Chris Wellisz. Credit: Porter Gifford

By Chris Wellisz
WASHINGTON DC, Jan 29 2020 (IPS)

Growing up in New York City in the 1970s, Edward Glaeser saw a great metropolis in decline. Crime was soaring. Garbage piled up on sidewalks as striking sanitation workers walked off the job. The city teetered on the edge of bankruptcy.

By the mid-1980s, it was clear that New York would bounce back. But it could still be a scary place; there was a triple homicide across the street from his school on the Upper West Side of Manhattan. Glaeser was nevertheless captivated by New York’s bustling street life and spent hours roaming its neighborhoods.

“It was both wonderful and terrifying, and it was hard not to be obsessed by it,” Glaeser recalls in an interview at his office at Harvard University.

Today, that sense of wonder still permeates Glaeser’s work as an urban economist. He deploys the economist’s theoretical tool kit to explore questions inspired by his youth in New York.

Why do some cities fail while others flourish? What accounts for sky-high housing costs in San Francisco? How does the growth of cities differ in rich and poor countries?

“I have always thought of myself as fundamentally a curious child,” Glaeser, 52, says. Rather than “pushing well-established literature forward,” he seeks to comprehend “something that I really don’t understand when I start out.”

While still a graduate student at the University of Chicago, Glaeser made his mark as a theorist of the benefits of agglomeration—the idea that dense and diverse cities are hothouses of innovation, energy, and creativity that fuel economic growth.

In the years since, his work has ranged across a breathtaking variety of subjects, from rent control and real estate bubbles to property rights, civil disobedience, and carbon emissions.

“For a couple decades now, Ed has been the leading thinker about the economics of place,” says Lawrence Summers, a Harvard professor who served as director of the National Economic Council under US President Barack Obama. “And the economics of urban areas are increasingly being seen as central to broad economic concerns.”

Glaeser and Summers are collaborating on a study of the hardening divide between well-educated, affluent coastal regions of the United States and islands of economic stagnation in what they call the “eastern heartland,” the interior states east of the Mississippi River.

There, in cities like Flint, Michigan, the proportion of prime-age men who aren’t working has been rising—along with rates of opioid addiction, disability, and mortality.

How can policy help? Traditionally, economists have been skeptical of the value of place-based policies like enterprise zones that offer tax breaks to investors, saying it is better to help people, not places.

People, they assumed, would move to where the jobs were. But labor mobility has declined in recent decades, partly because of high housing costs, partly because demand for relatively unskilled factory work has diminished.

Breaking with economic orthodoxy, Glaeser and Summers say that the federal government should tailor pro-employment measures, such as reducing the payroll tax or increasing tax credits to low earners, to fit the needs of economically distressed areas such as West Virginia. They also make the case for boosting investment in education.

As a Chicago-trained economist, Glaeser is a strong believer in the magic of free markets and opposes measures that distort incentives. “I have always been against spatial redistribution, taking from rich areas and giving to poor areas,” he says. “That doesn’t mean that you want the same policies everywhere.”

Urban economics seemed like a natural pursuit for Glaeser. His German-born father, Ludwig, was an architect who taught him how the built environment shapes people’s lives. His mother, Elizabeth, was an asset manager who introduced him to economics. Glaeser recalls how she used the example of competing cobblers to explain marginal cost pricing.

“I remember thinking what an amazing and fascinating thing it is to think about the impact of competition,” he says. He was 10 years old.

In high school, Glaeser excelled at history and mathematics. As a Princeton University undergraduate, he considered majoring in political science before choosing economics, seeing it as a path to Wall Street.

But dreams of a career in finance ended with the stock market crash of 1987, just as he started job interviews. So he opted for graduate school, because “it didn’t seem like I was cutting off many options,” he says.

“Then I got to Chicago, and that was when I really fell in love with economics.”

Glaeser keeps a framed photograph of himself with Gary Becker, the Chicago economist and Nobel prize laureate. Becker taught him that the discipline’s conceptual tools could be used to explore topics that had once been the domain of fields like sociology or anthropology—topics like racial discrimination, fertility, and the family.

“It was that sense of the creative side of economics that could work on a virtually unlimited canvas and try to make sense of any problem that you thought was important—that was the part that was so exciting to me,” Glaeser says.

