Inside the bear


When the Soviet Union collapsed 25 years ago, Russia looked set to become a free-market democracy. Arkady Ostrovsky explains why that did not happen, and how much of it is Mr Putin’s fault
The Economist Oct 22nd 2016 | From the print edition

ON AUGUST 20th Guzel Semenova, a 25-year-old Muscovite, was strolling through the grounds of Muzeon, one of the city’s parks, and stopped by a burnt-out, rusty trolleybus. Inside its shattered interior a small video screen was playing black-and-white footage of events that unfolded in the year she was born. A volunteer explained that the trolleybus had been part of an anti-tank barricade during a coup 25 years ago and symbolised the people’s victory. Ms Semenova looked confused. The 22-year-old volunteer, herself unsure what exactly had happened during those three days in August 1991, said it was when “Russia became free.” Ms Semenova listened politely, then walked on.

A patchy knowledge of those events is nothing unusual in Russia. A survey by the Levada Centre, the country’s leading independent pollster, shows that half the overall population and as many as 90% of young Russians know nothing about the drama that began in the small hours of August 19th 1991.

That morning the world woke up to news of a coup. Mikhail Gorbachev, the last Soviet leader, was detained in Crimea, “unable, for health reasons, to perform his duties”. Power had been seized by a group of hard-line Communists, the chief of the KGB and senior army generals, who declared a state of emergency. Tanks were rumbling through the centre of Moscow. The television, overrun by the KGB’s special forces, was playing Tchaikovsky’s “Swan Lake” on a loop. It was a last, desperate attempt to save the disintegrating empire.

But on the day of the coup not a soul came out to support the Soviet regime. Instead, tens of thousands of Muscovites took to the streets to build barricades and defend their new freedoms. Boris Yeltsin, the first democratically elected president of Russia, then a subordinate part of the Soviet Union, called for resistance. The KGB’s special forces were told to attack the Russian parliament, the epicentre of the opposition, but nobody was prepared to give a written order. Two days later three young men died under a tank. A few hours after that the troops were withdrawn and Gorbachev returned to Moscow. Jubilant crowds marched to the KGB’s headquarters and toppled the statue of its founder, Felix Dzerzhinsky.

Those three days marked the end of the Soviet Union, but they did not become a foundation myth for a new Russia. The country was tired of myths. Modern school textbooks barely mention them. Russian officials used to lay flowers at a small monument to the three young men killed by the tanks, but even this modest gesture stopped in 2004. This year liberals were banned from marching to the place of their victory 25 years ago. The small festival at the Muzeon attracted a few hundred people who watched a stylised performance of “Swan Lake” and a documentary from those days. Shot in St Petersburg, the cradle of the Bolshevik revolution, it showed a vast, peaceful crowd in the main square watching the death throes of the Soviet empire. The camera also captured a young Vladimir Putin by the side of his boss, Anatoly Sobchak, then the mayor of St Petersburg, who had defied the coup. A demonstrator was heard to shout: “When we get rid of the communist plague, we will again become free and we won’t have to fight [a war] again.”

The revolution of 1991 overturned the Soviet Union’s political, economic and social order and put 15 countries on the map where there had previously been only one. But like many revolutions in history, it was followed by a restoration.

The tsar the Kremlin most admires is Alexander III, who on taking office in 1881 reversed the liberalisation overseen by his father, who was assassinated, to impose an official ideology of Orthodoxy, nationalism and autocracy. His portrait and his famous saying, “Russia has only two allies: its army and its navy,” greet visitors to a revamped museum of Russian history at VDNKH, a prime example of Stalinist architecture in Moscow. Stalin himself has had a makeover too. Gigantic portraits of him line the roads in Crimea, proclaiming: “It is our victory!”

The two main pillars of the Soviet state, propaganda and the threat of repression, have been restored. The KGB, which was humiliated and broken up in the aftermath of the coup, has been rebuilt as the main vehicle for political and economic power. The secret police is once again jailing protesters and harassing civil activists. In September the Kremlin designated the Levada Centre a “foreign agent”, which could be the end of it. Television has been made into a venomous propaganda machine that encourages people to fight “national traitors” and “fifth-columnists”. Boris Nemtsov, a liberal politician who once represented Russia’s hopes of becoming a “normal” country, was murdered outside the Kremlin last year.

After nearly a decade of economic growth spurred by the market reforms of the 1990s and by rising oil prices, the Russian economy has descended into Soviet-era stagnation. Competition has been stifled and the state’s share in the economy has doubled. The military-industrial complex—the core of the Soviet economy—is once again seen as the engine of growth. Alternative power centres have been eliminated. Post-Soviet federalism has been emasculated, turning Russia into a unitary state.

Reactionary restoration at home has led to aggression abroad. Russia has invaded Georgia and Ukraine, two of the most democratic former Soviet republics. It has intervened in the conflict in Syria, propping up the regime of President Bashar al-Assad. It has attempted to undermine Euro-Atlantic institutions, backed right-wing parties in Europe and tried to meddle in America’s presidential election. And it is once again using the threat of nuclear arms to blackmail the West.

After the defeat of the 1991 coup, Russia was widely expected to become a Westernised, democratic, free-market country. This special report will explain why that did not happen, and ask whether the West has a Putin problem or a much deeper and more enduring Russia problem.

Mr Putin was originally chosen for the top job by Yeltsin, Russia’s first president, not least for being on the “democratic” side in 1991. When he came to power in 2000, he was expected to consolidate the country. Instead, he has reinstated an archaic model of the state.

It was naive to expect that after 74 years of Soviet rule, and several centuries of paternalism before that, Russia would rapidly emerge as a functioning Western-style democracy. But this report will show that Russia’s relapse into an authoritarian corporate state was not inevitable. It was the result of the choices made by the country’s elite at each new fork in the road. And although those choices cannot be unmade, they do not predetermine the future.

Not the Soviet Union

The collapse of the Soviet Union brought a massive change to Russia. The creation of private ownership launched industries that did not exist before, such as private banks, restaurants and mobile-phone networks. People are free to make money, consume and travel on a scale never seen before in Russia’s history. They consume not just more goods and services but more culture and information. The state no longer dominates people’s lives. Although it controls television, the internet remains largely unconstrained everywhere, and radio and print still have some freedom. Even Alexei Navalny, an opposition politician, admits that “despite the curtailing of political and civil freedoms, the past 25 years have been the freest in Russian history.”

People are becoming increasingly alienated from politics, as demonstrated by the low turnout in the parliamentary elections in September, but they are finding other ways of expressing their views. Although few Russians remember quite how the Soviet regime ended, many enjoy the results. Russia has a vibrant urban middle class which, until recently, was richer than its equivalents in eastern Europe. Russia’s cities, with their cafés, cycle lanes and shopping streets, don’t look very different from their European counterparts.

A new generation of Westernised Russians born since the end of the Soviet Union has come of age. The children of the Soviet intelligentsia—a vast educated professional class that supported Gorbachev—dress, eat and behave differently from their parents’ generation. They have a spring in their step.

Many of these young, educated Russians owe their comfortable lives to a decade of economic growth that began in 1998 and ended with the economic crisis in 2008-09. The impact of that crisis exposed the limits of Mr Putin’s model of governance. And although economic growth recovered fairly quickly, trust in Mr Putin’s model of governance declined sharply, from 35% at the end of 2008 to 20% in early 2012, whereas support for Western-style democracy shot up from 15% to 30%.

Those who felt that Russia needed both economic and political modernisation pinned their hopes on Dmitry Medvedev, who served as president from 2008 to 2012. The Russian elite wanted him to stay for a second term, but in September 2011 he announced that Mr Putin, who was then prime minister, would resume the presidency, while Mr Medvedev would become prime minister. He indicated that this job swap had been planned right from the start of his presidency. Many people felt they had been duped. When three months later the Kremlin blatantly rigged the parliamentary elections, they took to the streets, demanding the same sort of respect from the state as citizens as they were enjoying as private customers at home and abroad. They wanted Russia to become a European-style nation state, an idea formulated by Alexey Navalny, an anti-corruption blogger who had galvanised the protests through social media. His definition of the governing United Russia as a party of “crooks and thieves”, and the mood of protest, spread across the country.

