DISCLAIMER: This webinar transcript was loosely edited and there may be inaccuracies.

Alejandro Rueda SansI have the honor, of introducing to you, Javier Diaz. CEO of Bancoldex. I have the honor of working with him for two years before I came here to HKS. And now today, we have the pleasure of seeing him present on, the amazing work the bank has done for Colombia and bringing in some very new and innovative ideas, about how public development bank development banks should work. So, during his time at the bank, Javier has boosted the bank’s growth $3 billion. And transformed the entity’s business model from the second tier bank to one that provides direct credit to Colombian companies with an emphasis on innovation, sustainability and digital transformation. The bank has navigated some very important changes, during this time, which, of course we would present it. So without further ado. Welcome to DevTalks. Welcome to Harvard. And we’re honored to have you here. Look forward to your presentation.

Javier Díaz Fajardo All throughout this morning, I’ve had conversations with Alejandro, with colleagues from Colombia that actually pick your brain and you get to thinking, what should a public development bank do? So I laid out here and my bank colleagues in Colombia who I thank for this, were actually extremely helpful. So what is it that we should be doing? So first of all, we’re in the business of financing, and we cannot forget that we have to build a loan portfolio and it has to be a healthy loan portfolio. Sometimes when you’re in the development world you tend to forget that. And it’s very important. You have to you have to grow and you have to keep your non-performing loans low. Easier said than done. It’s quite a task to actually put these loans out there and make sure you get repaid. But you do that because you’re serving a purpose. And then if you look at this graph, you have to you have to consider innovation, development, new channels. What should we be doing that either the commercial banks are not doing or that we should be doing complementing what they do. So typically when you talk about development banks, you tend to think about market failures. I’ve been discussing this with Alejandro since yesterday. The market failure terminology has to be reevaluated. It used to be the fact that a public bank was only good for what the private bank wasn’t doing. And it’s much more complex than that. We need to be collaborating. We need to change the terminology. We need to be collecting. We need to be innovating. We’re probably commercial banks are doing something else. So this conversation is has been enticing on many ways. But one of those at least, is what we should be doing on a different scale. And then we’re all about sustainable development goals. I recently had to speak on a different forum, and I realized, or the metric is out there. Only 15% of SDGs are on the right track towards 2030.

And if you think about it, it’s. It’s pretty dramatic that this there’s this Paris agreement started out in 2015. We’re halfway there. Almost past the halfway mark. And we’re not. We’re not getting there. So we have to bring up new ideas. We have to harness the power of the public development banks. Now, on the other hand, I was recently at a different forum in corporate America. And the Paris Agreement, at least in their minds, is very much alive. So people have faith in this, and you can think simply that it’s not going to happen or that we’re doomed. It would sound like we’re doomed. But on the other hand, we have the tools to do much more. We also need a strategic focus on particular sectors. And I’m going to show you a different slide that that kind of portrays some banks or for agriculture. Some banks have a general mandate. Some banks are for SMEs, like in the case of bank colleagues. But we need to have a pretty important focus. And then time and time and again you will hear we need to do and we need to provide not just money, because money will only take us so far in the small world, in the development world. And I think in life generally, you need more than just resources. You need technical assistance. Most of the companies that we work with come back and say, great, thanks for the loan, but when can I get assistance on developing a new product? When can I get assistance on. Sometimes even basic accounting. So this whole blend is what probably makes the magic of a development bank work. Now getting down to the real world of what we do at Bancoldex my again, my colleagues in in Colombia prepared this slide and I thank them for it. This kind of shows you the different mandates that a public development bank might have.

So there’s of course, the generalists. And, and let me cite some examples here, which you may or may not be familiar with. bndes. Bndes is the Brazilian development bank, and they’re huge. I think their balance sheet is close to 100 billion USD. You’ve got multilateral like gov. I think the, the premier public development banks of the world are K of W and AfD the French agency for development. So when the smaller of us look up to the bigger brothers, that’s K of W, K of W was in charge of the postwar reconstruction of Germany. And it’s probably now the second or third largest factor in Germany. But it’s been around to serve a purpose. It’s reconstruction. And now they do quite a bit of work overseas. So those are the guys you kind of look up to. Then there’s some that are focused just on infrastructure. In Colombia we have two cousins for an infant there. And as you continue up the graph, you’ll see in Mexico, for example, you’ll see that some banks were meant for foreign trade and bank called X which who whom I’ll talk about in a minute. Bancoldex started out as simply foreign trade back in the early 90s. And over the course of three decades, we have morphed into something that looks more like nothing in Mexico. So I think the people who were at the helm back then realize that if we were going to continue just to do foreign trade, we would be out of business. So we stepped into microfinance and more recently when stepped in to direct AC Milan. And I’ll talk about that in a little while.

So part of what I would also like for you to take away is the fact that these development banks and generally institutions have to evolve. You have to understand the times you’re living in. You have to understand how to actually read the client, read the needs. And you can’t just stick to your original mandate. If you just stick to something. You’ll probably end up out of business. And that, I think, applies to any industry. And then you come to one called X. We put it at the top of the graph. Our business is micro small and medium enterprises. And I’ll tell you what we’re doing in that field. But before I get to Bancoldex, let me just on a different note, tell you of a number of very nice initiatives that are actually happening around the world. And in no particular order, green bonds. Green bonds have been around for quite a while, but at least in Colombia. Bank, called the Public Development Bank for SMEs, was actually the pioneer. We were the first issuer of green bonds in 2017, which sounds like a long time ago, but it isn’t. We did green bonds initially in the local market, then we’ve done a number of social bonds, and social for us is mostly micro. Making sure that micro entrepreneurs micro-businesses actually get these small loans. Is is is the reason why you issue social bonds and you find yourselves. But there’s also a number of very interesting initiatives out there. For example, the wildlife conservation bonds that were structured by the World Bank. There’s this a beautiful conservation project in Africa, which actually provides a sophisticated financial architecture to make sure that a particular population is being preserved.

And then there’s already blue bonds. I think Indonesia issued blue bonds in the Japanese market. But the next wave of labeled bonds you’re going to see is probably going to go blue. I don’t think the green is ever going to go away and shouldn’t, but you’re going to see these things evolving from the green to the social to the blue. So there’s I think there’s a lot of hope in the capital markets. And too many actors nowadays will only buy bonds if they’re labeled. That doesn’t mean that you’re getting a discount. And we can talk about that how in practice there’s there’s a big gap between what you actually think you can achieve price wise with the green bond and then what you actually get on the pricing day. But that’s financial architecture. Before we get to that, a lot of hope into the into the bonds that are being issued. And this is just to remind you that the idea of SEO or International Development Finance Club is a coalition of public involvement banks.

Now, why is it important to have a coalition, you would say? Is it just another club? Is it just to ring out studies or what are we here for? I think this time around we’re thinking about things differently, and we may be issuing bonds in the capital markets as a club, or at least between some of us that can actually benefit from the better investment grade of agencies, such as gave W or U of T, get the cheaper lending, I’m sorry, cheaper funding and then lend, much, much cheaper to those who actually need it. The difference in the cost of capital between those who have the better rating and those who don’t, is at least ten percentage points. Which goes back to the to the tried and true question. Why is it that those who have actually get the better rating and those who actually need it get get the lowest or the highest cost of capital, the lowest opportunity? So we’re trying to bridge that at the idea of, see, we’re working on making this issuance happen. We expect to go to market this year. And at the same time we do a number of technical assistance. We’re having a tremendously, positive, training on greenhouse gas accounting next, early May in Bogota. You’re invited if any of you are going to be in Bogota, Colombia for that. So having a club of development finance institutions is actually for a purpose. We need to lower the cost of capital for those who actually need it the most. And let me turn to a different initiative. Which is the Green Coalition. But before I get to that, I’m going to say something that may sound harsh, but it’s probably true. As we saw, the Latin American neighborhood hasn’t been performing that well. And there’s many reasons for that. Bad policies. Money that wasn’t that well spent. We can we could talk forever about why Latin America hasn’t progressed the way it has. But on the other hand, the eyes of the world are currently on the region because of the Amazon rainforest. So it’s almost shameful to say that the world is waking up to Latin America. Because the Amazon sits at the heart of our region. And in order to make the best of this, and in order to actually come up with good policies that actually protect the Amazon, the Inter-American development Bank, Bndes, they came up with the Green Coalition. Bancoldex has secured a place here. We are now the vice chair of this coalition. And this is again, in my mind, one of the better initiatives that you can be thinking about, which is how to protect the lungs of the world that are sitting in our region and actually make the best of that with very, very clear risk factors. I think the Amazon has lost at least 5 or 10% of its, of its rainforest over the past decades, and that is lost because of illegal mining. Illegal trading. There’s a lot of illegality going on in the Latin American neighborhood. It’s not just drugs. I mean, drugs make up a great part of it. But you can add again, mining, you can add many, many, many, many things that go around the illegal trading. And we need to protect that. It’s not easy, but we have to come up with better policies and ideas to actually make sure it’s not just the Amazon, it’s the people and everything around it. And then finally, I’ll probably spend a few minutes on Colombia and open up to questions.

So what does this mean for us? In Colombia, we have four development banks. Some people might say it’s probably too many. There’s five if you count bank radio. But we take care of different segments. So if you now bank audio, take care of the agriculture and the rural Ftnd is all about infrastructure that that was designed to lend to subnational. And it actually does quite, quite a great job at that. And then world, we’re all about micro small and medium enterprises. This is probably a bit too much information, but during Covid our role was actually proven because before then, before we had such a big crisis. People used to think, well, why do you need five development banks? Why are you around for so-and-so reason? What are you actually doing? When Covid hit, we mobilized over 1 billion USD to micro, small and medium enterprises. Some of that was subsidized. Some of it wasn’t. But I think we really played out our role when the pandemic hit. Now again, we’re aligned with the SDGs and making good of the world. But let me in my in my last few minutes get to something that I find which is very interesting. So. Part of what we do is not just lending to these enterprises, but we think about innovative ways in which we can change realities. And my colleagues and I at the bank, probably five years ago decided that we had to come up with something for better microfinance. Microfinance has been around for decades. Actually, I think the microfinance story in Colombia is quite successful. A lot of people who had never had access to credit, or even now, who actually would have to go to the street in very dangerous conditions, actually have access to microfinance. But there’s at least three problems with microfinance still. One, rates are too high. So the funding rate for any microfinance institution in Colombia legally is between 30 to 50%. Now you’re all financial people here. What is your. If your cost of capital is 50 or so percent, what is your return? How much do you need to be making? There’s huge inefficiencies there. So high. Too high, rates. There’s too little access. And there’s a huge asymmetry of information between the client and what the microfinance institution does. So only if you’re lucky. Do you actually get credit. So what we came up with is this B2C platform in which any micro entrepreneur in Colombia can actually register and ask for credit. So this is I don’t know if this is the best example or not, but think of the lending tree of microfinance. Anybody has and should have access to finance, but now we’re doing it in a technological way. So any anybody can register, anybody can ask for a small loan. And the way this works is we have 27 financial allies at the other side of the platform who are waiting to provide competitive offers on that particular microfinance loan.

So what we did as a development bank was put the whole system in place. We registered the people. It’s open to registration. I hope you actually go into the thing because it’s quite nice. And we also set up. Not initially. It wasn’t 27. It was eight. Now we have 27 banks and fintech companies competing for this loans. And what we’ve seen if you look at the screen is. Almost 70% of loans that have been mobilized actually get more than one offer. Now this was unthinkable not too far away. When would you think that a microfinance individual, a small business, very, very small business could actually be getting competitive offers for their business? We’ve now done that 22% of access is credit for the first time, 44% for women. And we’ve actually seen rates go down. Now this is incipient. This is just starting. We’ve mobilized roughly $2 million. It’s only been around for two years. But the nice thing about it is it works. And I think this is part of the moral of the story. Wherever you work, and especially if you work at a public development bank, what you need to be doing is pushing the envelope, always thinking about how you can do something better. And I think that’s what industry does generally. But when you’re talking about development, when you’re talking about public finance, this is what you really need to be doing. Focusing on technological solutions that will actually reach the people who need them and who have been left out of the system for too long. So that’s the micro story, I’m sorry, the story of microfinance. No credit. So I’ll probably stop there because I really want to get, to interact with you. But just to sum it up. Wherever you go. Consider the power of public development banks. Great institutions. Been around for a while and we’re actually renovating our mandate and doing things in a different way. Think about the fact that wherever you come from, Colombia, other nationalities, there’s always something that isn’t working right. And if you go back to the beginning of this presentation. It’s sad, but in many ways things are not improving. Going. We’re going back in time. And that’s why you come to tragedies such as the forced migration we’re having throughout the Latin American region. People willing to risk everything just to survive or to have a better lifestyle. So thank you for that. And, I’ll be very happy to answer your questions.

Alejandro Rueda Sans Thank you very much. Thank you so much for this wonderful presentation. It was really, really interesting to see how, I mean, how the bank has evolved. I mean, especially having been an and an insider, during, like the first years and just, looking at this evolution is very, something extremely thrilling, and, and very laudable, for, for, for what the bank has done. So, right now we’ll take, questions for those of you who are online, please feel free to type them in the zoom chat and we’ll take them, as they come in. And then perhaps I’ll kick off, starting with one question. I mean, given that we’re an academic institution and some of us are economists, and perhaps we think of banking and market failures in a very fair, in a very theoretical way. How is that useful? Or at least, how can those be crystallized in practice? Or should those be crystallized in practice by public development banks?

Javier Díaz Fajardo So the thing about public development banks is we get regulated the same way that any commercial bank would. So Basel three applies to us. We get superb supervision in the case of Colombia from the Superintendency of Finance, and everything that we do is actually measured as if we were funded commercially and lending commercially. And in a way we do that. But on the other hand, we are expected to have impact. And I’ve been discussing with Alejandro and other colleagues here at Harvard this morning the fact that maybe we should be getting different KPIs and measuring more impact than more financial return. Now, mind you, our financial return is not that extraordinary. But it has to be positive because otherwise you’re just going to go into bankruptcy and nobody wants that, especially in a bank. So to answer your question, Alejandro, and again, hopefully get more interaction on that, maybe we need a different set of KPIs. Maybe we need to be suggesting on Basel guidelines, the fact that a different category for development Bank should be included. And we definitely need to be thinking about larger support from governments who are parents of these banks. It may come in the form of guarantees. Mr. Hausmann was talking about the callable capital that the MDGs of the world have, which is very, very interesting. Only 2.5% of those paid in capital at the Inter-American development Bank. Everything else is callable, but it relies on the faith and credit of the United States and other big actors. So I think there’s a number of ways in which public development banks need to be doing more, how that needs to be measured more in terms of impact than in terms of financial return. But before we get there and in the real world, and I’m hoping my colleagues in Bogota are seeing this, we are reminded every day that we’re back. And we have to put those domes out there, and we have to grow the lawn portfolio, and we have to keep our NPOs low. So this is an interesting conversation, among other reasons, because it has to bridge what we should be doing and what we actually do in practice. And we’re not there yet. The aspirational is still out there. We need we need to get to that realm. But in the meantime, our preoccupations in what we do are very mundane. We have to make sure that that loan portfolio grows, our assets grow. And I think we’ve achieved that over the past five years. The milestone 3 billion USD that we surpassed about a year and a half ago was extremely important, because if you’re a bank and you don’t grow your balance sheet, then you’re really not performing as a bank. But then you and in our case, you have to be you have to measure your impact in terms of social, development and how many SMEs that you reach and so forth. And then if you bring in the Covid element, well, that that’s tried and true. So I’ll probably sum it up, Alejandro, in saying that we are short of laboratories. We need to be thinking about better ways of doing things. How to reach those who have been left out forever. In the meantime, we can’t lose money. And a different alternative is should they really be banks? Maybe they should be agencies. And there are agencies around the world that do all these good things, but they’re not measured as banks. But that’s a bit technical, so I’ll probably stop there in terms of saying that, yes, we need to be doing other things and being measured differently.

Alejandro Rueda Sans Fantastic. Thank you. Let’s see. So we have one question from the crowd, please.

Speaker 3 On this measuring framework. I’ve always had that dilemma between people can that can generate for their work for example, that might not be the ones that need the credit the most versus people who might have lower skill funding needs that might not generate as much employment. So how do you choose between who to allocate the grants to and how to guarantee that they have the greatest impact, possibly within the society.

Javier Díaz Fajardo That’s a great question, and I’ll try and tie the answer to a program which is under way in Colombia, and I’ll use it the Spanish terminology economic populaire, which is financed for the common people, if you will. I guess first thing is related to the way you phrase the question. You don’t actually get to pick and choose. What you try and do is as you as you put credit out there, and you make sure that it reaches everybody in an equitable conditions, but you don’t really have the privilege of picking and choosing who gets credit. I would start off by that. And then the second thing you have to know is in order to reach people who have been left out, at least credit wise, you probably have to start with a very, very large amount of subsidies, and subsidies are scarce. So it’s actually an interesting thing, what the government is doing, which is putting out their loans that have, 12 months of, of tenure, which is actually a very, very low tenor. You get guarantees from a different government entity, a repayment guarantee. So up to 70% of your loan is guaranteed by another institution. And then if you pay in time, I think it’s the first 7 or 8 capital installments, then you get one free installment and the rate is actually below the funding rate. Now, in order to achieve that kind of magic, again, you need a huge subsidy. And that’s what the government has embarked on. It’s let’s get money out there and has to be productive credit. It’s not consumer credit. So let’s get the money out there and let’s get the thing flowing. But on the other hand, do you have the the ticket and the subsidies to actually make good on that? Well, it’s starting out and it’s still very early to say whether it’s successful or not, but it’s, it’s I think it’s a very bold move on the, on the part of this government in Colombia and any government for that matter, to actually be putting these types of credits out there. Now, the bigger question is what happens after that? So you got your credit one year, and maybe you were you were, you were lucky and you paid on time. You didn’t have to access the government guarantee. But then what does that mean? That you’re now in the formal credit system? Maybe. Maybe not. Does that mean that you need technical assistance? Probably, yes.

You probably need much more in order to get you rolling. Because remember, these have been people who have been left out of the system forever. So I guess to sum it up, you need to put everything out there. You need not you need the subsidies. You need instruments like the public development banks, but you also need technical assistance. You need a lot of things to actually make good on the promise that people who have been left out can actually have a better future.

Speaker 3 Thank you so much for, giving this talk. I’m very curious. You mentioned three problems which the PDBs are still facing. Especially on the cost of capital front. Exactly how can a PDP solve for a cost of capital problem, both in Latin America and especially In Africa as well?

Javier Díaz Fajardo Okay. So, I’ll try and make it simple. The traditional terminology in terms of credit ratings, actually drives a wedge between those who are investment grade and those who are not. And you can take any scale. You can take Moody’s, you can take it, and B, you can take Fitch. There comes a point in the scale where you are either investment grade or you’re not. And I think that is pretty odious. And I think that, in a way, is is a self-fulfilling prophecy in which you’re actually excluding more people than you should. So what happens is if you’re not investment, great, your cost of capital gets actually shot up dramatically. And then getting out of the either non-investment grade or junk, as it’s called elsewhere, is actually hard, and it takes a lot of time. In the case of Colombia, we we lost the investment grade, I think it was back in the year 2001, and it took about ten years to recover. And then we were investment grade up until 2021, and we haven’t been investment grade since. And it’s just sad to think that it’s going to take another 7 or 8 years to get it back. That shouldn’t be the way things are. So how does that relate to the cost of capital? If you’re a subnational or you’re a public development bank and you’re sitting in the neighborhood that is not investment grade, your cost of capital gets dramatically shot up. So you may do. You may be doing everything right. But if you’re in the wrong neighborhood, then your cost of capital is not going to improve. But on the other hand, you also want to think, are we doomed to that? And we probably shouldn’t. So this ties into the idea that I was discussing before, which is if we’re in a society, global society, and a club in which the better credit can actually provide a guarantee or actually lever upon the lower credit, then the lower credit actually needs, we should be able to bridge the difference between its insanely high cost of capital and the benefit that it can get from a bigger brother. In a way, that’s the philosophy of the world Bank. The world Bank has the lowest cost of funding possible around. And it funds itself low, and then it charges very little to the other countries, and it charges a bit more to the bigger countries. But we need to be doing that not only at the world Bank level. At the practical level, we need to be having issuances out there all the time that combine the better balance sheet and the not so good balance sheet. So I’m hoping that answers the question. It’s all about more collaboration between the haves and the have nots.

Speaker 3 Okay. So I think public, development banks are a pretty interesting figure as you’re regulated by the government, but you have to. Be credible for private institutions. And so you’re all the time in a middle ground. You’re exposed to political cycles, and you have to align those private interests with the public, agenda. So I wanted to ask you, how do you do this and what are the main lessons that you have learned along the way in fulfilling this mission?

Javier Díaz Fajardo It’s a big question, I guess, to start tackling from any angle. One of the bigger lessons learned is you need good corporate governance. And I think in Colombia we have a lot of that. And in the case of bank colleagues, we’ve been around for 32 years, which is probably eight presidents, maybe nine. And I can tell you and I can guarantee that now. And in the past, Bancoldex has not been a politicized entity.

We serve the cause of the micro, small and medium enterprises that we serve. So if you have good corporate governance, then you can you can make sure that you’re focusing on what you have to do and not unpleasing X or Y individual. So I would start by saying that the good corporate governance is at the heart of these institutions. And then balancing everything else is that it’s a balancing act. It’s more art and science. In the end, you are regulated as, as we’ve been discussing by, by the typical rules. So yeah, every year is a challenge. And Alejandro can attest to this. Every year at the bank we have a budget. We have a balanced scorecard that actually, it applies equally to everyone, to to all individuals who work at Bancoldex. And that’s how we measure our, variable remuneration. So we either get a bonus or we don’t if we meet very stringent metrics. And I would also add that that is key because it’s different when you get your bonus based on the fact that your boss likes or doesn’t like. Here. We have a system. It’s laid out every year. It’s a big discussion with the board. So the last quarter of any year in Bancoldex is spent on preparing the budget, preparing the balanced scorecard, discussing it with the board, taking into account what they say. And then we have to start every year fresh. And we do we start tired in a way from that discussion. But we start fresh. And every year brings its own metrics and its own challenges. The not so good part of that is that we go on a year to year basis, and only so often do we think about the big picture. So we probably should be thinking more about the big picture. But again, to sum it up, it’s good corporate governance. Which in a way leaves you aside from the political cycle. And then again, just having good systems in place.

Speaker 3 Thank you for your presentation. It was very interesting. I have two questions. The first is how do you think the government should decide how much money to put or not in the development bank? I am from Brazil and there’s a lot of criticism about the money that’s put in behind this because of the opportunity cost that you could put in education or you could pay your public debt. So I’m curious to know what your thoughts are about how to decide where, to what degree the government should invest or not. And also related to last question, I’m curious to know to what degree you think that the public banks should be aligned or not to the government agenda, or they should be more focus on long term things? And a second question is more related. I was just reading yesterday the Mariana Mazzucato, a paper on mission oriented development banks, and she talks about the idea of like having the development banks focus on specific outcomes that they have can be like, for example, having 100 carbon neutral cities in Colombia, and you have this mission and you bring all the different sectors to solve that. I’m curious to know if what’s your thoughts on this mission oriented approach, and what are the main challenges in terms of measuring outcomes in terms of impact and not only financial numbers?

Javier Díaz Fajardo I thought you from Spain because you’re bringing the interest in. Okay. So how much money should the government put into its public development banks? I’ll talk about bonds in a few moments, but I think it’s not just about putting in equity. It’s about providing guarantees and other types of supports to your public development bank. So combine equity, the right amount of subsidies because you need to subsidize credit. And the example I was posing when you when you want to provide credit to people who have been left out of the system. It’s highly, highly subsidized. And it has to be. But then if you’re going to be providing loans to large corporates, then it probably doesn’t need a subsidy. So you need to get the blend right. What how much subsidy goes into each segment. and then. Let me talk about bonds just because I’ve interacted with colleagues there, and I think they’re all wonderful. But BNDES over time amassed a very large asset side of the balance sheet. And in the process they have, they have finance, the aerospace industry, they finance other industries. So I think the good about pouring a lot of money into a public development bank, or maybe too much money, is the fact that you build a big balance sheet and you actually achieve great achievements. On the other hand, that has required tremendous amount of subsidies. That has made BNDES, the owner on the books of many publicly traded equities. And you have to. And BNDES has a return on equity that at one point was as high as 30%. Now it’s probably lower than that.

But then you have to wonder why? Why would you expect such a high return on equity from a public development bank? There’s inefficiencies in the process. And by all means, I’m not I’m not badmouthing Bndes or the Brazilian government by any means. What I’m trying to say is that there’s always a quid pro quo if you put in money, and again, money and resources are scarce, then you have to target it, right, so that it reaches what you need to do in the end. But you can’t overdo it. And I think over time, maybe in the case of BNDES you have the good and the great, which is size. But then on the other hand, why are you holding public equities on a little rest quite a bit tighter, as if it’s still around. Why should that be in the balance sheet of a public development bank? Probably shouldn’t. So I think to your point, which is very fair, you probably need to get the right amount of subsidies and equity and guarantees, but you want to make sure that the multiplier effect is as high as possible. Because what we do, at least among colleagues, is we bring in private money. Everything that we do is private money. It’s funded by the private sector, and it’s the right amount of public subsidies that actually allow us to continue our mandate. I think in this point in time, in bank colleagues, we need more subsidies. Doesn’t mean we have to fill ourselves with subsidies, but we need more subsidies at this particular point. So I guess that would that would tackle the first question. And I’m sorry, I forgot your second question.