At the time, Chicago economists Robert Lucas and Paul Romer were developing the so-called endogenous growth theory, which focused on the role of innovation and the exchange of ideas in economic development.

As Glaeser recalls it, Lucas pointed to cities as places where knowledge spillovers occur—meaning people can benefit from other people’s ideas without paying for them. Think of a city like Detroit early last century, where Henry Ford used his experience as chief engineer at the Edison Illuminating Company to start his automobile business.

That concept inspired a groundbreaking 1992 paper, “Growth in Cities.” Glaeser and three co-authors set out to use cities as a laboratory in which to test the new growth theories. Using 30 years of data covering 170 US cities, they found that local competition and diversity, rather than specialization, are the prime motors of urban growth.

The paper instantly made Glaeser a star and earned him a job offer from Harvard.

Glaeser “showed that urban variety, not specialization in one particular thing, was a big driver of employment growth,” says Joseph Gyourko, a professor at the University of Pennsylvania’s Wharton School and a longtime collaborator. “It was Ed’s first really well-cited article, so it did start him on his path.”

Gyourko and Glaeser started working together in the early 2000s, when Glaeser took a year’s sabbatical at Penn. They wondered why some cities, such as Detroit, declined so slowly, and why so many people stayed instead of moving elsewhere. They hit upon a simple answer: housing is durable, and as cities slump, it becomes cheaper to live there.

That insight prompted a related question: Why is housing so much more expensive than the cost of construction in cities like New York and Boston? The answer: land-use restrictions limit density, curbing the supply of housing and driving up prices. It was basic economics, yet until then, urban economists hadn’t focused on the role of regulation.

Glaeser argues that excessive regulation is destructive of the very essence of urban life—density. Cities thrive on the creativity that occurs when people living cheek by jowl exchange ideas and know-how. Sunbelt cities like Houston have grown because an easy regulatory environment keeps housing inexpensive.

To economists like Glaeser, building and zoning regulations are a tax on development. Some level of tax makes economic sense, because construction imposes costs on residents in the form of noise, congestion, and pollution.

But overly stringent regulation, often pushed by residents who want to keep out newcomers and protect their property values, can make housing unaffordable for most people.

Glaeser is similarly skeptical of historic preservation rules, to the dismay of followers of Jane Jacobs, the legendary critic of urban-renewal projects who celebrated the lively street life of New York’s old ethnic neighborhoods.

Glaeser is a big Jacobs fan—he owns an autographed copy of her 1961 classic, The Death and Life of Great American Cities—but argues that her efforts to oppose development in Greenwich Village were at odds with her support for low-income housing.

“I believe that many of our oldest buildings are treasures,” he says. “But don’t simultaneously pretend that that’s a route toward affordability. Affordability is created by mass-produced cheap housing or mass-produced cheap commercial space. And you might not like it aesthetically, but that is the affordable route.”

In 2000, Glaeser published “Consumer City,” a paper he wrote with Jed Kolko and Albert Saiz. In it, he took the concept of agglomeration a step further, arguing that people are drawn not only to the opportunities that cities offer, but also to amenities such as theaters, museums, and restaurants.

“We know that cities can attract the disproportionately young and innovative,” says Richard Florida, a professor of urban studies at the University of Toronto. “Ed was identifying the factors driving that, this whole idea that cities are not only places of production, but places of consumption.”

Glaeser laments policies such as the mortgage interest deduction, which encourages people to buy homes rather than rent apartments; highway subsidies, which make it easier to drive to the suburbs; and a school system that disadvantages inner-city students.

Such policies, he argues, not only are antiurban but also contribute to climate change, because city dwellers, who live in smaller homes and use mass transit, consume less electricity and gasoline than their suburban counterparts.

Surprisingly, he and his wife, Nancy, who have three children, decided to move to the suburbs of Boston several years ago. To Glaeser, it was a perfectly rational decision: the suburbs offer more living space, better schools, and a reasonably fast commute.

Already well known in academia, Glaeser started to reach a broader audience with the publication in 2011 of his bestselling book, Triumph of the City, a lively study of urbanization from ancient Baghdad to modern Bangalore.

His eloquence and enthusiasm make him a sought-after speaker at academic forums and TED Talks. Invariably, he is impeccably attired in well-pressed suits and preaches the gospel of urbanization in crisp, rapid-fire sentences.

