How can Europe deal with its debt?

For a while, the storm seemed to have passed and the Eurozone entered a welcome tranquil period. Now, Greece has once again triggered the alarm and, while the financial and economic resilience of many member countries has improved, their political resilience has not. Greece is special in many ways and will have to be dealt with in a different way from the other member countries, but the renewed turbulence it has caused once again has highlighted that the construction of the monetary union remains incomplete.

In the inaugural report in CEPR’s new Monitoring the Eurozone series (Corsetti et al. 2015), the authors1 call for a reconsideration of the Eurozone’s architecture. The report is available to download here.

Important institutional steps have certainly been taken, but the weight of crisis-fighting has fallen heavily on the ECB, which increasingly faces the danger of becoming overburdened – while being criticised simultaneously by those who think it is doing too much and those who wish for more.

While the ECB is not the only central bank in danger of being overburdened, the political and institutional structure of the Eurozone makes the problem more complex and potentially divisive. Meanwhile, reforms at the European level have come to a standstill and all debates on increasing fiscal and political integration have remained moot. Some countries have implemented significant fiscal consolidation and structural reforms, but others have lagged.

Slow growth and the debt overhang

Fundamentally, the Eurozone remains vulnerable because growth is anaemic. A key reason behind this is a debt overhang, which discourages investment and consumption growth. Several countries are currently caught in a low-activity equilibrium involving weak demand, high unemployment and rising nonperforming loans. With a high outstanding debt stock, a new shock – whether external or within the Eurozone – could easily set off a new crisis.

The Eurosystem remains vulnerable to fiscal shocks since there is no room left for fiscal manoeuvre in a number of countries. In addition, the diabolic loop between banks and sovereigns is alive and well. While the Single Supervisory Mechanism and the Single Resolution Mechanism are critical to reversing financial fragmentation, they are not sufficient, particularly in the near and medium terms. High borrowing costs of banks and – by extension – corporates and households in peripheral countries are still related to continued sovereign risk.

In this setting, attempts to implement necessary reforms of the fiscal governance in the Eurozone are stillborn. The existing rules did not prevent countries from issuing too much debt, nor providing liberally excessive lending, as both private agents and the governments correctly anticipated that the Treaty was too weak to make the no-bailout clause credible. Under a credible no-bailout clause, correct pricing of risk should have deterred excessive debt accumulation ex ante.

This did not happen. By now, all the potential beneficial effects of deterrence are long gone. In the present situation, with debt levels already very large and a still developing and untested institutional framework to protect countries from adverse spillovers, debt restructuring involving the private sector is not an attractive option. All that is left are the adverse ex post consequences of overly large stocks of private, but especially public, debt, including the vulnerability to runs. This is why, in the present circumstances, the difficult inheritance of the recent past is bound to frustrate and undermine fiscal governance reform capable of reining in moral hazard. Any hope of proceeding from here will necessarily require a change in the initial condition, to be brought about with a courageous and convincing Eurozone political initiative, to back a technically well-designed, sizeable reduction in existing debt levels.

Three proposals

The report, A New Start for the Eurozone: Dealing with Debt, focus on three issues because they are important and they can be addressed without a fully-fledged fiscal federation or changes to the Treaty:

1. A one-time debt stock operation to rapidly reduce sovereign debt, particularly in the highly indebted peripheral countries. The authors offer a menu of options, one of which is a debt buyback through the commitment of future revenues, which could include seigniorage, VAT or a wealth (transfer) tax. This does not involve any redistribution across members of the currency union, but it would not be sufficient to eliminate the overhang. Therefore, they discuss a number of other choices, including a European solidarity tax with some limited redistribution across countries and ‘debt-equity’ exchange with GDP-indexed bonds.
2. A strengthened sovereign lending framework for the ESM, which both creates strong market-based incentives to avoid excessive debt levels in the future and makes future debt restructuring – should it become necessary – less painful than is currently the case.
3. A set of regulatory changes that discourage and limit the exposure of banks to sovereign debt, particularly that of their own sovereign. This should be complemented by the creation of a European synthetic bond that does not require mutualisation, but would constitute a safe asset and could facilitate unconventional monetary policies by the ECB.