Mr Putin was rattled and angry, but having witnessed the failure of the 1991 coup he knew that tanks were not the answer. Instead he trumped civic nationalism with the centuries-old idea of imperial or state nationalism, offering the idea of Russia as a besieged fortress. In 2014 he annexed Crimea. The tactic worked. The protests stopped and Mr Putin’s personal approval ratings shot up from 60% to 80%. By attacking Ukraine after its own revolution in 2014, Mr Putin persuaded his country and its neighbours that any revolt against the regime would be followed by bloodshed and chaos.

Smoke and mirrors

Mr Putin’s Russia is a slippery construct in which simulation and bluff play a big part

The Soviet Union had many faults, but postmodernism was not one of them. Mr Putin’s Russia is a more slippery construct in which simulation and bluff play a big part. Nothing is what it seems. Elections are held not to change power but to retain it; licensed “opposition” parties are manufactured by the Kremlin; Mr Medvedev’s modernisation was an illusion; doctorates awarded to scores of Russian officials, governors and even to Mr Putin himself were based on plagiarism or cheating, according to Dissernet, a grassroots organisation.

In 2014 Russia put on a remarkable show with the costliest winter Olympics ever staged, in Sochi on the Black Sea. The host country’s athletes got the largest number of gold medals, not least thanks to a massive doping operation in which the Federal Security Service (FSB), the KGB’s successor and Russia’s main security organisation, swapped urine samples through a hole in the wall between an official laboratory and a secret one next door. (That caused many Russian athletes to be banned from this year’s Rio Olympics.) In the same way that Russia has been doping its athletes, its state media have been doping the population with military triumphs and anti-American propaganda, conveying an artificial sense of strength. But unlike those sport victories, Russian violence in Ukraine and Syria is real enough.

Mr Putin’s restoration project is working because the disintegration of the Soviet Union was not complete. The remains of the Soviet and even pre-Soviet system, its institutions, economic structure and social practices, which lay dormant during the first post-Soviet decade, have been revived and strengthened by the current regime.

But just as the Soviet and pre-Soviet legacies cannot be erased, nor can the quarter-century since the USSR ceased to exist. The fundamental conflict between a modern lifestyle and the political restoration under Mr Putin, exposed by the protests of 2011-12, has been suppressed, not resolved. No restoration has ever ended in a return to the past, and none has been permanent.

Russia, perhaps more than other countries, advances through generational shifts. The current reactionary phase may turn out to be no more than a detour on the path towards a modern, federalist nation state. Or it could lead to further decline, interspersed with outbursts of aggression. Which is it to be?

Kodak’s Downfall Wasn’t About Technology

Harvard Business Review by Scott Anthony JULY 15, 2016


A generation ago, a “Kodak moment” meant something that was worth saving and savoring. Today, the term increasingly serves as a corporate bogeyman that warns executives of the need to stand up and respond when disruptive developments encroach on their market. Unfortunately, as time marches on the subtleties of what actually happened to Eastman Kodak are being forgotten, leading executives to draw the wrong conclusions from its struggles.

Given that Kodak’s core business was selling film, it is not hard to see why the last few decades proved challenging. Cameras went digital and then disappeared into cellphones. People went from printing pictures to sharing them online. Sure, people print nostalgic books and holiday cards, but that volume pales in comparison to Kodak’s heyday. The company filed for bankruptcy protection in 2012, exited legacy businesses and sold off its patents before re-emerging as a sharply smaller company in 2013. Once one of the most powerful companies in the world, today the company has a market capitalization of less than $1 billion.

Why did this happen?

An easy explanation is myopia. Kodak was so blinded by its success that it completely missed the rise of digital technologies. But that doesn’t square with reality. After all, the first prototype of a digital camera was created in 1975 by Steve Sasson, an engineer working for … Kodak. The camera was as big as a toaster, took 20 seconds to take an image, had low quality, and required complicated connections to a television to view, but it clearly had massive disruptive potential.
Spotting something and doing something about it are very different things. So, another explanation is that Kodak invented the technology but didn’t invest in it. Sasson himself told The New York Times that management’s response to his digital camera was “that’s cute – but don’t tell anyone about it.” A good line, but not completely accurate. In fact, Kodak invested billions to develop a range of digital cameras.

Doing something and doing the right thing are also different things. The next explanation is that Kodak mismanaged its investment in digital cameras, overshooting the market by trying to match performance of traditional film rather than embrace the simplicity of digital. That criticism perhaps held in early iterations of Kodak’s digital cameras (the $20,000 DCS-100, for example), but Kodak ultimately embraced simplicity, carving out a strong market position with technologies that made it easy to move pictures from cameras to computers.

All of that is moot, the next argument goes, because the real disruption occurred when cameras merged with phones, and people shifted from printing pictures to posting them on social media and mobile phone apps. And Kodak totally missed that.

But it didn’t, entirely.

Before Mark Zuckerberg wrote a line of Facebook’s code, Kodak made a prescient purchase, acquiring a photo sharing site called Ofoto in 2001. It was so close. Imagine if Kodak had truly embraced its historical tagline of “share memories, share life.” Perhaps it could have rebranded Ofoto as Kodak Moments (instead of EasyShare Gallery), making it the pioneer of a new category called life networking where people could share pictures, personal updates, and links to news and information. Maybe in 2010 it would have lured a young engineer from Google named Kevin Systrom to create a mobile version of the site.

In real life, unfortunately, Kodak used Ofoto to try to get more people to print digital images. It sold the site to Shutterfly as part of its bankruptcy plan for less than $25 million in April 2012. That same month Facebook plunked down $1 billion to acquire Instagram, the 13-employee company Systrom had co-founded 18 months earlier.

There were other ways in which Kodak could have emerged from the digital disruption of its core business. Consider Fuji Photo Film. As Rita Gunther McGrath describes in her compelling book The End of Competitive Advantage, in the 1980s Fuji was a distant second in the film business to Kodak. While Kodak stagnated and ultimately stumbled, Fuji aggressively explored new opportunities, creating products adjacent to its film business, such as magnetic tape optics and videotape, and branching into copiers and office automation, notably through a joint venture with Xerox. Today the company has annual revenues above $20 billion, competes in healthcare and electronics operations and derives significant revenues from document solutions.
The right lessons from Kodak are subtle. Companies often see the disruptive forces affecting their industry. They frequently divert sufficient resources to participate in emerging markets. Their failure is usually an inability to truly embrace the new business models the disruptive change opens up. Kodak created a digital camera, invested in the technology, and even understood that photos would be shared online. Where they failed was in realizing that online photo sharing was the new business, not just a way to expand the printing business.

So, if your company is beginning to talk about a digital transformation, make sure you ask three questions:

What business are we in today? Don’t answer the question with technologies, offerings, or categories. Instead, define the problem you are solving for customers, or, in our parlance “the job you are doing for them.” For Kodak, that’s the difference between framing itself as a chemical film company vs. an imaging company vs. a moment-sharing company.
What new opportunities does the disruption open up? Our colleague Clark Gilbert described more than a decade ago a great irony of disruption. Perceived as a threat, disruption is actually a great growth opportunity. Disruption always grows markets, but it also always transforms business models. Gilbert’s research showed how executives who perceive threats are rigid in response; those who see opportunities are expansive.
What capabilities do we need to realize these opportunities? Another great irony is that incumbents are best positioned to seize disruptive opportunities. After all, they have many capabilities that entrants are racing to replicate, such as access to markets, technologies, and healthy balance sheets. Of course, these capabilities impose constraints as well, and are almost always insufficient to compete in new markets in new ways. Approach new growth with appropriate humility.
Kodak remains a sad story of potential lost. The American icon had the talent, the money, and even the foresight to make the transition. Instead it ended up the victim of the aftershocks of a disruptive change. Learn the right lessons, and you can avoid its fate.

Why South Sudan is still at war

The Economist Oct 3rd 2016, 23:50 BY M.F.

LAST month the UN Security Council went on a three-day visit to South Sudan. Five years after a referendum gave birth to the East African country, the delegation was in no mood to celebrate. Fierce fighting between the army commanded by the president, Salva Kiir, and troops loyal to vice-president, Riek Machar, had left at least 300 dead over several days in July; local sources say the toll is vastly underestimated. A UN base was attacked; foreign aid workers were beaten and raped when troops stormed a hotel compound. Mr Machar has since fled the capital, and machineguns have gone silent in Juba. But the calm may not last for long. The Security Council is pushing for the deployment of a 4,000-strong regional protection force—adding to what is already the UN’s third-largest peacekeeping mission, with 12,000 troops. Why does peace remain so elusive for the world’s newest nation?