Despite his celebrity, he takes teaching seriously. Rebecca Diamond, who attended his advising sessions as a graduate student, said he was generous with his time. “He taught me perspective and not to get too stuck in the weeds,” says Diamond, who now teaches at Stanford University and stays in touch with Glaeser.

Developing-world cities are his latest passion. True to form, he sees them as relatively uncharted territory, neglected both by urban economists, who focus on advanced-economy cities, and development economists, who concentrate on rural areas. They are also growing fast, and their physical and institutional infrastructure are works in progress, so economists’ policy advice can have an impact.

“The ability of economists to make a difference by getting engaged is just very large,” he says. “So, I think it is the new frontier.”

It also takes him to interesting places. His latest research project, with Nava Ashraf and Alexia Delfino of the London School of Economics, took him to the markets of Lusaka, Zambia, to study barriers to female entrepreneurship.

They found women are more likely to go into business if the rule of law is strong enough to help overcome inherently unequal relations with men.

Like Jane Jacobs, Glaeser is big believer in observing what he sees around him. “You don’t really understand a city until you’ve actually walked in the streets,” Glaeser says.

“That’s what makes Ed a first rate applied theorist,” says Gyourko. “You’ve got to get your hands messy in the data. Sometimes data is just walking around.”

While researching Triumph of the City, Glaeser explored places like Mumbai’s Dharavi quarter, which was a “completely magical experience.” Among the world’s most densely populated places, Dharavi hums with entrepreneurial energy, with potters, tailors, and other craftsmen working side by side in cramped, ill-lit quarters.

At the same time, unpaved streets, polluted air, and open sewers are reminders of the downsides of density. But Glaeser doesn’t bemoan the poverty of such places; on the contrary, he says cities attract the poor precisely because they offer opportunity. For the developing world, urbanization is the best path to prosperity.

“For all of their problems, amazing things are happening in India and sub-Saharan Africa and Latin America,” Glaeser says. “And things obviously don’t always go the right direction, but cities have been working miracles of collaboration for thousands of years, and whenever I go to a developing-world city, it is obvious to me that the age of miracles is not over.”

Opinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy.

Credit: IMF

By Chris Wellisz
WASHINGTON DC, May 24 2019 (IPS)

As a child growing up in Communist Yugoslavia, Branko Milanovic witnessed the protests of 1968, when students occupied the campus of the University of Belgrade and hoisted banners reading “Down with the Red bourgeoisie!”

Milanovic, who now teaches economics at the City University of New York, recalls wondering whether his own family belonged to that maligned group. His father was a government official, and unlike many Yugoslav kids at the time, Milanovic had his very own bedroom—a sign of privilege in a nominally classless society. Mostly he remembers a sense of excitement as he and his friends loitered around the edge of the campus that summer, watching the students sporting red Karl Marx badges.

“I think that the social and political aspects of the protests became clearer to me later,” Milanovic says in an interview. Even so, “1968 was, in many ways, a watershed year” in an intellectual journey that has seen him emerge as a leading scholar of inequality. Decades before it became a fashion in economics, inequality would be the subject of his doctoral dissertation at the University of Belgrade.

Today, Milanovic is best known for a breakthrough study of global income inequality from 1988 to 2008, roughly spanning the period from the fall of the Berlin Wall—which spelled the beginning of the end of Communism in Europe—to the global financial crisis.

The 2013 article, co-written with Christoph Lakner, delineated what became known as the “elephant curve” because of its shape (see chart). It shows that over the 20 years that Milanovic calls the period of “high globalization,” huge increases in wealth were unevenly distributed across the world.

The middle classes in developing economies—mainly in Asia—enjoyed a dramatic increase in incomes. So did the top 1 percent of earners worldwide, or the “global plutocrats.”

Meanwhile, the lower middle classes in advanced economies saw their earnings stagnate.

The elephant curve’s power lies in its simplicity. It elegantly summarizes the source of so much middle-class discontent in advanced economies, discontent that has turbocharged the careers of populists from both extremes of the political spectrum and spurred calls for trade barriers and limits on immigration.

“Branko had a deep influence on global inequality research, particularly with his findings on the elephant curve, which has set the tone for future research,” says Thomas Piketty, author of the bestselling Capital in the Twenty-First Century.

