Why biodiversity matters
Mass murderer
In 1845, Belgian farmers discovered, too late, that a load of seed potatoes they had bought from America was contaminated with Phytophthora infestans, a Mexican fungus that had recently spread northwards. The blight caused by P. infestans rapidly spread from Belgium all over the continent, triggering the European potato famine. In Ireland, 1 million people out of a population of 8 million died of starvation and its side-effects, and another million emigrated. Social, economic and political reasons help explain why the country was so badly affected, but the main cause was that a third of the population was entirely dependent on the potato for food.
The Irish famine is a stark lesson in what happens when monoculture goes wrong, and why the resilience biodiversity brings is important to agriculture. But as we celebrate International Biodiversity Day, the outlook is not very encouraging. Around 12% of birds, 25% of mammals, and at least 32% of amphibians are threatened with extinction over the next century. Humans may have increased the rate of global extinctions by up to 1000 times the “natural” rate typical of Earth’s long-term history.
Plants used for food have been hard hit. Although humans ate around 10,000 plant species in the past, today’s diet is based on just over 100 plant species, a dozen of which represent 80% of human consumption, and four of which (rice, wheat, maize and potatoes) provide more than half of our energy requirements.
China has lost 90% of the wheat varieties it had 60 years ago. The US has lost over 90% of the fruit tree and vegetable varieties it had at the start of the 20th century. Mexico has lost 80% of its corn varieties, India 90% of its rice varieties. In Spain, the number of melon varieties has gone down from nearly 400 in the early 1970s to a dozen.
Biodiversity in itself is not the key to the production, recycling and other services ecosystems provide. What matters is the abundance of the species that are critical in maintaining habitat stability and providing those services. At a local scale, the loss of a species may have an adverse impact on ecosystem services, even if that species is not threatened globally.
In OECD countries agricultural land is a major primary habitat for certain populations of wild species, particularly certain species of birds and insects, in particular butterflies. For nearly all OECD countries, agricultural land area has decreased since the 1990s. Farmland has been converted to use for forestry and urban development, with much smaller areas converted to wetlands and other land uses. While little quantitative information about the biodiversity implications of converting farmland to forestry is available, the high rates of clearance of native vegetation for agricultural use in some countries are damaging biodiversity.
Biodiversity loss can have significant economic costs, but often they are indirect and longer term, while the benefits of the action that causes the loss are more immediate and measurable. For example, clearing mangroves to make room for shrimp farms raises incomes, but mangroves are important natural coastal defences, and the new farms, and the land behind them, are then exposed to destructive flooding that climate change could make even worse.
Most ecosystem services are externalities, meaning their benefits are not bought and sold commercially. This makes it hard to use market mechanisms to protect biodiversity, and governments have to take the lead. Most OECD countries and many others have implemented conservation programmes designed to protect and enhance the populations of endangered livestock breeds, and the number of breeds included under these programmes is increasing. Greater efforts are underway to conserve plant genetic resources useful for crop improvement.
There are also some multilateral initiatives to address biodiversity issues, including the International Treaty on Plant Genetic Resources for Food and Agriculture, also known as the International Seed Treaty. This is a comprehensive international agreement in harmony with Convention on Biological Diversity, designed to guarantee food security through the conservation, exchange and sustainable use of the world’s plant genetic resources for food and agriculture, as well as the fair and equitable benefit sharing arising from its use.
Could a tragedy similar to the Irish famine happen again? Traditional threats to crop production are either acute and of relatively short duration, such as extreme weather events. Chronic threats such as desertification or urban sprawl develop slowly. Strategies for dealing with these exist or are being developed. However, a new disease affecting a major food crop (such as rice), that appeared suddenly, spread easily and resisted known treatments could pose a serious threat if it persisted over a few growing seasons. New viruses and other pathogens appear all the time spontaneously. The vast majority of them die out immediately. Occasionally though, a strain that may have been around for centuries mutates and takes advantage of present day conditions. This is probably what HIV did, and as we discussed last week, recent years have seen the sudden emergence of potentially catastrophic viruses.
Lack of alternatives to infected species and the high mobility of people and goods enabled the 19th century potato blight to spread, and both of these factors are much stronger today.
Useful links
Economics and policies for biodiversity: OECD’s response
Biodiversity Chapter of the OECD Environmental Outlook to 2050: The Consequences of Inaction “Globally, terrestrial biodiversity(measured as mean species abundance – or MSA – an indicator of the intactness of a natural ecosystem) is projected to decrease a further 10% by 2050.”
We’re all going to die
See you again soon?
Imagine this scene between doctor and patient. The doctor: “I’ve got good news and bad news”. “Gimme the good news, doc”. “I’ve found you a bed in a hospital”. “Great! What’s the bad news?” “It’s in the Hospital for Incurables”. They were up-front if not exactly upbeat about these things in the old days, but could incurable diseases come back? The question is asked every time a new virus like the latest strain of coronavirus appears.