Speaker 3 Related to the idea of mission oriented machinery. Yes. Okay. So and it ties beautifully into the first question. Oh, it’s great to talk about mission oriented. It’s I mean, it’s something we all want, but then in the real world, we’re banks. And how do we achieve that? So in a way, it’s the same question. It’s the objective. It’s the mission. And I think we can all agree on that. But on the other hand, when you think about the nuts and bolts and how we achieve that, you have to go back to lowering the cost of capital and bringing in the right blend of government help. So it’s what I would dare to say is it’s not just about the mission oriented. It’s all about how you achieve that with the right government support.

Alejandro Rueda Sans Great. And I think we have time for one more question. From the audience.

Speaker 3 Thank you so much for the presentation. I am Isabella, I’m from Peru, and I am super interested in the impact investing field. One trend that I saw happening right now in sub-Saharan Africa is, some potential alliances between DfID and impact investing firms. So I was curious about like, what’s your vision on the impact investing firm and potential alliances like happening in the Latin American region?

Javier Díaz Fajardo The short answer is there’s not enough going on in Latin America on impact investing. So, that’s the short answer. The longer answer is goes back to the cost of capital. If you’re partnering with someone. What you need to do is to get that help or subsidy or whatever you want to call it, and blending it into a better rate. Now, when you do that, you have to ask for additionality and then measure what you’re actually accomplishing. So stated differently. We should be doing more of that. I think I think Africa is doing is doing a much better job in impact investing. That’s on the lending side, on the equity side, which is something the public banks also do. I think our story is smaller in numbers, but much more interesting in terms of impact. So let me cite a few examples in in Colombia and what we’ve done at Caltex. It’s hard to say. But over the past five years Colombia has been riddled with crises. Of course, state Covid. But then we have we have two small islands on the Caribbean, and they were struck by two hurricanes within a week. So not just one two hurricanes and one of the islands was even though it’s a small island and only one casualty. It was it was almost obliterated. My colleagues and I went there, I think three days after the second hurricane had passed, and it was literally as if they had dropped a bomb on the whole island, because when you take the hurricane effect in the south, it just kills everything. Everything that is green all of a sudden is brown and barren.

So when we got there, we decided, okay, what are we going to do besides the humanitarian? And we set out an impact investing fund. This is equity. And it’s not even equity. It’s quasi equity. It’s a very simple form of saying to a person who used to own a small hotel. I’ll give you this money, and let’s just make sure that you return the capital, not even an interest. And we do it. Any particular point in time. But, I think that sort of impact investing when you’re dealing with crises is something we have done well, we just need to do it on a permanent basis. But to do that on a permanent basis and not expect a financial return the way you should. You actually need for someone to cover that because again, go back to the point where if you’re a bank, you need to be showing results on a yearly basis. You need to be growing. So again, not enough impact investing going on. We need to be doing more of that. But I think on the other hand, I think the large corporates and the investment world is actually realizing this. It’s realizing the potential that us, the Ifis, have. So even though we’re not doing enough, I would see a brighter future for that.

Alejandro Rueda Sans Fantastic. And perhaps we have a couple of minutes to take one of the online questions. There’s been a few trickling in. I’m going to take this one which asks, about the lending landscape change in Latin America, given, the new influx of funds not only coming from the United States, from Europe, but now from China. And they cite here the case of China signing recently occurrences with our agreement with Argentina. How has that looked for in Colombia? How have how is Chinese capital changing the landscape of funding in Colombia?

Javier Díaz Fajardo Not in Colombia. I think, I think for, for historic and other reasons, Argentina has been much closer to China and Japan historically. Colombia, shamefully was close to immigration for the most part of the of the 20th century. And that’s a shame, because we probably missed out on a lot of great migration that we could have had. So I can’t speak for Argentina. I haven’t studied enough about the currency swap and so forth. But the bigger picture is China is out there and it’s a multipolar world. And I, I say this with a little bit of sadness. We’ve been overlooked, in a way, by the US and in a way by Europe. So if you’re overlooked and other people come and fill the void, then then this happens. Which is probably not a bad thing either. If you get a good currency swap, then.

Probably needed, then go for it. But on the other hand, it does show you that. Whether it’s China or whether it’s other actors, we need to be open to other actors. As an example, closer to home, Bogota, the city where I think you come from as well. We’re getting our first metro built. It’s taken forever. It’s taken decades to actually materialize. And the construction company is Chinese. I have no opinion on the fact that they’re Chinese. They could be Belgian. It doesn’t matter. But it comes to show that the one who won the bid, and the one willing to take certain risks where the Chinese at the moment. And so be it. Same thing, maybe for the currency swap in Argentina. I just I just think we need to we need to fill in the funding gaps wherever they come from. And I think we’ve been overlooked. So maybe other regions will, will, wake up and come back to this.

Alejandro Rueda Sans Fantastic. Oh, yeah. It has been an absolute honor to have you here at HKS. Thank you so much for making it over here. Thanks, everyone, for attending. Please, find our your, boxed meal outside on your way out. Sadly, we couldn’t be here in the classroom. But please join me in giving Javier a huge round of applause.

DISCLAIMER: This webinar transcript was loosely edited and there may be inaccuracies.

Christian Gibbons I’m not a professor and not a lecturer. I’m frontline guy that’s been doing economic development for 35 plus years. We changed economic development back in 1987 by adding an entrepreneurial approach. What I’d like to do is make this a little more interactive. As we go and pose some questions, take some questions, vote, we’re going to take polls assuming it works, which is what we’re trying to get to work here. I need to get some baselines. Was anybody in the Taubman Center seminar last fall that I gave? Okay, I apologize. There’s going to be a little bit of overlap. But there’s a lot of new stuff here. How many people are familiar with complex adaptive systems? Okay, fewer than I thought they might. I’m going to wade into that. I mean, people who know, Mr. Ned Ludd, Don’t say anything.

Anyone familiar with the term Economic Gardening before? today? Okay, well, we’re starting at Ground Zero. Good, because that’s what I’m prepared to say. So this is just stablished my credentials. If you go in and Google Economic Gardening, put it in quotes, you’re going to get vegetable gardens. You will see about 100,000 hits from some pretty major organizations in there.

Here’s the question, I want to ask, does everyone benefit from our economic system? What if I said, anybody in this country can buy and probably has bought an HDTV for $49? Remember, I said if you took everything in that Walmart, super Walmart, Costco, Target, whatever, and took it out that parking lot and piled it up, that almost everyone in America can buy almost everything in that pile. And this is where the quads this is. I know that there are 1910 1000s of our population are homeless, but 334 million people do have homes.

Take the poll again. Does everyone benefit from our economic system? The vast, vast majority. Okay, even though anybody combined it may not be able to buy Mercedes. Let me ask a different question. I asked about Ned Ludd. But he sees rowdy little band of Luddites are talking about I mean, people know Luddites if I said that. Okay, everybody has had an economics course, right? For those that don’t know, they were skilled laborers in England. They made high quality custom fabrics, in their homes, textiles, brocaded kinds of things. When the Industrial Revolution came along to England, factory owners replace them with these automated looms keep track of automated that’s what I want to talk to you all the way through here. So the looms destroyed the weavers jobs, and the weavers smash the looms seemed like a real straightforward solution at the time. I found this photo in Google It was titled wandering Luddite and they said they roam the countryside looking for work.

So let’s change the question a little bit. Should public policy encourage automation, mechanization, industrialization technology? I’m going to use the word automation all the way through, or should it discourage automation, or shouldn’t be no public policy whatsoever and this is a private sector matter. You know, things work out, let her rip. Okay, so here’s your three choices. In curry, public policy, encouraging automation, one to add additional people voting at the start over. How many we have in there 30 Maybe so half of the people 16 out of whatever six people we got. Thank you.

So we still got two other categories. Industrial Policy discourage automation. One, two. Okay. What about no public policy? This is the private sector thing. 1234. Okay. All right, getting a little bit of split in the population. How many people have been to Gary, Indiana, at least know the story of Gary. Half of you. These are pictures of the real Gary, you haven’t been there. It’s at the bottom of Lake Michigan. I used to fly into Chicago drive around in relation Michigan going over to the state of Michigan. And the interstate goes right through. And I’d get off every once in a while and drive around and just see what was happening there. It was established by US Steel, one of the biggest steel mills in the country. And at the tide of it employs 30,000 People that town was set 170,000. Let me give you the numbers are they’re down to about 3000. And the population is down about 70,000. So they’ve lost 100,000 people. And you know, they lost jobs. You can see the homes you can see the downtown either. It’s a major mess. I feel for it. I’m not criticizing I feel for gearing.

Okay, let’s take the poll again. So most of those jobs, well, first of all those jobs once a couple places, some of them went to China and other places with steel mills. Some of those jobs, just automated. They just got rid of the people. So they dropped down from 30 to 3000 170 to 70,000. Take the poll again, how many people think we ought to encourage automation as a public policy? Sounds so maybe a third, discourage automation as a public policy. nobody’s willing to discourage it, even though people don’t care and you don’t have places to go anymore. About no public policy, letting go.

Okay. And if people know or have heard of or been to Wakita, Oklahoma, that’s zero. If you’ve heard of it at all, it’s probably because you saw the movie Twister. And this was a movie about storm chasers. Helen Han. Bill Paxton. Wakita is a town that gets destroyed at the end of the movie up there at the top. And there’s this scene where they’re eating it at Meg’s house and the news report comes on. There’s an f4 Tornado they don’t run out of the house get in their cars drive storm, fast out of town, and there’s a helicopter shot following them leaving town and when they get to the edge, it rises up. You can see the Wakita water tower. Okita happens to be my hometown. My parents live across the street. That water tower was established in 1893. In the Cherokee Strip, Land Run 100,000 people as far down as you can see, and that photo lined up on the Kansas State Line so they could claim land in this trip and all you had to do race in the first drive a state with a white flag into the ground. You got 160 acres, yours to do whatever you wanted to build a house. It farm it, you can plot a town. It was free, absolutely free. To my great grandfather’s were in that race there in that photo. So I grew up on the farm that was great grandfather’s state in that race. And Wakita at the time had probably 500 people but there were farms every 160 acres all around. My dad’s in the Navy in the South Pacific comes home wants to start a family like they all did in the original baby boom. I am a baby. When I grew up baby boomers were people born in 4647 48. That’s when everybody came home and started families. Hamlet’s full of kids. Stores are full schools who burn bolding, everything’s thriving.

So after the run of Family Farm could farm a quarter section. Lamb quarter section is half mile half mile section is a mile by mile. And you may be two quarters at the absolute best. All that land was planted to wheat. And it took a crew of about 10 to 15 men to harvested and to run the machine over several weeks. Randy Laney, who was a high school classmate of mine, went college came back to farm. And Randy, with the help of three employees can cut more weed in the morning, and that threshing crew could cut in two weeks, Randy farms 48 quarters 48 of those farm families that state that original land are gone. So all the farm families settled in that land. Almost all of them are at 93 are gone, the jobs are gone. The stores that they used to shop to and Saturday are gone. Maybe 200 people left in town household incomes barely 30,000 Most people on social security, average age 82, Randy’s use of numbers a lot in terms of average household income. Now only use Wakita as an example because I know it. But this same story occurs all through the Great Plains and the Rust Belt in the Midwest and in the South and in the timber towns and in the fishing towns. Anything that’s a natural resource production town in this country looks a lot like this story. We corn, cotton, tobacco, timber, fishing, mining, towns that process natural resources are dying all over the country. It’s not just Lockheed. You haven’t seen in, take a road trip, just stay off the interstates you got to see what the other half of this country looks like. Those farmers go, what if I said some of them went to work for Boeing in Wichita, 90 miles away from my hometown. When a farm when something breaks down, you got to fix it yourself. Nobody’s coming. And most farmers have deep mechanical knowledge and tools, and a lot of them started making jet airplanes at a much higher income.

So let’s see where we stand again. We’re going to ask both questions at the same time. Should public policy encourage automation, discourage automation or be no public policy? With the understanding? We started out with a small group of Luddites, England early 1800s. long ways off? Nobody much cared about Adams. Small problems. We expanded it out to Gary, Indiana. Well, what about if it’s the old town? Well, it’s a small city that just gets decimated because of automation. And we’ve expanded that out to Wakita and all the walkies across the country that are decimated. Should public policy increase automation decrease the no public policy? Increase automation? 123 the same by changing their mind and this? Put your hands up against getting quick candidate. Okay, we’re coming to us decrease automation no public policy. One day you’re voting the same way people are thinking about it. Are you keeping track my numbers on Thank you?

Let me ask the second question. Does everyone benefit from the economic system? Same issue. Small groups. Bigger city, a lot of people but you got Walmart, Costco and you can buy tons and tons of stuff. Does everyone benefit from the economic system? Yes. 1234? No, all the rest of the people I got doesn’t mean not many people were in here. 3036 38 Something like that. I want to talk about something that’s messy from our business and we have to deal with it every day. And I’ve always called a capitalism’s conundrum. Here’s what I think because people tend to argue Well, capitalism does everything and capitalism doesn’t do anything. And, you know, maybe we have looked at different systems on and on and on. I think capitalism is very good at innovating new things solve problems. I think it’s the best in the world. And I also think that it makes things cheaper, and it gets applied to demand efficiently. It’s hard to argue with those things. There’s data behind that. Its drawbacks is you can’t have low wages. low speeds, me low price and high wages. There are two sides of the same coin wages as part of price, which is what’s going up and down here. It throws people out of work. I don’t think anybody’s going to argue that there’s a lot of people that got thrown out of work, if nothing else, Gary, and it destroys communities. What we’re wrestling with, I think, is this little piece of logic because you can’t have low prices and high wages. And they’re two sides of the same coin. So what we’re dealing with right now is everybody’s wages are rising. And evergreen, Colorado where I live, you can go to work for Burger, burger, Wendy’s started saying Burger Chef for the long run. 20 bucks. Used to be car wages, automobile wages. The hamburgers are $10. And so you give people raises to work at Wendy’s. And it’s like, Oh, that’s good. And it’s like, well, the prices just went up. Oh, well, that’s bad. That’s a conundrum in my mind, I don’t think we can get around it. I’m going to talk about what we do about that sort of thing. But driving down prices, throws people out of work, destroys communities, it’s hard fact to get around. Let me sweat for just a little bit. I want to talk about economic gardening. This is Littleton Colorado, where I work for 25 years, I live in Evergreen, but I worked in Littleton.

That’s our transit station. So the we send out an article about the history of economic gardening. Okay, all right, that’s fine. It’s not Shades of Grey, 50 Shades of Grey anyways, got plenty of things to read. Before 1987 economic development was about my town, getting your towns companies to move to my town. That’s the basic deal. And there’s a man over here that probably just lights up here. Because there is lots and lots of issues around the basic issues of incentive packages. And are they fair? And are they transparent, on and on and on, probably ought to let Greg do the last half of this. So the whole idea of economic gardening was invented in Mississippi, more or less, and all the things that they do was, the first thing they did was they come up to New England and took your textile mills and move them down the Mississippi, because they had cheaper wages, that cheaper land, they had cheaper taxes, they had cheaper, virtually anything. And so that was the basic deal is we’ll find a cheaper place for you to do business. Now. If that seems on paper to be a little bit sketchy. That’s what’s still being done today. And that’s kind of what set us off. So if, excuse me, if that is called economic hunting, we’ll go somewhere and bring a company to us. But we decided to stay home and work with the local entrepreneurs. We need water, fertilizer, do those kinds of things. So let me lay out some basic principles around our program. I know it’s a little hard to read that all that information is in the blue swath. See if I can point it out here. This is this is title. Most jobs are local. This is by state running down this side. And the anything and Brown was recruited in so this darkest brown that you see here was a straightforward recruiting deal. What’s what economic developments been about forever, never. The next brown means we recruited them last year and they did some jobs this year. We’ll go ahead and give them credit. They weren’t our jobs. They weren’t local. And then this brown is franchises. And that’s McDonald’s. They’re Illinois but they are creating jobs here. These jobs are created locally and accompany Look at that 80% line. Every state in the Union creates jobs locally on walk. 90% line running down and through there, some of them are as high as 90% of the jobs are created locally.

This is the other chart and I apologize, this is a screen chapter, there’s a capture, there’s actually two charts on here. And what I want you to pay attention to is this red line. And this red line. This is by size a company. And we deal with companies that are staged to 10 to 100 employees, one to 50 million in sales, that size of company, run 18 20% 15%. But it’s really stable in all kinds of economic situations, all parts of the country. Down here, this is okay, by size the company, those stage two companies, how many jobs did they create? That’s the 40% line right there, they’re bouncing around 3839 40% in there. Here’s a simpler way to look at it. And that is, as a general rule of thumb, you can say those states to companies, which are 15% of the total, are producing about 40% of the jobs, they’re punching way above their weight. That’s who we work with. This next principle of economic gardening is the idea that the wealth of the community is dependent on a small group of companies, we use a bathtub knowledge analogy, when we’re talking to councils and mayor’s club is the community. water in the tub is analogous to money circulating between the local businesses. So the CPA goes to the restaurant, restaurant uses the printer, the printer goes to CPA money’s just circulating around in there. And theoretically, that town could live forever, my town could have lived forever. It’s it made it made everything needed.

That no town does. New York City does not make everything it needs, doesn’t make its own cars, doesn’t grow its own weed, doesn’t make its own carpet, most of the carpet in this country is made in Dalton, Georgia. So every time you buy a new car from Detroit, or Tennessee, or you take your family down to Disney World, some of that money is leaving town. Money in town drops down, there’s less money, CPA only eats out once a week, instead of three times, the restaurant decides, you know, they’re not gonna go get things printed, the printer decides they’re going to do their own taxes this year. But obviously, there’s another factor in this. And that is the tub gets refilled by a faucet by selling things to the outside world, bringing them in, Gary, it was steel. As long as that faucet is running at the same rate as the drain the town stable, it’s a boss, it runs faster, and the drain town grows more money flow around with the local stores. Want to move the camera yet on a tight shot of that faucet?

Because who is that? Well, it turns out, it’s mostly those stage two entrepreneurial growth companies that sell innovation to external markets. That sentence summarizes 30 years of experience. If you keep track of anything, just learn that. So this is those companies we saw back in the starting slide. You know, the people who are creating so many jobs are in economic gardening, our focus is on the small group of companies. That’s all we do. And they do well the entire community does well. Not only is the CPA back eating three times a week, and now because of throwing there’s a new chocolate shop that opens up down on Main Street. So I want to introduce complex adaptive system, which is really complex, but I’m not going to go through it in great detail.

But it’s a new science created in 1984 Santa Fe Institute in New Mexico, Dr. Houseman, I think bunch of you have classes with him is the co chair of the science board down and he’s one of the people helped create it. All we did was learn about it and apply it to our business. So in the simplest terms, complex science studies, the interaction and the adaptations of individual agents, things that can app adapt and interact. That sounds like life sounds like business just because it is life and business are complex adaptive systems. From the economic gardening standpoint, the most important thing is this is that complexity creates emergent systems, new properties, new characteristics, new signatures that are not found in those component parts. And these emergent systems have their own outcomes. But they’re not planned keep track of that little sentence, this is gonna be a big factor in the benefiting conversation. And again, the example of why I think this is important. Our political system was planned. Inside, there’d be three equal branches of government and the checks and balances, two branches, the legislature for the big states, the small states Bill of Rights, we planned the political system. None of that is true about the economic system, it was not planned. No one said, you know, we need money, and I probably banks, and probably interest rates, and maybe stocks and bonds and derivatives, on and on. All of these emerged as part of the complex adaptive system. So we have a system that has outcomes, but not planned objectives. So when people talk about market failures, and it’s like, what’s the failure, there was never a proposal what it was supposed to do, it just emerged and started to operate. So I want to take a look at a couple of system properties that emerged and they’re called commodity traps and leverage points. Commodity traps is absolute core in my idea of why I think things are going wrong. Because Rafale. Raphael, thanks, I have a one note drum because that’s all I talked about. Commodity traps. Simplest way, this is what we use to explain the council. So simplest way to think about that is you can’t differentiate it. And we use salt because it’s the simplest way to think about it. And on the lower left, that’s my business is in the orange and yours is in the white, and selling salt for two bucks or selling it for a buck 80 and the consumers gone? Well, this is a short conversation on pick the cheap one, thank you. So the bar chart to the right, all the customers shifted to you. On the bar chart to the right, the only way for me to get back into business is I gotta drop my price, you’re gonna Buck 80.

So I’m not a buck 60. But I also got to get my expenses down. And I’ve got to drive out, you know, 5060 cents worth of expenses in there. So I order in bigger quantities. And, you know, I find more efficient systems. But there’s a big number in that income statement. And it’s wages. And it’s like, whoa, can we get rid of some of these wages. And so I move them from the union north, down to the Right to Work south, then to Mexico, and then to China, because I’m getting cheaper and cheaper labor all the way. But sooner. And as soon as I do that, and I drive mine back down, you are back in to the same situation that I had. So you go okay, to drop my price below, you gotta get my expenses down, get my wages down. Pretty soon, probably both of us donate the thing that we voted on all the way through there. And the thing that we saw had real impact and real communities and real people. And it’s like, we’ve got a system operating here. And this is like, a whoops, excuse me, let me back up just a second. This is like a arms race. Nobody wants to do an arms race. But you just built your arms and like, Oh, my God, we got to build that out. You got to build. This is exactly the same, except it’s working downward. And it’s like, oh, you drop your prices. And I don’t want to drop my prices. But I’m losing all my customers, do you I dropped my prices, you drop yours. We’re racing to the bottom, and the winner is the person that gets to zero first. No paper you’ve got? What? How does this work over the long run. So that, in essence is what a commodity trap is about. If you get to the situation where you can’t differentiate anymore. You’re commoditized. And once you’re commoditize, you’re in this game, whether you want to be ended or not. Let me talk about this core strategy that we use every company we deal with, we deal we’ve had about 3500 Some companies over the years. So we’ve done this a bunch of times. So all businesses can be defined as having a profit margin on their products times the number of products they sell, margin times volume, and that allows us to construct this diagram. So on the left hand side, you’ve got volume running from low to high down at the bottom, you’ve got margin running low to high that creates four quadrants out there. Two of those quadrants are not real and stop and think about how high margins I volume, we make a million dollars and what we’re selling and we’re selling a million of them. It’s like a golden ratio, you’re going to wake up in the morning people are going to be camped all up and down the street. You know, it’s going to exist for about a nanosecond out there. The other one that doesn’t exist, these are the gray ones is the Death Valley. And that is we don’t make very much on what we sell. But don’t worry about it because we’re not selling. Oh, your little margins? Like, what’s the point? Where are we going to work every day. So what you’re going to find is that what we’ve found, and let me put it that way, is that all businesses have one or two core strategy.

They’re either commodity and they say, You know what, we’re going to fight it out on price, or Walmart or anybody that’s producing big commoditized things. You know, the soap that you can buy a Walmart’s the same as Kroger’s are the same at Costco. And it’s like, they sell it cheaper down here. So the rules for winning is to get big and drive your cost down. Real simple. And you got to make a choice. And we always tell our businesses, we’re not telling you, we’re not advising you, we’re explaining how it works. You just tell us how you guys were. The other is a niche strategy. And in this strategy, niche, and the East niche in the West. From the west niche strategy is rules the winning is that you got to constantly innovate, you got to open up something a gap. And so I make something that you want, that you don’t make, and you’re going, Wow, that’s really expensive, you got that big, huge margin built in there, but I need it really bad. And so I’m willing to pay for it, that’s gonna exist for a little while the competitors go, we can do that. Apple, 18 months Samsung, country, Apple, Samsung. So the game there is you just got to keep opening up the gap on each one of the, the competitors you have. So if you’re in the commodity quadrant, low price, high volume, Walmart, you’re in, I just made this one up low button. So if you’re in the niche, it’s low volume, high margins.

So software for nucleolar plan, you know, the same not a lot of people do that. And it costs a lot of money to do it and you’ve got a monopoly. There’s something else in the system. It’s called leverage points. And H fac a SPAC is heating, ventilation and air conditioning. So your heating cooling system, the leverage the point to be made in systems thinking is that if you change the outcome of a system, you change it by the leverage point. And in the leverage point in the heating system is that thermostat. So let’s say it’s too hot. And so we go, okay, well, let’s open up all the doors and the windows to cool it down. What that does is activate that it gets the heat back on. That’s the leverage point, you can go out there on the edges and try to make changes go find the leverage point. And they aid in our economic system. We think the leverage point is supply and demand.

So what happens in innovation, I open up a gap, you try to close it down on me. But here’s the thing, think about it is you do not have to be the absolute best. You just got to be better than the competitors. And I’ll give an example. We work with a lot of job shop, males, companies in the Midwest, and they’ve all got five axis CNC machines. Sand machine has computer numeric control, it can make steel 1/5000 of an inch can drill holes do it’s the best you can get. But guess what? A lot of other people have five axis CNC machines, and they got them in China and they got them all over. You got a mountain California. And so they are still commoditized. And if you stop and think about it, it’s just exactly like salt. And it’s like we’re doing the best we’re doing the last thing. So here’s the basic commodity trap. You can do one or two things. You could be in the race to the bottom, you can be in the race to the top. So those are two core strategies for maps. And then we’re done. This is it shows an argument I’m making is that what’s causing the problems in our country is areas that got commoditize those people and I feel for them. They got thrown out of their jobs. You were working in Gary, Indiana, you you worked there 35 years and got raises you raise your children, you participate in the churches, you do all the good things from a personal standpoint, and you lost your job and it’s like that’s the best All right, here’s what’s happening is this is an innovation that Listen, I want you to pay attention to four patterns. Because these four maps are the same. These four areas on the West Coast is they’re not very big. You know, geography wise, this is real big geography wise, but nobody lives there. So there’s Montana and the Dakotas, Seattle, Portland, barre area, LA, San Diego, that pattern, this is the boss wash Boston to Washington. That’s an innovation. This pattern across the South has low levels of innovation, these areas from here, train Michigan, Wisconsin, Pennsylvania, Ohio, that list sounds familiar, because that’s the political those people are going to decide the election, you don’t live in one of those states that make any difference how you broke it.