Piketty and his collaborators confirmed the findings in a 2018 study, which found that the top 1 percent globally captured twice as much of total growth as the bottom 50 percent from 1980 to 2016.

Milanovic’s findings “appear to be even more spectacular than what was initially suggested,” Piketty says. “The elephant looks more like a mammoth.”

Economists long disdained the study of inequality. Many lived in a theoretical world populated by a mythical figure known as homo economicus, or rational man, whose only attribute was a drive to maximize his well-being. Differences among people, or groups, were irrelevant. Variety was irrelevant. Only averages mattered.

In this world of identical rational actors, the forces of supply and demand worked their magic to determine prices and quantities of goods, capital, and labor in a way that maximized welfare for society as a whole. The distribution of wealth or income didn’t fit into the picture. It was simply a by-product of market forces.

“The market solves everything,” Milanovic says. “So the topic really was not—still is not—totally mainstream.”

Then came the global financial crisis of 2008, and with it “the rise of the realization that the top 1 percent or the top 5 percent have really vastly outstripped, in income growth, the middle class,” he says.

The study of inequality also got a boost from the explosion of data that can be mined with evermore powerful computers, making it easier to divide the anonymous masses of consumers and workers into groups with common characteristics. Big data, he says, “enables the study of heterogeneity, and inequality is by definition heterogenous.”

Data has always been one of Milanovic’s passions, alongside his interest in social classes, which flourished during his high school years in Brussels, where his economist father was posted as Yugoslav envoy to the then–European Economic Community.

“High school in Belgium—and I think it was the same in France—was very Marxist,” he says.

His classmates were divided between leftist kids, influenced by the student movements of the late 1960s and early 1970s, and “bourgeois” kids. As the privileged son of a diplomat representing an ostensibly workers’ government, young Branko didn’t quite fit either category. “It was a very peculiar situation,” he says.

At university in Belgrade, Milanovic initially leaned toward philosophy but decided economics would be more practical. It also offered a way to combine his interests in statistics and social classes.

Graduate studies led to a fellowship at Florida State University in Tallahassee, where he was impressed by American abundance—huge portions of inexpensive food, free refills of coffee, big cars—alongside stark income inequality and racial discrimination.

Two years later, he was back in Belgrade to work on his doctoral dissertation on inequality in Yugoslavia, mining rare household survey data supplied by a friend who worked in the federal statistical office.

While his dissertation raised eyebrows in Marxist Yugoslavia—along with his decision to avoid joining the Communist Party—it launched a two-decade career at the World Bank’s Research Department.

“Branko was really one of the leading experts, even at that time, on income distribution,” says Alan Gelb, who hired Milanovic to join a small team studying the transition to market economies in post-Communist eastern Europe. Milanovic focused on issues of poverty and income distribution.

The wealth of data the World Bank collects was a priceless resource, and it inspired Milanovic to carry out cross-country comparisons of inequality, which were a novelty. One day in 1995, Milanovic was talking with Gelb’s successor as the head of his unit.

“I suddenly had this idea: ‘Look, we have all this data from around the world. We study individual countries, but we never put them together.’ ” Four years later, he published the first study of global income distribution based on household surveys.

In the years that followed, Milanovic published widely and profusely. Alongside his work on post-Communist economies, he continued to explore inequality and its link with globalization. His articles and books display the broad range of his interests, which include history, literature, and sports.

In one article, he estimates the average income and inequality level in Byzantium in the year 1000. Another looks at the links between labor mobility and inequality in soccer, which he calls the most globalized sport.

He found that club soccer has become very unequal because a dozen top European teams can afford to recruit the world’s best players. On the other hand, the free movement of soccer players has reduced inequality among national teams. The reason: players from small countries can hone their skills at top club teams, then return home to compete for their national teams.

Literary conversations with his wife, Michele de Nevers, a specialist in climate finance at the Center for Global Development, inspired him to write an offbeat analysis of Jane Austen’s Pride and Prejudice.

Arguing that the book is as much about money as love, he estimates the incomes of various characters and looks at how wealth influences the choice of mates for Austen’s protagonist, Elizabeth Bennet.

He did the same for Leo Tolstoy’s Anna Karenina. Both essays were published in Milanovic’s 2011 book, The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality .

Another book, Global Inequality: A New Approach for the Age of Globalization, was a milestone that synthesized years of his scholarship on inequality within and among countries since the Industrial Revolution.

In contrast to Piketty, who argues that inequality inexorably widens under capitalism, Milanovic sees it moving in waves or cycles under the influence of what he calls benign and malign forces.

In advanced economies, income disparity widened in the 19th and early 20th centuries until the malign forces of war and hyperinflation reduced it by destroying wealth. After World War II, benign forces such as progressive taxation, more powerful labor unions, and more widely accessible education pushed inequality down.

The fall of the Berlin Wall was a watershed. It brought the former Soviet bloc states into the global economy at a time when China also began opening up. Rapid growth in the developing world narrowed inequality between countries while widening it in the developed world, where middle-class incomes stagnated as the wealthy prospered.

What does the future hold? It looks good for much of the developing world and especially Asia, which will continue to catch up with the rich countries. In advanced economies, on the other hand, the outlook seems grimmer.

There, the twin forces of globalization and technological innovation will continue to squeeze the middle class. Social mobility will decline as an entrenched elite benefits from greater access to expensive higher education and wields its political clout to enact “pro-rich” policies, such as favorable tax regimes.

As income disparities grow, so will social tensions and political strife—a prognosis confirmed by events such as Brexit and protests in France that have occurred since the book’s publication in 2016.

Milanovic worries that this friction might lead to a “decoupling” of democracy and capitalism, resulting in plutocracy in the United States and populism or nativism in Europe.

While there has been considerable debate about inequality over the past decade, “nothing has really moved” in policy terms, he says. “We are on this automatic pilot which basically leads to higher inequality. But I am not totally losing faith.”

The traditional answer—redistribution of income—won’t work as well as it did in the past because of the mobility of capital, which allows the wealthy to shelter their incomes in tax havens. Instead, policy should aim for a redistribution of “endowments” such as wealth and education.

Measures would include higher inheritance taxes, policies that encourage companies to distribute shares to workers, and increased state funding for education.

“We cannot achieve that tomorrow,” he says. “But I think we should have an idea that we want to move to a capitalist world where endowments would be much more equally distributed than today.”

Milanovic also takes on the nettlesome issue of inequality between countries. He calculates that an American, simply by virtue of being born in the United States, will earn 93 times more than a person born in the world’s poorest country.

This is what Milanovic calls the “citizenship premium,” and it gives rise to pressure for migration as people born in poor countries seek their fortunes in richer ones.

Milanovic argues that halting migration is no more feasible than halting the movement of goods or capital. Yet it’s also unrealistic to expect citizens of advanced economies to open their borders. His solution: allow more immigrants but deny them the full rights of citizenship, and perhaps tax them to compensate citizens displaced in the labor force.

His current work, in a way, brings him back to his roots in Yugoslavia. It involves the study of class structure in the People’s Republic of China and, in particular, a close look at the top 5 percent of the income distribution. It forms a part of his next book, Capitalism, Alone, which argues that China has developed a distinct form of capitalism that will coexist with its liberal forebear.

Where is the study of inequality headed? Milanovic sees two frontiers, both driven by the availability of new data. One is wealth inequality, à la Piketty; the other is intergenerational inequality, a subject plumbed by economists such as Harvard’s Raj Chetty.

The two areas “appeal to young people who are now very socially aware,’’ he says. “On the other hand, they are very smart and want to work on tough topics.” He adds, “I am very optimistic in that sense.”

*Opinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy.

Excerpt:

Credit: IMF

By Chris Wellisz
WASHINGTON DC, Jan 2 2019 (IPS)

It happened again and again in a career punctuated by upheavals: the peso crisis of 1994, the Asian crisis of 1997, and finally, the big one—the global financial crisis of 2008.

Each time he started a new government job, Timothy Geithner hoped to find a letter from his predecessor, explaining what to do and whom to call if things fell apart. The desk drawer was always empty.

“Financial crises are probably the most devastating economic events that can happen to a country,” says Geithner, who fought the last conflagration as president of the Federal Reserve Bank of New York and later US Treasury secretary. “I’d like our successors to have a better base of knowledge.”