The last time a coronavirus caused world-wide panic was ten years ago when SARS killed around 9000 people in 37 countries. That’s half the number of victims of the 2009 H1N1 outbreak. Around 18,000 victims is a lot, but it’s nothing compared to the previous appearance of H1N1 in 1918, when the virus infected half a billion people (a fifth of the world’s population) and killed 40 to 100 million of them. At that time there was no treatment, but today antibiotics can cure even something as terrifying as the plague.
There are worries though that the microbes are winning again. Microbes resistant to penicillin appeared within a few years of the drug’s introduction, and since then medical science has been fighting an increasingly serious battle against resistance to cheap and effective first-choice, or “first-line” drugs. Moreover, bacterial infections which contribute most to human disease are also the most resistant: diarrhoeal diseases, respiratory tract infections, meningitis, sexually transmitted infections, and hospital-acquired infections.
The human and other consequences are enormous. In South Asia, for example, one newborn baby dies every two minutes due to treatment failure caused by antibiotic resistance. About 3 million women are at risk of impaired fertility following failure in the treatment of gonorrhoea. Treating multidrug-resistant tuberculosis in South Africa costs around $4300, compared with $35 if first-line drugs are effective. It’s not just in developing countries either. In their gloriously entitled report Bad Bugs, No Drugs, the Infectious Diseases Society of America estimated that 70% of the 90,000 deaths from bacterial infections were attributable to antibiotic resistant strains, and that “for many patients, there are simply no drugs that work”.
Resistance is becoming more serious due to a number of social, economic and behavioural causes. Urbanisation facilitates the spread of typhoid, tuberculosis, respiratory infections, and pneumonia. Pollution, environmental degradation, and changing weather patterns affect incidence and distribution, especially of diseases spread by insects. A growing number of elderly people need hospital care and are at risk of exposure to highly resistant pathogens found in hospitals. AIDS has enlarged the population of patients at risk from many previously rare infections. Global mobility increases the speed and facility with which diseases and resistant micro-organisms can spread.
Irrational use of antibiotics is also promoting microbial resistance. This is due to their being prescribed when not needed or in self-medication, or because patients do not complete courses for financial or other reasons. Antibiotics use in agriculture is another factor. In North America and Europe, half of all antimicrobial production by weight is used in farm animals and poultry, notably as regular supplements for prophylaxis or growth promotion, exposing even healthy animals to frequently subtherapeutic concentrations of antimicrobials. This is accompanied by an increased resistance in bacteria (such as salmonella and campylobacter) that can spread from animals, often through food, to cause infections in humans.
But while new diseases such as the latest coronavirus are emerging and others appearing in new locations (dengue fever in Texas and West Nile encephalitis in New York) only two new classes of antibiotics have been brought to the market in the past 30 years. You may remember that the Human Genome Project was supposed to lead to radical innovation in health care, characterised by new, highly-effective, targeted treatments for a vast range of diseases. It hasn’t happened. Two-thirds of the new applications to the US Food and Drug Administration (FDA) are for modifications to existing drugs rather than new drugs.
There are fears that a pessimistic scenario could come about in which biotechnology never lives up to its promise, the flow of major new treatments dries up, and the profits of big pharmaceutical companies decline, creating a vicious circle where there is less money to invest in long-term R&D to find new products. The discovery deficit is then made worse by investor and government reluctance to continue funding basic research and long-term projects that do not produce payoffs.
As Harvey Rubin pointed out in his 2011 study of pandemics for the OECD Future Shocks project, antimicrobial agents make less money for drugs companies than other prescription drugs. A study of ten-day treatment costs of all new drugs approved by the FDA between January 1997 and July 2003 showed that new antimicrobial drugs cost $137 (all anti-microbial agents) or $85 if anti-HIV medications are excluded, compared with $848 for anti-cancer agents.
Health is one of the indicators in the OECD Better Life Index, that shows what matters to individuals (you can make and share your own index here). It would be interesting to see how the average of all the BLI indices compiled so far compares with what governments think is important, based on budget allocations. It would also be interesting to see within health if conditions that affect or could affect people most are the ones receiving the most funding.
Useful links
Inequality rising in wake of crisis
‘There’s a lot of little kids going hungry round here,’ explained one friend, who works in a local community centre. Indeed, just the other day she had spoken to a family where the child had been chewing wallpaper at night. ‘He didn’t want to tell his mum because he knew she didn’t have the money for supper,’ she explained.”
That’s not from Dickens or George Orwell’s Down and Out in Paris or London, but from a recent column by Gillian Tett in the Financial Times. And she’s writing not about Lagos or Lahore, but Liverpool, a modern city in one of the world’s wealthiest countries.
Of course, the presence of poverty amid plenty – inequality – is not new. In reality, it’s hard to imagine any society functioning without some sort of wealth gap. But the past few decades have seen inequality rise in much of the world. That’s causing concern, and not just for reasons of social justice: A number of economists, most notably, perhaps, Joe Stiglitz, argue that excessive inequality undermines the foundations of growth by restricting the ability of poorer people to develop their human capital and by encouraging what economists call “rent seeking” – in essence, instead of creating a bigger economic pie, the well-off use their economic and political strength to take a bigger slice of the existing pie.