So six states take a look at household incomes, same pattern running down this side, same pattern running down this side, working very well. Household Income very low across the south. Take a look at this is called prosperous and distressed communities. Pattern problem here. This these this is the dicey states because we don’t know which way they’re going to go. election results of the last election. They’re, they’re right across here dicey in through this area. Closing arguments. There’s a simple version of our take on whether the economy is working for everyone. Capitalism has a conundrum built into it. It’s good at innovation, it’s good at driving down prices.

But to do that, it throws people out of work and it destroys communities. And the mechanism behind that is commoditization, it’s buried in there. It’s like a commodity trap. And it’s like a whirlpool in our economy. And if you slip into that commodity trap, your futures not going to look very well. So ultimately, it drives prices down and eventually they just automate it, like they did the weavers way, way back in the first part of this. That’s the commodity trap. We think public policy ought to be about moving people forward. modernization is the root of poverty, and it’s on the back end. Innovation is the root of wealth, and it’s on the front end. And it’s pretty clear. Look at those maps, big data is there. Public policy ought to be moving people from the back end, the front end, and from our standpoint, what we do with economic gardening, there’s four principles. Local, it’s already 80% stage two, that’s the 1540 rule.

Innovation spend a bunch of time talking about why innovation versus commodities, external markets, those four things.

DISCLAIMER: This webinar transcript was loosely edited and there may be inaccuracies.

Ricardo Hausmann: So it’s a great honor to have with us Marcos Buscaglia, who just published a book that we are going to be discussing. Marcos is a graduate from UPenn, where he got his Phd in economics has worked for many years in Wall Street and Citibank, and then Bank of America, and now has his own, analytical firm of Latin American economics and politics and has been in this, business for quite some time. He’s from Argentina. I’m from Venezuela, and both have been concerned about, democracy in our home countries and worried about, the role that Wall Street has in enabling or, you know, would be dictators or actual dictators. And so and that issue is what his book is about. And so, it’s really it’s really an honor to have that issue discussed because it’s, it’s an issue that I have, I have cared for, some time. And it’s really, really useful to see, a treatment of it and, and come up with some, some solutions and understanding what’s sort of like the structural incentives in the industry that may or may not help or hinder democracy and finance. We have Javier Murcio with us was also going to provide some comments on, on Marcos’s book. Javier also comes from Wall Street, where he has been, a portfolio manager of emerging markets, fixed income, for Standish, Bank, Bank of New York Mellon and, and he has been working with several of major players in, in the industry like Paribas and and Credit Suisse. So without any further ado, I think, Marcos, we’re going to sit to see your presentation more comfortably over here. [00:02:33][148.7]

Marcos Buscaglia: Okay. Thank you very much Ricardo for organizing this, and everyone for showing up. It’s, my pleasure to be here. So I would make, presentation of, you know, taking some minutes, and then we can, you know, we can take questions and discuss. So let me, let me start by by telling you how this, this started, because it’s not usual for an economist to write about democracy, of course. And, and, so it started with a conversation with a client in New York about the end of 2019, when Christina Kirshner was about to become, you know, vice president in this, this time, part of a ticket that she had chosen, you know, so she would be we all knew that she would be the president for the third time. And I had this conversation with this very smart, pleasant client. And he says, well, you know, if the government of Alberto Fernandez and Christina given her do the right things in economic terms, you know, like Wall Street always likes tight fiscal policy, you know, tight monetary policy, hawkish, you know, policy makers. We we’re you know, the market is going to finance them. And I came out and I say, you know this is not right. This shouldn’t be right, because I knew for a fact that 15 occasions I would try to undermine democracy in Argentina, as she did in the previous two terms, at least by undermining the judiciary to get a free from jail card. Why? Because she had so she has so many corruption cases, big corruption cases, the biggest in Argentina, etc.. You know, let me tell you that the bar is really, really high. So I wrote an article out of this idea. I wrote an article I published in the Financial Times blog, The Young BRICs, and I got a lot of attention. You know, I got people from journalists from Belarus saying, well, for instance, you know, one example we got we are being jailed. And at the same time, London investment houses are buying the bonds issued by, you know, the Belarus dictator, where there’s no doubt that he’s a dictator. 

Right. So that started the idea and I started, you know, digging and and what emerges is that. There is. It’s not only that I was concerned about Argentina or regard about Venezuela. The world was immersed in a democratic recession, you know, in the 70s. And then in the 80s, there was a consolidation of the opposite, trend. You know, democracy flourished in Eastern Europe, first in Spain and, and, and Portugal. Then, you know, it went to Latin America, then Eastern Europe, when the, you know, the world, you know, came down. So there was a democratic, you know, flourishing. But that came to a halt about the year 2006. And from then on, what started to emerge is that many countries, the democracy in many countries started to suffer. And as you know, Harvard Professor Levitsky says, democracy started to suffer, not in the old fashioned ways, not, you know, through the dots, but basically through tinkering with the democracy in checks and balances. You know, in, in, in, in, in the countries, like tinkering with the independence of the judiciary, the independence of the press, etc., etc.. So, you know, these democratic processes took, you know, came down relatively slowly in most countries. And these guys build bridges, registered, you know, and I will talk about a lot. Freedom House and another, you know, houses that measure democracy. This has been registered in real time by democracy watchers like freedom House and Economist Intelligence Unit, we them and many others that measure democracy. So you see basically I mean, these are rankings of, you know, the the higher you know, the more democratic the country is. Basically these houses measure, you know, the sanctity of the electoral process, the independence of the press, of the judiciary, different measures, you know, like several variables. And there is a lot of discussion about this. But then I will talk, you know, more about the how they are useful, you know, useful measures. And basically you see that, that, democracy started to recede, particularly in the margin in the emerging markets. Right. The Economist Intelligence Unit, the same trend, same trend you see here. So basically, there is a Democratic, recession. 

And and what is important to note is, are at the same time, at the same time, portfolio flows to emerging markets countries, you know, saw, you know, increase significantly. You know, it’s not only that foreign direct investment increased to emerging market countries at this time. You know, I’m talking about the year 2006. And you can see there, but also that if you look at the you have to look at the, at the red part of the bars. Right. These are the the flows portfolio flows started to increase significantly. Portfolio meaning you know, people here in Boston or in New York buying for pension funds in the US or Canada or Europe, buying bonds issued by these government. The governments of these countries are stocks of companies that are headquartered in these countries, portfolio flows. So if you look at the red bars, you know, by the year 2006, they started to increase significantly. You know, then they came down, you know, particularly pertaining to what happened to monetary policy policy in the US mostly. But at the end of the day, they at the same time that democracy was starting to be under attack, you know, for, you know, Western investors started to invest more in these countries. So I started to look at several countries, and that’s what I do in the book. In the book I selected some stories, Venezuela, Turkey, Russia, China, Hungary. And, and then, you know, a little bit of, of Belarus and Poland and, and also a subset of, you know, Latin American countries, like Argentina, Bolivia, Ecuador. So, so basically trying to put together what was going on in the market and what was going on with democracy. And what you find is really, startling because you see that democracy was being dismantled. And at the same time, markets were totally oblivious to that, to that event. Let me start with Venezuela, you know, and I see, there is there is a typo here. This was not a presidential election, by the way, you will notice this, Ricardo, very, very fast. But basically, let me let me tell you what happened. Chavez came to power in February 1999. They won. He called for a referendum to change the constitution. Let me know. There was not the the mechanism to change the Constitution. There was. They got the Constitution, didn’t have a referendum as a mechanism to change the constitution. So that was unconstitutional by itself. They the Supreme Court said nothing.

So basically he changed the Constitution where he got most of the votes in the in the Assembly discussing the. Constitution, and he got rid of all the checks and balances. He packed the court. After a few years, he, changed, you know the term eliminate the term limits. But the basic obliteration of democracy in Venezuela was done at the beginning of 1991. So February, right. June was the constitutional election, you know, for the Constitutional Assembly. In July, Chavez comes to Wall Street, he rings the bell in the New York Stock Exchange. He basically went to, you know, the well, the first story I gave a speech to the Plaza of all investors are not that big. The only cheer him up. Venezuela started to issue bonds in 2001 and 2003, when few emerging markets, you know, issued bonds. By then it was a very limited market. Why did markets love Venezuela? Because oil prices started to go up. So they, Venezuela and PDVSA issued, you know, a big amount of bonds, billions and billions of bonds, the government 43 billion bonds. You know, and PDVSA, another 36 year old company, the government oil company, 34 billion worth in bonds, which ended up by different mechanisms in the portfolios of Wall Street investors. And the market didn’t care. The market only started to care about Venezuela about 2014 when oil prices came down. Right. But not as much come 2017. You know, there was outrage in the market. Decent. Bought 2.2. 8 billion worth of bonds. You know, an in in May 2017, the outrage was because a few days before a famous economist called Ricardo Hausmann published, an Op-Ed calling them hunger bonds. Basically saying, whoever buys these bonds is subjecting the Venezuelan population. Correct me, Ricardo, to starving because the government is willing to starve the Venezuelan population. If that needs to happen to repay these bonds. Right. And in spite of that, you know, this company base with well intentioned people, you know, both this bond and I will I will elaborate on why they bought that, you know, and why the market continues to buy these bonds. So basically, the point is here, you see that democracy in Venezuela, you know, deteriorated by 2016. 

Freedom House, the degraded Venezuela to not free country was already degraded to partially free in 1999, right well ahead of time. A economist intelligence unit degraded Venezuela to authoritarian regime in 2017. And in spite of that, the market continued to finance Venezuela up until what happened. The US imposed sanctions in 2017 and then bonds collapsed. One prices collapse and then they could not buy bonds anymore. And that’s one lesson that is important. That is a big discussion. And we were discussing this with Ricardo before. That is there is not I will show you later, but there is not a definite conclusion about whether investing in democracies is better than investing in non democracies. But you see, as you go into the stories, you find so many examples of people that invested a lot in autocracies and they lost their share. So these guys disarm both the Venezuelan bonds and 30 cent to the dollar, you know, very cheap. But a few months after they went $0.05 to the dollar. Right. So they lost their share. So that’s a case of Venezuela. You know, let me you know and like I would, I would just go over there and then we can you can distribute the slides. Of course. Let me tell you that the case of Turkey is, it’s a very nice story. You know, it’s another type of populism. You know, the populism in Venezuela is a populism of us against the leads, against Wall Street, against IMF, US, against Ricardo Hausmann. Maduro talks about Ricardo, against Ricardo. You know, in the case of Turkey is a populism based more on, on, on, the formation of religion, I would say. Right. And but the fact is that also Turkey has been, you know, the Erdogan has been attacking the judiciary, the free press, the bureaucracy, all the checks and balances in Turkey had been demolished in, you know, as, as time went by and these were recorded in real time by freedom House, economist Intelligence Unit beat. I mean, it’s not that they it’s not that nobody knew they wouldn’t be registered and, and spread out the word that these countries were the democracy was basically endangered in all these countries. But they market, you know, like Turkish bonds or Turkey stocks. Not because you know, or not, not because of what was happening on the but what was happening with the fiscal deficit or, you know, exports. So so basically, let me tell you one, one nice story about, the one that I like the most about Turkey. So not to bore you is that, there were elections in last year in, in May, and all the polls pointed to Erdogan losing that election. 

Right. He already had eliminated term limits, you know. But he was. All the polls indicated that he would lose because the opposition was united. What happened? He would like all the populists to win the election. He was not only twisting electoral rules, but he was spending like crazy, you know, like giving the gas for free for households and giving handouts. Spending money. Government money like crazy. Well, it happened that 41 days before the election. Markets cheered the fact that Turkey, the Turkish government, issued the first green bond of Turkey. Green bonds are very important now that trillions of dollars of green bonds and are very good green bonds are very good. But if you look at who issued the green bonds, you know, oftentimes more than one third of them are issued by non-democratic countries. That’s the case of Turkey. They they the government got $2.5 billion in bonds 41 days before the election. Money’s fungible. You know how how come you know that that money wasn’t directed for rather than to, to win the election, which he actually won, right. Let me go to Russia. You know, Russia’s the same. The same story. I will make it short. You know, basically, Putin demolished democracy from day one. I mean, in the fourth day after he acceded to power in 1999, you know, he they the police raided, the the offices of Media Most Wanted, the biggest independent, you know, broadcaster and put the, you know, the, the owner in jail a few a few weeks after and in very different ways. You know, Putin has been undermining democracy. And basically, you know, freedom House already in 2004 labeled it that’s not free. Right. So this was recorded in real time by democracy watchers, but the market was basically still like in Venezuela, the sorry, you know, Russia for the same reason as Venezuela. It produced oil and oil prices were up. So, for instance, by the when when Putin wanted to rip off the assets from Khodorkovsky, you know, the the all the owner of Yukos. Right. Western banks provided offered the financing to Russia’s government to basically rip off his assets in a very illegal way. The guy was jailed by with no reason and stayed for ten years in prison. 

And basically the banks financing their operation were western banks. But let me tell you. And the Russian story provides us with another, you know, tale about, the importance of, you know, avoiding greenwashing. And this is, the following, basically, most investors in Wall Street. Follow tracks. What is called bond and equity indices? No. So if you higher have higher, you know, your company your pension fund want that have higher more sure standards to to manage your money. Typically companies like the one caveat, you walk in and say, well, I will track the emerging market. JP morgan’s emerging market bond index that is, has a number of countries with different weights for each country. And I will show you that I can outperform the index. I am better than my my competitor here, you know, next door in managing your money because I will await I will make better than the index. But your benchmark the way, the way you are, the index that you’re measured again is an index of bonds compiled by JPMorgan, you know, or other other banks. And in the equity inequity business is the same. The Morgan Stanley stock index is the the most track one. Well, it happens that a few years ago JP Morgan that has this call JP Morgan and be diversified bond index and the most track by the industry. Lounge and a similar one, but ESD corrected. You know, everyone knows what ISS SD is basically, you know, acronym for environmental, social and Governance Indicators. That basically emerged as a response of market pressure to for companies and governments to take account in the environment. You know, gender equity in the boards and, you know, care for labor, and for labor, rights. So a whole industry appeared to basically, take into account those those demand. So JP Morgan launched the m b ESG. Correct as well. Fun fact. Fun quote unquote. Fact. By the time Russia invaded Ukraine. If you were an investor tracking the ESG corrected version of the MBM, you should have had a bigger share of Russian bonds than in the non USD corrected. Is this clear? You know. So basically is my point here that what you think? I already told you that in the case of Turkey you could see that green bonds can be greenwashing. And what I’m telling you now is that ESG, which is a law very controversial. I think it’s a very good development tool. You know, again, they care about investor concerns. 

You know, that’s not correct for democracy. In fact, in the case of Russia, you would have had more bonds of Russia by the time Russia invaded Ukraine than if you were not tracking the ESG corrected version of the MBA. Okay. So let me let me skip China. Then we can talk a lot about China. But what is the connection between Wall Street and and autocrats. Is that worse than the City of London have financed the governments of countries such as Venezuela, Russia, when they were turning more autocratic? This still goes on. Oftentimes investors don’t even know that they’re doing that. You know, when I tell my my friends, you know, that I can bet you that if you go now and take your portfolio are financing, you know, you know, you’re financing a lot of autocracies and you don’t even know why. Because you you put your money in some professional investment manager, right? Like J.P. Morgan or Standish. And they track this in this or you buy ETF, you know. And I will tell you what an ETF and you yourself by an ETF that includes those countries or stocks of companies headquartered in those countries. An ETF is basically, a way to buy portfolios of securities like they and they track differently. So you can buy the most popular ETF, for instance, one that tracks the S&P 500 have higher. What is that is a is a composite of the 500 biggest stocks in the US market. So you don’t need to go and buy each of the stocks. You just buy this ETF with a click of your mouse. And and the company let’s say Vanguard or Blackrock. They replicate that for you. Okay. So they’re ETF of all the colors and taste is including a lot of ETF that that track emerging market bonds and emerging market stocks. So when you buy an ETF for instance of emerging market stocks they have 30% typically invested in China. Okay. So this is this is what happens. and and again the main market mechanisms are that equity and bond benchmark indices constructed by banks such as Morgan and Morgan Stanley, hundreds of millions of dollars invested in ETF and mutual funds use these indices as benchmark. and are not they’re not correct for democracy. For instance J.P. Morgan and be diversified that not the one corrected by ESG. The most widely followed one right includes 35 countries out of, sorry, out of 76 seven countries, 35 are non-democratic and 16 are highly autocratic in a way that I will define in a minute. 

I will define what it what non-democratic and what kind of autocratic mean. So my proposal, my proposal is that we can mimic what, investors have done with environment that, you know, gender equity and labor rights in the last few years, incorporating them into the decision process in the in your investment through ESG integration to do the same with democracy. Now, ESG is mainstream. One out of $2. Professional assets of professional managers manage in Europe, one out of two follow some ESG criteria and one out of three in the US. So this is mainstream already, so we can do the same with democracy, in my opinion. But first, and with this, I’m about to to finish. You need You need to be sure that you are measuring this, right? And of course, this is an issue of debate, right? You need to have to be sure that when you’re saying, oh, this country is not democratic, that this is real. And, and and basically, you know what, what we found doing research on this is that, we took the three most common, you know, democracy workers, economist, Intelligence unit, freedom House and v them, v them stands for the realities of democracy. They have this, you know, they they they construct the synthesis, and then they label the countries, you know, in this 3 or 4 categories. What we found to our satisfaction is that the correlation between them is very high. Very, very high. Close to 90% is very different. You know, in the ESG world, there is a lot of controversy because companies that measure ESG score for companies, the correlation between them is very low. So if she was scoring Tesla, she would say Tesla is a very good ESG company, high score. And then Ricardo would say, no, it has a very low easy score. The correlation is well below 50% between a score ESG score providers. That doesn’t happen with Democracy Index. Waters right. The correlation is very hard then tapping and then and the same underlying relay reality. So my proposal is to say well. Just to be sure. Let’s. Let us label us non-democratic countries that are labeled in the lowest two. You know, buckets by two of these democracy workers. What I’m doing there is mimicking some, I talk a lot about, bond indices.

There are some money indices that only, invest in countries that are labeled as, investment grade by rating agencies like Standard Poor’s and Moody’s and and and Fitch. Right. So basically investment grade means that there is a very low probability of, of default. But to put them in this on the indices, you require that the country is labeled as investment grade by two. I do of these companies. Well I’m mimicking that and saying let’s if two companies of this, sort of companies, institutions label the country as non-democratic, you know. Well, the country’s non-democratic and you can excluded from your portfolio, or you can reduce the weight in your portfolio compared to the benchmark index, which can be the JP Morgan index, or at least to start with. You could exclude the highly autocratic one, which I define as being in the lowest, you know, bucket for two of these, investment democracy watchers. So you see the countries that appear, you know, I just put some examples in all of the countries in the emerging world that, you know, in the low was one you you would exclude the worst democracy, offenders. Just, to finish, a couple of things. There is this question about whether investing in democracies is not only good, but is profitable or not. Right. And the answer. You know, we were discussing this with regards. There’s no, definite answer from academia. There’s no there’s very little research on this, actually. You know, the the most comprehensive one that I found this lately. And we, we ask basically they, they do find that there is a positive relation between in the stock market, they use stock market returns, the positive, you know, results between democracy and investment returns. But to be honest, that’s I don’t want to oversell this. I want to come like some ESG providers come and say buy ESG in their, you know, products. And you will not only do good you to do better in your portfolio. And that has been there has been a lot of scams about that. I don’t want to oversell this, but what I do think is that what is has a lot more, consensus. I think, although there is always some debate, of course, is that democracies at the end of the day tend to grow faster and on democracies. 

So my take is, if that’s really true, it should be the case where you know that companies that are headquartered in countries that are democratic end up doing better than in non-democratic countries. And for the same reason governments that are in democratic countries, you know, should be better payers over time than non-democratic countries. Finally, you know, just as an example, I’m not selling products here, but it’s basically there are some ETF. This is a lever to fund democracy in business. These are two ETF. You can buy them in your with your own account on. And there are some institutional investors that are already implementing democracy connected investment strategies. All of them are in the equity world, not in the fixed income world in the bond bond. Well, with us and with this I finish. What I want to achieve with the book is first to raise awareness. You know, the raise awareness is to to let the world know that this is a problem, that markets have been financing autocrats. And this is not good, right. And they cannot be a solution to a problem that, you know, nobody sees as a problem. So I want to basically want to raise this issue that this is a problem. And the second is to start, you know, proposing some alternatives of of course, this is the first step, but I think there are ways to for you if you want to avoid financing autocracies, is there are ways in which you can implement that in your in your own portfolios. So with this I, I, I end and. Okay. 

Ricardo Hausmann: So very, very interesting. I have, many, many questions to you. But before I raise them, let me ask Javier for his comments. 

Javier Murcio: Thank you for inviting me. I mean, this is a very, very interesting, very topical issue. I took lots of notes before I came here, so, I’m not going to go through them because I will get lost. I want to first, present to, things one experience as a portfolio manager. Where does these present a challenge? How would one act around this very, very important issue? And the second, I would provide some ideas of my own, presenting maybe a question to the panel about this full challenge of the so-called democratic recession. Let me start with two numbers. Don’t quote me exactly on them. They’re very, very close. 5% and 7%. The world, as you know, is experiencing a demographic waved. That means that there are older people. Increasingly, even these so-called emerging markets and less and less, working age population. Which means that anybody who has a pension or any form of retirement provided by government is your own savings. It said that it said that less and less working people, have to work. To be, decent return and hopefully a decent standard of living to the retired people and the five and 7% number that I presented. And again, don’t put them in them. Exactly, because those numbers tend to change depending on actuarial tables and so on. You need at this point a 5% real return. This is adjusted for inflation or a 7% nominal return. In nominal terms, you know, without adjusting for inflation. Of course, in the last couple of years, inflation has been up in the, in the world and so on. So that means that as a portfolio manager and I was a portfolio manager and institutional level, which means I was managing money not at the retail level, but for large pension funds, for insurance companies worldwide, governments and so on. I needed to at least get that, and not so much myself, because of course my partner Marcos was only part of a larger portfolio, but the clients would want at least that much more or less regular basis. 

We made sure that as, we heard through measuring against indices. So the challenges were to beat these indices and ideally to be the competition. However, when that is not all risk, investing in emerging markets you are dealing with. Basically any investor. Two challenges, which I would argue are more increased in the emerging market world, which is the ability and the willingness to pay and the law of the rating agencies, views on these countries basically are based on that. How do the numbers look and the current basis and towards the future? And what is the environment, political, social, etc., where we believe that the government is going to want to pay now, something that Marcos presented here, the growth in assets under management, in emerging markets, in some of these economies, which took place in the 90s, and, you know, part of 2000, coincided with a world where commodities were very important. There was a commodity cycle that defined the world economy. And as, client of mine back in the 80s when I was working for a large consulting firm, told me. And I asked him, he was the CEO of one of the very large, one of the largest, perhaps the largest oil companies. I said, how do you deal investing in both countries? I’m afraid of the real US civil war. You know, working in a jungle or all the challenges. You know, you’re taking oil out of deep sea and so on. And he, Sunsilk, which I will always remember, was there is no oil in Switzerland. You have to invest in Nigeria. You invest in this team Venezuela. You have to invest in Mexico, in Saudi Arabia, where it is hard to get that there and only present that as an example, because as it happens, a lot of emerging markets happen to have a very reach in commodities. So they enjoy, period of growth, which coincided with what we call globalization and so on, which attracted a lot of capital. Because one of the things that capital goes after is growth. And these countries, as long as they grow faster than developed economies, they were a destination for investment. The other thing is that. Typically, if you were investment reasonable, I give you a large return in developed economies. You go for riskier and riskier assets. That changed in the last couple of years. Why? Because money was free, as I call it. But you go to the crisis in 2008.

Interest rates were zero, essentially in the developed world. So during the previous periods 1920, in most of my career, money was free. If you look at interest rates were very low, which means that investors started moving more and more into riskier assets, and these involved emerging markets because they offer you a higher rate of return. Lately, with us, you know, interest rates coming up in the developed world. It’s it has been a challenge for people that want to capture investment because, you know, you can’t get a 5% return in the investment in the United States, for example. However, as I said, getting there is not easy. You have to make sure you see the indices and so on. And let me give you an example of the challenge that you face. At some point, some of the indices that Marcus mentioned, the JP Morgan and B or so they are doing this is that if we want to get in the NBA, the NBA diversify. Venezuela, who by then was already in the way of being non democratic or whatever you want to define it and so on, represented only if I remember correctly at some point 3% of the index. The UCSF portfolio manager. I can do without any sweat. Right? They have another 40 countries or whatever to invest in. However, the yield on Venezuelan bonds was 40% at any given time because of the risk of a country. The market was asking Venezuela to pay that much. So if you do the math as a portfolio manager, you are punished by not investing in Venezuela because a little 3%, if you do the math. Give me 40%. If I happen to be completely out of Venezuela, whatever I get anywhere else. 5678 9%. Does not compensate for me having been out, or that little portion of it should have been as well. I was thinking out of the scene this a song which made life easy to view one. So what I want to share with you is precisely that this is a challenge, that, that, asset manager faces, ESG came a bit late in my career. And he’s been very important and he’s very encouraging, as you see these, I read something that caught my attention that, for example, I’m using history, of course, at this point as a proxy of of what we’re dealing with. Companies, you know. That opera? You know, management. They are getting into it, not because they are being converted to the idea of ESG. We are getting into these because there is demand for it and there are serving the millennials. 