Certainly, the goal is ambitious. The proposals aim to kill, with one stone, the three birds of enforcing long-run fiscal discipline, dealing with the legacy debt overhang and breaking the sovereign bank loop.

This would require a concerted effort and significant investment of political capital, which may only become available if the fragility of the present situation becomes apparent. However, the solutions to these three problems are strongly complementary and would generate large welfare improvements for Eurozone citizens if implemented jointly. Indeed, the authors stress that the package proposed should not be unbundled and nor should the implementation be partial.

Source: Article by Richard Baldwin, World Economic Forum (April 16 2015)

Times of India: Farming the farmer: By tying peasants to land, political parties propagate an insidious new caste system

The moment a budget is presented in Parliament or assemblies, it’s standard theatre for opposition members to rush out and denounce it as anti-poor or anti-farmer. They paint the government to be representing corporates, intent only on selling farmers’ land to industries at a throwaway price. They demand imposition of more and more taxes on the rich and distribution of these to the poor.

The government also comes forward with the claim of presenting a pro-poor, pro-farmer budget followed by a laundry list of freebies provided for the poor. The opposition claims ‘rich are getting richer and poor poorer’.

All these suggest that budgets should be prepared solely for the poor. The middle class or rich do not exist, even if they do nothing need be done for them. Everything must be done for the poor because they vote in large numbers.

So, is poverty a virtue? Does one commit a crime by earning well? ‘Industry’ is presented as a dirty word. The overwhelming perception is that any industrialist sets up industry for the exploitation of labour, society and farmers. He is therefore undeserving of any mercy. The more merciless the government can be towards the corporate, the more popular it supposedly becomes.

‘Profit’ too is a dirty word, but unless the industrialist earns a good profit why should he set up any industry? There is no need for him to make the effort, overcoming a myriad governmental and societal obstacles.

There is not a single chief minister or prime minister in independent India who has not made untiring efforts to draw industry to his domain. Even the very pro-poor, pro-farmer Left Front government in West Bengal had to do so, at the risk of losing power. And they all do it to eradicate poverty. To create jobs and employment. To increase per capita income. To improve people’s standard of living.

Most farmers approach politicians, MPs, MLAs, ministers to get a job for their wards in industry, not in the farming sector. Because there is no profit in agriculture. While this is the reality on one side, on the other farmers are incited to resist when industry comes.

By improvement of the standard of living of the poor we mean converting an earthen house to pucca, provisioning a washing machine, a refrigerator or even an air conditioner and a two wheeler.

These rescue the women from the drudgery of washing clothes; prevent wastage of vegetables and other food items; provide more comfort leading to increase in efficiency and some leisure. And we require electricity to run them. Without industry who would provide the cement, steel, pipes, power needed for all these accessories to a decent standard of living?

Land acquisition is now encountering stiff resistance even for roads, irrigation, power generation, atomic energy and defence projects. But during the 67 years of Independence, all the cities and towns of India have expanded enormously all around, essentially on farmland. And farmers have often willingly sold their land for a good price.

Around Sanand in Gujarat, where the Tatas set up their Nano car manufacturing facility after being booted out from Singur in Bengal, international automobile companies such as Peugeot of France, the US General Motors and Suzuki of Japan have developed their factories by purchasing farmlands. The farmers losing land have told media that they haven’t seen as much money in generations as they are doing now, enabling them to get rid of indebtedness for the first time. Other land owners demand their land be sold.

So, should a farmer remain tied to farming for generations? Can’t he be allowed to shift occupation to get rid of poverty?

It sounds satisfying to say that while the rich are getting richer the poor are getting poorer. But are the poor really getting poorer in a liberalised economy? Planning Commission estimates show 22% to be below the poverty line two years back, compared to 37.2% a decade back. In most states the actual land owner has shifted to urban areas for a better lifestyle, farm labourers and share croppers are the real land owners now. They, too, have raised their standard of living to an extent.