The conflict has ethnic undertones. Dinka tribesmen make up most of Mr Kiir’s Sudan People’s Liberation Army (SPLA), while Mr Machar’s SPLA-in-Opposition is primarily Nuer. Hate speech, ubiquitous on the radio and social media, is fanning the flames. But it is the country’s cynical elite that has allowed tribal tensions to fester. During the period that preceded the referendum, from 2005 to 2011, SPLA leaders made little effort to promote reconciliation within what was then the Southern Sudan Autonomous Region, where competition for recruits during the 22-year war for independence had left deep scars. Instead the overriding ideology was to secure support for self-determination, with the Sudanese regime in Khartoum blamed for every failing in its dirt-poor new neighbour to the south. That provided a cover for those in power, unchecked by Juba’s fledging institutions, to pilfer public coffers. South Sudan was born with very weak foundations on which to build a nation.

Post-independence leaders soon proved uninterested in achieving this anyway—something the country’s donors long failed to recognise. Created at a time when Iraq and Afghanistan dominated America’s agenda, South Sudan appeared to be the poster-child for Western conflict resolution. Accordingly, the child got spoiled: about $1.4 billion of international aid was allocated to the country for its first year after independence; hundreds of consultants were dispatched to the civil service, schools and hospitals. But it was all carrot and no stick. With no conditions attached, the money rarely found its way to infrastructure projects and public services. The consultants’ advice, especially when it was about boosting governance and reforming the army, was ignored. Chiefly focused on state-building, Western aid also failed to bring together estranged communities. All this left plenty of leeway for factional chiefs to whip up tensions and consolidate power, their rivalries culminating in a full-blown civil war in 2013.

Despite a peace agreement in August 2015, the strife was never really extinguished. A government of national unity took months to form; the demilitarisation of Juba, called for by the accord, did not happen. With his arch-rival in hiding since this summer’s clashes, Mr Kiir is now starting to make the right noises again. But his commitment to peace remains questionable. A leaked UN report alleges that government forces recently procured lorries loaded with fresh weapons, and two fighter-jets. America’s hardening stance is met with growing irritation: Americans were the first targets when soldiers ransacked the hotel compound in July—an attack that underlined the UN’s impotence. The opposition could remobilise too. Taban Deng Gai, the new vice-president, is seen as a ruthless politician. But his ability to rein in troops remains unproven.

Metrics 3.0: A New Vision for Shared Metrics

After accountability and standardization, what should the next phase of measurement focus on?

An evolution in metrics:

Metrics 1.0: Accountability. Individual organizations began to identify outputs and outcomes by which to track their impact. Funders became more data-driven, and began asked investees and grantees for more than anecdotes.

Metrics 2.0: Common standards. Organizations started to realize that to distinguish themselves from purely commercial operations, enhance comparability of results, and increase the flow of capital to the sector, they would need to develop a shared measurement system by which to monitor and report social and environmental performance. In 2013, more than 50 percent of impact investing funds listed in ImpactBase used IRIS, the common language to report social and environmental performance indicators. The conversation about shared metrics has been robust.

But it is at Metrics 2.0 that collaborative efforts seem to plateau. Individual organizations can continue on their own unique paths of performance monitoring and impact evaluation, and the group can keep reporting on common output and outcome metrics year after year, but again we return to the question: Where do we go from here?

We have yet to fully realize the opportunities impact measurement and evaluation can create, and we believe there is another step-change—Metrics 3.0—that we should aim to reach within three years.

A Vision for Metrics 3.0

The next phase of metrics will shift the emphasis from accountability (Metrics 1.0) andstandardization (Metrics 2.0) to value creation (Metrics 3.0).

For metrics and evaluations to create value for us, individually and collectively, we must do two things:

  1. Integrate impact metrics with financial and operational ones. Integrated metrics can help organizations develop better products and services, improve resource allocation, and build more efficient and impactful businesses.
  2. Implement targeted, actionable evaluations that are useful to multiple stakeholders and fit with collective learning agendas. Such evaluations will build on existing knowledge; break down big questions into manageable, answerable pieces; and put the answers back together to inform strategic decision-making for enterprises and the sector at large.

The chart below lays out our vision for how Metrics 3.0 will drive business value and impact at the organizational level, and help us to achieve our shared goals and mission as a sector:

1. Organization-Level Measurement

Most organizations track social and environmental metrics as a separate function; the data is stored separately, analyzed by dedicated staff, and reported on in its own publications. Our vision for Metrics 3.0 shifts isolated impact metrics to integrated financial, operational, and impact metrics.

For instance, Root Capital provides loans to agricultural businesses in Africa and Latin America. Even if perfect information were available about the impact of every loan (such as the number of producers reached, the precise amount of extra income that each earned as a result of the loan, and the effect of that extra income on their lives and their children’s futures) that information would not be a sufficient basis for making underwriting decisions or setting long-term portfolio strategy.

Four windows to opportunity. (Image courtesy of Dalberg, Root Capital, and ANDE)

Root Capital also needs to know the expected revenues, operational costs, and risks of the loan to evaluate impact per dollar, per loan. In 2013, the impact team led an initiative to estimate the impact and profitability per loan, and then developed integrated impact-profitability dashboards for each loan officer. This enabled them to make data-driven decisions about their portfolio management and new client acquisition.

Integrating financial and impact metrics is a challenging task. Existing forms of cost-benefit analysis, developed for policy-makers and service delivery nonprofits, don’t quite fit the new breed of social entrepreneurs, impact investors, and mission-driven businesses. The challenge for metrics professionals is to become sufficiently fluent in operational and financial metrics to both integrate them with impact metrics, and create and advocate for this integrated approach with the leaders of their enterprises.

2. Ecosystem-Level Measurement

We have not realized the potential of aggregated impact data. At a sector level, Metrics 3.0 continues the unfinished work of Metrics 2.0. It encourages demand-led aggregation of impact data, which creates value by demonstrating the scale or reach of a group of organizations, or by enabling capital providers to compare organizations’ impacts and efficiency more effectively. More broadly, we believe that aggregated data will be useful only when it is collected with a clear purpose.

For instance, the South African nonprofit Catalyst for Growth has initiated an analytics platform that will bring transparency to the incubation and acceleration market by providing comparable data on the effects programs have on SGBs. This analytics platform will help SGBs and funders identify the best incubators and accelerators, while giving incubators and accelerators feedback on their performance to stimulate improvement.

Similarly, in Mexico a group of organizations are developing approaches that will increase the flow of resources to women entrepreneurs. Convened by Value for Women, the ANDE Mexico Women’s Working Group has come together to benchmark its practices and performance. Its aggregated performance data will provide evidence to make the case for investing in women, decrease transaction costs, and reduce the perceived risks to serving women entrepreneurs.

In both cases, data aggregation is focused on a particular inefficiency in the market. These efforts not only provide participating organizations with actionable information, but also create sector-level resources for measurement that can be leveraged by others.

3. Organization-Level Evaluation

Evaluations are expensive. Using the highest standards of rigor, it’s possible to spend more evaluating an investment than the actual investment amount. But we believe that organizations can creatively and less expensively conduct evaluations that create more value for additional stakeholders, including the subjects of the evaluation. Hard data about consumers and producers living at the bottom of pyramid is scarce and valuable to others, including upstream companies in the value chain, NGOs serving the same community, and donors and investors. Each data collection exercise represents an opportunity to create value in multiple ways:

  • By testing assumptions about our impact, and hopefully, demonstrating impact to capital providers
  • By refining products and services
  • By channeling feedback from low-income consumers or producers to others engaged in the community (who may in turn be willing to share the cost of the evaluation)

For instance, the nonprofit impact investment fund Acumen, Root Capital, and ANDE, a network of organizations that supports entrepreneurship in developing countries, are experimenting with new ways to decrease the cost and increase the value of data-collection at the consumer- or farmer-level. In particular, our aim is to use mobile data collection platforms and short-form impact survey methodologies such as the Grameen Foundation’s Progress out of Poverty Index. Together we seek to build public knowledge about how we can use technological and methodological innovations in data collection to make large-scale “outcome” data collection more cost-effective, while creating opportunities for enterprises to collect data that is most relevant for their operations.

4. Ecosystem-Level Evaluation

Evaluation, like most forms of knowledge creation, is a public good. Not every organization will conduct evaluations, but every organization could potentially benefit from evaluations done by others. What’s more, organizations working together can build a base of evidence about what works that no single organization could build alone.