I didn’t mind that. I’m going all the alphabet. Millennials Z what if I am ancient somebody me in the old category are becoming more and more aware or in this case of environment want. And they are demanding investments in there and companies are responding. So that is the positive side of it. Let me tell you, however, the negative side of the negative, but perhaps a bit more pessimistic, and this is a discussion that we would like to have, is a little bit out of what I should be talking about. But together with the so-called democratic recession that we are going through, and so the charts that Marcus presented and so on, I mean, concern and this is not new. For years now, and I would probably argue this goes back 15 or 20 years at least. Your research showing that many of these countries are disenchanted with democracy? And here I want to press in 2 or 3 cases if I remember them all. And again, this is more of the discussion. This this is a philosophical part of my presentation to you. I already told you of the experience as a portfolio manager. Number one, we will face a problem of radiation. Marcos has divided into autocratic rule. Call it totally authoritarian, whatever. Think of Poland. 2016 Poland changes into a Law and order party, which proceeds to look for these governments to, undermine the judiciary. And in their recent election, finally, these squirming results that we were about to democracy. What are you doing between. There are many races you know better than I. To define democracy. But lack of an independent judiciary is certainly not good. So? So do you help Poland in the process? You get out of Poland when the judiciary certainly under attack, and then go back when there is not another example. Mexico and insoluble. Mexico, there is less, you know, there is freedom of the press. What is under attack? The president, very openly, you know, those what populist governments do, which is undermine institutions. However, his ratings approval and I would call that client client. So of course, because he’s giving money literally to poor people and so on. With all the discussion that this entails, he’s got 60% of approval. You know, his candidate in this year’s election is likely to win. He won majorities in Congress, majorities in state governments, and so on. Is that democracy? 

El Salvador. It is an election coming up this Sunday. But Kelly has, as you know, gone hard against, narco trafficking and all of that with all kinds of human rights abuses you can imagine. He’s 90% popular in the polls. People want him and goes back to what I mentioned they do while ago. There is a certain disenchantment with democracy. I’ve heard the philosophical view that if we listed all the roles that you believe in the state. You know, to this day be provider of health or education infrastructure on companies. We can argue all of that. Shades of left or right, whatever. At the very least, when people got together as a society in a cave is because you had a leader with a bigger stick that at least could defend you against the others. And some people in these cases as well, you know, increasing the work for different ways, seem to want that. So these cases worry me. Because not only there is indeed any recession, but some people may do without it. If is going to provide them a either means to a living. You made the money. I don’t care where it comes from or be. Deal with violence which is hurting us all. And the final one that I want to make a. This is something that Marcus is more of an expert in, but believe me, Argentina was in the in the minds of everybody 2019. Busy and not good at time. Of course, is he did a lot of good things. If you want, that that we would like to see. But we had a fear that Alberto Fernandez and Cristina Fernandez occasionally were going to come to power. The IMF gave the largest single long time I’m sorry in this history to Argentina. 44 billion, if I remember correctly, something Argentina right now is is struggling for the last couple of years and will continue to do so today. A few of us knew that that was the biggest mistake. For a number of reasons. There was no way that the money was going to be paid with the optics were very bad. In my mind, I defend this view. It was an open way to say we finance the candidate we want. Make you fail. He lost with money given away. That money went out immediately. But India has zero research at this point. Negative information. So as an investor, where did you play all of this to invest in Mexico, knowing that is an erosion of democracy. Do you get returns in a world that the commodity cycle seems to have come to an end? You still have the challenge to develop in these 510% whatever you want. 

You know, in general for finance, the population in the world or the aging population in the world. You see something gradual. Can you move from index to index? You went from autocratic to democratic back and forth. I’m thinking Poland, for example, in this case. So as you see, I think of it as a dynamic problem. So, I want to stop here. I would obviously like to hear your comments and questions, but I went to throw some ideas. As I say, first to share with you what I believe is a challenge for my colleagues in the industry. You know, asset managers, but also, if you want, from a philosophical point of view, where how do we get to this education and this synthesis and these indicators that an investor can feel comfortable in doing the right thing, which I hope people will do. Thank you.

Ricardo Hausmann: Okay. Thank you. Thank you. Marcos, I don’t know if you want to respond to that before we go on, but let me let me pose to you a question. Him. And the question has to do with. Suppose we have the right measures of democracy and so on. And we. Access to the market of non democracies and so on. In. What goals will we have achieved? One is you will feel better. Where? And you know, we’ll have some kind of moral kick because our money didn’t go to fund unsavory people or. More optimistic. A description is that you will make the life of dictators harder, and consequently more likely that people in the country will want to. Kick them out. Move them out, and it will be harder for them to to keep their coalition going because they’re more restricted, or there’ll be payoffs to get rid of them, because then you’ll have more market access. So. So actually you are achieving some good in the world. So is it about you feeling better? Is it about a plausible theory of change where the world gets better? What underlying worldview do you espouse? 

Marcos Buscaglia: Yeah, no, I’d say it’s a very good question. And, and so, let me address that and then address the issue of, you know, how gradual this is. That is also a very good question. And I think that, of course, you know, the feel good is always there, like in the same vein, a green bond or, you know, going into the and mandate for investment is the feel good part is always there. But but I think that you, you can, you can bring some change, some change. Because at the end of the day, all these wannabe dictators that started not as if most often they started out, you know, in a democratic elections thank food intake job. You know, they. They. They were able to establish, you know, Tography because they were very successful in economic terms. They usually come when you study, particularly cases, you know, like like, Russia, Venezuela, even Argentina with a given. All these wannabe dictators come after a period of stagnation and depression. And people say, well, I want to change. I want, you know, new parties, new ideas, and they come. And they say I’m the new thing. But for different reasons. They are very successful. Each other’s work, they’re successful. The kids know what we’re successful putting was very successful. You know, the Russian economy shrink every year, like four percentage points on average during the 90s. And then it started to grow like 7% on average the first few times. And so you say, well, so their their popularity and hence their capacity to have majorities in Congress which allow them to tinker. We know with democracy the judiciary and the press come out of success. So my take is that part of that success. Was financed by the market. So if you if you took that money out, let’s assume for the sake of the of the explanation that there was zero money, they would probably have been less successful and less capable of, you know, bringing down the checks and balances by which they became dictators. I’m not sure about that, of course, but my take is that success, you know, although they are dictators, they they didn’t become dictators in one day. They it was a process. And in that so if they if they didn’t have that money from Wall Street, they would have probably been less successful for just, you know, fiscal adjustments are very unpopular. Well, if they didn’t have financing from the market, they would probably have to have had to implement fiscal adjustment, rendering them unpopular. 

And then people say, well, I want change before it was too late because at some point it’s too late. Look at Venezuela. You know, at some point it becomes too late. So that’s that’s my take. So I’m not sure about that of course. But my take is that success. This. This wannabe outlook is when they see the process, they they are able to undermine, you know, year of the year Democratic, say, checks and balances because they’re successful. They’re like, you know, like, Amlo in Mexico or they, they are very successful. And the market, I think, has something to do with that. And again, I’m not sure about that. It is the same debate as with sanctions, you know. You’re very well aware of that. I mean, why do you impose sanctions to make their life more difficult? There is this debate or to kick them out? Well. I think that, at the very least, is to make the life of of them more difficult personally, you know. But that, you know, at some point you would like to introduce regime change. And I think the same about this, this issue. So that that is, your question and then what you mentioned about what do we do about Mexico? You know, these cases are not autocracies, but are not democracies. And, you know, there you look at the these indices are starting to go down. The case of El Salvador to me is a little bit more clear because he’s running. Bukele is running against the you know, the Constitution has set a limit, which he he’s basically not obeying. So it’s a clear cut case. But but it is a very reasonable question. Poland. What do you do? Because democracy. I think there is. You know, Larry Diamond, this, democracy. Democracy is like a continuum variable is not one because there are no coupe de dots now, or fewer is not 1 or 0. You are democratic or undemocratic. It’s like it’s a continuous variable where, you know, one day one journalist is jailed, the next day you one when judges kick out without, you know, and so democracy starts winding down, you know, like they’re gonna continue. So at which point you say, I will not embezzle. So there are ways to address that. I think that is, you don’t need to have binary decisions in, in, in your investment as well, unless taking aside the the obvious the biggest democracy offenders. Right. 

But in countries that that are, you know, like cases that you see that they’re racial but still. Well, you can, you can say I will not invest in Poland, but I will say, let’s assume that the JP Morgan index has 5% of Poland. Well, I will have 2.5% or whatever, you know, like half of that in by doing that, you are also, I think trying to get the same result because if if all the investors would do the same, they the government of Poland, the, the the party, what was the name of PiS, right. PiS that was undermining democracy. It would have had less money, right, or more expensive money if it wanted to tap the market, you know, and basically, he would have rendered them less popular and, and force regime change even faster. By the way, Poland is the Polish government was under the PiS that also, you know, tinker with the Supreme Court, the, you know, freedom of press, etc. was the biggest issue of green bonds in the, in the world. Right. So, so, so basically, I think that there are ways to address your concerns, which is a very valid concerns. What you do with countries like Mexico, it’s not clear the guy is undermining democracy, but it is still an electoral democracy. Well, I think that maybe avoiding binary systems in this, in the same way to SD, you have different ways to implement ESG. Some are called exclusion strategies. You don’t invest in tobacco companies or oil companies, for example, but that’s one type of ESG investment. Other other type of strategies is ESG inclusion. Well is inclusion is well, instead of having 10% of tobacco companies like my benchmark in Texas, I will have 5% in. So in that way, I will be investing more money in companies that do good for the environmental, for health, you know? So there are ways to address that that problem, which is a real concern because again, democracy I like this expression. It’s like a continuous variable. You know, it’s like, no, there are events that are drawing you down a democracy up or down, but often, oftentimes are very, you know, small steps.

Javier Murcio: Right. Can I sorry. A couple of things. As you say, investing less or more is what we would call being over, or underweight. Or you can have zero. And I put extreme case, like, if you get out of Venezuela completely, say when you as part of the index that you have zero, but you can still come in 3% with a 1% or whatever, or you could put five, 10% whatever, or their weight on their weighed against the index. But again, not only to to repeat that there is a way that there is, a cost to that decision. You know, even on their way, Venezuela, say from 3 to 1%. Can you do the math? No, it’s a lot. You are punished, you know.

Marcos Buscaglia: So just to answer that, I my my proposal, of course, is that I hope all these index providers would offer what I call DSG indices so they, they wouldn’t pass the burden to you as an institutional investor. You know, that of, of being underweight. So like another a new alternative. You have the J.P. Morgan Diversified and then you have the J.P. Morgan Diversified corrected for ESG. And then you have a new product, a new index call in the Midwest if I DSG correct. And so in that one you probably wouldn’t have Venezuela or you have a smaller server, Venezuela. So it wouldn’t put a burden on you as an asset manager. 

Javier Murcio: Let me give you, some good news I talked about before, because sometimes it comes on demand. When you do institutional, when you manage institutional money, as I said, large pension funds, governance, etc., etc., you pretty much dealing with only one institution or two, you know what I mean? Even, you know, a customized product anybody can go and buy, you know, robot store, you know, it’s There were cases. That we were asked and mostly by by actually by northern European, yes, governments or, you know, pension funds and so on. They would specifically ask not to invest, for example, in ministry, you know, and that was good because it would be I won’t judge you against the index. You know, I understand that you’re going to underperform the index because you’re going to be out of Venezuela. It’s okay, you know. So. So that is the good news. The one thing I’ll talk about dynamics. I mean, years ago, I came out with a term. It’s not my copyright. But anyway, I tried. I tried to capture what was going on. They call it democratically populist, democratic, populist dictatorships. What happens when? After a while. And again, if you believe in populism as something that tends to undermine institutions, eventually they change institutions to the point that you are. Democratically elected because you change the electoral rules. Because you change the, judiciary. Whatever it is. Okay? People elected me this way. You can argue. Well, yes, because you don’t know about opposition parties or something. But over time, that is something that seems to be happening in many places. And that is what worries me, that that deterioration, that’s what I call the dynamic, probably that trend if you want, whatever some point represent that point. If you’re moving in that direction, you are dealing with a democratically elected government that has to change the laws. And by the way, we fear about that in this country, in a way that. Yeah, what can you tell me? I mean, I mean, I could, you know, the right wing.

Attendee: Thank you. My name is Wil. I’m an MPP one here at the Kennedy School. And I really fascinating, discussion, and I appreciate it. I think my question is about, in response to your proposed solution. It seems like that there’s a possible unintended consequence or risk of maybe strengthening anti-democratic coalitions. So it seems like there’s this moment where, you know, countries like, Iran, Russia, China are coming together to propose alternate, institutions to kind of the, the global, system. Right. So an example of that might be the, spfs instead of the Swift system. So I guess I wonder if would this type of index that you’re proposing, take developing countries, maybe in sub-Saharan Africa or South America, that are teetering on the edge and push them towards, you know, coalescing with anti-democratic coalitions.

Ricardo Hausmann: Before you answer, let me see if there’s any other question in the audience. Sure. Yes. 

Attendee: Thank you so much for the for the talk. I was, wondering if you distinguish between, bond markets and equity markets and how you think about, penalizing, sort of a nation versus penalizing, governments. And, and this is you said you it’s similar with the sanctions debate. And so I was wondering if you had more, more insight on that. Thank you. 

Marcos Buscaglia: Okay. Two very good questions and and just my, my, my I don’t know if I have the answers, but. Yeah, it’s a risk, right. You’re saying, oh, I’m the government of and all Salvadoran markets are not, offering me money. So I will go to get the money from Russia or from, you know, from or from China for whatever that that has already happened in some way. I mean, China is now the biggest official creditor in the world. And the loan loans all by developing countries to to China are bigger than they were the ones. So to to the to the world Bank, you know, and the IMF. But but that’s a, that’s a risk for, for sure. But I think that it’s not it’s not a perfect substitute, you know, in the sense that inasmuch as China has emerged, you know, as a big creditor, you know, the size of what you can offer, it fails compared to what the market can offer. You failed. And and to be sure, you know, the conditions asked by China are a lot more, demanding, you know, in, in, in, in terms of interest rate, you know, maturity than, than and collateral, you know, than what the market would ask you if you are, if you are well behaved. So, so, I think it yeah, it is a risk. But but I think that the, the carrot, you know, of being a democratic country that gets funding from the market would, would be much, would await the, the cost, you know, the this, this thing. I see your question is again, also a very good question to, you know, in the bond market to me is very key in the government bond market, you know, and as a sovereign, you know, if you buy, if you buy the bond, you are, you know, financing the government of Chavez or Maduro. And then your you may or or the case of target I wrote down in the case of equity. It depends also let’s, let’s take let’s say quasi sovereigns, you know, the, the market, you know, the biggest IPO by then in history was Saudi Aramco. You know, they this was in the working of investment banks just the same time as allegedly the you know the royal family killed the you know works the journalist Jamal Khashoggi in the consulate in Istanbul. Right. Markets do not care a few months. So my take is that in the case of quasi sovereign, you know, equity to me is very clear. Let’s same with Gazprom. Gazprom was used, you know, by by Putin even I’m talking about before the invasion. You like to, to, benefit when, when, when the, you know, Ukraine government was pro Russia gas prices were lower than when the government was. anti-russia. So basically, by buying quasi sobering equity, you know, your ipso facto financing the, the government of the country in that in the case of private companies is a more broad line, to be honest, he said there are a lot more gray areas. Right? In, in there is one case in which I think it’s more clear cut, the case of China. Why? Because when you read, the more you read, the more you realize that all companies in China are supposedly, you know, have CCP, committee, Chinese Communist Party committees inside, they are forced to obey the government to spy for the war. So yet when you buy Chinese stocks. You end up financing the Chinese government. There are other cases in which is, you know, not very clear, right? Because oftentimes companies in emerging markets are just trying to resist, you know, the government. But let me tell you that the more you read, the more you realize that for them to resist when you when you’re buying companies in emerging market countries that are turned into dictators, the more to resist, they should bribe more officials. They should do going to projects that the officials want. I mean, so in some way you are also financing the government. So my thinking is that, to be honest, particularly for the democracy, was the worst offender. I wouldn’t I wouldn’t buy stocks of these countries.

Ricardo Hausmann: Thank you very, very much. Thank you for coming. 

Marcos Buscaglia: Thank you. 

DISCLAIMER: This webinar transcript was loosely edited and there may be inaccuracies.

LaChaun Banks: Hello, everyone. We’re going to go ahead and get started. Thank you for being here today and welcome to the Growth Lab’s Development Talk. I am LaChaun Banks. I am the director for Equity and Inclusion at the Bloomberg Harvard City Leadership Initiative and at the Ash Center for Democratic Governance. It is my great pleasure to welcome today. Carel Kleynhans, South African property developer and CEO of Diversity Urban Property Group. He’s worked closely with the Growth Lab during their two year engagement in South Africa, focused on diagnosing the causes of South Africa’s economic challenges and working to include more South Africans in the process of economic growth. So we are so excited to hear from him today.

 Carel Kleynhans: Thank you to. And also to everybody. It’s really a pleasure to be here and thank you for taking a bit of the time out of your schedules to to, I guess, hear what I have to say. I think Alexia was the first victim, at least of a case of my like in Session talking about this topic. So when we met in South Africa, when it was probably over a year ago, the you know, it was clear that there was immediately a lot of, I guess, common interest in this issue that I’d like to share a little bit about today. And it’s really, for me, a pleasure to be able to continue having a receptive audience, at least I hope, around this. And thank you to Sean as well for facilitating this discussion. Maybe I’ll just end of it here so you can all see the screen. I want to share with you just briefly a little bit about kind of what we do as a business and why we do it really, and then really steer the conversation actually away from from our direct work and more towards maybe a conversation around specifically the issue just in the abstract of inclusivity in cities and why it’s such an important issue in my view. So as the Sean mentioned in her introduction, we develop affordable housing in South Africa and really the asset class that would be called multifamily in the US. So essentially apartment buildings that we try and do it in a slightly less horrible way to the norm. And I’ll illustrate that visually for you in a moment. What I mean by that and we’ve built about 7000 apartments today. We’ve got about 2000 under construction as we stand today, another 5000 that will come into construction in the next year. So we’re quite busy and and really we hope to just basically keep doing this and expanding. Not necessarily. We certainly as a company can solve the housing crisis of not even South Africa, never mind, you know, the broader kind of context within which we operate. But for us, the ultimate goal really is to demonstrate a commercially viable and scalable alternative to the current norm around typically spatially marginalizing patterns of affordable housing development. And we hope that if we can do a good enough job at that, that we can really inspired the private capital market to follow suit and really redirect a lot of the capital flows that are going to lots of great things at the moment and to do better things in the simplest possible sense. So that’s what we do. I just want to make sure these are literally probably not the best stats when I got them on the train up this morning. So so please bear with me. But just to illustrate the point that cities on mostly housing. This is stats from the US, from HUD stats, the U.S. Department of Housing and Urban Development. And essentially what this shows is that 70% of built form in the states by serve by area is is residential. If you look at it in terms of count of buildings, that over 90% of buildings in the states are ultimately residential dwellings. So the reality is that cities are mostly houses. Very simply put, and this is just to show the equivalent statistic in South Africa, this is stats from our national kind of statistical office, I guess around square meters of building plans approved by building type for these two years. It’s not a little bit outdated. And you can clearly see the impact of of the pandemic from 2019 to 2020 on and on building approvals. But if there’s a little point here that basically this is all residential, smaller houses, bigger houses, apartments and then basically everything else. And as you can see, it’s just it’s all housing, right? And the US, I mean, this 70% stat over here I think is indicative of obviously a very advanced economy where there is a lot more kind of commercial use outside of the residential sphere. This is really, I think, much more typical of an emerging market context. So obviously, we’ve all heard this stat a million times and people always quoted in different ways. And I always wonder when it’s going to stop referencing 2015. So it’s like by 2050, so many people of any. Living in cities. And, you know, I wonder if it’s just going to stay that until 2045. But anyway, it’s at least for as long as I’ve remembered. The job is good, but the point is that there’s this massive urban rural migration happening globally, especially in developing contexts, or at least that’s where most of it still needs to happen. And essentially, if you think about it in 20 or 30 or however many years into the future, the majority of urban form that will exist in the pretty near future doesn’t exist today. And the point I want to make with these couple of slides combined is. Lots of urban forms still to be built in the next couple of decades. It’s mostly in the developing world, meaning that it’s mostly in markets where people have lower per capita spending ability and it’s going to be mostly residential. So by implication, it’s an affordable housing problem. The future of what our cities look like really is intimately linked to how we build affordable housing. Just in the simplest possible sense. So this is something that’s important to get right. And and I want to talk you through why I think that is the case. This is actually the first thing I spoke. And it’s so interesting. What’s pictured here is a housing development that I went to the G 2 hours before I met Addiction. So I’d had this thing in my diary that was set up by Keesha. Actually, I think she introduced us here. So someone who is one of those people who, when they ask you to meet someone, you just say yes because it’s like someone who I really admire and I must be honest, actually had no idea what the meeting was about, that we were that we had. And I’d just like earlier on that morning, been up to this place, which is about an hour and 20 minutes drive from central Johannesburg where I’m from. And this is an enormous 16,000 houses, new housing estate that’s being built literally on an old farm that was just like risen to residential. So the government at great expense installed both services infrastructure here and this private developers rolling out 16,000 houses and about two and a half thousand units a year here. This is like basically entry entry level housing in the South African context. These are, you know, typically low wage earning kind of people working in low wage portions of the would you go to like administrative sector, like clerical workers, administrative staff, people working in retail, people working in the service economy. And these people all live at least an hour and ten to an hour and 20 minutes commute from the city. And you would if you’re living here, you’d be spending probably about a third of your income on transport. Come on. Right. This is a disaster not only for the people who live here, but certainly for our society as a whole. And I was very worked up about this when we met, which I think is perhaps why I was as animated as I was my first kind of engagement. So I thought I’d just draw a picture of that. This is this is kind of typically what this stuff looks like, just a bit closer. This is not in Cape Town. It’s actually where I was born. You can see Table Mountain in the background there. And this is it’s on what we call the Cape Flats. And it’s just this sprawling tundra of just like housing going out into the middle of nowhere where we are effectively locking people into poverty. Because once you here, you basically can never get out. And this is government funded public housing. And in South Africa, this is a project in South Sudan just to show like these things happen kind of all over. And really this is this typical form of urban development is basically the norm for housing development, really all of Africa and especially affordable housing development. So and just this is a last picture. This is, again, Johannesburg. This is a slightly more established community just to show like what this eventually looks like. So the typical form is that you get these kind of like matchbox houses built like this, and then people over time fill it in a little bit and do densify to a degree with backyard rental units that they build. And so like all of these little structures here, that’s the first structure that was built by the government. And then all of this stuff is filled in by people over time. But even with that infill and further investment by the community into the neighborhood, the problem is you’ve started with a spatial form that can never be anything other than this, right? You’ve got small plot sizes to build that apartment building on here is impossible because you’d need to do a land assembly through multiple owners. Often it’s like intergenerational, you know, title and ownership. It’s just it’s basically impossible. So this will be for pretty much for for all practical purposes, be this forever. So why is this a bad thing? The in the context of South Africa, South Africans spend and this that is actually understated. According to our most recent general household survey, South Africans spend on average 33% of their disposable income on transport, which is a complete loss. Like you get nothing for that. You’re spending 24 hours a day commuting to and from where you need to go every day, whether that’s work, where your kids go to school or where you buy your groceries. It’s just an unbelievable loss for our society. You’ve got a there’s an incredible environmental dimension to this, which I think would probably be obvious to most of you. And then also, we were speaking a lot about this earlier today in terms of fiscal. See, this is a huge challenge, especially for governments in emerging market contexts where fiscal constraints are real. The very well established literature around the fact that it’s also just kind of obvious if you have more kilometers of roads that you need to build or, you know, sewer lines to install or electricity cables that need to run, then it’s just more expensive than doing it in a more dense configuration. But it’s not just in terms of the upfront infrastructure cost, it’s also service delivery over that in a sprawling urban form. It just costs more to run ambulances if you’re running them like 20 miles out to get someone and back to the hospital as opposed to like two blocks down. So so in all these various ways, it’s more like urban sprawl and sprawling kind of urban fabrics are much more expensive to maintain in the in the hands of the state. So and then I like the little UN SDGs logo logo here, which I’m sure many of you have seen. It’s basically a case of lack, but it can be from a hat and that kind of area of development that we all collectively agree is important is somehow impacted by, you know, urban form, whether it’s gender outcomes or early childhood development or public health. All of these things intimately link into spatial form in the way in which cities are going back to the point I made right at the outset. All these cities yet to be built. What’s going to be built? The housing. It’s going to be mostly low wage households. Housing. So the point is, if you want to get all of the stuff right, you really need to start thinking about how to get housing right. So so that’s what we do as a business. So this is the image of one of our projects that an extended team actually were able to visit. It’s called Jewel City. The reason it’s called Jewel City is this is in quite a central part of Johannesburg. It’s actually where the diamond and precious metals trade of Johannesburg was kind of housed for for many decades. It is an area that was in urban decline because a lot of the industries had moved out. And actually gold the gold sector in South Africa has been in systemic decline for four decades. And we acquired seven city blocks immediately adjacent to one another from the former landlord and redeveloped it into this kind of, I guess, neighborhood, really that is to us really the blueprint of the alternative to to this road that we are trying to demonstrate can be commercially viable to invest in. So so what is here? This is 2700 affordable rental apartments for the cost of rent here. The way in which essentially priced to the consumer is that it costs the same to live in an apartment in this building at all in as it would cost. It’s actually cheaper renting here than it would cost you to live out here like 2 hours away. And that plus the lower cost of transport combined would be more than staying here. That’s if you’re one person staying alone, if you’re two people sharing and both of you were doing the commute, then it stands to reason that it’s that a significantly more affordable to live here. And that’s not to mention the the you know, all the ancillary benefits that you’re getting because in this community, this building actually over here that you can’t see very well is a there’s a primary school and a high school. We’ve got an 800 doing a school there. We’ve got a primary health care clinic with doctors, nurses, physios and dentists. We’ve got an early childhood development center. We’ve got loads of kind of public space. This is this was quite recently after it was developed. All these trees are now much bigger and well established. Those are public greenery and there’s lots of public art, all the kind of basic amenities that you need from a pharmacy to your grocery store, restaurants and everything. It’s all there. And this it’s, you know, for guys like yourselves, I think I believe most of whom have had the benefit of probably growing up in a neighborhood or close to a neighborhood that’s perhaps similar to this in terms of access to amenities. It might not be that profound a thing. But for for the average South African who lives here, this is like it’s unthinkable to think that you can that you could live in a place like this. We do a huge amount of surveying to our tenants and ask them like, what matters to you? And like, why do you choose to live here, etc.. And the feedback that we get almost without exception is that, you know, people who’ve grown up here, never in their entire lives thought that they would be able to afford to be able to live somewhere that looks like this. It’s just it never even occurred to them. But from our perspective and similarly, you know, we talk to our capital partners who invest in us and funders, and they say, well, you know, how could you make it commercially viable to do this right? Because there’s this bullshit preconceived notion that poor people can’t have nice things. And and essentially, at the end of the day, what we’re trying to do is say, actually, guys, this makes a hell of a lot of commercial sense to do this because we are building really, really high quality assets in the hands of our funders that ultimately pension funds, because this thing will keep generating, you know, like rental income for the next couple of centuries, really, if we do a good job at maintaining it. So I’m going to actually just skip on that. I’m sorry. This is another one that we’re doing at the moment. This is a I don’t know if any of you’ve ever been to South Africa, but that’s Sandton over there. It’s kind of like the I guess the largest it’s like the Manhattan of Africa, frankly. And this is like 800 meters down the road, 4000 apartments of people living there. This is the second a couple of this is just the first building that’s going up there, about ten buildings that look like this. And they’re going to be all over. And again, this whole bottom level here is a big school, 4500 learners again, next school in the clinic, and all the basic things are going. And so basically that’s that’s what we’re doing. But I want to skip on from what we do and return the conversation maybe just to why it’s this question of why it’s so important to really think critically about how we get urban form, right? Ultimately, if we want to achieve most of the, I think, goals that we collectively agree on or worth pursuing as a society that. Thanks.