In today’s globalised world merit is the main criterion. The more efficient or skilled one is, the more prosperous one grows. Today’s liberal democracies provide equal opportunity to all, which hasn’t happened in history before. Therefore, ‘capitalist’ and ‘industry’ should not be dirty words.

All capitalist states have turned into welfare states. They make the poor more competitive through capacity building, teaching them to fish rather than simply distributing fish. The Indian government should not aim to be ‘mai-baap’, infantilising people and making them depend on it for everything. The citizen must not be rendered a passive fatalist.

Rather, he must be taught to dream so that the dream can materialise one day. He must think, poverty is a curse. He must make every effort to get rid of it. He must not remain a beggar for government doles. Instead, the state should remove all hurdles to his becoming competitive in today’s economy.

Source: M A Kharabela Swain (The writer is a former MP from Odisha) - Times of India, April 23rd, 2015

What makes a good and sustainable procurement system

One of the most important phases in the implementation of public works and development programs is procurement — or the acquisition of good and services to deliver project objectives and results.

International development institutions, private organizations, national governments and corporations need a reliable procurement process to ensure timely delivery of services to their stakeholders. Disaster victims, for instance, could starve or die from diseases if the procurement of food and medicine is delayed or not done right. The quality of education, meanwhile, may not improve if school supplies, books and teaching materials are not delivered in rural areas.

But how can you make procurement better and more sustainable?

While there isn’t one strategy that can apply to all contexts, Steve Schooner, co-director of George Washington University’s government procurement law program, explained that a sustainable procurement system will only be possible if the legal and institutional environment allows for it.

“Anybody can come up with a very good procurement legislation, but it’s another if we can apply it and implement it well with transparency, integrity, accountability, efficiency and effectiveness,” the professor said in a procurement conference attended by Devex, adding that governments — as the main proponents of public procurement — should always engage the private sector and other stakeholders in the process.

Eveline Venanzoni, head of the ecological procurement service of the Swiss Federal Office for the Environment, agreed, saying that sustainable procurement systems take into account the environmental, social and economic effects of the process.

She explained that modern procurement systems should integrate objectives into larger development goals and aspirations — a move away from the detached view that procurement had been put under over the past couple of decades, as an industry of winning contracts and delivering them.

Some governments, such as that of the Philippines, and even multilateral institutions like theWorld Bank and the Asian Development Bank have recognized the benefits of aligning procurement processes with national and international interests. Doing so, according to Venanzoni, is “good for the whole procurement process” as it cuts costs and improves efficiencies.

Process should be clear and stable

The whole procurement process should also be clear and stable, with each stakeholder fully aware of their specific roles and the general objectives of the project — everyone is a vital piece of a huge puzzle.

Felipe Estefan, an open government strategist at the World Bank, shared that in the whole procurement process, “everyone should be aware of the goals, objectives and their responsibilities so people and other stakeholders are aware of what’s happening and what is expected. This helps in managing expectations.”

The World Bank official added that being engaged and fully aware of the process, objectives and expected outcomes of the whole project also empowers stakeholders and beneficiaries to hold contractors and funders accountable if a certain key result is not achieved or a certain good or service is not delivered — making the whole process sustainable and more effective.

Procurement should also be more outcome-oriented with a view of delivering quality results, instead of just being process-oriented. Schooner shared that “having goals is better in making procurement outcome-oriented” because it is a “double-edged sword” that always targets policy goals and value for money.

By focusing just on the process, Jose Tomas Syquia, executive director for procurement at the Philippine budget department, shared that the whole system runs the risk of becoming a checklist where stakeholders just do what is written without any “discretion.”

“Procurement is not just about having a checklist and crossing them out. There should be discretion to be able to exercise judgment,” the Philippine official said. “If there’s nothing like that, there’s no growth or no room for improvement. Crossing out everything in the checklist does not necessarily suggest and ensure success, effectiveness and efficiency.”

Having a standard is important

The implementation of standards as a way to make procurement sustainable is also key. Schooner shared that the maturity of a procurement process is the presence of standards or benchmarks where all stakeholders are required to follow.

“Think about your procurement regime and think inwardly and ask if there are things that need to be improved,” he said.