So every summer, Geithner takes time off from his job as president of Warburg Pincus, a private equity firm, to help teach a two-week crisis management workshop for regulators from around the world.

It’s one part of the Yale Program on Financial Stability, which also offers a master’s degree and is undertaking an ambitious project to create, on a very large scale, what Geithner never found in that desk drawer—a manual for crisis managers.

“A lot of times we’ve made the same mistakes in fighting financial crises over time simply because there was no body of knowledge that people had jointly studied and debated,” says Andrew Metrick, a professor of finance at Yale who founded and runs the program. “It’s almost like you show up at the emergency room and the doctor says, ‘It looks like a broken arm. I think I’ve seen someone once do something for a broken arm.’”

Metrick was one of those emergency room financial doctors. Six months after the collapse of Lehman Brothers in September 2008, he got a call from the Obama administration.

They desperately needed a financial economist. So Metrick moved to Washington to work for the Council of Economic Advisers. There, as chief staff economist, he helped develop programs to revive housing and financial markets.

When it came time to propose legislation, he discovered that academic research wasn’t very useful.

“There was no real great connection between academic knowledge, economic intuition, and what we actually could put in the law because there just wasn’t a good body of research there,” Metrick says. “I was determined that when I came back to the academy I would try to be part of something that would help to fill that gap.”

That was the genesis of the Yale Program on Financial Stability, which got off the ground in 2014 with donations from organizations including the Alfred P. Sloan Foundation.

Geithner joined soon after, teaching, raising money, and chairing the advisory board, which includes former central bankers such as the Federal Reserve’s Ben Bernanke, Mexico’s Agustín Carstens, and Malaysia’s Zeti Akhtar Aziz.

Geithner brought a practical focus to what became known as the New Bagehot Crisis-Response Project, named for Walter Bagehot, a 19th century British economist and author of Lombard Street: A Description of the Money Market, a bible of sorts for the guardians of financial stability.

The project’s 14 researchers compile case studies of responses to the global financial crisis and the euro crisis that followed it. Eventually, they plan to study manias and panics going back to the South Sea Bubble in the 18th century.

While the global crisis spawned countless books, articles, and memoirs, the Bagehot project seeks to analyze it in a systematic way—and determine what kinds of government actions worked, what kinds didn’t, and why. The architects of crisis-fighting programs in various countries are consultants on the project.

“Our focus is really on the technical details of the interventions,” Metrick says.

Their plan is to create an online tool that crisis managers can turn to in real time, in case they need to recapitalize a bank, say, or set up an emergency liquidity facility. They will also learn what to avoid, like Ireland’s decision to guarantee the liabilities of its banks, which transformed a bank run into a far more serious sovereign debt crisis.

“Because the classic panic happens pretty rarely in the same country, even though it happens around the world with pretty appalling frequency, there’s not actually that much institutional memory, and there certainly wasn’t at the Treasury or the Fed, about how you deal with a systemic financial crisis,” Geithner says in an interview.

The summer symposium—Geithner called it a “war college”—was a two-week workshop for central bankers and regulators. The central banks of China, Europe, Japan, and the United States all sent participants, along with agencies like the Bank for International Settlements and the European Stability Mechanism.

Another piece of the Yale program is the two-day Financial Crisis Forum, where veterans including former Treasury Secretary Henry Paulson offer their insights on subjects from capital injections to frozen money markets.

“For the current generation of officials, especially the younger ones who attend the conference, learning from history is vital,” says Paul Tucker, deputy governor of the Bank of England from 2009 to 2013. “Going forward, current officials also need to learn from the crises that, believe it or not, were averted or successfully contained.”

Finally, there is Yale’s one-year master’s degree in systemic risk, which offers early career professionals a chance to hone their skills and develop new ones. A recent graduate is Özgü Özen Çavuşoğlu, who returned to her job in the financial stability division of Turkey’s central bank and is now researching an early-warning system for the country’s economy.

Just as important, she says, was the opportunity to forge bonds with colleagues from across the globe.

“We are living in an interconnected world,” Özen Çavuşoğlu says. “That’s why the network of people with the same understanding will play an important role in having a stable global economy.”