LaChaun Banks: Thank you so much, Carel, for giving this this great presentation. So I have a few questions here. I’m going to start with. The first one is so I teach racial equity and economic development. And I had a student a few years ago who was a space major, and I said, Why do you want to take my economic development class? She said, I’m interested to see what it would be like to start a civilization or society on Mars, which I thought was fascinating. But this goes directly to the vision of diversity you talk about your mission is getting cities right when it comes to building equitably and how this can create more economic prosperity and social equity in the areas. Talk a little bit more about what it means to get a city right from the beginning. 

Carel Kleynhans: Thanks. I would love to meet this student of yours. Again. I don’t think it’s a. I don’t have any profound insights around what a city that is. Right. Looks like, Right. I think the kind of the basic theory around urban design is incredibly well established. I was telling Alexia earlier that I read a book by actually one of your faculty members here at Laser when I was a teenager called Triumph of the City. And in that, I think it speaks very compellingly to the, I guess, urban economic benefits that arise from agglomeration economics. And and I think, let’s say in economic terms, like a city that is right is described well, another book that was written in the sixties by Jane Jacobs, The Death and Life of Great American Cities, I think describes a very compelling me, just like the kind of physical form of a city that works well. You’ve got streets where people look on the streets, you’ve got a certain amount of density, you’ve got actual two blocks and activated street edges. And in the street public space, you know, these are the principles of urban design. And what makes a city well work well, I think is very well understood and well established. But what what we are not getting right is that that understanding in theory isn’t translating into the practical reality of the vast majority of urban form. And I think this is the really the the question of our time is how do we get the the theory that we understand so well to translate into reality? And and I think for me, at least in the context in which I operate, getting it right means taking the these principles that are well understood and and incorporating them into a space that caters for the average person and not just the elite few. Because there are some areas of South Africa that have like recently developed neighborhoods that are like lovely, really, really nice. And that ticks all the boxes of that good urban design, you know, kind of empowering space, etc.. But it’s for a complete minority. So. Yeah. 

LaChaun Banks: Excellent. Thank you for that. Recently, I’ve been hearing a lot of cities here in the States talk about the need to create more green space and canopy coverage in low income housing areas. We can date this back to redlining and when things were being built. How do you all tackle the environmental challenges as well as the affordability challenges? 

Carel Kleynhans: And. Again, I think if you if you’re getting density right, a lot of this, it becomes a lot easier. So if you just quickly go back to this, you know, if this is what you’re building or even this, you know, just like the amount of trees that you need to plant here, which at the end of the day cost money to to make this like a genuinely green space is is, you know, kind of financially impossible. But, you know, initial city over here, we planted 400 trees which sounds like a lot, but it’s it isn’t actually that many if you consider it in the space that it occupies. But this is like an urban oasis now. But it was commercially viable because we’ve got a 2700 apartments and like that, you know, concentrated environment and then effectively financially supported. So I do think density is like it’s sorry that it’s such a simple, but it is the great kind of like irony with this, with the challenges that so many of the solutions are very obvious, you know, seemingly very obvious, but they’re very hard to realize in practice that that’s just around greenery and the degree. And that’s obviously an important part of, I guess, the overall environmental sustainability of of of a of a neighborhood or of of a city. But if I can digress for a moment, just briefly on the topic of sustainability. So we did an interesting study with the Green Building Council in Africa. That’s actually some research that we commissioned and paid for and did it in partnership with them. And many of you would know Arup, the global consulting engineering firm. But but we got them to actually do a quite a sophisticated lifecycle analysis on this type of urban residential development being like dense and central versus the other ones that was pictured. And just in terms of just looking at carbon as a dimension of sustainability, it’s unbelievable and again, quite obvious when you think about it. But, but it was quite amazing. I think the power of the work was to demonstrate that quantitatively and robustly, quantitatively that it’s over the lifecycle of a building massively more carbon intensive to build the same unit like the same residential unit out in the middle of nowhere, as opposed to in a centrally located area. Because you’re effectively by building that thing there. There’s a path dependency around patterns of usage that you lock that user into that they don’t. I mean, there’s like even like a choice dimension here like that that I think is quite, quite relevant, but that you are basically a radically more sustainable thermal dense urban form than, than building out in the middle of nowhere.

LaChaun Banks: Great. Thanks. Karl, can you talk to us about what policies are in place in South Africa that allowed this project to happen and be successful in? Are there overall policies that you think are crucial to developing equitably that you can share that others could maybe benefit from implementing? 

Carel Kleynhans: Um, yeah, I could, I could talk for hours to this question. And so I think the honest truth is that everything we are doing as a business is kind of like in spite of the policy environment and not, not as a result of it. We and I say this as someone who like I thought that I was going into public policy as a student. This was like my kind of future path that I then I thought of after reading Ed’s book. And and then I realized that South Africa actually has amazingly progressive spatial policy on paper. But the problem is that it’s not translating into practice. And the and I then became an Amazon banker and but but but really with with the ultimate goal of kind of a re approaching the problem but from the from the private capital market side and that’s what we’re doing at the moment so. The the there is quite a lot that can be done through policy, I believe. But it is a simple spatial policy saying like we would like to have dense urban development isn’t enough. The the challenge is that. And again, sorry to keep referencing how conversations of early, but we’ve had a very productive morning of conversations. So this is all top of mind for me. But. The the typical nine typical peer in the market. Right. Another developer building apartments for low cost housing in South Africa is rationally choosing to do something very different to this. And the other market outcome that I showed you. Not because they’re evil people or they like one to fuck with people with like building housing. I’ll do whatever. They’re just responding to a set of incentives as rational actors and doing what’s like the kind of like the given the context, the the market outcome. We are choosing a much harder path because we’ve got a high pain threshold and make poor life decisions. But this is but, but, but this is not, I’d say the the the thing that would result normally. So so I do think that, you know, it’s this like delicate balance between like how much do you want to use policy to constrain market outcomes and how much do you want to use policy to incentivize better market outcomes? I think my personal view is I think you need both. I do think you need to make it harder to build out there in the middle of nowhere through, for example, facing constraints on the ease of rezoning farmland into, you know, housing in the middle of nowhere or perhaps through by as a local authority being less generous with installing roads and, you know, like, you know, bulk infrastructure like through an electricity for a developer that’s ultimately building something that doesn’t fit with your spatial policy. And this is a market failure in South Africa, where we have. I guess a weak public sector that is easily, um, uh, like lobbied. I mean, lobbying I think is a kind word like one might use a word like, just like blunt corruption as well into, into, into outcomes that are not desirable, but so it’s not a very precise answer. But the thing is it’s. It’s this is frankly something that I think if a guy’s like, you should really try and work on this, like, how does one get this, this and the policy space to result in better than a special outcomes? I don’t actually quite know. 

LaChaun Banks: And it sounds like you’re talking a lot about intentionality and how you are going against the grain, which, you know, that takes the decision to actually do that. So ten years from now, what would success look like with your project? 

Carel Kleynhans: Um. Well, I often think about this. I don’t know. I really hope that it’s not just us doing it because, I mean, I get so yes, like for whatever reason, like myself and my partners. And it’s not easy, not just me. Like I work with an amazing team of people that, you know, if anything came more about this issue than I do. And but but the thing is, I really hope that we are not relying on the intentionality to use your word, of a few, you know, for this to happen in a couple of years. But that one can get to a space where this is a more kind of automatic market outcome and not an exception. So so what would it take to get there? I think that what we are the primary thing that we are doing as a business is demonstrating that this is more commercially viable than the other. The alternative. So if we through a couple years of like solid investment performance, can demonstrate that this is actually just a better investment than the stuff out in the middle of nowhere, it’s more resilient to, you know, economic shocks. And it’s the kind of thing that a pension fund would be better served to hold on their balance sheet than than, you know, housing. That subprime, if anything, taught us is is not worth much if people are willing to be the keys in the door if it is not serving them. So so so I think that will be one of our major contributions is to show that this is a good thing to be doing with your capital as a capital allocator. Right. But but I hope that we can also use the work that we doing as a platform to engage in conversations like this one that I’m grateful to have and, and, and and really start, you know, contributing to a collective conversation around the policy space as well. And yeah, hopefully that will basically I’d really like to see more of this like massive chunk of urban expansion that still needs to happen in the next couple of decades. Not be horrible. 

LaChaun Banks: Great. I have one more question, then I’m going to open it up for questions and I am going off script. Carel, So don’t kill me, okay? You do it like you don’t kill me. This is exciting to see. But one of the first questions I thought of is there education you have to do around folks going from like a single family house to now living in an apartment like this. And is there a lot of talk about the space if someone has three kids versus living out in these what look like single family houses to moving here? Is there a lot of education that needs to be done on this is different or is it a lot of coercion to get folks to come or is it just people flooding the gates saying we want to be in an area where we can have other amenities? Hmm. 

Carel Kleynhans: And I yeah, I don’t know. Honestly. I’m wondering if if we could have a better outcome if we did more education. But the truth is that we don’t really. We again, I think there are a lot of preconceived ideas around, you know, what the consumer would like to have. And I guess our experience is that people are voting with their feet here in that we’re like absolutely at capacity, essentially permanently. And that, to me, is suggestive of the fact that clearly there is something known as being forced to live here. So like the fact that people so eagerly live there and pay rent to me suggests that they clearly lack something in it for them that works. You know, I don’t know if this speaks to your question, but maybe just an observation. So we’ve got quite strict hostels because obviously these are dense buildings and, you know, the I guess we we write our house rules thinking that this is going to be like really hard to enforce and ensure that people aren’t like having a rave at 2 a.m. on a Tuesday morning and, you know, this kind of thing. But interestingly, what we find is that we actually enforce that. We spend very little energy enforcing our own house rules because the community self enforces and self-regulate, because the reality is that, you know, people who live with us are people who probably need a good night’s rest on a Tuesday night much more than we do. And because we’ve got the luxury of perhaps more resilience in terms of day to day, and if we have a bed at work tomorrow, it’s really not the end of the world. But, you know, for for for vulnerable the vulnerable households, which are the majority of people who live with us, you know, getting a good night’s rest and like knowing that your kids are safe in the building and and these things are massively important. And once that’s established, you know, initially, then the community takes huge or derives huge value from that and essentially self-enforcing. So if I’m going to have like a bender on a Tuesday night, then it’s very likely that my neighbor is going to scold me way before our security got on stage and has to get involved. So, so so that is. Yeah, definitely an experience of fun.

LaChaun Banks: Thank you for taking that impromptu question. All right. I would like to open it up to the audience if we have any questions out here before we get to Zoom. Oh, okay. Plaid shirt. I’m going to have you stand up, Say your name and say your question loud. I’ll try and repeat it. Also for folks on Zoom, I don’t know if we have another microphone. Do you want? 

Guest: Hi, my name is Stephan. I’m a Ph.D. student in Urban Planning. So my question is, I’m reminded a little bit of the developer, Jonathan Lieberman, and Opportunity in Maboneng, which also was a very exciting splash on the scene. But the properties were were liquidated en masse. How would you differentiate your approach from that approach? Maybe you learn some lessons from Property City that you’re doing differently, and then maybe if you could speak to sort of the cultural politics of what living in the city means for residents as well as just the the economic aspect. 

Carel Kleynhans: So from a business model point of view, we have quite different opportunity. They were developing fairly high end residential apartments. My knowledge, kind of like typical and let’s call it inventory generation to be kind type type like high end apartments and selling them off into the consumer market. And that, you know, the I guess, business model ran into trouble, but they were highly leveraged and they were having cost overruns on the one end and not achieving the slide rates on the other and then basically had a squeeze and went bankrupt. So we were able to build these buildings and hold them on balance sheet permanently. We don’t sell them and we rent them out. So for us, our kind of commercial viability is does the rent that we’re able to collect net of expenses. So was our cost of capital. And as long as that does, then we’re viable. So it’s a very different model. And, and because we typically work with pension capital and institutional investors, there’s a lot more checks and balances built in that I think prevent effectively speculative development. So so we’re quite unregulated, which which I think serves us as as much as that is the bane of my existence on many at Tuesday morning. But so that’s that’s your first question on the cultural significance of living in the city. I’m not exactly sure what you what you’re referring to there, but I do think that, you know, it’s very hard not to in the context of the Africa, you know, the the legacy of apartheid era, spatial planning and spatial segregation along racial lines is so ever present still with us today that it’s very hard not to think basically. To engage with what we do and think about basically spatial transformation. Really, at the end of the day, the reality is that 99% of people who live with us are black and their parents would not legally have been able to live here. So especially this this project, right. This is in Sandton, the. The it’s really hard to stress the degree to which this blows people’s mind that basically, to put it super bluntly, poor black people will be able to live in Sandton, right? It’s just like totally unheard of. And and and even where we are now, like almost 30 years into the dawn of democracy in South Africa, this is still surprising to people. Right. So so, you know, I don’t know if that that speaks to what you are getting at, but I mean, I think that is a very big part of what we do. And the the weight of this is not lost on us. 

LaChaun Banks: There’s someone in the back and then over there. 

Guest: Thank you so much. I’m Hagan from South Korea. I would like to applaud your work and building such public housing. I think we have the same model, but in the larger scale in South Korea. And what’s happening is the social mix is not happening because of the very architecture of such buildings being like a fortress. Do you have anything in mind?

Carel Kleynhans: By design, you can encourage more social mixing such settings? Yeah, super relevant question. I mean, I’m familiar with the work in South Korea. It’s amazing. So we do try and create a mix across the income spectrum through creating different sizes and types and basically pricing of units within our buildings. And then but but I do think that, too, to be perfectly frank, it’s less of a concern for us at the moment because literally just by bringing this target market into these areas spatially. There’s such a transformative aspect to it already. So basically you’re taking someone who would have never been able to live in this area at all and providing them with an opportunity to live there. And that in itself is already quite, you know, that that is where most of the mixing is happening, basically. But it is something that we are thinking about and asking ourselves, like how do we create further integration within our buildings? And you know, it is top of mind, but other than creating different sizes of units and trying to play across as broad an income spectrum as possible without going into like basically pricing the affordable market. That’s pretty much what we’re doing it. And. 

Guest: Hi, my name is Ekamadate. I’m an architect developer from Kenya. I’m an affordable housing company that builds what I call multi-family housing. I discovered or affordable housing in Kenya. We had 137 units. So you are on 5000. You’re sort of you’re hitting the bar. So I have I think we need a much longer conversation on how you get there, because building housing in emerging markets is a, you know, battle. But I do have a question in terms of your funding structure and how you ensure how you structure your funding such that this first of all, it doesn’t restrict when it comes they don’t restrict how you structure a development, but then they also give you patient capital. So I’m at the Harvard Graduate School of Design at the moment doing the math in real estate. So this might be finance. But basically you’re saying you’re getting patient capital, pension fund capital. So they expect a certain amount of returns. And I’m wondering, do they then impose kind of restrictions on your and the income that you’re supposed to be getting on your property? Does that mean that over time we need to sort of control for rental growth? How does then when you increase, when you don’t have sort of like when it’s still a financial building, it’s still income producing property that has to meet certain returns. How then do you control, you know, the market putting pressure on you to either increase your rents beyond what the people you’re targeting can afford? So it’s sort of like how do you control for the social factors you’re trying to hit, especially because your buildings look beautiful. Eventually someone in the middle class would be like, You know what? Why not? And then they sort of create internal gentrification. And then also the second one is I don’t know how it is in other apartment buildings in South Africa is sort of like at some point, what is your density threshold that then it doesn’t begin to deteriorate the quality of life? What’s that maximum, do you think, in your experience? Thank you. 

Carel Kleynhans: Coop. Very happy to chat further. I love Nairobi. It’s one of my favorite cities in the world, so I’m happy to exchange ideas. To start at the end. It’s not Rinker at all. It’s a we charge would be kind of market and maybe like a little bit too much of a neoliberal in this respect. But I don’t believe I’m not aware of any example of rent control that’s ever worked sustainably in any market anywhere in the world. So I do think that the way to keep housing affordable is to build loads of it. And and that’s what we need to do. So. The the funding model is, I think, to a degree a function of the fact that we are lucky to have a well-developed capital market in South Africa. The difference between South Africa and Kenya is that our prime lending rate is about 10%, whereas yours is over 20%. Right. So we are actually able to bring these projects online and service debt on them, whereas in Kenya you can’t develop at the yields required to service it. So it’s all equity and then you’ve got a high cost of capital on average. So it makes the project harder to get off the ground. So, so but, but the I’ve got lots of ideas, but I’m not going to bore the entire audience with the panel. So happy to chat with you offline, but you need to chat to the device. And three and 300 apartments is, in my mind the limit for how many should be in the building. To your question on entity.

Guest: What size? 

Carel Kleynhans: In terms of dwelling in its factors. All I would think about it, I’d say 400 hectare four or 500 hectare and still get like really good of employment that density. 

Guest: So my name is Heiner. I’m also an investor in real estate at the GST. My background in city planning and I’m actually really interested in building affordable housing communities in Mexico. So it’s fascinating seeing how the development pattern in South Africa mirrors what’s happening right now in Mexico as well. So I have two questions in comparison to areas being median income in the neighborhoods that you have developed projects. How are the rents priced in the properties that you’re developing? So this sort of relates to the previous question. Can you specify which income segment of the population, your affordable housing targets? And then also, can you provide a rough estimate as to the occupancy rates in your project as well? What do you consider to be a success in measuring the impact of projects? 

Carel Kleynhans: For us, full is 95 96% occupancy so that you’ll have a certain amount of operational vacancy at all times. So like a couple of apartments are being renovated or someone just moved out in the middle of the month and it’s empty until the end of the month. So so 95% is full. And that’s how we evaluate the in terms of rental. So we basically charge as much as we can, frankly, but for a given product in a given market segment. But we build the way in which we make it affordable as we build really basically small, dense units in well-located areas. So. Not doing a very good job at answering this. Okay. So who lives with us? Basically the lowest wage earning formerly employed people. So? So like, if you’ve got a job basically working in retail and like, you’re like a cashier, you should be able to live with us in the area where you work. Right. That’s that’s the that’s the desire. So the if you in our society is complex, we’ve got 40% unemployment. So if you don’t earn an income, then you can’t pay rent. It’s kind of obvious. So so there’s a huge amount of South African society that is like by default excluded already. So so we still have a huge need for public housing programs and we actually speak about it today. But we also developed social housing, which is state subsidized. And there is a and and we Alexia heard a lot about this from me, but it’s a it’s a program that is way too small, a portion of our total housing program. And it’s something that’s basically what the Pinehurst Civic colleagues would call demand side led interventions where you basically effectively subsidizing the end user and letting them decide where they want to live through social housing. So we have that. And that’s that’s growing. That’s what people who earn some money, but typically an informal employment, but they they still can’t afford to live with us because at the end of the day, our cheapest rent is basically the cost of building the cheapest apartment that former money can build. That is building code compliant and basically dividing that cost by the cost of capital gives you the rent you need to charge. That’s sort of like how we get to it. So and that so happens to be at the moment basically like the lowest wage earning portion of society, essentially minimum wage earners. And then then we play from that up quite a bit up the income spectrum by virtue of how our income distribution works in the country. So we basically go from, like they’d say, the. And percentile buy earnings. To like the 70th percentile and then that. Basically the middle class basically sits above us.

LaChaun Banks: [Inaudible] 

 Guest: Thanks so much for being here. My name is Alex. I’m a second year student here at the Kennedy School and the MPA and International Development Program. I actually spent part of my summer in Johannesburg working with CAF, so I got a little taste of this. And my question is around. I guess when we talk about affordable housing, we mostly talk about the rental market. And obviously, in the South African context, with apartheid, you know, a lot of black and nonwhite families were prevented from owning homes. So kind of where does home ownership maybe fit into this conversation? Is it even a conversation being had? And then also, I guess a second question, kind of talking about the spatial part that you talked a little bit about commute costs and, you know, people kind of coming to the center of the city for work. Is there also talk about kind of reviving or maybe not reviving, but creating a vibrant ecosystems kind of in townships on the outskirts of cities to kind of address the affordable housing kind of race to the center problem? Love to hear your thoughts.

 Carel Kleynhans: Yeah, we’ve definitely done, like I’d say at least like six, six or seven of the ten most pertinent questions. And that was like two of the top three, I think. So. On home ownership. I mean. There is an insane amount of literature on like both for and against. Right. So I don’t think I’m qualified to say specifically, which is correct. And it definitely is contextually specific. Like what is more appropriate I think is contextually specific and even into household it differs. But I do think like just my observation in the South African context that there is way less access to affordable, well-located rental housing than there is housing that you can acquire. And I think, you know, I’ll give you an interesting statistic. In South Africa, only 14% of households are nuclear family households where it’s mom and dad And again. Right. And single, single family homes as I could. Typology really have been designed and conceived of in the postwar era as something that is in suburbia and caters to mom, dad and kids or to kids. And that is like a household form that essentially doesn’t exist in our context. And I think I daresay probably even here too. So basically, we’ve got changing demographic, the changing demographics profile of society, where you’ve got more single family households and a lot of single mothers. Basically the largest single grouping of tenants in our buildings are single mothers. We’ve got over 50% of our tenants are female headed households, not because we specifically favor them or, you know, get to do them anything, but which is almost three times the national average for for households. And it’s because single mothers basically really value being in a good location and a safe building close to where the kids go to school. Surprise. It’s not that. It’s not you know, it’s kind of the point I want to make is, you know, there is a real, I think, need for more flexible forms of home like housing tenure in a society that has none, that is majority nontraditional household structures. And because we have so little of that relative to our total housing stock, you know, my personal focus and emphasis is going to be on rental housing because that’s really where there’s a massive need. And I think that rental housing and basically flexibility around ten years is going to be important. I’ll just say one other thing on this. So. So the benefit of having a large portfolio, as we do with quite a spectrum of of of kind of, let’s say, unit types and and price points across the portfolio, is that in any given month we do between two and 300 what we call arrangements where we basically have and we were losing a big cost of our business model is basically the cost of acquiring a new tenant. And we were we had this very high rate of churn where a lot of people would leave us all the time. So we started looking into that and doing a lot of exit surveying and figuring out like what’s going on here. And we realized that often it’s not that someone loses their entire income and they can’t live with us anymore, but they actually just like have a family member who has lost their job and they need to like, subsidize their income for a couple of months or they’ve had some like temporary thing happen to them, which means that they can probably afford 70% of the rent that they could afford previously, but they definitely can’t afford the unit they’re in anymore. So what we’ve started doing now is by depending on the circumstance of the individual, either giving them a temporary rental rebate and perhaps a repayment plan to catch that up at the time or like a bit of a discount. We’ve put a foundation that for certain tenant groups, you know, would subsidize it that actually came out of the pandemic. And but then what we do a lot of is moving people within our portfolio. So we’ll say like, okay, cool, you had a two bedroom unit, but you can only afford like, like a lesser And now for a while, let’s move you to a one bedroom unit like down the corridor for a couple of months. And like, once you back on your feet, move it back into a two bedroom unit again. Now, this is the kind of flexibility that you’re going to get in rental housing that is very difficult to achieve in titled home ownership, where what ends up happening there is now you’ve had that same thing happen to you, but now the bank forecloses on your mortgage and your credit rating is flat forever and you’re out of the house. So basically, I definitely am more in favor of rental.

[00:51:54] LaChaun Banks: Can we keep going? Yeah. Okay. Yes, You. 