The GWU professor added that stakeholders should also be aware that awarding of the contract is not the end of the procurement process. It is rather the “first contact of business” because it is “not an assurance that you will get results every single time.”

Monitoring and evaluation of goods and services delivered from the start of the contract to the delivery of the last ones should be done to ensure that beneficiaries are getting what they deserve and expect.

These standards should be streamlined — or even centralized — in all procurement services and programs as it allows for “buying in volume, competitive pricing and coherent implementation,” among others, Venanzoni shared. “Make things measurable and set up a standard so you can assess progress and improvement easily.”

“Countries tend to measure what’s easy to measure and not what’s important,” Schooner concluded. “We shouldn’t just train [stakeholders], but we should empower them.”

Source: Devex, April 22, 2015

Anjuli Bhargava: Forget smart, make cities livable

Here's what the government should do to make our cities better - work out a plan to manage the traffic situation and make public transport more attractive

All of last month, newspapers have been full of news aboutpollution levels in Delhi and how we are losing years of our lives due to the air we breathe. The expats in India have been warned, sales of air purifiers are on the rise and I'm sure hardship allowances of diplomats in India will go up. Even the early morning walks at Lodi Garden - as one of our columnists has informed us - are no longer as fresh as they felt before.

If the Cabinet looked beyond its noses and Lutyens' Delhi, it would quickly see what a menace the traffic in the city has become - this despite the Metro taking a huge load off the roads. Start at 9 a m from Gurgaon and try and reach Noida or Greater Noida. It is easier and faster to reach Mumbai, which is 1,433 km away - aerially, of course. Senior government officials need to take a ride crossing south Delhi during peak hours for a reality check on what can happen and how long and frustrating it can be.

Driving within Gurgaon - the Millennium City - has become a challenge. As the city tries to regulate its ever-increasing traffic, roads are made one way and back the other way without any warning. Cybercity - the hub of corporate Gurgaon - resembles a large construction site, with uneven large craters (akin to the moon, I suspect) on the road. There are forks and U-turns that everyone regularly misses. Cars are often backing up into a steady stream of traffic as they realise they have missed some turn or the other - they are so poorly sign-posted, if at all.

The traffic situation in several other cities - be it Bengaluru, Pune, Hyderabad or Kolkata - is steadily deteriorating as well. Traffic peak hours in all these cities are dreaded and cases of road rage are no longer unheard of even in these relatively less aggressive cities.

I have a few suggestions that focus on Delhi but can easily be extended to other cities. First; make it more attractive for people like us - who own the majority of the cars - to minimise the use of personal vehicles and increase the use of public transport. As things stand, road space is hogged by car owners, leaving little room for cyclists and pedestrians.

I know public buses and taxis are not an option for the relatively better off but the metro is a very viable option if one plans and sticks to non-peak hours. Of course, it won't take all the cars off the roads right away (since most of the work and meetings will happen during peak times) but it will be a start.

For this to work, two things need to happen. One, you need a Metro station within one km of most locations. The Metro network - which is currently around 200 km - needs to go up at least threefold.

Second - and this is key - car owners have to change the way they think. The Metro is not only for people like "them". As someone wisely said, a society is wealthy not when rich people travel in cars but when they use public transport. If Cherie Blair - former British prime minister Tony Blair's wife - could use the London Underground to commute in the city, there is no reason affluent Indians - and indeed Indian politicians' wives to begin with - cannot do the same and lead by example.

Once the metro coverage expands, the authorities can limit access to certain areas by making it prohibitively expensive, like cities such as London do. This works like a congestion tax for cars that move into the city at peak hours.

There are other methods that cities have adopted - enforcement will remain the challenge - like designated days for even and odd number-plates. This forces citizens into some kind of car-pooling even if they have cars with both even- and odd-numbered plates.

While what I mention is just common sense, there is no dearth of expert advice on better management if someone has the will to implement it. So, even as the Cabinet and our ministers sit down to put the final touches to their plan for smart cities, I have a request. Forget smart, just make them livable.

Source: Anjuli Bhargava: Business Standard (April 23rd)