The link to the original article: https://www.imf.org/external/pubs/ft/fandd/2018/12/tim-geithner-yale-program-financial-stability-wellisz.htm?utm_medium=email&utm_source=govdelivery

Excerpt:

By Chris Wellisz
WASHINGTON DC, Dec 18 2018 (IPS)

Oleksii Sobolev was a fund manager by day and a pro-democracy protester by night. After work, he would leave his office at Dragon Asset Management in Kiev to join the crowds camped out in Independence Square demanding the resignation of a president they viewed as corrupt.

Sobolev handed out food and helped clean up the square. When police started firing at the so-called Maidan protesters, he brought tires that were burned to create a protective curtain of smoke.

“The saying was, ‘Fires save lives,’” Sobolev recalls.

Ukraine’s president ended up in exile, and Sobolev gave up managing money to take an unpaid advisory post helping to restructure state-owned enterprises. Four years later, he has put his business skills to work fighting corruption, a problem that continues to bedevil the eastern European country of 44 million people.

Ukraine ranked 131st among 176 countries on Transparency International’s Corruption Perceptions Index 2016.

Sobolev’s team of activists created an electronic auction system that brought transparency to notoriously murky sales of public assets ranging from bank loans to scrap metal.

In its first 13 months, the system, ProZorro.Sale, handled $210 million, almost as much as the money raised from conventional privatization sales in the past five years, says Max Nefyodov, Ukraine’s first deputy economy minister. That’s a significant boost for the cash-strapped Ukrainian government.

Sobolev belongs to a new breed of idealistic young people who are using digital technologies to promote transparency and integrity. Just as smartphones and social media helped empower popular uprisings from Ukraine to Tunisia, 21st century technologies such as blockchain and big data offer powerful new weapons against corruption, a phenomenon that dates back at least as far as the first century BC, when Julius Caesar secured the office of Pontifex Maximus by greasing voters’ palms.

Corruption’s toll
Worldwide, bribery alone is estimated to cost as much as $2 trillion a year, about equal to the GDP of Italy and many times the $142 billion in global development aid. But corruption takes a much bigger toll, according to a 2016 IMF study “Corruption: Costs and Mitigating Strategies.” It discourages private investment, curbing economic growth.

Corrupt officials channel public funds to wasteful projects that generate bribes, depleting funds that could be spent on health, education, and other services that benefit the poor. And young people have little incentive to acquire new skills in societies where who they know is more important than what they know.

“Countries that are less corrupt have higher growth rates, have higher levels of GDP, and have higher levels on the Human Development Index of the United Nations,” which measures things like life expectancy and years of schooling, says Susan Rose-Ackerman, a Yale University law professor who studies the political economy of corruption.

That explains why international financial institutions, such as the IMF and World Bank, are helping governments fight corruption through improved transparency, accountability, and institution building.

The anti-corruption drive is providing opportunities for private technology companies like the Bitfury Group, which signed a contract with the Republic of Georgia to register land titles using blockchain technology. Blockchain serves simultaneously as a means of exchange—of money or information—and a database that automatically registers transactions.

Records are encrypted and stored across a network of computers, rather than in a central location, so they cannot be altered or stolen.

Some start-ups are offering their services to charitable organizations as well as governments. Among them is Dublin-based AID:Tech, which created a platform that ensures the integrity of charitable contributions and social welfare payments.

“I know a lot of people who would love to give money but don’t because they don’t know where it goes,” says AID:Tech’s CEO and cofounder, Joseph Thompson.

AID:Tech was inspired by a charity event in 2009. Thompson ran 152 miles across the Sahara Desert to raise money for children who needed reconstructive surgery. When he asked for evidence that the aid had been delivered to the intended recipients, the charity couldn’t provide it.

Thompson, who has master’s degrees in business, digital currencies, and computer science, set out to find a way to make sure that charitable donations don’t go astray. He found it in blockchain, also known as distributed ledger technology.

Originally developed to store and exchange Bitcoin, a cryptocurrency, it has since been adapted for a variety of uses.

“If you can get an end-beneficiary on the blockchain, that’s their bank account,” Thompson says. Donations go straight to the beneficiary, without intermediaries; the company provides the technology but doesn’t handle any money.

“There’s no more fraud, no more people claiming benefits for dead parents or brothers and sisters who have emigrated.”

The Irish Red Cross agreed to test Thompson’s solution with a program to distribute aid to Syrian refugees in Lebanon. Each recipient was given a small plastic card stamped with a QR code—a type of machine-readable optical label.