[00:52:06] Guest: Thanks for speaking with us. My name is Emily Alexis. I’m an MPA student here and I did an MBA. And I’m curious if you could return to the cost of development. How did you raise the capital needed to build to build these projects by the seven city blocks in the city? And then what kind of returns are you offering to your investors and what’s the timeline? Just to get a sense on how this could apply in a U.S. context and like the threshold for the investment?

[00:52:38] Carel Kleynhans: Nothing about the U.S. housing market makes any sense to me. I should start by saying that I don’t know how any of it would apply. But so quite simply, we we kind of try and deliver like high return on equities. So like a holding period, we it’s mostly permanent capital. So guys think it’s not exactly like an hour or two an exit. That’s kind of what we’re trying to achieve, which is pretty much market related for real estate, private equity in South Africa, which it has to be, right, because we are raising capital from guys who are saying like, do I want to invest in that shopping center over there and make said return, or am I going to give it to to these guys? So so we have to be competitive in the local capital market. And so it’s not like soft capital at all or like subsidized in any way. That to answer your question, though, it’s a it’s been we’ve been very lucky to have managed to get very established South African real estate partners who had great relationship with the capital market on board with the vision of what we doing early on. And we effectively leveraged their reputation in the market with basically local banks and pension funds to raise cash is the simple answer. There’s a much longer story will maybe tell you afterwards. 

 LaChaun Banks: [Inaudible] 

 Guest: Thank you very much I’m Fernando Garcia, a research fellow here at the Growth lab. I think you talked about this a bit, but maybe I would like you to elaborate a little bit more. Why is it that there are not more people like you or like your firm do this? Like in general? You know, in both in South Africa and maybe in other parts of the world? 

Carel Kleynhans: And I think that’s a good question. And I don’t actually entirely know. I think it’s because it’s easier to do the alternative than simply so. And I think because it hasn’t been convincingly demonstrated that this makes more money. 

Guest: So what is the. 

Carel Kleynhans: Yeah. Yeah, true. Yeah. 

Guest: It is. 

Carel Kleynhans: Yeah. So it’s easier to build expensive stuff. 

LaChaun Banks: Well, thank you all for joining today. We love these development talks and we’re glad that you’re here. And thank you to you, Carel, for giving us such a great experience when it comes to low income housing and how we can really get this right. So with that, enjoy the rest of your day.

Carel Kleynhans: Thank you. Thank you. 

DISCLAIMER: This webinar transcript was loosely edited and there may be inaccuracies.

Karen Donfried: Good afternoon, everyone, and a very warm welcome to this session of the Growth Lab Development Talks. I am Karen Donfried and I’m a senior fellow at the Belfer Center here at the Harvard Kennedy School. And prior to that, I was the Assistant Secretary of State for Europe and Eurasia. So I have long been a fan of Moldova, and it is such an extraordinary pleasure to be moderating this conversation with Natalia Gavrilita. She is Moldova’s former prime minister. And this is for a conversation about leading change and navigating crisis. Something which, for better or for worse, you owned your skills on. I had the privilege of watching Natalia when she was prime minister. And if you want an example of bravery and resilience, it surely is Moldova. It is arguably the most vulnerable country in Europe today. It has to fend off Russian malign influence and also is a neighbor to Ukraine. So they have been directly impacted by Russia’s war against Ukraine. And Italia was prime minister. She was part of a very dynamic duo with Moldova’s president, Maia Sandu. And I just found both of them inspiring in their leadership. What we’re going to do is I’m going to give you the opportunity to set the stage with some brief comments. Then I have a few questions for her, and then I’m going to open it up to all of you. So please be thinking about what questions you want to ask her as she’s speaking. So again, great to have you here. Over to you. 

Natalia Gavrilita: It’s great to be back at the Kennedy School and it’s great to have this event. I’m very excited about your interest and to have such a knowledgeable person moderate this discussion. Karen knows the region and the context very well. Also, I have to be very careful what I say because Professor Hausmann is here and I have to show that I’ve taken all the great lessons from my class with him back to managing the crisis and implementing structural reforms in Moldova. And also by surprise, Lucio Vinas de Sousa is here, who right after Kennedy School I worked with at the DGA and the European Commission, and we wrote a couple of interesting papers on quasi fiscal activities in Moldova. And the trade flows with Russia will touch upon in my presentation. I want to start by sort of you imagining what it’s like primary that is neighboring Ukraine on the 24th of February. We had, you know, we read the intelligence, saw the news. You know, there was this debate, will there be a war or not? And we did all the contingency planning that we could. But ultimately, we really didn’t think that such a terrible aggression and a large scale war can happen right in our neighborhood. And we had a lot of reasons to be very worried. First of all, we shared 1200 kilometers of border with Ukraine, one third of which is with the separatist Transnistria region, which the central authorities do not control. This separatist region has Russian troops on its territory that supposedly are guarding some 20,000 tons of munitions that were left from the Soviet Union in the village bordering Ukraine. Also, majority of the people in Moldova believe in neutrality. For 30 years, neutrality was seen as a way to convince the Russian authorities to withdraw Russian troops from Moldova. And this has been talked about so much that, you know, we didn’t have any security umbrella. We didn’t think about investing in our security and military because it was frowned upon by Russia. And then we touted neutrality as sort of a solution to getting the Russian troops out. At the same time, this war had the potential to bring a large humanitarian crisis because the western most of the eastern, most sorry border crossing point with Ukraine is only 60 hours away from Odessa. And the region of Odessa has a population of 2.3 million people. So just the region and the whole of Moldova has a population of 2.6 million people. Later, when I visited border crossing points and interacted with the refugees, I’ve even met people who walked from Odessa to the border with Moldova. And then also Moldova is quite a poor country. Our GDP per capita is 5,230 USD and we were already grappling with, you know, the consequences of the pandemic and energy blackmail that Russia put us through in the autumn of 21 and rising inflation. So all of this together, we were facing sort of a potential of a military incursion, a humanitarian crisis, coupled with all the problems that we already were facing. And politically, the government had been in power only six months. And this the last parliamentary elections that Moldova had were actually quite remarkable and extraordinary after years of sort of not having a purpose and being ruled by various oligarchs and pro-Russian forces. And after a massive banking fraud that we saw in 2014, after 12% of GDP was siphoned off through labor. So we saw this wave of people voting for rule of law, rule of law and justice reform, corruption, structural reforms, fair competition. And so expectations were very, very high that what the government would do is actually quickly transform Moldova into a sort of developed European state. So. What? What we did was actually implement everything that we sort of prepared for or so. I think what is extraordinary and how sort of the Ebola in Moldova mobilized is that we managed to deal with the crisis in the way that changed Moldova’s reputation. And at the same time, we very much moved forward with the structural reforms that people voters voted us for. So just to give you a couple of sort of outcome indicators, we ultimately received five times more refugees than the UNHCR thought our total capability to be at. I think some over 600,000 people crossed through Moldova and at the highest point we housed 125,000 refugees. And for a country as small as Moldova. This was the highest per capita figure out of any European country. At the same time, we supported Ukraine in other ways that we could. So we are very strong on solidarity. We did all this work together with the Romanian government to improve logistics. So we opened a floating new bridge. You know, no new bridge with Romania has been in the works for 30 years and we in just several months build the infrastructure leading to the river and build a floating bridge on the river to ease some of these logistics constraints. We’ll be in one year diversified our 100% dependency on Gazprom for gas provision in the right bank, Moldova. So the what is under the control of the central government to zero gas from Gazprom. So we bought everything on the international markets, even though everybody knows prices went crazy. We I think nobody expected Moldova to be the first country to use the Greece Bulgaria interconnector or the first country to use the Trans Balkan pipeline in reverse with sort of all the not only with sort of the ability to go to the markets, but all the governance arrangements that that means and all the contacts that you need to make in order to make it happen. We also implemented structural reforms at the same time in 2022. We were the highest performer on Media Freedom Index. We also improved our Transparency International indicators to reach a ten year high. So corruption went down, particularly in state owned enterprises and other areas that customs, fiscal authority and so on. We also started an external evaluation of judges and prosecutors together with international partners and started sort of a very comprehensive justice reform and improved our standing on the rule of law indices. And of course, this all came at a price. So we had quite profound stagflation. The economy contracted by 6% in 2022 and a further 2.5% in the first semester of this year. Inflation at its highest in 2022 was 34%. It’s still over 10% now. We saw the standards of living falling. The tariffs for gas increased seven times for the population. This means that, you know, an average Moldovan household spent 15% of their income on energy bills, compared to less than 5% in European countries. And last year, this figure went up to as high as 43%. So 43% of the incomes of our average household went to pay gas bills or electricity bills. So what what we did. We also introduced very quickly a targeted energy vulnerability program which provided cash transfers to the most vulnerable population and reduced some of this costs for fuel for the households. But of course, ultimately we also pay paid politically. And the government that I led had to resign in order to provide an opportunity for continuing further reforms and giving some optimism to the people that things can go better. Last thing I want to say before we open it up to questions is that I’m very proud of Moldova as an example of women’s leadership. You know, I think traditionally we see sort of some of these security, military jobs or crisis management in more traditional light. And I think that what we’ve demonstrated is that women can manage such situations just as well. I want to add that besides the president’s being a woman and the prime minister being a woman, and I think during that time, we were the only country in the world that had sort of both positions filled by women. We also had the minister of Internal Affairs, a woman, and that ministry basically handled the brunt of the refugee crisis, but also the sort of border management and security issues. We also at that time had a head of the constitutional court who was a woman then the anti-corruption prosecutor. And this is also due to the policies we’ve implemented. So we’ve introduced double quota in Parliament, for example, and 40% of our members of parliament are women. And in these elections coming, we have local elections coming up in November. We are taking this quota to the local level as well. We’ve also introduced a number of policies to make it easier for women to participate in such responsible positions by making more flexible sort of parental leave rules around daycares and so on and so forth. So I’m very proud to say that sort of the entire society mobilized in a way that completely changed Moldova’s reputation. And then from a country that was only in the news due to some, you know, outstanding corruption crisis. We turned sort of the reputation of Moldova as a small country with a big card who, in the midst of a war in neighboring Ukraine, managed to support the Ukrainians, support the refugees, support solidarity lanes and food security in the entire world, and at the same time transform the country in a way that was worthy of becoming candidate to the European Union, which was ultimately our biggest promise to our people. When we went into elections. We said that by 2024, in the four years of the mandate, we would apply for candidate status to the European Union. So when we started, we didn’t even think we could apply until 2024. But the way that this worked out is that we not only applied but also became candidate. And we are very positive that in a month or two there will also be a decision of the opening up negotiations with Moldova going forward. So I will close by saying, watch this space. A newcomer to the European Union and come visit Moldova, Research Moldova. You know, when I was here, very few people knew about Moldova. I kept talking about it in all my classes, so my friends nicknamed me Moldova. But I think now that you came, I think now there is a growing number of people who could have that nickname. So that that is a very positive development. Thank you. 

Karen Donfried: Well, you’ve made it clear why the Moldovan story is so remarkable. You’ve also made it clear the challenges you face and the statistics you rolled out about stagflation, about economic contraction, standards of living, falling high energy costs. These are challenges that are still with Moldova. And I’m curious what you see as the recipe that leads Moldova to restore economic growth. And this will be part of your new position as well. But just what did you learn in Professor Hausmann’s class that you can that can lead Moldova? 

Natalia Gavrilita: Well, the main thing I learned is that we need to be humble about, you know, the recipes for growth. And we also need to understand very well the context and the sort of take decisions based on on the context. And it’s actually very hard because Moldova is a small country, it’s very small an open economy. It’s very much influenced by what is happening in the region. It also has the problems that many Eastern European countries have, and that is a deficit of people. We have very high outmigration and low fertility rates. So the population of Moldova is shrinking very rapidly. And so we have to think like, what is the response to that? And, you know, even if we want to attract a competent labor force from abroad, actually when there’s a war in the vicinity, not many people want to come. So we have to think about, you know, our labor force and where do we direct the scarce resource, So what type of sectors we want to develop and why? You know, we were talking about industrial policy coming back in the US and Europe. So I think we need to do some sort of fresh analysis and see, well, under these circumstances, what is our offer to investors, to our development partners, what is our role in the region? What is our role in a future reconstruction of Ukraine? What do we need to do to sort of improve our capabilities, our infrastructure, to be an active participant in these developments? And at the same time, I mean, we have to do what we’ve done. We know that we need more capital. We needs higher productivity. But without proper rule of law, that’s actually very difficult to achieve. So we need to continue with justice reform, too, with governance reforms to improve our institutions, to improve our services of the expectations of our people. Because ultimately, you know, it’s this economic differences and wages and then this outlook and expectations that drive our people and especially the most. Talented people out of Moldova. So it’s very challenging. Again, I’ve met with investors who are saying, Oh, we’ve waited for someone like you to come to power in Moldova so long, but we’re going to wait until the war is over and then make our decision about investment. So, you know, we we have to think and we have been thinking with our partners, for example. You know, guarantee instruments like, you know, guarantee for political risk or currency risk that would help some investors to make the leap come to move Moldova, even even before the war is over. So there is a number of of things that we need to do. And I think that we are trying our hardest to do it. I now I’m also I’m working on a new economic think tank in Moldova to work on some of these solutions to to the more strategic issues that governments sometimes don’t have the time or the capability to think about because of low state capability, which you probably all know the. 

Karen Donfried: Thanks so much. You have shared with me that along with this challenge of economic growth, the other big challenge for Moldova as it seeks to stay on this pro EU path that your government and President Sandu ushered in is the challenge of Russian malign influence. You have a very large country that is actively seeking to destabilize your country. How do you fight back against that? 

Natalia Gavrilita: So even though we are not involved in the military conflict, we definitely have a hybrid war with Russia. So in the beginning of the war, you know, in some of the meetings, I would even say, look, Russia doesn’t have to spend money on a missile, you know, to attack Moldova because it can attack through hybrid means and destabilize the country to the point where it doesn’t need missiles. So we have seen a ramping up of these hybrid war elements like cyber attacks, for example. We’ve had more than 200 cyber attacks in 2022, including in August of 20 2022, the the biggest attack in the history of Moldova. And I’m glad to say that through a number of techniques, we were able to withstand that attack, even though its magnitude sort of was was higher than our capacity. I’m not an I.T. specialist. I can tell you all the details, but it was quite a nervous two or three days, including because we had attacks from within. So we’ve had our own authorities. We had sort of servers that were taken over and there were attacks from within. So we managed to stop some of that in time to to not do the damage. At the same time, we had in 2022, more than 300 bomb ballots. So pretty much every day we saw bump, bump alerts to the airport in particular and the court systems. So the airport. So, for example, I will tell you, I was going on an official visit to Romania and they called in and said there’s a bomb. Right around the time that my flight was supposed to leave. And then 4 hours later, the foreign minister was supposed to leave on another flight. There was a bomb alert again. So in two days. Do you think that was a coincidence, that it was like bomb ballots? Right when we were supposed to leave, But that disrupted the law. It’s sort of you know, this is this feeling of insecurity that people have. Like they hear about one ballot every day. And then most importantly, we have an extraordinary amount of disinformation and fake news and half truths. And so we had a lot of influence on Moldova, still has about 30% of Russian speaking population. These are not just Russians, these are Ukrainians Bulgarians. A minority, a Turkic minority called Gaga was and even some Moldovans. Historically, they they’ve been following more sort of the the the Russian language news. And we closed six TV stations, the same TV stations that European Union closed. So these were Russian retransmitted channels. But then we saw everybody move to online. And now the Internet is like 70% use it as one of the three top news providers. Telegram is massively popular in Moldova. And people believe in what they read there. And sometimes I would read things about sort of my fellow member, like members of the party, you know, like members of parliament, and I would actually have to take the time and go and ask them, because some of these half truths are just so difficult to disentangle, even if you have massive amounts of information and critical thinking. Now, think about people who you know are Russian speaking and maybe poorly educated. This changes a lot, their attitudes and their perception of the reality. So it’s very difficult to think of solutions to to these problems right now before the local elections. We’re seeing massive amounts of cash going to through what? Of these pro-Russian parties from a fugitive or led by a fugitive oligarch who is not in Moldova but still manages to disrupt the politics in Moldova. So this is why when yesterday some students asked me what is the most important element of keeping us to the pro-European path? And I said it’s actually combating disinformation. It’s investing into good content. It’s investing in education and critical thinking. I mean, this is more long term, but investing in the free media and sort of helping our societies. I think liberal democracy is under attack everywhere. And we do need good content to be able to to maintain our country’s on the spot traffic. 

Karen Donfried: I have so many more questions to ask, but I know all of you do as well. So I want to come to those of you in the audience who wants to jump in, please. You might you. 

Attendee: Thank you so much, Prime Minister, for your time today. And in 2018, I visited Moldova. I research Moldova. It’s a beautiful country and I really echo your call. Everyone should should do that to make wine. And they have fantastic, fantastic wine. And then among many other things, my research had a lot to do with the situation in Transnistria back in 2018. There was some hope that the negotiations were moving forward. The situation has changed a lot now, so I was wondering if you could share your thoughts on in the context of Moldova nowadays with the EU, given kind of its status on one hand and Russia behaving so aggressively in the neighborhood, on the other hand, what can Moldova do and how can will be supported to bring Transnistria back? Thank you. 

Natalia Gavrilita: Thank you for this question. So counterintuitively, I actually think there is more hope now than in 2018. So one important thing that happened after the war started is that the border between Moldova and Ukraine on the Transnistrian perimeter was closed. So this means that this big hole that was sucking out resources through contraband and smuggling and, you know, the illicit activity now is closed like all goods from the Transnistrian region, which has historically a better developed industry than the the right bank, Moldova, because it’s separated by a river for those who don’t know. But yeah, so now all goods go through Moldovan border crossings and all of a sudden we have more leverage. Companies have had to register. It means they have to comply to Moldovan legislation. We have seen that, you know, the only way that the TRANSNISTRIAN can sell the electricity that they produce is to Moldova. And with the expiration of the gas transit agreement between Russia and Ukraine, there is a real question. Well, where are they going to get the gas from? And then, you know, what will the price of gas means for the competitiveness of their production of electricity or the metal processing industry or the cement industry and so on? So so the real question is what happens to the 1500 troops that are stationed on the territory of Moldova? And then, you know, how do we integrate the region in a way that doesn’t disrupt the advances that Moldova has made? So we had a positive signal from the EU that, you know, we could move forward with the EU integration process even if we have a frozen conflict. But we want to integrate these people and they all have Moldovan passports. So actually they could come and vote and participate in the political process. So I think that sort of managing that and that a transition period where they are exposed to at least some alternative news because for 30 years they’ve only had Russian propaganda. And I was giving this example recently that my family comes from the transition region and sometimes my aunts and uncles believe what they read in the Russian newspapers rather than me. So that tells you how strong that propaganda is. So we we we need to analyze the data that we are getting from this change. Significant change in circumstances. We need to think about our leverage and negotiate in terms of sort of the new economic distribution. And we need to think what is the type of transition towards democratization that would allow us to integrate the Transnistrian region without destabilizing the rest of Moldova? 

Karen Donfried: Yeah. Yeah. 

Guest: Many thanks. One of the pieces that actually wrote all those years ago was what was originally called The Cost of the Normal Dover, which was a sort of a blueprint on how it could integrated as a new stretch of the border economic body of Moldova. But that’s not my point. The point that I would like to try to make is the following. Once you enter the European Union, the European Union is not something that necessarily yields what you want to get in the end of the day. There’s no guarantee of convergence, as we use on European parlance, but provide you some tools for convergence for your account. I come from a country that actually has failed to converge in the past four years, so we didn’t use the opportunities that would be a and no integration offered to us. From a point of view of your own strategic thinking about what’s going to be the niche that Moldova is going to aim for once in the European Union, what are the users that you are going to have for the resources that will come once you become a professional counselor because this unlocks the envelope of resources for you. Is there any strategic thinking in terms of how you are going to use this opportunity in what is the niche that you want to have as an economy, as a country On the broader structure of the union is not only our question for Moldova, but for the other countries, especially for Ukraine. Once we actually start this process. So if that is the strategic thinking, I would like to try to understand from you what it is and if it is not. I would urge you to start doing this. 

Natalia Gavrilita: Thank you. This is actually the million dollar question, and this is why we are trying to bring the growth lab to Moldova to do some analysis and help us come with this, come up with this sort of strategic niche. I mean, again, I said there is change in context and actually it’s very difficult to analyze what is that needs. Given the the the change in context, then I’ll give you some examples. So Moldova is currently one like a big agricultural produce. I mean, it’s only 10% of GDP now. It used to be much more, but it employs a lot of people. So, you know, we could start doing more and processing, but then who are we competing with? What are the logistics costs and so on. So these are very good questions. But other sectors, pharmaceuticals, for example, we have a very good medical university with good value for money, and therefore it’s popular even with international students. And we also have some pharmaceutical companies that, you know, some of them are Romanian companies that have European certification. Structural reforms and regulations in the last two years in the pharmaceutical sectors. It has gone very much under the radar. But and we’ve become all of a sudden competitive for some products because logistics are so expensive with China. But do we know what’s going to happen in two or three years? Is China going to become competitive again? Or we could invest in infrastructure and, you know, expand our logistics routes and create sort of some of these logistics centers. But then now there is a lot of demand because the just airport is closed. What happens when the support reopens? Will that flow up all of a sudden and all this investment will be and or poorly spent? So, you know, industrial policy in the past. Her birth name because, you know, it was sort of accepted in the literature that governments are very bad at making these bets, you know, and they cannot come up with sort of the right industry to support order. And it’s a hit or miss. You know, luckily now we have better frameworks, but still, these are not trivial questions and should be thought through very well. And you also need to have a political process where this is understood beyond the lifetime of a government which in Moldova on average lasts a year. So, so, so these are the type of issues, precisely the type of issues that we should think of in the process of European integration, because it will affect the sequencing of adjustments to some of the regulations of the European. [00:35:47][176.2]

Karen Donfried: Thanks. Yeah.

Guest: Thank you so much for being here. My name is Lucas. I’m in the MVP program and before I worked in the European Parliament. And my question is about EU accession, and I’m curious to learn. What do Moldovans expect from the accession process? Because we all know that the Western Balkan countries, they’ve been in this process for years, sometimes for centuries, and lately they haven’t been so many steps forward. So really my question is, what do you and what do Moldovans expect from their status as a country? 

Natalia Gavrilita: So I think what I expect and what Moldovans expect is a bit different. So what I expect is an impetus for the true transformation of Moldova. I mean, we have seen from the European integration process that this is a process that, if used wisely, can provide the political support to do some of these very difficult transformations. So I think, you know, the process itself is just as valuable as the ultimate prize of becoming member of the European Union. In fact, we have seen from some countries that once you get that prize, it becomes difficult again to stay on the path of transformation, particularly in the rule of law and justice sector. So. To me, the next several years are crucial because, you know, we make it honored by 2030 as our objective is, you know, we can actually, as part of this process, deeply transform Moldova in a way that will bring it to a new equilibrium. What people expect is peace and prosperity. And I think that’s what people expect everywhere. And yes, people want that quickly. And, you know, we need to work with people to help them along the way, to help them understand and have the right expectations about what type of sacrifices do we need to do in the short term to achieve those objectives in the medium and long term. And even then, you know, it’s a fast changing world. And, you know, sometimes we may not get there. So I think this is very natural. And I think all politicians and all economists and technical people should understand this and then work with these expectations. 

Karen Donfried: And like it. It’s about the journey, not just the destination. Okay. Let’s come to this side of the room for a change and I think we’re back to you. 

Guest: Thank you. Thank you for visiting us. My name is Kim. I work at the growth lab, and I’m actually very interested in the Moldovan case. In a way, I’m asking a related question. I wanted to hear your views on the EU, but from a people’s perspective, you have a 2.6 million population, as you mentioned. I believe at this point for sure, more than a million of those hold Romanian citizenship. So technically there are EU citizens as well, even though many of them still living in Moldova. And I’m sure that presents it’s a very regional situation, I believe, to be in on that scale. I’m wondering how you think about the challenges that this creates for for the country in the opportunities also that this could lead you to either individually for such citizens, but also for the country collectively? 

Natalia Gavrilita: Thank you. This is a very good question. So indeed, basically half of the population of Moldova, at least half. Are already EU and they citizens. This means that they can travel freely in the EU, get jobs in the EU and, you know, benefit from all the advantages. And you know, in the beginning of the war, we actually saw a lot of people just take the passports and go. And that presents a whole set of challenges. At the same time, I’m optimistic. I tell everybody, look, you know, we are a small country and half of the population has already integrated whether we want it or not. So actually, we are very good. Well, you know, success story and good case scenario. So invest in us and we will sort of be a success story of making it to the European Union quickly and hopefully not just balancing it, because in the Western Balkans I had recently a conversation where, you know, we need to bring the European Union in our countries and not our country’s problems into the European Union. 

Karen Donfried: I know you in the back. And then I want a woman to ask a question, too. So where? 

Guest: So building on that, we talked about our mobile business being with the largest GSM workers. How is that affecting the whole society? I mean, I was a refugee and I was affect your business. You have your business. 