We envision that in Metrics 3.0, sector-wide initiatives will catalogue existing information and findings, and identify gaps. In a virtuous circle, this will drive individual organizations to develop evaluations that are “repurposable”—that is, useful to multiple stakeholders.

One example of a sector-wide learning agenda that is already underway is the Smallholder Impact Literature Wiki. The Initiative for Smallholder Finance recently developed the wiki to provide a living resource for its community that helps smallholder farmers capture, organize, and easily access the growing body of literature. The wiki instantly makes clear, for example, that while we have strong evidence to support the theory that providing inputs to smallholders will increase productivity, we don’t have a strong evidence base for the impact of technical assistance of agricultural SGBs. The tool enables new entrants to the field to quickly understand which elements of smallholder finance have been proven to drive impact and in what context, and what gaps remain in our understanding.


The practice of measuring impact has come a long way, but we have yet to realize its potential in creating value for individual enterprises and society at large. We invite our colleagues and peers to join us in envisioning and implementing Metrics 3.0, the next step-change in shared metrics. In doing so, individual organizations can maximize the value of impact metrics by integrating them with financial and operational metrics to inform both day-to-day decision-making and longer-term strategic planning. Multiple enterprises in a sector can collaborate to demonstrate collective scale, channel resources to the most impactful and efficient activities, and start building a base of evidence about what works around a shared learning agenda.

In the next three years, our three organizations are committed to taking action in each of the four windows of opportunity that Metrics 3.0 presents, and we invite you to join us.

To learn more, follow @AspenANDE this week, as ANDE hosts its annual “Metrics Conference” in Washington, D.C. on June 3 and 4.

High-seas piracy hits a two-decade low

PIRATES, the scourge of the high seas, were mostly kept at bay during the first half of 2016. According to the International Maritime Bureau’s Piracy Reporting Centre, there were 98 attacks worldwide in the six months to July, the lowest figure in 21 years. Indonesia’s waters remained the most pirate-infested in the world. The sprawling archipelago of 17,000 islands suffered 21 attacks and three attempted attacks. The waters along the coast of Somalia, once a piracy hotspot, have seen a dramatic decline in attacks since 2011. Piracy off Nigeria’s coast, meanwhile, has increased.

The recent decline in global piracy can be attributed in part to better security on ships. For years, the UN’s International Maritime Organisation discouraged boat owners from arming their crews. Ships tried in vain to defend against heavily-armed pirates using little more than diligent watch-keeping and water cannons. In the mid-2000s, facing rising insurance and ransom costs, shipping companies began employing private security contractors. These firms are increasingly supplied by “floating armouries” to help evade laws that bar crews from bringing weapons into territorial waters.

Better policing of the high seas has also played a part. In 2008, following a spate of pirate attacks in the Gulf of Aden, America, the European Union and NATO sent a flotilla of warships to patrol the coast of Somalia. The large naval presence today deters all but the most ruthless buccaneers. But “Operation Ocean Shield”, NATO’s counter piracy mission, is scheduled to end in December. Perhaps it is time to batten down the hatches once again.

What’s the point?

Immigration systems

The countries that invented points-based immigration systems have concluded they do not work

Jul 9th 2016 | OTTAWA | The Economist From the print edition

BRITAIN’S Conservative Party was languishing in opposition when, in 2005, it hit upon a winning idea. If elected, it would introduce an “Australian-style points system” for work permits. So popular was the pitch that a Labour government created such a system three years later; the immigration minister, Liam Byrne, even flew to Sydney to launch the scheme, although it did not last long. Campaigners for Britain to leave the European Union repeated the promise this year. It was their most detailed policy proposal, and may well have carried them to victory.

“There’s something deep in the British psyche about the Australian system,” says Mr Byrne. But points-based immigration regimes look most attractive from a distance. The countries that invented them concluded some time ago that they are flawed, and have tweaked them radically. They have also discovered that points systems do not completely cure xenophobia.

Canada created the world’s first points system, in 1967. Would-be immigrants who scored highest on youth, education, experience and fluency in English or French were offered permanent residency. In 1979 Australia created a similar system. Both countries were abandoning racist schemes that had favoured whites (Australia ran one called “bring out a Briton”). Henceforth, the aim would be to lure talent, wherever it was from.

The new systems soon attracted admirers. New Zealand built a points-based immigration system in 1991; Britain, the Czech Republic, Denmark and Singapore began to experiment. But it gradually became clear that Australia and Canada were much better at attracting accomplished immigrants than at using their skills.

Employers were unimpressed with the new arrivals’ qualifications and foreign work experience. In Australia, 13.5% of recently arrived immigrants who had applied from overseas under the points system were unemployed in late 2013, compared with just 1% of those who had come in with a job offer. Pure points systems “don’t work”, says Madeleine Sumption of the Migration Observatory at Oxford University.

Another problem in Canada was that the number of applicants exceeded the number allowed in each year. At the worst point, applicants for the Federal Skilled Workers programme were waiting up to eight years for a decision. Businesses complained that superb applicants were languishing behind merely decent ones.

To deal with these flaws Australia and Canada have transformed their immigration systems. Both now weigh local work experience and job offers more heavily. Between 2002-03 and 2014-15 the number of Australian visas granted on the basis of job offers rose five-fold, from 9,700 to 48,300 (see chart). In Canada, the points system has been reworked so that any skilled applicant with a job offer scores higher than any applicant without.

Both countries have also inverted the process of applying for visas. Instead of putting applicants in a queue, they now invite people merely to express an interest in migrating. Those who pass an initial points test are put into a pool, where they can remain for a year or two. Every so often the best candidates are skimmed off and invited to apply for visas. Companies and provinces can trawl the pool, looking for promising immigrants to sponsor. Anybody they pluck out is likely to get a visa quickly.

These reforms seem to have had some effect. Immigrants to Australia are still less likely than natives to be economically active, but the gap has closed—from 9.8 percentage points in 2002-03 to 6.3 points in 2013-14. Canada’s huge backlog has gone: many of those stuck in the queue were ejected and given their fees back.

Businesses are less happy, though. In Canada, a firm that wants to offer a job to a foreigner must prove that it tried and failed to hire a Canadian—a slow, costly and sometimes daft process. Kumaran Thillainadarajah, an immigrant entrepreneur who founded a firm as a student, had to explain why he and not a native should be chief executive. The system is too cumbersome, says Sarah Anson-Cartwright of the Canadian Chamber of Commerce. She looks enviously at Britain, which has a fast-track visa scheme for technology workers.

Less popular still is the surge of temporary foreign workers, many unskilled. Canada created a scheme for them in 1973, mostly targeting agricultural workers and carers. In 2002 it was expanded to other jobs, and employers were allowed to pay immigrants 15% less than Canadians. The number of temporary migrant workers rose two and a half times between 2002 and 2013, to 127,000.

Amid protests from trade unions, which argued that Canadian workers were being undercut, the government announced a clampdown. Firms would have to explain why they could not hire Canadians, and those with more than ten staff would be barred from employing lots of temporary foreign workers. But the state has quietly retreated on both reforms. Fish-processing factories in eastern Canada no longer need to prove that Canadians do not want their jobs. Meat-packers and mushroom-growers are now demanding equal treatment.

Britain’s experiment with a points-based system in 2008 was also thwarted by business pleading. The scheme was never as flexible as Australia’s or Canada’s. But at least it was simple—until the lobbying began. Firms moaned that vital foreign workers were blocked because they lacked the required qualifications. Carve-outs were duly created: butchers and ballet dancers were given special treatment and footballers were not required to speak English. What remained of the system was then bulldozed by a Tory-led government that had pledged to slash immigration.

A simple immigration system that attracts global talent, calms the natives and gives businesses the workers they crave seems an impossible dream. Perhaps it is also a foolish one. Governments cannot know what kind of immigrants their economies will require because they do not know how their economies will evolve. There will always be special pleading and exceptions. As Mr Byrne puts it: “Migration systems are complicated because people are complicated.”

Master, mistress or mouse?

The United Nations

Despite an unprecedented push to pick the UN’s next boss by open contest, the choice will probably be a stitch-up


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THE job of secretary-general to the UN is something of a poisoned chalice. The only one of its eight holders to date who is widely admired is Dag Hammarskjold, a Swede who died in an air crash in 1961, trying to end the first of post-independence Congo’s horrors. Kofi Annan, a shrewd and charming Ghanaian who held the post in 1997-2006, is seen as next best, despite patchy success in the world’s trouble spots. South Korea’s Ban Ki-moon, his outgoing successor (pictured above at the UN’s headquarters in New York), is viewed as the dullest—and among the worst.