High levels of income inequality also seem to be linked to low levels of social mobility – in effect, it becomes more difficult for people to reach a position where they earn more than their parents did. Why? As Timothy Noah has memorably explained, “it’s harder to climb a ladder when the rungs are farther apart”. Alan Krueger, who chairs the panel of economists that advise President Obama, calls this phenomenon “The Great Gatsby Curve”. The fact that it’s getting attention at the highest levels of the U.S. government is indicative of growing concern over inequality.
Unfortunately, there’s no sign of it going away: New data from the OECD today show that the Great Recession has done nothing to narrow the gap between rich and poor – quite the opposite, in fact.
The numbers focus in part on what economists call “market income,” essentially the income households earn from work (as well as from investments), but excluding money they give to the state in tax and receive from it in the form of benefits. The data show that inequalities in market income in OECD countries rose by 1.4 percentage points between 2007 and 2010. That may not sound like much, but it’s equal to the increase seen in the previous 12 years.
Of course, for most families, market income is, at most, an abstract concept; what really matters for them is take-home income – in other words, the money they have after paying tax and receiving payments from the state. As taxes have tended to rise since the crisis struck, and as more people are now receiving payments like unemployment benefits, much of the increase in market income inequality has actually been cancelled out.
Does this mean it doesn’t matter? Not necessarily: Firstly, the data released today go up only to 2010. Since then, presumably, many long-term unemployed have seen a fall-off in their benefits, so reducing take-home income. As the OECD paper notes, “… these results only tell the beginning of the story”. Secondly, governments in many countries have moved to tighten spending in response to rising debt burdens. In her FT column, Gillian Tett touches directly on this point: “[T]ucked away behind (cheap) curtains on the estates, thousands of poor households are being quietly hammered by a myriad of subtle, hard-to-understand cuts.”
Her image of a hungry boy eating wallpaper also introduces another key aspect of the inequality story – namely, the impact on children and young people. As the OECD paper notes, poverty among children rose in 16 of the OECD’s 34 countries between 2007 and 2010 (although, it declined in the United Kingdom), while poverty among young people went up in 19. This links to a longer-term trend that has seen “youth and children replacing the elderly as the group at greater risk of income poverty across OECD countries,” as today’s paper notes.
Indeed, a recent Unicef report on child well-being showed that in eight OECD countries, more than 15% of children live in relative poverty. Some might argue that relative poverty shows only where someone stands in material terms in their own society, not an absolute sense of their ability to meet their needs. Nevertheless, as the Unicef authors note, the reality for children living in relative poverty is that they are “to some significant extent excluded from the advantages and opportunities which most children in that particular society would consider normal”.
Useful links
OECD work on income distribution and poverty
What’s next for the MDGs?
If you follow development issues, you’ll know that a major effort is under way to agree a successor to the Millennium Development Goals (MDGs) before they expire at the end of 2015. This month should bring another milestone on that road with the completion of a report by an international panel of 27 political leaders and experts outlining the possible shape of the post-2015 goals.
When that report lands on the desk of the United Nations’ secretary-general, it will no doubt join a large pile of other submissions and recommendations on how best to follow up on the MDGs. Already this year, the UN has published findings from an ongoing “global conversation” about the MDGs. The organisation is also inviting people to share their views in its MY World survey – more than a third of a million people have already done so. Civil society has been busy, too, holding meetings and launching Beyond2015 , as have independent think-tanks like the UK’s Overseas Development Institute (ODI).
It all adds up to a lot of activity. It’s also all very different from the process that led up to the creation of the original MDGs at the turn of the century. Back then, the draft MDGs were written in a basement office at the UN in New York. The then-head of the UNDP, Mark Malloch-Brown, later admitted that his team almost forgot to include any reference to environmental sustainability: “I was walking along the corridor, relieved at job done,” he told journalist Mark Tran last year, “when I ran into the beaming head of the UN environment programme and a terrible swearword crossed my mind when I realised we’d forgotten an environmental goal … we raced back to put in the sustainable development goal.”
Of course, the Millennium Development Goals weren’t just the product of chance encounters in the bowels of the UN. In reality, many of the ideas and targets they embody had bubbled up through international conferences in the 1980s and ’90s. And the idea of bringing all this work together in a set of headline international goals that – crucially – could be monitored had its roots in OECD work in the mid-1990s. (Richard Manning’s account of the MDG’s history is here.)
Still, when you contrast the level of interest in the MDGs today with their relatively informal origins (and the oft-forgotten fact that they were never formally endorsed by the UN General Assembly), it’s clear that – unlike many international agreements – they’ve only grown in stature. Critics might argue that much of this esteem is unwarranted – after all, it’s unlikely as of now that most of the goals will be met by the 2015 deadline. But, as even The Economist has noted, the MDGs have played a key role in how we think of development, shifting the debate away from “how much is being spent on development towards how much is being achieved”.