Natalia Gavrilita: So it’s very interesting because this refugees case study is very different from any other refugee situation. So I’ve worked on refugee issues before, immigration issues before, and I have seen some of the refugee camps in Jordan, for example, or, you know, I have worked in the West Bank, so I know very well sort of the situation of Palestinian refugees in the Middle East and Syrian refugees and their plight. And here what we had is people who are have had historically very close relations. We have in our society many, many households who have friends and family in Ukraine. And they actually when you talk about refugees, they actually house their second cousins, you know, for a while. So. So there is a lot of interlinking. And also Moldovans are bilingual and they all speak Russian. So it’s easy for people to integrate. We very quickly adopted rules that allowed the refugees to participate fully in our life. So in the social and economic life. So we gave them the right of work. So we had entire projects, for example, in the cabling industry move from Ukraine to Moldova. We also received support from our partners, not immediately, but over time where, you know, we are covering the costs of health care for the Ukrainian refugees, we are covering the cost of education. And we also I mean, this refugee population is largely women and children because men are not allowed to leave Ukraine. So what we have seen is that sometimes it’s a and this happened after the pandemic. What we’ve seen is sometimes there is a whole parallel world where just Ukraine move to Moldova, and it’s probably not making a difference in either the I mean, it’s making a difference only in consumption because they work online for Ukrainian companies that children study online. By the way, I think Ukrainian teachers should receive monuments and medals after this, because sometimes in these refugee situations, the online classes where the only normalcy that the children saw and that was very important. So so part of the population, it’s like they’re living in Ukraine, but they are just physically located in Moldova. Part of the population has integrated, are working. And, you know, if anything is helping Moldova because of the high deficit of people and probably after they leave is when we’re going to say, oh, actually, you know, that contributed to growth. And we didn’t understand because we were on a. Negative drunk and then, you know, part of it. Like, for example, I mean, there are really interesting issues to research, really. For example, Moldova has had very high cumulative inflation, but the exchange rate is not affected. This could be because some of these Ukrainian refugees are coming with cash to Moldova and they are orders of magnitude different than in Moldova. So some of them may be actually very affluent refugees. And we’ve even for them, it’s very comfortable to live in Moldova. We’ve seen even a few European countries to Moldova because it’s much more like home and it’s closer to home and there could be some circular migration. By the way, it’s very interesting, I think, to study circular migration in light of many Moldovans holding Romanian passports because, you know, you would think that sort of this keeps their link with Moldova and then allows them to return much easier because they know they can leave at any time. So it’s very it would be very interesting to disentangle some of that. But basically we need policies to be able to attract people and at the same time sort of allow people to realize their potential wherever they are. 

Karen Donfried: Lots of great analytical work. Yeah, please. 

Guest: I commit a bank to the UK Government and I Shorenstein but I had I’ve worked closely with Annabelle Ronco and Anastasia with you on strategic communications efforts. So my question is around that, both about perceptions of the EU and all the investments, the complex policy topics. You’re talk about this growth, but how is that felt and understood by the day to day as a citizen? Something that we try to have challenges with in the UK? And I grew up in Serbia where I feel, you know, friends ten, ten years ago really excited by EU accession, really supportive. And then I speak to a lot of them now and I’ve gone completely the other way. So I want to hear a bit more about how you see that being managed in Moldova. That’s a very difficult question. So again, everything depends on where are people getting their information from? Who do they trust? And how do we support or foster or affect this trust. So as I mentioned, like we we tried to communicate throughout the crisis. You know, I, I had press conferences every week after the government meeting. But ultimately, you know, it might have been worse than better because then you would have somebody like cut half a sentence and manipulate it. Right. So. So it’s a very difficult question. So on one hand, we have achieved some progress. So, for example, support for the European Union went up, Support for NATO went up. This is very important in Moldova. But at the same time, you know, in the beginning of the war, people blamed Putin, Russia, much more than now, Like they’ve come back to an equilibrium because they’ve they’ve watched the news, you know, there’s fatigue and then they sort of very easily fall back into believes that they have held previously. So we have created we are trying different approaches. So we are working with different recipes. So we have created this institution, a new institution which has just been formed to combat disinformation from a national security perspective. And it’s a very difficult topic. So we talk to civil society a lot. We believe in liberal democracy. We believe in, you know, the freedom of speech. And everybody’s right to say what they what they feel. At the same time, we need to limit the Russia’s influence because it’s actually a tool of war. So. I think we’re going to also, I would say watch this space. We’re going to be at the forefront of like using or creating a government institution that, you know, will try to combat disinformation from a government perspective. 

Karen Donfried: Well, this has been a terrific conversation and unfortunately. One more question. One more question, and we’ll pick one, one, one that we’re back. So short question. Short answer, because I know folks have commitments at one.

Guest: You just heard as well, folks, I’m not sure this is going to be a short question and the short answer, so maybe we can cut it short. I think what I was really curious about is to hear, you know, that Moldova, too, has, you know, sort of developed some comparative advantage around medical education and pharmaceuticals. And I know, you know, there are a couple of European Union countries that do that, Hungary and Latvia, but prohibitively hard for Germans and Italians, for example, to get to medical studies in their countries. And so they go to Latvia to go to Hungary. And it’s phenomenal universities. The problem that you see is that these countries sometimes don’t really have the ecosystem to retain the talent, right? You have talent inflows, but then, you know, people in especially within the European Union, because it’s easy, they go back home and by all means, Italy needs good doctors. This makes me really happy that people come back. But I was just wondering about your sort of like talent retention strategies, too, and sort of the ecosystem you’re creating or are you planning on creating around developing, you know, maybe specialty experts in the field of, you know, medical medicine, pharmaceuticals, you know. Veterinary services, etc.. Thank you.

Natalia Gavrilita: So to make it short, I will say that growth is the best strategy. I have not seen any better strategy to get out of poverty, improve your systems, improve governance and just, you know, become better at everything than ensuring economic growth and prosperity. If I am to go just a little bit, then to details for the IT industry, for example, we have created a special fiscal regime and our I.T. specialists are staying in the country more than other areas. You know, we have now ideas over 10% of GDP. And this creates an ecosystem, you know, for the I.T. specialists. So now we have these, like really cute cafes and co-working spaces, and it’s nice design. And so in a way, what we need to do is sort of pursue our strategies for growth. And I think if there is the sort of the cost benefit of providing sort of some special attraction and then just letting sort of the ecosystem develop. 

Karen Donfried: Well, Natalia, this has been fantastic. And you’ve talked about the many challenges Moldova faces. You’ve talked about the feeling of insecurity Moldovans have as they face these economic concerns, as they have more next door. You’ve also talked about the fact that reforms fit tight, and there’s a question about how much time you have. You mentioned the local elections in early November. It is not looking like the governing party will do well. Those local elections matter in and of themselves, but they also matter for the presidential election next year, for the parliamentary elections in 2025. And I think probably everyone in this room hopes very much that Moldova will be in a place where you have a government in place that can see Moldova through on these reforms. And there are a lot of smart people in this room, including at the growth lab, who I know were committed to trying to help you think through what the best answers are for Moldova. And so I want everyone to join me not only in thanking Natalia, but also in wishing the very best for Moldova as it seeks to deepen its democracy and reach that Europe goal. So thank you. Thank you very much.

DISCLAIMER: This webinar transcript was loosely edited and there may be inaccuracies.

Ricardo Hausmann Today we are really, really honored to have my good old friend Indermit Gill, who’s been a really important thinker for a very long time on issues of growth and development. And he’s now the chief economist of the World Bank. I think it’s it’s a fantastic appointment. And I think he’s going to have a huge impact. We’ll see it in his next World Development report, which is going to be on the middle-income trap which is a really important topic. He’ll be moderated by Dany Bahar, by our own Dany Bahar. Dany is a graduate of the school, he got his Ph.D. at the school and he’s also an MPA/ID and he’s a Professor at Brown. And so it’s it’s great. And he’s a research fellow, a senior research fellow at the Growth Lab. So Dany and Indermit, it’s an honor to have you, and I’m looking forward to your conversation.

Indermit Gill So I’m just going to show you a few slides. No, I’m going to show you many slides. But the basic message is this one over here, the world is in a really bad state and it’s worse than last year. And there are even more risks now. So if that’s not bad enough, if you look at the longer-term economic prospects, they are actually worse than what they were before. With the ten years before COVID and those although those years were much worse than the years the first the first ten years of this millennium. So essentially what you sort of see is declining potential. So these are all things that you probably already know. I’m just going to prove them rigorously. Right. The other thing, though, is that the one thing that you probably haven’t heard is especially from somebody from the World Bank on the IMF, you don’t hear who’s responsible for this. Right. So I like to tell you who’s responsible for it. The third thing, of course, is that there are remedies, but these are very difficult remedies. And essentially, I think that the remedies are similar to what the Oakland A’s were trying to do when they when they had lost, you know, big stars like Jason Giambi and others. And they were trying to sort of recreate some of these superstars in the aggregate. Right. So you really need a lot of numbers and so on. And what essentially what we have to do is we have to recreate China in the aggregate. So that’s essentially the big solution. Okay. It’s not an easy thing to do. All right. So I’m showing you a few slides over here. So first, I’m going to just quickly talk about the next two years are 20, 23 and 2024. So there’s not likely to be a global recession because global recessions don’t happen unless the US goes into a recession. And we think that the US will not go into a recession. But we will actually probably end up having the year that the five years of 2000 to 2024 are set to record the weakest global growth since the mid-1990s. Okay. And then so and the problem is that the growth is slowing down but is slowing down relatively or slowed down relatively more in the poorer countries. So, in fact, compared with the pre-COVID days, about a third of emerging markets in developing economies, AMD’s is emerging markets in developing economies. They’ll still be actually at per capita income levels that are lower than what they had before the crisis, right, in 2024. There are some bright spots, right. And the bright spots are the place bottom. Mainly they are mainly the mainly in East Asia and in South Asia, especially India. But other than that, it’s really hard to sort of find bright spots. Okay. So here is what we have here. So here are the World Bank’s projections for the world, as you can see, is 2021, which was supposed to be a year of recovery, a rebound. We did have that. But that but then by essentially 2022, essentially what you got was growth was back to the pre-COVID, the pre-COVID decade. And since then, it’s actually lower. Right. And that’s true of advanced economies and that’s true of emerging markets and developing economies. And it’s true of emerging markets and developing economies, excluding China. But China is somewhere in between this and this, which is why we always have a second category. Okay, then if you look at inflation, as you can sort of see, everybody says that inflation is coming down. It is, but inflation is still much higher than what it was in the four or five years before the COVID average. Right. And then, okay, so who’s responsible for this? Right. So this I mean, the other thing that you see over here is that the the world is in a real mess. Okay. So once you get to that, like around 2% growth rate, you’re skating very close to the edge in the sense that you get one more hit and you go down below 1% growth and you enter a global recession. Right. So you’re not we are essentially in a big hole. Right. Okay. Big holes are not made by small economies. Big holes are made by big economies. So if you sort of see it, you actually sort of see these three big policy mistakes. The first one has to do with misdiagnosing. Inflation is right. The second one has to do with misdiagnosing a virus. And then the third one is misdiagnosing the energy narrative. Okay. And you sort of see over here is I don’t want to sort of spell out all of this stuff, but you see you see for each one of these things, you actually sort of see mistakes being made. And what’s very what is actually very striking, Ricardo, is that you’re not finding that you’re you are now finding that the quality of economic policies is actually better in many emerging markets in developing countries as compared to those that we always thought had very good economic policies. The EU, the US and by the way, China too. We always had a lot of trust in China because we always thought that, look, you know, we think that the quality of economic management in China is very good. Chinese data are terrible. But it didn’t matter because you don’t need the data because you have so much faith in the you you have so much faith in the quality of economic management. Now, that’s not true anymore. So now you actually need data and you don’t have it. Okay. The third thing I thought I’d say a few things about this one because. So I used to think until last summer, I used to think that. That the EU has done really well in terms of cutting emissions, in terms of moving to cleaner energy and things like that. Right. And I thought that the US had cheated. Right. That basically what the US did was it didn’t actually move out of fossil fuels, it just moved from coal to gas. And that’s how you can cut emissions by half if you just do that, right. And we were always sort of told what Europe actually has done. It has you know, it’s moved out of nuclear. It’s moved out of school. It’s gone into wind and wind and solar and stuff like that. Right. Well, then you had then you had the invasion of Ukraine. You had all of that. And basically what you saw was that actually you found that the largest economies in Europe had not moved out of had not moved really out of fossil fuels. They just moved instead of shale gas. They had moved to Russian gas and from what, Germany and Austria and others. So they just moved into gas. But it was Russian gas. Right. And then we were also sort of told, no, no, no. Actually, if you look at electricity generation, depending on the day, actually Germany’s electricity up to half, you know, between a third and a half of it actually came from renewables, you know, wind and solar and so on. But we are never told that that’s not the full energy consumption because electricity is just one-fifth of the total. So if you sort of add it all up, if you actually looked at it before the problem started and so on, the amount that Germany was actually consuming, the share of Germany’s energy needs that were coming from renewables was something like 6.3%. Okay. The rest of it was all the usual stuff. So in some sense, I feel that that by sort of, you know, by overestimating the the speed of the shift to renewables. The EU got itself into this right. And when and when you actually had when you had a disruption in gas and oil and so on, you actually had problems. Now things are improving. Right. So things have started to improve over time. One of that is that US CPI inflation has come down and as you can sort of see is essentially what has happened is that US services have proved to be quite resilient. So they have proved to be quite resilient. But as you can sort of see, the trend is not particularly good there. The other thing you would see is because of that misdiagnosis, which I mentioned to you, is if you sort of look at what has happened to expectations of interest rates, they have shifted up over time. Right. They’ve shifted up between 6th of June and 21st of August in the sense that we were expecting that interest rates would be like this or federal funds rates would be that now they’re higher and it’s because inflation has proved to be much more resilient than people thought. Oh, much more obstinate and. But you see, I spoke about the bright spots. And if you sort of see over here, I mean, here’s the world will grow roughly around 2% this year and the next year. Then if you sort of look at emerging markets in developing economies, roughly twice that amount. But then if you start to sort of look at the Asian countries, you sort of see higher growth rates. You don’t see all of the ASEAN countries. It’s a little higher at around four and a half, five. And then if you look at China, it’s actually coming down from about six to about four and that India is staying up at around six. And Indonesia has staying up at around five. And these economies are doing well. But outside of outside, it’s really hard to find such stories outside outside of East and South Asia. Okay, So here’s the upshot of it. The upshot of it is that if you sort of look at five year period and look at growth in emerging markets only and you sort of see these were the good years here and you see this, this is what we are projecting these five years to look like. And the only time they were any lower was in the early 1990s. And then if you sort of look over here as a world here, emerging markets and developing economies, they are low-income countries and these are fragile and conflict-affected countries. And you see these these are the shares of countries that will have a lower per capita income in 2024 as compared to before the pandemic. And you sort of see over here is that for the world as a whole, it’ll be about a quarter. But for these countries, you’ll see it’ll be more like two-thirds. And for low-income countries to be more than a third. So this is after five years. So, you know, this is, you know, basically a lost half-decade. All right. All right. All right. So that’s what’s happening now. A very short-term view of things. So what we also did was we actually sort of we did a major exercise at the World Bank where we looked at what is what are the prognosis for growth, What is potential growth rate? And so you have to sort of calculate this and you’re using a whole bunch of assumptions and using a whole bunch of methods and so on. So we did that. We looked at all of the methods that central banks and others used to actually project potential growth. So potential growth is the growth at which an economy can grow without triggering inflation, roughly speaking. Right. And basically what we found was regardless of which way we were measuring all the stuff we found, the potential growth rates in advanced economies were really cutting, were really coming down very, very rapidly. And the reasons are the ones that you could kind of know is actually demographics and other things. Right. Yeah. And but. But this was not just the case only for emerging. It was not just a case for advanced economies. It was also the case for emerging markets and developing economies for a whole bunch of reasons. And for them, that growth potential was also coming down. And those were the main factors, of course. And then the as I said, is that, you know, how do you try to sort of get out of this? You try to get out of this by eking out a little bit of growth, extra growth from a whole bunch of economies. Right. Like one percentage point more, one percentage point from India, from Indonesia, from Mexico, and from Brazil and so on, too. Right. Okay. All right. So that’s what we did. I just signed off. So all of this was by the way, all of this is assuming a really optimistic situation in the sense that you should you shouldn’t have any more crises. If you had more crises, all bets are off. Okay. And so here’s what they look like. So this is a the world you sort of see for this decade, the first decade of the things the second decade is the third decade. Right. And you sort of see everything coming down for advanced economies especially. It goes from about 2 to 1. When you get to 1%, you’re sort of skating on the edge of a global recession every year. And then you feel here is that even for emerging markets of developing economies, you also sort of see this cut. It goes from about 6%. It was about 6% growth in the first in the first decade. It went down to five. Now is four. It’s going to be four. And this is the average that we had between in the first two decades of the millennium. You sort of see the average over there. And from that you can sort of see across the board. The only the only part of the world where you sort of see any good signs is South Asia. But you don’t sort of see a big decline. You also don’t see a big decline in sub-Saharan Africa. The problem is that sub-Saharan Africa wasn’t very high to start with. And for sub-Saharan Africa, a 3% growth means that per capita incomes are not increasing. Okay. So basically, if it goes down below that, then per capita income start to fall. And as you all know, that the the the conditions of social conditions, economic condition and political conditions in a country where per capita incomes are falling a materially different from those where per capita incomes are increasing. Okay, so then what we did was we actually broke this down and said, okay, how much of this is because of productivity? How much of this is because of how much of this is because of capital and how much of it is because of labor? Right. And so you sort of see over here is that in general, it looks like it’s across the board for emerging markets. Right. So for you want to see this decline in the component of labor, and this is, roughly speaking, the demographic. But. Right. And then you see over here, this is the amount that comes from investment. And this is, roughly speaking, the investment climate. Okay. Getting worse. You have debt overhangs, etc., etc., that actually kill investment. And then this has to do with the efficiency of the economy. And as you see, even that the rate of growth of the efficiency of the economy is actually also going down from not so much between last decade and now, but definitely compared to the first thing. Okay. So then what I did was I asked the team to sort of give us the perfect things for China as you sort of see all of the dividends that came to China from essentially a growing labor force. So growing think will be gone. Right. And then if you look at India, India looks stable. Right. And then Indonesia also does. Okay. But in general, East Asian countries are starting to look more and more like this, where one of the drivers is not to actually have that. And then I also asked about Brazil and Mexico and South Africa. And as you see, I was surprised that actually I was pleasantly surprised that actually this is not going down. It’s actually looking. Okay. Mexico to you know, I think I mean. So I’m trying to sort of find good news here. Right. These are very, very small differences, almost. And so. Right. So South Africa, I have. So I actually worked on South Africa recently. And South Africa really looks terrible because South Africa has the highest inequality in the world, while the lowest growth rates in the world. They have the highest unemployment rates in the world and now they have the highest electricity shortages. You know, is and before the COVID crisis, the public finances were relatively stable there. Not anymore. So, you know, it’s like five strikes down. All right. So then you have remedies. All right. So how do you fix this? So we tried to sort of see, okay, let’s say that. Okay. Say that each of the countries did what they did best. Europe take the best decade for each country, for each of these things and say, you know, if you sort of if they just replicated that performance. Right, what would be the overall growth rate, Right. If they just took the best reform years and they replicated those. So you ended or you end up essentially with this. So essentially, you you do would get essentially an investment surge. You would get education and health improvements and give you that much and labor and social benefit reforms that can actually mean a lot, especially in countries like Turkey, in countries like India and so on, where you actually have many women who are not actually in the labor force. So if you have labor reforms that actually bring them in, right, you actually do get this thing. So you can actually you can recover some of the this is what I mean by Moneyball. Okay. So you have to sort of have a lot of countries do this and they have to play really well as a team. That’s the last thing. And that’s really important too, because what that also means is that you ought to be actually trading with each other, too. Okay. The problem is that trade as a share of GDP is also going down. Right. So all of these things are happening at the same time. So in general, you do get you actually can come up with ways to sort of counter all of this. I’m thinking too long, Danny. No. Okay. Okay. So if you go back to this thing again, right. If you go back to this stuff again and you sort of say, okay, how much? So here. Roughly speaking, you know, you want to sort of exploit the digital divide. Okay. Here. Roughly speaking, what you really want to do is you want to sort of say, can we explore, can these countries exploit the opportunities that come from the shift to cleaner, cleaner technologies, the carbon dividend? Let’s call it that. Right. And then this one over here is really I think it’s really, you know, for most of these countries, I think it’s really about about getting about using the talents of women more. Right. You always end up with a policy implication where the women have to work harder because men because women are coming up with the policy implications of. All right. Okay. So these are the risks. I won’t go into too much into this. I can just tell you this, that I’ll be making a presentation sort of like this one here. And, you know, I. So I. We have this chart over here. And when I started my job, it just had like four or five, you know. And then every time they give me a new presentation, there’s another one and there’s another one. So now I started to work out of all of this stuff. Which ones are the ones that are that are that I’m really worried about today, right now. You know, and I would sort of say really worried about financial stress in advanced economies because a lot of these banks and so on had made bets that was booming, that interest rates were going to be low. And those bets are all off now. Right. So that still worries us a lot. And when that happens, you get a big credit crunch, etc., and then everything goes wrong. And this one, this is a huge thing in the sense that because of the trade wars between the US, because of sanctions between the US and China, because of the sanctions on Russia and so on, you have this fragmentation of economic. And by that I mean sort of trade as well as financial networks. And if you sort of look at the period during which the world did really well, it was a period when you actually didn’t have this fragmentation, you know, between 1990 and 2015. Right. So you had the fall of the wall and then you get this sort of a unification of global financial systems and everybody prospers. Almost everybody prospers. But then, you know, you essentially now you get this fragmentation again. And generally speaking, when fragmentation happens, it doesn’t go into two fragments. It generally goes into three. So you’ll get the US fragment, then you get the pro-China one and then you’ll get the Indias. And I’ll say, I don’t want to belong to either one of these. I want to, you know, so you get a third fragment, right? So in the old days, it was called the Third World, the nonaligned movement, etc., etc.. And then but this one, you know, it’s super concerned about this one because growth actually solves a lot of things. It solves the jobs problem. It solves the standard of living problem. It solves the climate action problem, too, because you can do a lot more when you have growth than when you don’t. Okay, so I’ll stop here because otherwise then we won’t have any have any kind of income system.

Dany Bahar That was a fantastic presentation. So let me let me bring up a few things and hear your thoughts. And I’m going to ask about the future. I know economists are terrible at predicting, especially the future of the system, and you are the chief economist. So it seems like from seeing your slides, I was thinking, well, the world is going through a long COVID. Right. So these economic impacts from COVID and the mistakes. But I like your framing. It seems like we are now paying for these mistakes to some extent. You also mentioned some secular, you know, determinants that are there are making that the growth issue worth like weak investment, that overhang and demographics. I wonder how much of of of how much or even of these secular ones at least the first two are really part of repaying for the mistakes. How much of this is really structural or how much of these are you optimistic that we’re going to be able to get over it with some sound policies?

Indermit Gill I think you’ve answered your question. I think you’re absolutely right. One shouldn’t sort of think of all of these as equally secular in that sense. Right. So, for example, the debt part, I mean, there was there was a feeling, you know, we used to say that, you know, that if a low-income country had a public debt to GDP ratio of around 40%, it was skating close to the edge, a middle-income country, if it had it around 60%, it was getting close to the edge. Right. And then a high income country, you know, depending on where the country was, of course, it shouldn’t be more than 80%. 60 70% is good, right? Because you sort of keep a buffer somehow along the way. What happened was that we sort of changed that metric. We said, oh, it doesn’t matter if this country gets to 60%. So it was for a really simple reason. The world got used to very low interest rates. So the cost of actually financing this debt was relatively low. But we would always want these countries that these things change very quickly, you know, and when they changed, especially since the maturities were relatively small rate for smaller maturities, the interest rates were lower for these countries had an incentive to borrow even lower. Right. So then the question then was that this thing can come up very, very quickly and very soon. What happens is that the best way to sort of see the problems is go back to the time when Paul Volcker raised interest rates in the United States. And look what happened. There were two dozen countries that went bankrupt. Okay. So you needed the Brady Deal and the Baker deal, etc., etc.. Something similar is happening right now. I can actually rattle off 24 countries that are either in debt distress or close to it. And some of them, they’re getting bigger and bigger. All right. So it was Zambia and Chad. Who cares? Right. But then it becomes Ethiopia and Ghana. You start up again now, then becomes Egypt, Pakistan, you know, Argentina, etc., Argentina, Argentina’s always there. So we all of this, you know, I should. That was a low blow. Sorry, a cheap shot. So, so so you’re right. So that part. So I think some of it is this sort of it’s the mistake of thinking that low-interest rates will be there forever, you know, And so so and the second thing I think is so I would say the truly secular thing is probably just the demographic that’s.

Dany Bahar One thing that I’m that we didn’t talk about, you mentioned a little bit about the fact that trade may be weakening a little bit. And there’s the sanctions part, but there’s also this a few ideas around it, Right. This idea that a also kind of a long copy, the effect of reshoring. Right. So the idea that that, particular rich countries will want to bring back certain industries that were already offshored and that came already from a big backlash against globalization that has been going on for a while. So I wonder how much of that do you buy or how much of that do you see really happening? Kind of going back and globalization. And if that’s the case, is this making it worse for developing countries or there could be opportunities.

Indermit Gill So, you know, trade there’s one trade that’s trade, generally speaking. The other one is trade that involves China. Right. So here, take a look. Yeah. So know, here’s China, right? So essentially what has happened is that the shares in the the changes in the share of US imports. Right. So you get this big hit over here that essentially these are because of tariffs and so on. Right. Starting with Trump but continuing after that. Right. And then you sort of see is, okay, well, that’s not so bad because you can actually offset a lot of this stuff, at least in the short run. You get a Vietnam that comes up by one that comes of Korea and so on. And then, you know, you start to sort of see even India is responding to this. And we Indians take a little bit of time, but then we are a big country. So once we sort of get into it, it could actually end up being the problem. That is there are other things with this trade that happened with China. So, for example, here is some work that our guys have just finished is that they’ve looked at what has happened to the patent applications and the EPO, WIPO and USPTO. Right. You know, for Chinese funds as well as for US firms that were involved. And you sort of see as soon as you start to sort of see these tariffs and all coming in, you start to sort of see these patent applications dropping wood sides of the both sides of the Pacific. Okay. So you start to sort of see this. And then if you sort of also look at this and you sort of say if you look at the source of backwards citations, right. So here’s the US. Yeah. So here Japan and so on and the others and this is China in back in 1990, between 1996 and 2001. Fast forward to this east, China has become a much more important part of this. So all of this stuff is threatened. That’s one thing. The other thing that I don’t have slides to show over here is that China is like the Saudi Arabia of renewables now. Right? So if you look at the share of the share of things that you need for solar and for batteries and for wind turbines and so on, a massive amount of that is being is being supplied by China. So when the US sells, the US and others want to say, we want you to speed up the transition to clean energy and we want you to stop trading with China. That’s cognitive dissonance. You have what you have. I mean, you really have a problem there. You can do both.