In Mr Ban’s defence, he is decent and dogged. He can claim some credit for new development goals set last year and for overseeing a climate-change agreement in Paris in December. But he is painfully ineloquent, addicted to protocol and lacking in spontaneity and depth. Even after nine years in the job he is apt to stumble, most recently by calling Morocco’s presence in Western Sahara “an occupation”. Though most unbiased observers would agree, the diplomatic lapse gave the Moroccans an excuse to kick out UN staff trying to keep the peace in the area.

Overall Mr Ban personifies the defect to which the UN is prone: plumping for the lowest common denominator. He got the job because none of the permanent members of the Security Council—America, Britain, China, France and Russia—found him too objectionable. China wanted an Asian; America regarded him as broadly in its camp; Russia found him acceptably nondescript. It is an error the UN looks set to repeat when he steps down by the end of this year.

UN-watchers say there is almost a consensus that Mr Ban’s successor should be an eastern European woman—because no one satisfying either criterion has ever been chosen. Bulgaria has nominated Irina Bokova, the head of UNESCO, the UN’s cultural arm. But early in her career she was a loyal Muscovite Communist, so America may block her. If Bulgaria then names Kristalina Georgieva, the European Union’s budget commissioner, who may also fancy a shot, the Russians may block her because of the sanctions imposed by the EU on Russia over its actions in Ukraine.

At some point, presumably, a sufficiently inoffensive woman from the favoured region could be found. However, nine candidates (seven from eastern Europe, of whom three are women) have broken with precedent by declaring their candidacy rather than lobbying behind the scenes (see table). In recent weeks they have all set out their stalls in public hearings before the UN General Assembly in New York.

Only two, both from outside eastern Europe, really impressed: António Guterres, a former Portuguese prime minister who has run the UN’s commission for refugees deftly; and Helen Clark, a former prime minister of New Zealand who leads the UN’s development programme. The Americans are said to dislike Ms Clark for trying to curb their nuclear tests in the Pacific. The Russians may well shun them both. A few late runners may emerge. Kevin Rudd, a former Australian prime minister who speaks Chinese, wants to have a go, but is thinly supported. Susana Malcorra, a long-serving UN official who is Argentina’s foreign minister, may yet jump in. So conceivably could Michelle Bachelet, Chile’s president, who previously headed the UN’s agency for promoting women. Angela Merkel is speculated about wistfully, but most think that she would rather stay as Germany’s chancellor, however onerous the job has become.

Many ordinary members want the Big Five to give them two finalists to choose between, rather than a single name to be rubber-stamped. But that would require an elastic interpretation of the UN’s charter. At least the public hearings, which may resume if more candidates come forward, have probably knocked out the palpably implausible of the nine, ie, most of them.


The margins matter

No secretary-general could have ended, let alone prevented, all the many conflicts during Mr Ban’s tenure, such as the recent ones in Burundi and eastern Congo (see article). The UN can only be as effective as the warring parties or the big powers permit. But its boss matters because, for all its faults, the UN is the last resort when chaos breaks out. Though it has often failed to stop conflicts erupting, its secretary-general is often the only person who can call combatants to the negotiating table, and it is the sole entity with the capacity to pick up the pieces afterwards. It can make a difference only at the margin. But in some of the world’s most benighted places, that may be the margin between life and death.

The secretary-general is also the UN’s “chief administrative officer”. In this respect, too, under Mr Ban it has floundered. Anthony Banbury, a long-serving American UN official, penned a tale of woe in the New York Times soon after he had retired in disgust in March. It was failing, he wrote, “thanks to colossal mismanagement”. Budgets for peacekeeping and other missions, he complained, were sloppily drawn up and poorly supervised. The most obvious defect, he wrote, is a “sclerotic personnel system”, whereby “it takes on average 213 days to recruit someone”.

Hiring is often political rather than on merit. Informal regional quotas often entrench the incompetent and even the corrupt. In the Iraqi “oil for food” scandal, before Mr Ban’s era, several senior officials were either implicated in or failed to stop rampant graft. More recently peacekeepers in the Central African Republic sexually abused civilians they were supposed to protect. Countries such as the Democratic Republic of Congo, whose armies are notoriously prone to atrocities, were asked to contribute troops—for reasons of political expediency. A Swedish official in the UN’s human rights commission, Anders Kompass, was suspended (though later exonerated) for exposing sexual abuse by French soldiers after senior people refused to act.

The UN’s mode of governance is equally open to criticism. Countries that have grown in population, or economic or military heft, since it was founded in 1945, demand more of a voice—and not only when it comes to choosing a secretary-general. Many want to increase the number of permanent Security Council members. Brazil, Germany, India and Japan have hinted that they might, in return for admission, even at first forgo the right of veto that the Big Five hold. But each potential candidate has a rival. Pakistan cannot abide the notion of India being a permanent member. China is against Japan. Argentina and Mexico would block Brazil. Nigeria and South Africa would each howl if the other won a permanent seat for Africa. And why no permanent Arab member?

Despite the UN’s glaring faults, deplored ever more vociferously by its critics, most reforms are likely to be blocked. The Big Five are still prone to veto any dilution of their power. Poor countries do not want the administration streamlined or the budget squeezed: they do not pay for the UN and many see it as a gravy train which gives their people cushy jobs. As for a suggestion to strengthen the secretary-general’s independence by giving him or her only a single seven-year term rather than five-year stints with no term limits, as now, neither the Americans nor the Russians actually want someone strong or independent. The world needs a well-run UN, led by someone clever and tough, yet idealistic. Sadly, it probably will not get it.

How the financial crisis made Europe stronger

A Union Flag flutters next to a European Union (EU) flag, and other flags of EU countries on Open Doors Day of the EU institutions in Brussels, Belgium May 9, 2015.World Economic Forum, Image: REUTERS/Francois Lenoir
Europe is back in the game. Having suffered the worst financial and economic crisis of the last 80 years, Europe took decisive action to improve its public finances, push through deep reforms, and establish new institutions to manage and prevent crises better. The changes are structural, long-lasting and make Europe more competitive. Europe is stronger, better equipped and in the midst of ambitious new financial and economic initiatives.


Europe is stronger than you think

The global crisis hit Europe twice. The first strike came from abroad in 2007. In the United States, markets had ignored credit risk in subprime mortgage markets. A lack of financial supervision allowed opaque financial instruments to flourish, aggravating the problem. As a result, the U.S. banking system underwent a dramatic bail-out in September 2008. European banks suffered in the fallout. Two years later, a second crisis erupted in the euro area. Years of unsustainable government policies had caused deficits and debt burdens to mushroom and bloated pre-crisis wages and housing prices. As the situation worsened, Europe took courageous decisions to put the continent back on firm footing.

Five key responses combined to steer Europe out of the crisis (figure 1).

First, crisis-hit countries like Ireland and Spain pushed through badly needed reforms, improving public finances and increasing competitiveness.

Second, EU economic governance was strengthened. The European Commission received new powers to enforce the Stability and Growth Pact, issue country-specific recommendations (the ‘European semester’), and underline obstacles that need to be removed to foster growth. Eurostat, Europe’s statistical agency, became more powerful in cross-checking and challenging the data received from each country.

Third, euro area countries created the European Stability Mechanism (ESM), and its predecessor the European Financial Stability Facility. These institutions were a great success: no country was forced to leave the euro area, the cash-for-reform approach worked, and growth accelerated in countries that implemented reforms. Importantly, no European taxpayer money was spent on the rescue programmes. The ESM raises the funds needed in capital markets through highly-rated bonds, and passes on the low funding cost to programme countries at rates today of around 1-2%. This approach produces budget savings for programme countries, particularly Greece, which would pay much more if it were to tap capital markets independently.

Fourth, the European Central Bank’s unconventional measures helped. The ECB expanded its balance sheet like the FED, Bank of Japan and Bank of England, provided unlimited liquidity for banks, started a bond purchasing programme to avoid low inflation, which also made it easier for banks to lend and boost investor sentiment. The euro weakened which helped to increase exports.