So how will all this attention shape the next round of MDGs? Views differ: One risk, as the ODI’s Claire Melamed has warned, is that the post-2015 process will become like a Christmas tree, “handing out baubles to single issue groups without thinking hard about how it all fits together”. On the other hand, the breadth of consultation in the post-2015 process should go some way to redressing a criticism of the original MDGs, namely that they were driven by the perspective of Western donors and not that of the developing world.
Indeed, one idea that’s already emerging in the post-2015 debate is that the next set of goals could be truly global, applying to developing and developed countries. The idea is that the post-2015 process would produce a small set of global goals, which would be translated at the national level into a set of specific targets reflecting each country’s particular needs and capabilities. Or, as a new paper from the OECD expresses it, “A post-2015 goals framework needs to be relevant to all countries and should propose truly global goals with shared – but not equal – responsibilities for all countries.”
The post-2015 process is already far more inclusive than its predecessor; over the next few months, we should get a sense of how far that’s reflected in the next set of goals themselves.
Useful links
Aid recipients?
Following this article in The Guardian criticising the way OECD measures aid, today’s post is from Jon Lomoy, Director of the OECD Development Co-operation Directorate (DCD-DAC)
ODA – official development assistance – is an important concept and an important measure. It is, to date, the only systematic means we have of assessing the efforts the ‘traditional’ donors make to support development. But the world is changing, and development finance is changing. In this light, do we need to look at the ODA concept again? I think we agree that the answer is yes.
There are several criticisms of the ODA concept.
Some say that it includes too much – that it counts much more than the money that actually flows into developing country budgets (donor administrative costs, refugee costs, etc.) This is why the OECD has introduced the concept of ‘country programmable aid’, which enables us to identify just how much is directly usable by countries to fund their priorities and programmes.
On the other hand, some feel that ODA cash-flow-based measurement includes too little. Countries make efforts that are not counted as ODA – guarantees, callable capital etc. – that could mobilise significant investment for development by mitigating risk. This is of particular concern today when an increasing number of developing countries need loans, guarantees and equity – rather than grant funding – to boost infrastructure and finance economic growth.
Finally, the ODA concept does not capture the complex and continually evolving interaction between public efforts and the use of market mechanisms.
All this gives rise to tensions between ODA as a measure of development effort by donors, and flows available to developing countries to reduce poverty and promote growth. This is why the Ministers of our DAC member development agencies – when they met in London in December 2012 – gave the OECD-DAC the mandate to take a fresh look at the broader financing concept, as well the concept and role of ODA per se.
This includes, of course, the issue of loans, which is the subject of much debate at the moment – both within the DAC and in the public arena. Loans have always been an important part of development financing – both concessional loans, such as the ones provided by the World Bank’s International Development Association (IDA), and non-concessional loans provided by many bi-lateral and multi-lateral donors, for instance the World Bank’s International Bank for Reconstruction and Development (IBRD).
Today, there is a growing demand for loans from the developing countries. The good news is that countries are growing – and this means they need and can afford to borrow money to fuel their continuing economic growth. This is one reason why this debate has risen to the top of the agenda.
Recently it has also become evident that our members follow different approaches in determining what makes a loan concessional. Some members follow the approach of the multilateral development banks – where only loans that have been subsidized are reported as concessional. Others emphasize the recipients’ perspective, arguing that loans given on more beneficial terms than developing countries could otherwise attain on the market could be considered concessional. As former OECD-DAC Chair Richard Manning pointed out in his 9 April letter to the Financial Times, there is a need to revisit these calculations to ensure that they reflect the current markets terms. It is also important to keep in mind the importance of the public guarantees for institutions providing loans, which address the high-risk factor of some development investments.
As the discussions continue, it is important that these differences – and the data behind them – continue to be publicly known and available for scrutiny. This will stimulate – as we already can see – a welcome and healthy debate. It is fundamental that we continue and deepen these discussions if we’re going to get in place an effective strategy for how to finance the new set of international development goals that will take over from the Millennium Development Goals after 2015.
But with the increasing complexity of development financing, the broadening of the development agenda and the growing diversity among developing countries, that debate needs to be about aid and other sources of financing for development. It is not – and cannot be – a question of either/or. That said, we need to be able to discuss other sources of financing without that discussion being used as – or perceived as – an excuse for donors to walk away from their aid commitments.
There is full agreement among DAC members that as we move towards 2015, we need to settle this debate, prioritizing innovative means to measure and promote development finance. At OECD, we will continue to work with our members and with other key stakeholders – including developing countries, as well as the United Nations, the World Bank, the International Monetary Fund (IMF) and other international financial institutions – to ensure that we have a robust measurement system for development finance in place by 2015.
In this way, we will also ensure that the OECD DAC continues to be a key source of reliable and transparent data on development financing.
Useful links
The Language of Reasons
Click to see on Amazon
Today’s post is by international hip hop activist Umar Alim Al-Junaid, author of “The Book on Language Learning: 10 Reasons Why African Americans NEED to Learn a Second Language”
In comparison to the rest of the world, some would say that being born in America has its divine-like advantages, some would argue the opposite. Yet, when it comes to language we can all agree that for the past 300 plus years English has been the most important language of capitalism.
