asia to pursue their own rights and aspirations, just as we have seen people do all over the world.

IN THE LAST decade, our foreign policy has transitioned from dealing with the post-Cold War peace dividend to demanding commitments in Iraq and Afghanistan. As those wars wind down, we will need to accelerate efforts to pivot to new global realities.

We know that these new realities require us to innovate, to compete, and to lead in new ways. Rather than pull back from the world, we need to press forward and renew our leadership. In a time of scarce resources, there's no question that we need to invest them wisely where they will yield the biggest returns, which is why the Asia-Pacific represents such a real 21st-century opportunity for us.

Other regions remain vitally important, of course. Europe, home to most of our traditional allies, is still a partner of first resort, working alongside the United States on nearly every urgent global challenge, and we are investing in updating the structures of our alliance. The people of the Middle East and North Africa are charting a new path that is already having profound global consequences, and the United States is committed to active and sustained partnerships as the region transforms. Africa holds enormous untapped potential for economic and political development in the years ahead. And our neighbors in the Western Hemisphere are not just our biggest export partners; they are also playing a growing role in global political and economic affairs. Each of these regions demands American engagement and leadership.

And we are prepared to lead. Now, I'm well aware that there are those who question our staying power around the world. We've heard this talk before. At the end of the Vietnam War, there was a thriving industry of global commentators promoting the idea that America was in retreat, and it is a theme that repeats itself every few decades. But whenever the United States has experienced setbacks, we've overcome them through reinvention and innovation. Our capacity to come back stronger is unmatched in modern history. It flows from our model of free democracy and free enterprise, a model that remains the most powerful source of prosperity and progress known to humankind. I hear everywhere I go that the world still looks to the United States for leadership. Our military is by far the strongest, and our economy is by far the largest in the world. Our workers are the most productive. Our universities are renowned the world over. So there should be no doubt that America has the capacity to secure and sustain our global leadership in this century as we did in the last.

As we move forward to set the stage for engagement in the Asia-Pacific over the next 60 years, we are mindful of the bipartisan legacy that has shaped our engagement for the past 60. And we are focused on the steps we have to take at home -- increasing our savings, reforming our financial systems, relying less on borrowing, overcoming partisan division -- to secure and sustain our leadership abroad.

This kind of pivot is not easy, but we have paved the way for it over the past two-and-a-half years, and we are committed to seeing it through as among the most important diplomatic efforts of our time.

White House: Now is Not the Time to Wave the White Flag on Clean Energy Jobs

2011-10-04T13:44:00.000-07:00

Now is Not the Time to Wave the White Flag on Clean Energy Jobs. Blog post from Dan Pfeiffer, White House Communications Director
http://www.whitehouse.gov/blog/2011/10/04/now-not-time-wave-white-flag-clean-energy-jobs
October 04, 2011

This morning, Chairman Cliff Stearns, who leads the House Energy and Commerce Subcommittee on Oversight and Investigations, told NPR that "We can't compete with China to make solar panels and wind turbines."

This comment reflects exactly the sort of counterproductive defeatism that Energy Secretary Steven Chu warned against this weekend when he spoke to a group of America’s most promising young solar innovators:

“The United States faces a choice today: Will we sit on the sidelines and fall behind or will we play to win the clean energy race? Some say this is a race America can’t win. They’re ready to wave the white flag and declare defeat… Others say this is a race America shouldn’t even be in. They say we can’t afford to invest in clean energy. I say we can’t afford not to.

“It’s not enough for our country to invent clean energy technologies – we have to make them and use them too. Invented in America, made in America, and sold around the world – that’s how we’ll create good jobs and lead in the 21st century.”

The race for clean energy jobs and industries is on – and it is a race well worth winning. The International Energy Agency projects that in the coming decades, solar power could grow to more than 20 percent of the world’s electricity.
Conservatively, this means that there is an economic opportunity worth trillions of dollars for whichever countries claim the lead. The global market for wind turbines is also growing exponentially.

But it’s not just the vast potential of jobs tomorrow – these industries employ a growing number of Americans today. In fact, business groups estimate that America’s solar industry accounts for about 100,000 jobs and the wind industry employs 75,000. Should we simply tell those workers that we’ve given up on them?

A study released last month showed that, in spite of the intense global competition, the U.S. remains a net global exporter of solar technology – with $5.6 billion in exports and an overall positive trade balance of $1.8 billion.