Finally, the Banking Union was established: new institutions were created to monitor macro-prudential risks and supervise banks, securities markets and insurance companies. The Single Supervisory Mechanism is the centrepiece of this initiative; it oversees the 130 largest euro area banks. During the crisis, EU banks also padded out their capital, increasing their capital base by €600 billion since 2008.


And the results?

The results are impressive (figure 2). The crisis-hit countries implemented radical reforms. They now head multiple international rankings, earning the sobriquet ‘reform champions’. Many of Europe’s crisis countries – Greece, Ireland, Portugal, and Spain – ended up in the top five of 34 OECD members (a club for the most developed countries) in recognition of their structural reforms. They did so by improving their public finances, reducing deficits, and cutting labour costs to make themselves more competitive. The euro area outperformed the US, Japan and the UK in fiscal terms: the aggregate euro area budget deficit was significantly smaller than these three peers. And finally, some of the crisis countries are becoming growth leaders. In 2015, Ireland hit a record high 6.9% GDP growth and Spain 3.2%. Ireland’s growth matched China’s, while Spain’s is almost a third again as high as the US’s (2.5%) over the same period. These are extraordinary achievements.


Three big initiatives to shape Europe’s economic future

During the crisis, Europe picked up the pace of policy reform and integration with three big initiatives that merit close attention. They will set the economic and financial agenda for the next five to 10 years and will be key to Europe’s economic future (figure 3.)


Completion of the Banking Union

Europe’s Banking Union is moving forward. On 1 January 2016, the new European mechanism to resolve failing banks went live. The Single Resolution Mechanism’s (SRM) goal is to resolve distressed banks at the lowest cost to taxpayers. It includes the participation of the private sector, such as shareholders, junior and senior creditors and unsecured and very large depositors, according to the bail-in rules under the Bank Recovery and Resolution Directive (BRRD). Additionally, SRM-covered banks will most likely need to provide €55 billion in funding over the next eight years to create the Single Resolution Fund (SRF). While this means higher costs for banks, it reduces the need for taxpayers to cover bank failures.

The final step to completing the Banking Union is a common deposit guarantee scheme similar to the US’s Federal Deposit Insurance Corporation (FDIC). This year, a European Commission proposal to establish a European Deposit Insurance Scheme (EDIS) has been hotly debated. The aim is to guarantee individual deposits of up to €100,000 at all banks in the euro area – benefiting around 340 million citizens in 19 countries. It is far from a done deal, but if agreed and implemented, the US and Europe will share a similar approach to supervision, stress testing, resolution, and deposit guarantees.


A deeper Capital Markets Union

With the Banking Union advancing at high speed, Europe launched another big project last year: the Capital Markets Union (CMU). The CMU’s goal is to create deeper and more integrated capital markets. Traditionally, Europe has been dominated by bank financing: when an entrepreneur needed funding, banks were the go-to partner. During the crisis, banks tried to reduce their risk exposure and, as a result, financing for entrepreneurs, small- and medium-sized enterprises (SMEs), and some corporations, dried up. The CMU aims to address this issue.

The differences on the two sides of the Atlantic are large. Banking Union bank assets total €30.2 trillion compared to just $13.4 trillion in the US, a gap explained by the source of financing (figure 4). Euro area banking credit reaches some 170% of GDP, against only 45% of GDP in the US. Stock market capitalisation and debt securities are respectively some 45% and 10% of GDP in the euro area compared to 110% and 45% in the US.

The CMU initiative could transform Europe’s capital markets over the 2016–2019 period. The CMU is designed to reduce dependency on banks. It should increase the flow of funding from Venture Capital to Private Equity, to IPOs and eventually to equity and debt capital market financing. It aims to standardise prospectus legislation across countries (currently there are large differences across European countries, not to mention the different language requirements), deepen the covered bond market, develop a stronger securitisation market, align bankruptcy laws, and stimulate more cross-border capital investments. Despite the challenges, Europe has strong foundations to build on. It is home to some of the largest pension funds in the world and countries with strong household savings habits such as Sweden, Germany, and the Netherlands.

Strengthen Economic and Monetary Union (EMU)

The Presidents of the European Central Bank, Eurogroup, European Commission, European Council and European Parliament presented a plan, the Five Presidents Report, to further deepen Economic and Monetary Union over the next 10 years, or through 2025. The goal is to pull all these initiatives together, complete the Banking Union, make progress on the Capital Markets Union, and introduce new initiatives for the euro area. These initiatives could include establishing a new fiscal council for the euro area, a euro area macroeconomic stabilisation function, or even a euro area treasury.

Combining these initiatives has one big advantage: it would allow for more risk reduction and better risk-sharing across the euro area and reduce the need for the public sector to use taxpayers’ money for economic and financial shock absorption. In the US, economic and business cycles are smoothed out across the 50 states to a much greater degree than in Europe, with market mechanisms doing the lion’s share of the work (figure 5). Fiscal transfers play only a limited role. About 75% of economic and business cycle shocks in the US are smoothed, 62% by financial market transactions and only about 13% through fiscal transfers and taxpayers’ contributions. This underscores how important it is for Europe to complete Banking Union, deepen CMU, and strengthen the EMU.

These three big initiatives, if implemented successfully over the next five to 10 years, will define Europe’s economic future in the long-run.


Can Europe afford to deviate from its path?

There are some headwinds, including the migrant crisis and the June 2016 UK referendum on EU membership. European policy makers, enterprises and citizens need to turn these events to their advantage.

Immigration can stimulate growth, with a small but positive short-term impact on EU GDP. It can also help compensate for weak long-term demographics. If executed well, the benefits could be significant. Take Germany for example. The country has around 81 million citizens today, but that figure is seen declining 13% to 67 million by 2060 (figure 6). This will hit economic growth. It will also undermine the sustainability of public finances, as the share of over-65-year-olds rises to 33% in 2060 from 20% and puts pressure on the pay-as-you-go pension scheme. According to the German Statistical agency, more immigration could bring the population to 73 million by 2060. At today’s GDP per capita, that difference of six million people means €210 billion in GDP potential. However, the devil is in the detail. Europe must protect its outer borders well, bring in the right skill sets, and provide successful economic and social integration programmes. Managing the fear of immigration and growing populism present the biggest challenges. Countries that know how to manage most of these elements well, like Canada and Luxembourg, have reaped the rewards.

The UK referendum and similar discussions in other member states are an important part of a healthy democratic process, but it is essential to consider the implications. Can European countries really afford not to be financially and economically interconnected and integrated?

Europe’s percentage of global GDP declined to 23% in 2010 from 32% in 1970 (figure 7) and, if no new policy initiatives are undertaken, could fall to 9% by 2050. This will have an enormous economic, financial, and geopolitical impact. Europe, and North America, will decline in size and influence. To counter this trend, further integration, not fragmentation, is needed.

Europe’s best way forward is to stay together as a strong, well-integrated, and deeply interconnected continent. Over the past 70 years, Europe has achieved unprecedented peace, stability, and wealth creation. It is the world’s largest single market. It is in its best interests to remain the global financial and economic leader.


A bright future

Europe not only endured the last crisis, it capitalised upon it. Europe’s five key policy responses meant the continent emerged stronger. The results, such as in Ireland or Spain, are impressive. Completing the Banking Union, deepening the Capital Markets Union, and strengthening Economic and Monetary Union will make Europe’s economy more competitive, diverse, and robust. It is crucial that Europe not deviate from this path and that it continues to turn headwinds, like immigration, into opportunities.

Europe has put together the building blocks for a bright future; its citizens can justly be proud of these achievements. Realising this ambitious agenda will make Europe stronger, more influential, and ensure it maintains its position as an economic powerhouse.

Trade, at what price?

America and the world

America’s economy benefits hugely from trade. But its costs have been amplified by policy failures
Apr 2nd 2016 | WASHINGTON, DC | The Economist From the print edition


SO COMMON is anti-trade rhetoric in the election campaign that you might think America is about to erect a wall on every side. Donald Trump threatens to slap a 45% tariff on Chinese imports and to bully firms into returning their factories to America. Bernie Sanders proudly recalls his unwavering opposition to free-trade agreements, past and current. And Hillary Clinton, having supported the Trans-Pacific Partnership (TPP), the latest trade accord, as secretary of state, now opposes it.

Presidential candidates have taken such positions in the past. Barack Obama, who today peddles trade deals, slammed them in 2008. What makes today’s protectionism more potent is that it draws on broader changes in thinking among economists about the impact of trade. Many are now a good deal more critical.