The reasons I wrote “The Book on Language Learning: 10 Reasons Why African Americans NEED To Learn A Second Language” are many, but for now I’m going to give you the top 10, in no particular order.
Cultural Literacy. Cultural literacy means having exchange with other cultures with reflection and through an inclusive knowledge of the world around us. So, I wanted to write a book that celebrates art, history, and experience. Personally, I have found that the best way to do that is by learning the language of a particular culture/s that we find interesting which, in turn, I feel is a an overall celebration of the human family.
Business/Economy. I wanted to write a book that places acquiring a second language of utmost importance for American citizens as it pertains to our current economic situation as a country, but especially for those of us in the African American community who suffer the worst. According to an article by Rakesh Kochhar, Richard Fry, and Paul Taylor for the Pew Research Center “the typical Black household has just $5,677, Hispanic households $6,325 in wealth and the typical White household $113,149”. Keep in mind that this is total assets after debt during the great recession. And considering that careers in language are predicted to grow over the next 10 to 20 years it would be in the US interest to become serious about becoming a bi-lingual society. English is the lingua franca of global business, but for how long?
History. I wanted to write a book that connected African Americans to their history – from the glory of Africa before 1492 and their descendents living in the western hemisphere today. There has been a cultural disconnect between Africans born in the United States and those Africans across the rest of the diaspora and I believe that language is an important step towards reconnecting, à la Marcus Garvey. I explain this disconnection more in depth in the book but for now it is safe to say that for those African Americans inclined to know who they are, their place in history, and their future, language is your bridge back to the other side of the Atlantic.
Monocultural Americana. I wanted to write a book that took a serious look at the effects of growing up in a country that uses its language as a weapon of cultural imperialism extending far beyond its borders.
Travel. For many reasons most African-Americans will probably never make it outside of their own ‘hoods. I wanted to write a book that will inspire African Americans to visit their world, it’s really that simple. Not to mention that when you do decide to travel the world you will quickly learn that despite what you may believe…everyone in the world does NOT speak English. Besides, the best way to experience that trip to China, and grasp the full flavor of its beautiful people and culture is to at least have a working knowledge of Mandarin.
Freedom. I wanted to write a book that connects language to freedom. How do the two relate to each other, well, pick up the book and you’ll find out! Shameless, I know.
Youth. I wanted to write a book that shows African American children that it is actually cool to learn a foreign language, that they can learn a second language and that they NEED to be bi-lingual in the world they are living today in where most children their age are already speaking English as a second or third language. And to also let Black children know that, no, learning a language is not only for white people!
Perspective. I wanted to write a book on learning a second language that was written from the perspective of an African American male. There’s not much representation of Blacks in the multilingual community (more for lack of their not being many) so it follows that there aren’t many African Americans writing about second language acquisition. I hope to express myself in the same language, face and tone that most African Americans can understand and relate to.
Story. I wanted to write a book that, not only, gives reasons why African Americans need to become bi-lingual . I also wanted to write a book that brings the reader into my personal story on how I came to fall in love with learning languages, and how it feels living in the United States being one of a handful of African Americans who share that love. Often times Americans think that one has to be some sort of genius to be “good” at learning languages and I wanted to dispel that myth. Trust me folks, I am in no way, shape, form, or fashion a genius.
Audience. I just wanted to write a book that I hope people will read.
Yes, I will admit, “The Book on Language Learning: 10 Reasons Why African Americans NEED To Learn A Second Language” is written with the African American reader in mind. It is also written for the English speaking world as whole which includes the UK and Australia.
Our world is experiencing great change, and although English is the tongue of capitalism, English will not maintain that luxury much longer as we enter this new epoch of globalism.
Useful links
In addition to the links above, you can contact Umar on Twitter, Facebook and Soundcloud
Beyond Babel: Linguistic and intercultural skills for tomorrow
Insights podcast on multilingualism with Bruno della Chiesa
Bruno della Chiesa was the soul of Languages in a Global World. Hear him discussing the relation between multilingualism and ageism, sexism, imperialism and much more in French, with Anne-Lise Prigent, or in English with Patrick Love.
Learn languages and… expand your own being (among a few other things) is an Insights blog article on Languages in a Global World
Video winners heading to Paris
Young video makers from Asia have taken top honours in this year’s edition of the OECD’s annual video competition. Regular readers may recall that the OECD asked entrants to show how we could shape tomorrow’s global economy for the better. “Think differently!” we said, and that’s just what our winners did.
From Korea, Shin Jae Ho’s video looks at the part each of us can play in making the world a better place, and suggests we’re not doing a great job of measuring and valuing the importance of each of these individual contributions.
From Indonesia, Achmad Danny Gazali emphasizes the role that Indonesia’s 62 million young people will play in determining the shape of their society. The good news for this developing country, says Danny, is that it can call on 62 million hopes and 62 million solutions for its future.
And also from Korea, Shin Jaein uses the Korean staple bibimbap – a tasty mix of rice, meat and vegetables – to show the creative potential that could be generated by lowering the walls separating industry, art, society and technology.