Money was deducted when the cards were scanned at supermarket checkout counters. Five hundred electronic vouchers worth $20 apiece were redeemed in Lebanon, and not a penny went astray.

“The results were fantastic,’’ says Daniel Curran, head of fundraising for the Irish Red Cross. Using a dashboard Thompson set up, he tracked spending by recipients in real time, gleaning valuable insights into their needs. (He was surprised to learn that refugees bound for resettlement in Ireland bought dental products rather than winter clothes.)

The technology also allows charities to appeal to a younger class of smartphone-wielding donors, and it reduces their reliance on expensive direct-marketing campaigns. That means more money will flow to the people who need it.

“This is a cheaper, more transparent, faster, and efficient way of not just obtaining the donation, but actually getting the donation to the beneficiary in the end,” Curran says.

Doing well by doing good
AID:Tech is expanding rapidly, with contracts to provide software for the delivery of remittances to Serbia, social welfare payments in Jordan, and aid to homeless women in Ireland. It is raising between $3 million and $5 million from investors and plans to open offices in Singapore and Dubai. The goal is to have at least 100,000 people on the platform by June.

Thompson doesn’t hesitate to say he aims to do well by doing good. “We are a for-profit, but we’re using technology to solve some of the world’s biggest problems,’’ he says. The platform, he says, can be used by governments and social welfare agencies around the globe, with a potential customer base in the billions.

Another promising use for blockchain: secure digital storage of documents.

“Blockchain is so powerful because it gives us something we didn’t have in the digital world,” says Gonzalo Blousson, cofounder and CEO of Signatura, a platform that can be used to sign and notarize documents among multiple people. “Digital information is easy to modify. Blockchain gives us immutability.”

Blousson is working with Argentina’s second-largest city, Córdoba, which recently passed a law requiring public officials to file financial disclosure forms. Blockchain ensures that the forms are both visible to the public and cannot be altered.

Blousson and his team also used the technology to build a procurement platform, called Teneris, which companies and governments can use to solicit bids from suppliers of goods and services, a process that is often rife with opportunities for bribery and bid rigging.

Still, blockchain has its limitations, says Beth Noveck, a New York University (NYU) professor who specializes in the use of technology to bring transparency to government. Corruption also occurs after bids are awarded—when a building contractor uses shoddy materials to cut corners, for example.

That’s where big data offers a promising investigatory tool, Noveck says. The technology makes it possible to aggregate data on government spending and contracting and to analyze it for signs of waste, fraud, and corruption. As Noveck puts it, “You can spot the patterns of whose brother-in-law got too many contracts.”

Mobilizing citizen involvement also makes a difference, says Noveck, a lawyer by training who heads NYU’s Governance Lab. People like Diego Mendiburu are doing just that. A former journalist and technology buff, he put together a team of programmers to develop a mobile app that allows Mexicans to report substandard public services.

Users with smartphones can capture and share short videos of potholes that go unfilled or trees that are cut down illegally as a way of shaming public officials and pressuring them to act.

The app, Supercivicos, uses GPS technology to pinpoint the date and location of the videos, then builds a database of reports that can be used by civic groups and government agencies to identify problem services and find solutions.

Mendiburu wants users to become engaged citizen-journalists. “It’s not only about pointing out what’s wrong, it’s about telling stories,” he says. “We believe that this project can be exported to other countries in Latin America.”

In Ukraine, there are similar ambitions for ProZorro.Sale (the name combines the Ukrainian word for transparency with Zorro, the fictional Mexican who defended the poor against corrupt officials). As of December, Transparency International Ukraine was in talks with the European Bank for Reconstruction and Development to adapt the system for use elsewhere in Europe.

Of course, digital technology, while effective, can be stymied by governments, whose support is needed in the fight against official corruption. Late last year, the IMF and World Bank criticized Ukraine for undermining its recently established National Anti-Corruption Bureau and for failing to make good on promises to create an independent anti-corruption court.

“E-tools are important, but institutions are far more important,” says Viktor Nestulia, director of the Innovation Projects Program at Transparency International Ukraine.

*https://www.imf.org/external/pubs/ft/fandd/2018/03/pdf/wellisz.pdf

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