Since the 1980s, America’s economy has gradually opened up to cheap imports. This accelerated in 1993, when President Bill Clinton signed the North American Free-Trade Agreement (NAFTA) with Mexico and Canada. The deal, America’s first broad trade accord to include a poor economy, eliminated most tariffs on trade between the three countries over a decade. Coincidentally, within a year of the start of tariff reductions, the peso collapsed, making Mexican imports cheaper still. Excluding fuel (which America had to buy from somewhere) imports from Mexico grew by about five times between 1993 and 2013, according to the Peterson Institute, a think-tank. Exports to Mexico grew by about three-and-a-half times. As a result of the disparity, a bilateral trade deficit worth $23 billion (then, 0.2% of America’s GDP) opened up within five years.

The small size of Mexico’s economy—America’s is still well over ten times bigger—limited NAFTA’s impact. A greater shock was coming: in 2001 China joined the World Trade Organisation (WTO). Although this did not change any tariffs, a tsunami of cheap Chinese imports followed. “Made in China” labels became ubiquitous on clothes, toys, furniture and, eventually, electronics as Chinese imports surged from 1% of GDP in 2000 to 2.7% by 2015. The best explanation for this sudden inflow is that WTO membership gave certainty to investors in China’s export industries; until then, America could impose higher tariffs on China at will.

Many blamed the yuan’s peg to the dollar for creating a trade imbalance. By 2014 China had accumulated nearly $4 trillion in foreign currency to sustain the peg. Economists have always struggled to formalise the allegation that China manipulates the yuan. Over time, higher wage inflation in booming China should undermine the advantage of a weak currency. Wages have indeed risen much faster in China than in the West. China’s current-account surplus, which reached 10% of GDP in 2007, is often cited as proof of fiddling. But Chinese surpluses and American deficits are—as a matter of accounting—the difference between saving and investment in those countries. So China’s vast surpluses in part reflected its extraordinary propensity to save.

In any case, cheap imports were a windfall for American consumers. Excluding food and energy, prices of goods have fallen almost every year since NAFTA. Clothes now cost the same as they did in 1986; furnishing a house is as cheap as it was 35 years ago. More trade brought more choice, too. Robert Lawrence and Lawrence Edwards, two economists, estimate that trade with China alone put $250 a year into the pocket of every American by 2008. The gains from cheap stuff flowed disproportionately to the less well-off, because the poor spend more of their incomes on goods than the rich.

At the same time, trade created new markets for American firms. In 1993 America sold nearly $10 billion-worth of cars and parts to Mexico, at today’s prices. By 2013 that had risen to $70 billion. Many American firms have become tightly integrated across the southern border, with low-skilled work done in Mexico and more complex tasks done at home. Exports to China grew by almost 200% between 2005 and 2014, with agriculture and the aerospace and car industries leading the charge. Some workers have benefited from rising exports, because firms that export pay more; one estimate puts the export wage-premium at 18%. Outsourcing low-wage assembly has also increased the productivity of America’s high-skilled workers. For example, Apple’s ability to assemble its iPhones cheaply in China has made the work of its American designers much more lucrative.

The gain and the pain

Trade, though, has an acute image problem. Its benefits are hard to perceive directly, spread as they are across large constituencies: consumers, exporters, and workers who may not realise just how much of what they make is shipped overseas. In contrast, its costs are highly concentrated. Cheap imports have been lethal for many American manufacturers, particularly in the midwestern rustbelt and in the South.

Economic theory predicts that trade, though often good for average incomes, will squeeze the pay of those workers whose skills are relatively abundant overseas. A sharp rise in the college premium—the additional wages earned by skilled workers—from around 30% in 1979 to almost 50% by 2000 seemed to corroborate that theory, as it coincided with the first wave of cheap imports (see chart). But for some time there was scant evidence of a causal link between the two trends. In 1995 Paul Krugman, a trade economist, estimated that trade with poor countries explained only a tenth of the growth in the skilled-worker premium in the 1980s. Mr Krugman and others found that technological change was more to blame. That would explain why the return to education increased even in poor countries, which trade theory did not predict.

But by 2008 Mr Krugman had changed his mind, warning that the sheer volume of trade with China and other poor countries was probably increasing inequality. In 2013 an updated estimate of his model showed that trade with poor countries depressed unskilled workers’ wages by 10% in 2011, up from 2.7% in 1979, according to Josh Bivens of the Economic Policy Institute, a think-tank. In that time, trade accounted for one-third of the rise in the college premium.

For other economists, the impact of trade on jobs was a growing concern. The sharp decline in American manufacturing employment began in 2000, just as Chinese imports took off (see chart). Yet on the extreme assumption that every dollar spent on imports replaced a dollar spent employing an American, Mr Lawrence calculates that between 2000 and 2007 Chinese imports caused, at most, 188,000 of 484,000 annual manufacturing-job losses. A recent, more detailed, estimate by Daron Acemoglu, David Autor and others chalks up about 1m of 5.5m manufacturing jobs lost between 1999 and 2011 to Chinese competition (with similar-sized job losses in other industries).

This implies that many other factors are in play. Technological change is probably the prime culprit for shrinking manufacturing employment. Productivity increases in the industry have been staggering. For instance, since 1994 carmaking’s contribution to GDP—to which outsourced production by American firms does not contribute—has fallen by about 10%. But there are 30% fewer carmaking jobs. This had led to the false impression that America’s car industry has outsourced most of its work. Such are the advances in manufacturing technology that if China disappeared tomorrow, far fewer jobs would return to America’s shores than left them.

But another recent achievement of trade economists has been to show that trade-induced job losses, while relatively small, are particularly painful: more so than those caused by technology. Until recently, most economists assumed that displaced workers could find new work relatively easily. After all, in June 2007, on the eve of the financial crisis, unemployment was 4.6%—lower than it was before the recession of the early 1990s. Between 2000 and 2007 Americans left 5m jobs a month and started 5.1m new ones. A million or so jobs lost to trade with China over more than a decade seems tiny by comparison.

But many workers displaced by Chinese imports did not simply find another job. Mr Autor and his colleagues have shown that, at local level, employment falls at least one-for-one with jobs lost to trade, and that displaced workers are unlikely to move to seek new work. The lowest-skilled who do find new jobs tend to move to similar, and thus similarly vulnerable, employment. One reason for this immobility could be that the economy is now an unwelcoming place for jobseekers without a university degree. The housing collapse of the late 2000s, which left many Americans trapped in negative equity, may have made things worse. This new strain of research has lent support to the claim of Dani Rodrik, a globalisation sceptic, that “If you are of low skill, have little education, and are not very mobile, international trade has been bad news for you pretty much throughout your entire life.”

The losers from trade became reliant on the government. One supposed safety-net was “trade-adjustment assistance” (TAA), a programme dating from 1962 and beefed up after the signing of NAFTA. If the Department of Labour accepts a petition for TAA, workers get an extension to their unemployment-insurance payments. For most of the 2000s, the extension lasted six months. In addition, beneficiaries can enroll in training programmes; if they do, they receive more payments while they train. Workers over 50 also get a kind of wage insurance which pays up to $12,000 over two years to compensate them for starting a new job on lower pay.

Until 2009 TAA was more limited for those displaced by Chinese competition than by NAFTA, notionally because no free-trade deal had been signed with the Chinese. It covered only those whose factories had shut because of direct competition from Chinese imports. It left out those further up the supply chain, or those whose employers had moved factories to China. Some workers decided to claim disability benefits instead. Mr Autor and his colleagues found that in areas affected by trade with China, new spending on disability benefits was more than double new spending on unemployment insurance and TAA (see chart).

Even for those workers who did qualify for TAA, support was woefully inadequate. Only about a third entered training programmes, perhaps because the budget was so low: just $1,700 per displaced worker in 2007. The wage-insurance scheme was better than nothing, but was not enough to make up for wage losses which frequently exceeded 20%. The workers who lost the most in lifetime earnings—the young—were not eligible for wage insurance. In the aftermath of the recession TAA was improved, and Mr Obama now wants to expand wage insurance. But it is too late for those who lost out in the 2000s.

Obstructing their progress

How does this bear on today’s trade-policy debates? Economists were wrong to think in the 1990s that the concentrated costs of trade, which textbooks always predicted, had somehow been avoided. It is now clear that they can be, in fact, worse than first thought. But the gains from trade, which are larger still, were never an illusion. Trade sceptics sometimes seem to suggest that workers were better-off before the 1980s, because protectionism was rife but growth stayed high. Yet living standards today are far higher. Trade barriers, which prevent such advances, are a futile, self-defeating way to help the unskilled.