Congratulations to the winners, who will all be invited to travel to Paris next month to take part in the OECD Forum.
And, of course, many thanks to everyone else who took part.
Useful links
Please let me keep three screens.
Today’s post is from Adrian Blundell-Wignall, Special Advisor to the OECD Secretary-General on Financial Markets. The view expressed here is his own and does not necessarily reflect that of any OECD government.
This week, the German Parliament’s Finance Committee invited Paul Atkinson and me to comment on a draft bank-separation law. The draft is strongly influenced by the 2012 Final Report of the High-level Expert Group on reforming the structure of the EU banking sector chaired by Erkki Liikanen.
Liikanen proposes assigning trading and available for sale securities above a threshold of 15-25% and all activities related to market making to a separate, well-capitalized, subsidiary. This would maintain the advantages of the universal bank model in a holding company structure, but insured deposits could not be used to subsidize the trading activities. The OECD has long proposed a non-operating holding company structure for separation, by ring fencing and separately capitalizing the different activities without restricting a bank from offering a complete range of services to customers. In general terms Liikanen is similar to this. It has the advantage of also of promoting a level playing field for bank competition with stand-alone securities trading firms.
However, the proposal involving a €100 bn “separation trigger” for total assets held for trading and available for sale is not sensible. No bank under €400bn total assets with any amount of derivatives would ever be considered as long as it kept no more than 24.9% of trading assets? If a bank with around €100bn trading assets was subject to a plus or minus 10% volatility cycle in asset values, it could separated and reunited as prices rose and fell.
The Liikanen report urges the Basel Committee and the EU to deal with the shortcomings of model-based risk weighting approach in the capital rules, so that the trading subsidiary (in particular) is well capitalized and not subject to error. The Expert Group also stresses that the directives on resolution and bail-in are an essential complement to its separation proposal. Clarification and pre-notification of instruments that are not guaranteed and will be subject to bail-in should be transparent to promote trust. As far as possible, such instruments should be marketed to non-banks.
Strengthening boards, promoting risk management and disclosure, tackling incentive schemes and sanctions to ensure compliance were also recommended by the Liikanen group.
While the OECD has supported much of this over the years, we disagree with Liikanen on two important points, concerning separation and minimum capital standards.
The first major problem is that, while idea of a threshold for separation is good, the Liikanen group has not chosen the right variable on which to base the threshold. Recent OECD work has sought empirically to explore the factors that make a bank more or less risky: i.e. that take it towards or away from the default point. This research was necessary, because policy after the crisis had to be made ‘on the run’ without enough detailed empirical evidence on which to base reform. Most of the research referred to in the Liikanen report pre-dates the crisis, or is related to recent policy developments, but none of it contains research relating business model features to banks’ distance to default. Yet it is crucial to know which mechanisms are and are not supported by the data.
With respect to the business model features of bank risk, the OECD study shows that liquid trading assets, properly separated from the gross market value of (mainly over the counter illiquid) derivatives, helps to increase the bank’s distance from default and make it less (not more) risky. On the other hand derivatives are overwhelmingly the business model feature that gives rise to interconnectedness risk and default paths arising from illiquidity in crisis conditions (for example the massive margin calls in 2008-2009).
This makes intuitive sense too. Most derivatives are not standardized and trade over-the-counter, i.e. directly between the two parties without being supervised by an exchange. An institution can find itself in a position where it cannot operate because it doesn’t have the liquidity to meet immediate calls for payments on derivatives markets. Dexia is a recent example of such a failure, and if AIG’s derivative commitments had not been met from official sources, bank collapses through interdependence channels would have been difficult to contain. Liquid trading securities, on the other hand, can be sold precisely to meet margin and collateral calls —a very good thing.
This is a fairly major problem for the Liikanen report—they are not looking at the right threshold variable. The idea of a threshold makes sense, but it must be based on the key variable if banks are to be safer. In the OECD view this is derivatives: any bank with a gross market value of derivatives above 10%-15% should be considered for separation.
Putting to one side the empirical evidence for a moment, consider intuitively the case of Wells Fargo (appropriately converted to International Financial Reporting Standards – IFRS – derivatives concepts) and Deutsche Bank. Wells Fargo offers most essential services to its customers, has very low leverage, had no issues in the crisis and is one of the most profitable banks in the world. Wells Fargo received no payments from the US government in settlement of the AIG counterparty positions. Yet Wells Fargo would be considered for separation under Liikanen ‘percent-of-assets’ threshold test. Its trading and available for sale assets were around 21% in mid 2012, but its derivatives were only 6.5% of its adjusted balance sheet—a safe business model for interconnectedness risk according to the OECD research.
Deutsche Bank, on the other hand, with 40% of its balance sheet in derivatives and only 14% of liquid trading and available for sale securities would not be considered for separation on this rule. Deutsche Bank received a payment from the US government in settlement of its AIG positions equal to 37% of equity less goodwill. Enough said.