It is certainly true that China is playing to win. Last year alone, China offered its solar manufacturers $30 billion in government financing, vastly exceeding the U.S. investment. And China has overtaken the United States market share in solar power – a technology we invented.

Chairman Stearns and other members of his party in Congress believe that America cannot, or should not, try to compete for jobs in a cutting edge and rapidly growing industry. We simply disagree: the answer to this challenge is not to wave the white flag and give up on American workers. America has never declared defeat after a single setback – and we shouldn’t start now.

America’s entrepreneurs and innovators are still the very best in the world. Our workers are second to none – and we have never been afraid of a challenge. It’s time to do what we’ve always done in the face of a tough competitor: roll up our sleeves and recapture the lead.

EPA Inspector General Statement on Greenhouse Gases Endangerment Finding Report - Data Quality Processes

2011-09-30T00:07:00.000-07:00

EPA Inspector General Statement on Greenhouse Gases Endangerment Finding Report - Data Quality Processes

Press Statement - U.S. Environmental Protection Agency
For Immediate Release
Office of Inspector General
Washington, D.C., September 28, 2011Contact: John Manibusan. Phone: (202) 566-2391
http://www.epa.gov/oig/reports/2011/IG_Statement_Greenhouse_Gases_Endangerment_Report.pdf

WASHINGTON, D.C. – Statement of Inspector General Arthur A. Elkins, Jr., on the Office of Inspector General (OIG) report Procedural Review of EPA’s Greenhouse Gases Endangerment Finding Data Quality Processes:

“The OIG evaluated EPA’s compliance with established policy and procedures in the development of the endangerment finding, including processes for ensuring information quality. We concluded that the technical support document that accompanied EPA’s endangerment finding is a highly influential scientific assessment and thus required a more rigorous EPA peer review than occurred. EPA did not certify whether it complied with OMB’s or its own peer review policies in either the proposed or final endangerment findings as required. While it may be debatable what impact, if any, this had on EPA’s finding, it is clear that EPA did not follow all required steps for a highly influential scientific assessment. We also noted that documentation of events and analyses could be improved.

We made no determination regarding the impact that EPA’s information quality control systems may have had on the scientific information used to support the finding. We did not test the validity of the scientific or technical information used to support the endangerment finding, nor did we evaluate the merit of EPA’s conclusions or analyses.

We make recommendations that we think will strengthen EPA’s control over data quality processes. EPA disagreed with our conclusions and did not agree to take any corrective actions in response to this report. All the report’s recommendations are unresolved.”

###

Publication Bubble Threatens China's Scientific Advance

2011-09-29T08:09:00.001-07:00

Publication Bubble Threatens China's Scientific Advance
Chinese Academy of Sciences
Sep 26, 2011
http://english.cas.ac.cn/Ne/CN/201109/t20110926_75603.shtml

As China's economy has soared to the second place in the world, the country's scientific strength has also surged -- if only measured by the numbers.

Chinese researchers published more than 1.2 million papers from 2006 to 2010 -- second only to the United States but well ahead of Britain, Germany and Japan, according to data recently published by Elsevier, a leading international scientific publisher and data provider. This figure represents a 14 percent increase over the period from 2005 to 2009.

The number of published academic papers in science and technology is often seen as a gauge of national scientific prowess.

But these impressive numbers mask an uncomfortable fact: most of these papers are of low quality or have little impact. Citation per article (CPA) measures the quality and impact of papers. China's CPA is 1.47, the lowest figure among the top 20 publishing countries, according to Elsevier's Scopus citation database.

China's CPA dropped from 1.72 for the period from 2005 to 2009, and is now below emerging countries such as India and Brazil. Among papers lead-authored by Chinese researchers, most citations were by domestic peers and, in many cases, were self-citations.

"While quantity is an important indicator because it gives a sense of scientific capacity and the overall level of scientific activity in any particular field, citations are the primary indicator of overall scientific impact," said Daniel Calto, Director of SciVal Solutions at Elsevier North America.

Calto attributed China's low CPA to a "dilution effect."

"When the rise in the number of publications is so rapid, as it has been in China -- increasing quantity does not necessarily imply an overall increase in quality," said Calto.

He noted the same pattern in a variety of rapidly emerging research countries such as India, Brazil, and earlier in places like the Republic of Korea.