Today’s trade agreements are very different from NAFTA or other deals which have brought down tariffs, because most levies have already been abolished. Only 10% of the projected gains from TPP, for instance, come from tariff reductions. Where tariffs do fall in the TPP, America is primed to benefit. For example, Uncle Sam’s carmakers will cheer the end of big Malaysian and Vietnamese tariffs on motors.

The TPP’s biggest provisions concern protection for intellectual property, liberalising trade in services and enforcing stricter labour and environmental standards. All this probably helps American workers. Mr Autor and two of his most frequent co-authors support the deal, arguing that the globalisation of manufacturing is a fait accompli. Blocking the TPP or other modern trade deals will not undo the failure to help those who lost out from trade with China.

To the extent that some Americans are harmed, which is inevitable, the projected gains of future free-trade agreements should be more than enough to compensate losers, if only the government can get itself organised. Peter Petri and Michael Plummer, two economists, estimate that the TPP will boost American incomes by $131 billion, or 0.5% of GDP. That is over 100 times what America spent on trade-adjustment assistance in 2009: there is plenty of scope to do more for the losers from trade.

Many gains from trade remain on the table. Some hope that China may eventually join the TPP. China’s urban middle class will double over the next decade and seek services, from finance to telecoms, which America could compete to provide. The TPP includes restrictions on state-owned enterprises. China will be welcomed into the agreement only if it curtails subsidies to its national champions.

Europe presents another opportunity. Negotiators hope that the coming Transatlantic Trade and Investment Partnership will harmonise regulatory standards across the Atlantic in industries such as pharmaceuticals, telecoms and transport. Removing all such “non-tariff barriers” could raise America’s GDP by up to 3%, according to the most optimistic study. And the world has still to grapple with how best to regulate global flows of data—an issue in which America, as the world’s technology hub, has a huge stake.

Americans are not oblivious to these facts. A recent Gallup poll found that 58% see trade as an opportunity; only 34% see it as a threat. But this only reinforces the idea that the costs of trade are concentrated. Research shows that the more local workers compete with imports, the lower the number of votes cast for incumbent politicians—as the presidential hopefuls well know. If America is to go on reaping the gains from trade, it must ensure it compensates those who lose out. You can oppose protectionism, or you can oppose redistribution. It is getting harder to do both.

Tackling Heropreneurship

Why we need to move from “the social entrepreneur” to social impact.


Step aside, Superman, there’s a new kind of superhero in town. We’ve entered an era of heropreneurship, where reverence for the heroic social entrepreneur has led countless people to pursue a career path that promises opportunities to save the world, gain social status, and earn money, all at the same time. In business schools across North America and Europe, the longest waiting lists—once reserved for investment banking interviews—are now shared by entrepreneurship training courses and social impact events. The coffers of social collateral have shifted, and starting a social business is at the top of the Type A student’s to-do list.

I’ve watched this shift first hand, first as an MBA student, and now through working in a business school and speaking with students at universities around the world. I’ve witnessed a significant increase in the number of students listing their career ambitions as “being a social entrepreneur,” a growing stream of new social entrepreneurship training courses, and increasing numbers of students graduating and jumping straight into launching a social venture. As I’ve watched more and more students focus their ventures on problems they haven’t lived, such as building an app for African farmers when the founding team has neither farmed nor been to Africa, my worries have grown about the way we teach, fund, and celebrate social entrepreneurship. I wondered whether others had the same conflicting feelings as me: excitement about the good intentions, but concern about how they were manifesting. So I decided to do some research.

I conducted more than 40 interviews with educators, funders, and entrepreneurs, and had dozens of conversations with students. Many noted that the term “social entrepreneur,” which began to gain popularity more than 20 years ago, used to refer to people who had first-hand experience with a problem and went on to work on solving it. These people shifted how systems worked through collaborative cross-sector efforts, and though generating income was part of their work, their efforts and influence far outreached the size of their businesses. Many educators and funders share my concern that the focus now is on a distilled and mass-produced version of the promise of the social entrepreneur.

In this “everyone an entrepreneur” era, hack-a-thons, accelerators, business incubators, and social entrepreneurship training courses are around every corner. They mostly focus on training people with the skills they need to start a social business, neglecting the many other skills required to fully understand a problem and fuel social change.

To really change a system, I believe people need a more holistic set of skills, including systems thinking, an understanding of collaboration tools to further collective impact, and lateral leadership skills such as the ability to lead without power and to galvanize movement toward a common goal across a diverse and disjointed solutions ecosystem. They also need a grounded understanding of themselves and their skills, such as how they like to work, which roles in a team best fit their skills, and if/how their risk tolerance fits with the range of social impact career options. Finally, if they plan to take a leadership or strategic role in solving a problem, they need a deep understanding of the reality of that problem.

Unfortunately, all too often, the people who get the funding to try their hand at solving global challenges haven’t lived those problems themselves. This comes from a range of biases. Donors, for example, often fund people they can relate to, and as the Dunning-Krugar effect explains, we often think the problems we know less about are easier to solve. The obsession with becoming “a founder” also arises from a lack of diverse educational funding programs. For example, most universities offer competitions or funding to help students start a venture, but don’t have contests and tools to support them in learning about and then “apprenticing with” the problems they care about.

We—the educators, social entrepreneurship training program designers, social impact funders, and university professors who give money and accolades to students to go out and solve problems before we’ve given them the tools to understand those problems—are largely to blame for this phenomenon. We’re wasting limited resources on shallow solutions to complex problems, and telling our students it’s OK to go out and use someone else’s time and backyard as a learning ground, without first requiring that they earn the right to take leadership on solving a problem they don’t yet understand.

My conversations led me to a number of ideas for how we could work to redirect this plethora of good intention. Here are a few:

    • We need to provide funding for learning, not just solving. A good example of this is the “Apprenticing with a Problem” funding (inspired by Peery Foundation Executive Director Jessamyn Shams-Lau, who first introduced me to the term) that I helped launch at the Skoll Centre at Oxford’s Saïd Business School. Only applicant teams that have lived the problem they are trying to solve or can prove that they have “apprenticed with” it can apply for funds to start-up a venture. But others can now apply for funds to go out and learn more about the issue they care about—to support an internship with a social impact organization in a similar challenge or geography, for instance.

      We also need to create more incentives and tools for students to learn about problems and to identify a range of ways they might contribute to solutions—beyond their business ideas. Our ecosystem mapping competition at Oxford’s Saïd Business School, for example, aims to reward students for their understanding of problems they care about, and I have developed an Impact Gaps Canvas, which others can build on, to help students think through the solutions mapping process.

    • We need to celebrate a range of social impact roles. Many students believe that entrepreneurs are at the top of the impact careers hierarchy, but this isn’t the case. We also need people to join and help grow those start-ups, as well as people to take roles in more traditional businesses, governments, and organizations to help transform them from the inside. Educators need to highlight a range of high-impact career options and role models, spread out the accolades, and help students identify a range of roles where they can help replicate, connect, and redesign broken systems.

      To do this, we launched a Social Impact Careers Conference at Oxford; are planning an Alumni Award; and are bringing in a wider range of role models to inspire our students to apprentice with the problems they care about. For example, the unique journey of people like Avani Patel—who apprenticed with education problems, first as a teacher and later as a school administrator, before taking a role managing philanthropic educational investments—serves to inspire others seeking ways to contribute to the social change.

  • We need to ask collaboration and learning questions. If we want to create solutions to global challenges that are grounded in a deep understanding of those problems and primed to fuel collaboration and collective impact, then we need to fund only the ones that are primed to do that! But many funding applications and accelerator programs ask more questions about business competition than collaboration. What if every social impact funder asked start-up applicants this: “What five organizations working in the same sector, within the same geography, or with the same demographic have you spoken with, and how have you built on the lessons you learned from their successes and failures?” If we encourage and celebrate “building on,” we will hopefully end up with fewer innovations designed in a vacuum, and applicants will feel less pressure to prove they are unique and more pressure to prove they’ve learned about the problem and current solutions landscape before building their business solution.

As with any other systemic problem, tackling heropreneurship will need to be a collective effort. How do you think we can better channel good intentions into collective positive impact?

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