The second main issue after separation, minimum capital requirements, is dealt with extensively in the Liikanen Report, with calls for “…more robust risk weights…more consistent treatment of risk in internal models [and that] the treatment of real estate lending…should be reconsidered,…”
The Expert Group should have had the courage of its convictions. The core problem is the risk weighting system as proposed in the so-called Basel III international regulatory framework for banks. This introduces an illusory “risk sensitivity” that relates minimum capital requirements to “risk-weighted assets (RWA)”, instead of to actual balance sheets. This has evolved into a system of extreme complexity that invites institutions to look for regulatory ways to reduce RWA relative to total assets (including negotiating with supervisory authorities) rather than ensuring they really have enough capital, defeating the entire purpose of capital adequacy rules.
So long as capital requirements are based on RWA, whose relationship to the actual balance sheet is effectively a management tool, many banks (and the system as a whole) are likely to be under-capitalized. The best solution would be to scrap the risk-weight system at both global and European levels in favor of something vastly simpler and more effective. Failing that, the equivalent can be achieved by strengthening the role of the (non-risk-weighted) leverage ratio to the point where it overrides the risk-weight system.
Useful links
OECD work on sovereign debt and financial stability
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Today’s post is from Erwin van Veen of the International Network on Conflict and Fragility (INCAF)
By some estimates, poverty has been reduced in recent years from 1.3 billion people in 2005 to fewer than 900 million in 2010. That’s about half a billion people in just five years – a truly impressive achievement. The talk is now of aiming for poverty eradication in the global development framework that will replace the Millennium Development Goals when they ‘expire’ in 2015. This, however, is likely to be a tricky challenge for at least two reasons. First, China and India can take credit for most of the recent reduction of poverty. As they largely achieved this without help from the international development community, it raises the question whether an international focus on direct poverty reduction will generate the greatest benefits. Creating an enabling environment centred on equitable investment, peace and security and sustainable development may be more productive – and contentious.
Second, estimates from experts like Andy Sumner and Homi Kharas suggest that a significant number of the remaining poor live and will live in fragile environments. This is problematic for effective poverty reduction because their governments have not necessarily demonstrated great commitment to this objective, while international aid to such countries is often not fit for purpose (consider the 2011 survey on monitoring the Paris Declaration on Aid Effectiveness, the 2011 monitoring report of the Fragile States Principles or the New Deal for Engagement).
Hence, a global, political push for poverty eradication through the post-2015 framework is likely to benefit from parallel bottom-up social innovation and mobilization. Modern technology can be a real game changer in this regard and two initiatives currently on-going in India and East-Africa have great potential.
India is setting up a biometrical system that will enable direct cash transfers to the country’s poorest. In one fell swoop this will eliminate layers of overhead and corruption by ensuring benefits reach intended recipients directly through a fairly foolproof system. Costs have been kept low by combining an open policy in selecting devices and software, and stimulating competition between private vendors.
Another example of modern technology at work is M-Pesa (mobile money in Swahili), the world’s most developed mobile-phone based money transfer and payment system. It uses national ID cards or passports as its basis to easily deposit, withdraw, and transfer money. It’s widely in used in Kenya and Tanzania in particular.
Now imagine linking a person’s identity – as established and stored in a biometrical database – with an internet-enabled, mobile-phone based platform that hosts (financial) services and information at global scale. Such a system would allow both accurate transfers at the level of individuals, including peer-to-peer, and authentication of beneficiaries. With internet-enabled mobile phone penetration rates rising fast everywhere, even remote corners of the world are reachable. This kind of technology can also be put in the service of development in fragile and conflict-affected countries, in at least two ways.
One application could be to use such mobile-phone enabled databases to share royalties resulting from natural resource extraction directly and more widely with local communities. A major problem with natural resource extraction in many fragile environments is that a significant part of the revenue that states receive gets stolen by those in power. Local communities don’t tend to see much of it, which results in a sense of injustice, marginalization, and occasionally, violence.
In fact, the Centre for Global Development is already exploring an Oil2Cash scheme that would see resource-rich governments make direct cash transfers to the accounts of individual citizens via modern technology. Apart from the merits and demerits of direct cash transfers, this scheme faces an important obstacle: why would governments that can currently spend this revenue at their discretion suddenly want to share it with their citizens? An alternative might be to make energy companies responsible for distributing part of the revenue directly to citizens that live in the relevant area. This probably requires creating a global norm – enforceable through national legislation – that ensures every exploration contract concluded in a fragile environment features a clause stipulating that energy companies will set up appropriate mechanisms to transfer a certain percentage of the revenues. The challenge here is of course how to make it stick globally and avoid creating competitive advantage for countries that do not sign up.
One option is to use the momentum of the new post-2015 development agenda to build on existing initiatives like the UN’s Global Compact and the Extractive Industries Transparency Initiative to create a global natural resource charter that, among other things, commits oil companies to share part of exploration revenues directly with local communities – corporate social responsibility in direct action. Another option is to follow in the tracks of regulatory efforts to improve due diligence of mineral supply chains, which faces similar collective action dilemma’s, build on its experiences and learn from its lessons (for OECD work click here).