"Chinese researchers are too obsessed with SCI (Science Citation Index), churning out too many articles of low quality," said Mu Rongping, Director-General of the Institute of Policy and Management at the Chinese Academy of Sciences, China's major think tank.

SCI is one of the databases used by Chinese researchers to look-up their citation performance. The alternative, Scopus, provides a wider coverage worldwide.

"Chinese researchers from a wide range of areas and institutions are vying for publication, as it is a key criterion for academic appraisal in China, if not the only one. As a result, the growth of quality pales in comparison to that of quantity," said Mu, an expert on China's national science policy and competitiveness.

On the other hand, China also falls behind the United States in multidisciplinary research, which is a core engine for scientific advance and research excellence.

From 2006 to 2010, China published 1,229,706 papers while the United States churned out 2,082,733. According to a new metric introduced by Elsevier's Spotlight research assessment solution, China generated 885 competencies while the United States had 1,817.

In other words, China's total research output is more than half that of the United States, while the number of competencies showing China's strength in multidisciplinary research is less than half that of the United States.

Cong Cao, an expert on China's science and technology, put it more bluntly in an article he wrote: "When the paper bubble bursts, which will happen sooner or later, one may find that the real situation of scientific research in China probably is not that rosy."

China has been investing heavily in scientific research and technological development in recent years to strengthen its innovative capacity, The proportion of GDP spent on R&D grew from 0.9 percent in 2000 to 1.4 percent in 2007, according to the World Bank.

An IMF forecast in 2010 says China now ranks second globally in R&D spending. The IMF calculates China's R&D expenditure at 150 billion U.S. dollars when based on Purchasing Power Parity, a widely used economic concept that attempts to equalize differences in standard of living among countries.

By this measure, China surpassed Japan in R&D spending in 2010.

Many see China's huge investment in R&D as the momentum behind the country's explosive increase in research papers.

"Getting published is, in some ways, an improvement over being unable to get published," Mu said. "But the problem is, if the papers continue to be of low quality for a long time, it will be a waste of resources."

In China, academic papers play a central role in the academic appraisal system, which is closely related to degrees and job promotions.

While acknowledging the importance of academic papers in research, Mu believes a more balanced appraisal system should be adopted. "This is a problem with science management. If we put too much focus on the quantity of research papers, we leave the job of appraisal to journal editors."

In China, the avid pursuit of publishing sometimes gives rise to scientific fraud. In the most high-profile case in recent years, two lecturers from central China's Jinggangshan University were sacked in 2010 after a journal that published their work admitted 70 papers they wrote over two years had been falsified.

"This is one of the worst cases. These unethical people not only deceived people to further their academic reputations, they also led academic research on the wrong path, which is a waste of resources," Mu said.

A study done by researchers at Wuhan University in 2010 says more than 100 million U.S. dollars changes hands in China every year for ghost-written academic papers. The market in buying and selling scientific papers has grown five-fold in the past three years.

The study says Chinese academics and students often buy and sell scientific papers to swell publication lists and many of the purported authors never write the papers they sign. Some master's or doctoral students are making a living by churning out papers for others. Others mass-produce scientific papers in order to get monetary rewards from their institutions.

A 2009 survey by the China Association for Science and Technology (CAST) of 30,078 people doing science-related work shows that nearly one-third of respondents attributed fraud to the current system that evaluates researchers' academic performance largely on the basis of how many papers they write and publish.

Despite rampant fraud, China will continue to inject huge money into science. According to the latest national science guideline, which was issued in 2006 by the State Council, the investment in R&D will account for 2.5 percent of GDP in 2020.

"If China achieves its stated goal of investing 2.5 percent of its GDP in R&D in 2020, and sustains its very fast economic growth over the next decade, it would quite likely pass the U.S. in terms of total R&D investment sometime in the late 2010s," said Calto, adding that it is also quite likely that at some point China will churn out more papers than the United States.

According to Calto, China does mostly applied research, which helps drive manufacturing and economic growth, while basic research only accounts for 6 percent, compared with about 35 percent in Germany, Britain, and the United States, and 16 percent in Japan.

"In the long term, in order to really achieve dominance in any scientific area, I think it will be necessary to put significant financial resources into fundamental basic research -- these are the theoretical areas that can drive the highest level of innovation," Calto said. (Xinhua)