A second application of modern technology to reduce fragility could lie in the area of disaster management. Several recent reports suggest that the frequency and intensity of natural disasters are increasing. While some of the largest, most deadly and most costly disasters have affected highly developed countries with the means to recover (such as Japan and the US), many affect populations living in fragile environments that are far less resilient to deal with their catastrophic consequences. The coastal zones that will absorb most of Africa’s population growth over the next decades are especially vulnerable.
It should be possible to register these populations in a biometrical system – akin to what India is piloting – so that when disaster strikes, global peer-to-peer transfers can be made directly to empower individuals to start rebuilding their own lives. In 2011 Kenyans already mobilized €171,000 in two days through M-Pesa contributions for the “Kenyans for Kenya” fundraiser set up to respond to famine and deaths from starvation in its Turkana District. Image what such a system might accomplish at a global scale by way of a ‘social protection floor’ in cases such as the Haiti earthquake or the recent droughts and famines in Ethiopia, Kenya and Somalia.
While such systems require significant one-off investments, do not solve more structural barriers to development, and still have to be made to work politically, they hold promise to move away from traditional rich-to-poor, Official Development Aid flows and can capitalize on a global world in which development is a rapidly changing notion and social empowerment on the rise.
Useful links
OECD work on peacebuilding, statebuilding and security
Now, build peace
Find out more about the New Deal between fragile states and partners
Today’s post is from Donata Garrassi of the International Dialogue on Peacebuilding and Statebuilding and Brenda Killen, Head of OECD’s Global Partnerships and Policy Division
In May 2011, The Economist featured an image of Osama Bin Laden on its front cover with the title: “Now, kill his dream”. Conflict and instability are constantly in the headlines, from the civil war in Syria, to unrest across North Africa, to seemingly endless bloodshed and turmoil in the Sahel.
We have yet to see this much more inspiring headline: “Now, build peace”. However, many countries around the world are doing exactly that: building peace. Liberia, Sierra Leone and Timor-Leste, to mention a few, are recovering from armed conflict, rebuilding institutions that provide security and justice to citizens, and embarking on political transitions. Their leaders are working hard to maximize the benefits of their natural resources, attract private investment and create jobs for their burgeoning youth populations.
Conflict and instability directly affect 1.5 billion people. But in an interconnected world, local actions reverberate on the global stage in a way that can no longer be isolated or contained. Forging peace is not just a collective responsibility; it is in our collective interest to help countries transition toward peace and resilience. The good news is that conflict-affected and fragile countries, with the support of development partners, have identified tools and strategies for addressing the underlying causes of conflict and laying the foundations for peace.
One of these is the New Deal for Engagement in Fragile States, a breakthrough agreement signed by over 40 countries and organisations, including the 19 conflict-affected and fragile countries that form the g7+. The New Deal sets out 5 pre-conditions for building peaceful states—the Peacebuilding and Statebuilding Goals (PSGs)—and provides a practical framework for countries and development partners to assess, prioritise, plan, implement and hold each other accountable.
The New Deal represents a potential breakthrough in the way national and international partners work in situations of conflict and fragility, with implications for diplomatic and political, security, and development interventions. The Secretary General of the United Nations has called upon the member states to work towards the realisation of the PSGs on more than one occasion. Countries such as South Sudan and the Democratic Republic of Congo are using New Deal tools to identify dimensions of fragility and peacebuilding priorities. The New Deal is also inspiring civil society organisations from the global North and from the South in their advocacy on the need for healthy state-society relationship as the foundation of sustainable peace.
To make a lasting difference, we need to adopt the New Deal as a “new mindset” for how we address conflict and instability. It needs to be incorporated into national development plans and budgets, reflected in newspaper headlines and speeches, and promoted by civil society activists and business leaders alike. Moreover, the principles that underpin the New Deal must be reflected in the future development agenda that will be hopefully agreed after the Millennium Development Goals (MDGs) “expire” in 2015.
Development partners can support country transitions toward resilience by fulfilling their commitments to provide quality, timely, and flexible aid. While some countries have achieved the promised target of allocating 0.7% of their Gross National Income (GNI) to Official Development Assistance (ODA), figures recently published by the Organisation of Economic Cooperation and Development (OECD) show that the aid disbursed by OECD countries – as an overall average – is not even half of this. Low-income countries, many of which are conflict-affected or fragile, are the ones most likely to suffer from this shortfall.
While the volume of aid matters, even more important is how it is used. The New Deal and the g7+ group of fragile states help by establishing guidelines for development cooperation. A central concept is that aid should enable countries to assume responsibility for their own transitions and deliver concrete results for their people. The New Deal promotes a new model of partnership that catalyses national ownership and leadership with a long-term vision, as opposed to a “quick win” approach.
The leaders of the International Dialogue on Peacebuilding and Statebuilding, the political forum that produced the New Deal and that reunites the g7+ countries, development partners and civil society representatives, will meet in Washington, D.C. on 19 April. It will be a very good opportunity to agree on concrete actions to put New Deal commitments into practice and into the headlines. Now, build peace.
Useful links
OECD work on conflict and fragility
Evaluating Peacebuilding Activities in Settings of Conflict and Fragility