Dany Bahar If I get it right, You’re more worried not only about trade per se, but everything the trade brings with it, namely innovation, particularly for developing countries.

Indermit Gill Yeah. So, you know, and the other thing is when we look at trade, for example, at the crudest level, one should actually look at trade in goods and trade in services. So, for example, you know, you actually find that there is perhaps a big upside on trade in services, you know, but then if you sort of start to sort of look at the services, trade policy, restrictiveness and so on, you actually find that that that this needs to come down a lot, you know, and a few countries have made changes. And so but India, for example, is one of the most restrictive. China is relative. Indonesia has restricted, you know. So all of these countries that we think of as like great traders are actually, you know, especially China. So and actually very restrictive on the services side. And this is that this is essentially a difficult thing. Now, even if you want to increase productivity growth in manufacturing, you need to sort of liberalize this.

Dany Bahar Well, let me just one more question and then I’m going to open it up for for everybody. And I’m going to stay standing because this looks like a, looks like a political debate.

Indermit Gill As long as I’m on the right side, haha. 

Dany Bahar I want to ask you about job creation. Job creation. Talking about politics is the one thing that you hear from everybody on the left and the right in developing countries, developed countries. You know, we care about good jobs and there’s like a bunch of earthquakes happening right now in the world in terms of the future of work. Right. So there is type of remote work. We’re still trying to understand. How is that going? I mean, that was kind of fueled by COVID, but it’s going to be here to stay. There’s AI tools all over. So I wonder. He’s a tough question, but I wonder if you have any thoughts or what would be the right framework to think about whether these are opportunities for developing countries or they’re actually going to bring in some good challenges.

Indermit Gill Three quick three quick responses on that one and then we can take other questions on it. So the first one is because the demand for labor is a derived demand. It comes from the demand for goods and services. You have to sort of look at that and it goes takes you back to growth. So, for example, there’s this big debate in India about trying to sort of get more women into the labor force and so on. And one of the things that people are saying is that part of the reason is there’s just not enough pressure on wages because job growth is not increasing that much. Right. So India needs to probably need to grow not at 6%, but at eight, 9% and so on. And that point then you start to sort of see a pressure on wages because job growth is going up and then put women into the labor force. So first part is that one. The second part on the I guess the other part is that, you know, in general what you sort of say is interventions to sort of, you know, how does one speed up job growth? I always said and it’s never been a popular idea that essentially that the policies of government should be much more focused on job destruction or helping people whose jobs are destroyed, not working as much on the job creation side, because governments do that terribly and the private sector does it rather well, You know, so you leave that to the private sector and just make sure that you sort of mitigate the pain of job destruction. Then the third point is the one that you mentioned about new technologies. Right. So I actually sort of did some work some time back about about and we actually wrote this up. And I think so if you look at the general purpose technologies in AI and machine learning and so on, in the general purpose technology, and then there is always a dread that whenever a new GPT comes, there’s always a dread that jobs will be destroyed. Right. So for example, the first GPT was the steam engine, right? And people were worried about job destruction. The second GPT was electricity and people again were and actually jobs were destroyed. So for example, if you look at some of these things, they actually led to huge job destruction in agriculture. Right. And then the third GPT was the third GPT was information technology. And then there was also this worry that all this and then the 4th GPT, but now we are talking about is, is AI and machine learning and so on. So again, you know, so you actually look at this and say, well, these fears seem to be overblown because the world has been through these things many times. Right. But then when I sort of actually looked at some of the data done by people and I don’t remember the names of the authors, but they’ve done some really good work that I tried to sort of look to see. How long does it take for a GPT to get mainstreamed in production? Right. If you look at that, you actually find that the steam engine took about 80 years. Okay. If you look at electricity, it took about 40. Okay. If you look at IT took about 20. So if that is a rate of progression and that’s the Gill rule, please call it the GIll rule, if you would because I made that up (laughter). Right. But if that happens, that means that this one, when it comes, it’ll be ten years. That’s too short a time for this. Up to 20 years, you can still adjust. Forty years, of course, you can adjust. There’s not so much of our jobs being destroyed is much more about how much time do people have to switch to other things. And I think that’s the worry. The worry is that this one won’t give us enough time. The other part of it is that, you know, you could sort of look at this thing about why is it that people are really much more concerned about it and so on. Another way to sort of think about it is that the first deputy sort of worked on not you know, we worked on essentially lowering the pressure on your legs in terms of walking long distances and so on. And then if you sort of look at electricity as you sort of keep going up, like that goes two hands after that. And then it is about the brains. And so all these brainy people over here really worried about the outcome. Right. You weren’t worried about electricity as But yeah, you’re worried about what’s going to replace your brains? No. Yeah. And it will. Because you came to the wrong university, you had to go to a place that actually taught you how to analyze this.

Dany Bahar They came to the Duke of the North.

Indermit Gill And why I wasn’t talking, but I wasn’t talking about Duke. I was told I’m wearing maroon. There’s no it’s not crimson.

Indermit Gill There you go.

Dany Bahar So let’s open now for a question. I think it’s best if we take a few at the same time so we have more opportunity. So shall we take three or four? And we have one there. We have one there. We have a microphone. So introduce yourself quickly and make sure you end up with a question mark at the end.

Guest Thank you. I am Pradeep. I teach economics at the Jawaharlal Nehru University in Delhi, India. So I was very pleased about this because not much of econometrics, if anybody know a bit what you are dressed very well. Once in one of the slides you said about the multiple risks. And I’m a little surprised to see that the again, you have highlighted only the older things like we keep starting from I must not see you also financial straits pragmatism we’ve got long-term growth prospectus what not the pensions are not coming from other things like climate geopolitics because that seems to be very tense and to me, like the way I understand the economy changing is that we are not capturing the data the way we need to capture on those aspects. That is impact on, but public impact on economic growth. What he did something like it’s not America like the way I understand the things my readings so it’s not actually convincing me the way that that is being told here think I think you’re right. I think you’re right both in terms of some things being more measurable and so on, because you can see it in you can see it in high frequency indicators and things like that. And then the second one is, you know, is also the ones that we sort of see faster moving. So it takes heart anyway. But you’re absolutely right. I had I got the same comment from the from the finance minister of Indonesia two weeks ago. Same comment. This one exactly what you said. So you in good company?

Guest Hi, I’m Sue. I was a recent graduate and I’m a research fellow at the CID. Now, I was a bit more curious when you talked about the bright spots of India and Indonesia. What, in your opinion, are they doing right to maintain the higher levels of growth? Because like you said, how India, for instance, had had declining labor force participation from women? And how does that compare with some of the remedies in women participation and carbon investments that you said? So what are they doing right and how does that compare with what you have suggested?

Dany Bahar Let’s let’s take a couple more and I’ll remind you of the question. So we have one next. Yeah, right next to the gentleman.

Guest Hi, Jason. I’m a fellow at the Belfer Center. I’m just interested if there’s anything in particular you want to hear out of the G-20 this weekend or you don’t want to hear or whether you think it doesn’t really matter.

Guest I thank you very much for the talk today. So I’m Jay. I’m a big fan of economics, but an even bigger fan of baseball. And I was curious about your analogy to the Oakland A’s and China. And in particular. So you brought up. Jason Giambi leaving the A’s, who’s this big player and then has to have a lot of little players fill his void. And I’m curious for China, are you looking at the demand side in that Chinese demand is falling and the resistance use fiscal stimulus, the supply side with, you know, COVID and supply chain shocks both or neither for who the for what the smaller countries have to replicate.

Indermit Gill This is the danger of playing to a gallery of one, because I knew that Ricardo likes analogies like this. I came up with this one, but I didn’t think it through. And that’s the difference between Ricardo and me, he thinks it through. Okay.

Dany Bahar Yeah, go ahead. Yeah.

Indermit Gill Yeah. So I can start with that one. You know, I was just saying that essentially what we really need to do is we need to get like one or two percentage points, one percentage point more from India, one percentage point more from Indonesia and so on. And if you then if you aggregate all of that stuff that then offsets this decline, this decline in potential growth in China, you have to multiply this by about 20 trillion, but you need to sort of add out all of these. That’s what I meant, you know, in the sense that you sort of get, you know, smaller players to step up their game a little bit. Right. But then remember, you also have to get these smaller players to trade with each other the way China because a large part of the China sort of big move was the fact that was trading a lot of inefficiency, lower knowledge flows and so on. That trading part is really hard, you know, in the sense that your team worked on it. Right, which I don’t think was quite there in Moneyball because they were just breaking it down. But you know, each person, right? The only team aspect of it was that they were supposed to sort of, you know, it didn’t matter whether or not you got on first base because of a walk or a hit. You just got on, right? Yeah. Okay.

Dany Bahar Let me add that I’m going to remind you of the other two. But let me there’s a question from Zoom, that I think is a good follow-up, which is what is the US? What changes in US policy are needed, do you think, to support a global re-engagement of China?

Indermit Gill Oh, I. That’s a tough one. I thought if you asked me what changes in US policy generally, I think that, you know, pressing both the brake and the accelerator at the same time is a really bad idea. So you should. You’re going to take your foot off the accelerator. Right. And I’m talking with the fiscal accelerator and the monetary brake. You know, so I think that’s part of the problem here. But in terms of that one, let me think about that. I mean, think about that.

Dany Bahar We had a question about India and Indonesia. What are they doing right now? How about the G20.

Indermit Gill India, you know, India? I think that one of the things that you sort of see from this right away is that if you sort of look at the growth of the Labor Party, you know, that’s that’s it’s steady in India. It’s kind of steady also in Indonesia. Right. So that’s one of the things I think in a sense, these two economies were actually relatively inefficient. Right. So Indonesia is has just roughly now reached upper middle-income status. India is still halfway through halfway through lower middle income. So they should be growing faster. So it’s not as of in fact, I think that India should be growing a little bit higher than this right now, Indonesia. So this is something I don’t know if they’d be talking with you, Ricardo, but they have some really bad ideas. So they want they want to create an opaque for for where you are, a nickel and lithium and so on. So I think and Ricardo wants him to talk with them about it. And I guess it seemed like a contested conclusion. Does maybe the Venezuelan idea which is that saying that so you know but they have commodities so they actually even though the you know, they have commodities and they have relatively low labor force participation. Okay. That’s one. I think India the other part that India is, is on the digital technologies and so on. So I was told by Nandan Nilekani, who is the I guess he’s the father of Indian I.T., and he was saying that what India has been doing is that, you know, India created this unique identity card, universal identity card. Right. And the world sort of thought this was, you know, as the world took some time to catch up to that. Right. By the time they caught up to it, actually, what India had done was it had actually used that as a platform to cut financial transactions a lot. The cost of financial transactions a lot as a result of it. It made sense for these banks to actually to actually reach out and include people in the financial systems who had very small accounts that because the cost of each account went down massively. Right. So the world has caught up to that, too. And what Nandan was saying, well, actually, we moved on to another part of it. Now what we’ve moved on is that what we are trying to do is we are trying to help poor people or low-wage people use that digital, use the digital use digital footprint as capital. So, for example, they can actually, you know, that you can actually sort of get a lot of banks to bid for your services by giving them temporary access to your digital records so that they know exactly what your income and your expenditures and all have been. And you can even say, for example, you have an autorickshaw driver that autorickshaw driver can actually get a loan which is paid, which is repaid every time the guy actually gets money from somebody because he’s getting everything digitally, you know. So they’ve actually already moved on to that. So that’s that’s another reason why I feel like India could actually, you know, think that that part has to do with the that that part has to do with this part of the Indian growth. Right. And then, you know, under Modi and this is open to debate, but under Modi, you know, you’ve had an improvement in the business climate as well. And people are sort of thinking that some of those things are going to be permanent. So as a result of all of those things, Indonesia, I don’t know as well think, but Indonesia has a serious problem of infrastructure links between the different islands. So if they invest in that, they’re going to get a huge, huge productivity to be out of that. Well, there was one more question.

Dany Bahar About the G20.

Indermit Gill The G20. If they only did one thing, which is that if they only agreed on a way to help countries that are in debt distress quickly. The G20 common framework is neither, okay. It’s not a framework and it’s not very common. Right. Okay. So you have to sort of have. You have to have something that is actually not country by country and so on, because country by country. The treatments. Screw the screw the weakest countries. No. So it took Zambia two and a half years and they still haven’t actually got any debt relief. But it took Zambia two and a half years to actually get to a point where they can now dream of debt relief. Meanwhile, Zambia went from being an upper middle income country to a low income country. No. So this happens all the time. And I feel that with the interest rates rising in the US and so on, we’re going to get a very similar thing. It won’t all be in Latin America as well as the Philippines. In a few countries it’ll be spread out all over the world. But you’re going to get this problem. And given the fact that we don’t have that kind of a mechanism, that the G20 is not going to do it. Right. Because they can’t. Because. Because it’s because it’s a consensus driven organization. And China won’t agree. Right. Because of that. And one China one agreed. The other one is that France will not agree to to actually to like disband the Paris Club and say why don’t we ask the World Bank and the IMF to actually intermediate these deals rather than it being done in the Paris Club? You know, the Paris Club, it was a book club. Is is this arrangement that the French led where essentially creditors. Did they all get together and they decide they actually decide the terms of debt relief for countries that are poor, mainly in Africa, but also in other places. But the the problem is that the amount of debt that is owed to these countries that belong to the Paris Club is now a smaller and smaller fraction. It’s less than a third. All right. It’s actually less than a quarter now, but they still maintain the fact that so they are you know, they are basically playing around with Chinese money and Saudi money and Turkish money and Indian money. Right. And these other countries say we don’t like this. So basically, they need to come up with this. And there is this there is there’s going to be this impasse both on the French and the Chinese side. So that would be the one thing.

Dany Bahar So let’s do another round of questions. Here, here, and one over there.

Guest Hi, my name is Adwoa. Thank you for the presentation. I, I know you’re doing important work on the middle-income trap, and I was wondering, I wanted to get your thoughts on this phenomenon of the missing middle, which are the population right above the poverty line who don’t get social protection. I was wondering if there is any interventions that you think the government or social sector can do and provide to support this population, this very vulnerable population other than social protection, other than taxes, something that’s maybe really driven? Thank you.

Indermit Gill Yeah, well, how much time do you have? Because we are actually. We are doing a whole big report on this issue, and you should talk. We should make you give you a lot of stuff on this one. Absolutely right. But you are spot on.

Dany Bahar To the one in the back. Yes. Yes.

Guest Hi. My name’s Melanie and I’m an MPP. So this graph is really interesting and I love the take-up position between labor capital and productivity. And what stands out is that productivity is declining across all these countries. We’ve recorded a global productivity slowdown, but amidst and all these crises and, you know, COVID, it feels like there really is no solution to boosting that productivity. And I think boosting productivity would help lift China or some of the more advanced countries as well. So wondering if you had any insights on what would be that catalyst. Do you think it’s I or do you think it’s something else? So what will be that step change in growth for the world?

Indermit Gill Yeah.

Dany Bahar We have one here. Sorry, I’m just bombarded with questions.

Indermit Gill And no worries. No, it’s good.

Guest My question is about the industrial transition that’s kind of supported by subsidies. So we’re sort of seeing not a race to the bottom, but every country is kind of racing to provide a set of subsidies so that the whole green transition takes place in their geographies. So my question is, when these subsidies and what does it mean for the productivity landscape when like the efficiencies, when the subsidies are removed and the efficiencies come back to parity, what does it mean at that point when, like capital stocks have depreciated? Is it going to lead to efficiency problems? Do you see this as a necessary step towards the green transition? Just your thoughts on that.

Indermit Gill This Is a purely hypothetical question, because the subsidies never end. I’m kidding. I’m kidding. When I had a slide that actually sort of said that in fact this is a problem or what you just said. And the worry is the worry is that a lot of this is being done by countries in the guise of the green-green transition, but it’s actually just a protectionist measure. And if that is true, then I’ve coined the phrase, which is that it is simultaneously shameless and shameful. Yeah, but it’s. I think it’s a real danger because it basically then means that because these things will then take some other form and so on. Right. So, so I think this is something, this is another thing that the G20 could actually use to try to discipline this. But the problem is the that the body that actually would have actually overseen this well and so on is the WTO. And the WTO is pretty toothless right now. Yeah.

Dany Bahar We had one on interventions for variable interval populations other than traditional interventions. If you have any thoughts on that.

Indermit Gill Yeah. Yeah. I don’t know.

Dany Bahar Let me add another question to that because the one we have in the chat that I think is related, we had a question from Uganda, from Uganda asking also particular about our policies for labor marketing, push ups of female of women. I mean, two different things, but then you might combine them.

Indermit Gill So, you know, so that there’s this old Chinese saying, I think is that Indians never write things down. And then when they’re pressed for details, they invariably resort to storytelling. So. So I’m going to tell you a story. The story is from Saudi Arabia. So Saudi Arabia actually, we’ve been working a lot with Saudi Arabia to increase labor force participation of women. Yeah. And what happened was that they’ve actually changed quite a few laws and so on. We have something called the Women of Business and the Law Report. Right. And, you know, we actually got a lot of pushback from the Saudis initially, and then they just basically adopted these things. And, you know, they kept changing things like, you know, inheritance rules. The fact that that that essentially we would basically men could drive, etc.. Right. But they that the timing of this was great. The timing of it was that they actually made all of these changes and then COVID came. And when COVID came, a lot of the workers, the migrant workers actually returned to their countries. When COVID restrictions were lifted, a lot of those jobs actually ended up going to Saudi women like sales jobs and so on. So you actually sort of see this massive improvement in female labor force participation in Saudi Arabia. Some of it is luck, but some of it is definitely the hard work of removing some of these. The story from Saudi Arabia essentially illustrates that you can actually do these things, that these things, you know, can happen in places where you wouldn’t have thought the odds were very high and then you would have thought that the that the speed would be very fast, you know, And both of those things happened. Right now, in the case of India, there’s a lot of analysis on India on this one. You know, and I think there are some really nice there are some really nice analogies between India and Bangladesh and actually between West Bengal and Bangladesh, where you actually sort of find that female labor force participation in Bangladesh is twice as high as that in West Bengal. And normally speaking, we think of Muslims as. Societies are having lower levels of participation. In that case, you actually saw that actually higher. Right. So I think that in the case of India, I was talking about this. One of the problems in India is that northern India is like a very safe suburb when it comes to weather, when it comes to public security for men. And it’s like an inner city when it comes to public security for women. Public security is a huge problem in especially especially in northern India. And by the way, in northern India is where 10% of the world’s population lives. That’s the thing. And there are a whole lot of other things. The one part that I find, Ricardo, is that, you know, so I never sort of really paid a lot of attention to the caste system in India, mainly because of my religion, where we are actually not super robust and so on. But. But, you know, probably because of ignorance. Right. But the more I went to India, the more I realized the system has a lot to do with all of this stuff. And we can sort of. So this is 5000 years old, you know. So it’s really going to be hard, but I think it’s very related to the labor force participation and so on, because labor force participation of women is relatively high in the lower costs. It’s it’s lower in the higher cost. No. So how does one sort of fix that? It’s a it’s a tricky problem. Yeah, it.

Dany Bahar That was another very easy question with you here. I want to note that I was also the presence of Somik Lall who is visiting for the day, who’s leading the World Development Report for next year. So I know Somik has thought a lot of, a lot of this issue.

Indermit Gill Somik is looking at exactly the problem that you mentioned you have, that when countries become middle-income, they end up having these three pathologies. The first one is that they end up having not enough mid-sized firms. The second one is not a large enough middle income, but a not a large enough middle class. And then the third one that we sort of see is that they actually end up using energy sources that are on either end of the spectrum, either very clean energy like hydro and stuff like that, or very dirty energy like coal. And compared to higher-income countries, they end up using mid-carbon fuels a lot more like gas. That’s. And I’m really thankful to you for not saying that my story was what was wrong. It’s true, right?

Guest Yeah. Yeah.

Dany Bahar There was an easy question for you about what do you think is the next is in the next boost for productivity. What is going to cause an explosion of productivity if I rephrase it a little bit.

Indermit Gill I’m…  so in six months Somik will give you a really good answer to this. But I think one of the things is that you know, it goes back to this thing about how we think about how we think about productivity growth, right? So we might think about it as within we could think about it as new firms coming in or and so on. Sometimes we also sort of say, Oh, you know, large firms tend to have low productivity growth and smaller firms have higher productivity growth, I think. Somik’s report is questioning all of this stuff in a very, very nicely in a very compelling way, because better and better into the data, you know, So in fact, for example, it has to do with, you know, how do you make sure that you discipline the incumbents, whether those incumbents are large firms, whether those incumbents are the elites or whether those incumbents are state owned enterprises that actually prevent a large part of the energy transition. Okay. But you have to work with them. It’s not it’s not a question of somehow trying to sort of say that we’re going to get rid of these guys. You know, you’ll always have the elites and so on. So how do you sort of make sure that you actually have that that you use? You have a group of elites or you have a group of incumbents that brought innovation rather than. So that’s part of the answer to your question.

Guest So sorry, just to recap, so you largely think it relates to competition policy then and how to improve dynamism between the businesses?

Indermit Gill Definitely that except that one of the things that Somik has taught me is that there is no place where you’re going to get perfect competition, right? So you have to sort of figure out a good way to make imperfect competition work. So competition policy better bid, you know, So it has to be premised on that point that you’re going to have that that there is going to be that there’s going to be that there’s not going to be any place where you have perfect competition. And then how do you how do you design competition policy that is alert to all of these dangers about about elite capture? Yeah, all of these things. Right. But he’s he’s the man. He’s the man. You should ask this question.

Dany Bahar I’m told that we have time for one more question. I’m hours invested in me. I decided I’m going to ask. But I think it’s going to be useful for everybody. So I think we have here a lot of people who are going to be looking to start very meaningful careers on development, on development in general. But beyond that. So we want to pick your brain on what’s your best piece of advice in terms of like what are the you know, what are the most exciting things to be thinking of in terms of development work and jobs in development in the World Bank and outside the World Bank?

Indermit Gill So the first thing is the best place to work if you want to work in development. Okay. The two best places. One is you work in a developing country. If you decide you don’t want to work in a developing country, then you work at the World Bank. That’s the best place to be. It’s a really good place to work. So you should sort of make sure that you know what the World Bank is doing. And so it’s not the only place, but I think is the industry leader in international development for no other reason. The World Bank has this, I guess a niche of the World Bank is that it has no niche. It has to cover the full spectrum of development problems all the way from monetary down to religious. I don’t know. So it has to sort of cover it all. So in that sense, you know, it, you know, pretty much anything that you’re going to be working on. The World Bank is interesting, you know. Now, the one thing that I do know is that is that, you know, if you if you all want to sort of work on the sustainable energy part and so on, you should know it’s a crowded field. Okay. A lot of people want to work on those things. If you want to work on those things, then make sure that you have a skill that other people don’t have. And that usually means a technical skill. It usually means an unpleasant thing, you know, something that other pleasant things everybody wants to do. Right. So it has to be something unpleasant is usually some technical stuff is trying to figure out what are the Israelis saying? I mean, that’s not easy, right? But if you figure that out, then you have a skill that people want. That technical skill gets you that first job. Okay. And then the World Bank proceeds to destroy that technical skill until you have nothing left.

Dany Bahar All right. Well, let me thank you on behalf of all of us for this excellent talk. Thank you for your time.

DISCLAIMER: This webinar transcript was loosely edited and there may be inaccuracies.

Ricardo Hausmann: I’m Ricardo Hausmann, and this is one of our development talks in our development series. And I’m really, really pleased and honored to have Suman Bery with us, the head of the National Institute for the Transformation of India, which is a new institution that it’s taken sort of like the senior think tank of the government, where he’s going back to India with this amazing accumulation of experiences. A, to really think hard about these issues. I’m going to to lead the conversation for the first half of the of this session and then I’m going to pass it on to Akshay Mathur, one of our own Mason fellows. I had the honor and the privilege of having him in my in my course. He’s a senior fellow at the Center for International Governance Innovation based in Canada, and his own research focuses on issues of international relations, international financial architecture, global trading systems, global economic governance and global digital governance. And some of those issues will be relevant for the discussion today. The session has been titled Investment in the Energy Transition Global and Domestic Dimensions. I’m going to start that conversation by first asking Suman Bery issues of where is India going, where is India’s growth going before we tackle sort of like India’s energy transition and the global aspects of that transition. It’s sort of like the F.T. chapter, though. The Economist chapter is very optimistic on India’s growth. I would say that there’s a consensus that India is likely to be a fast growing country. Everybody has their own opinions. Actually, you know, we have the utmost of economic complexity. We calculate country’s economic growth potential. And in India, as always, it comes out at the top, at the top for our own logic and reasons. But in a you know, a lot of the talk is about India having a big domestic market, demography being in the right direction, with fertility rates coming down, with urbanization going up and with educational levels going up and so on now. And unfortunately, that’s so first of all, India has been a big country for a long time. And so with China and and, you know, they had periods in which they were not growing and periods in which you were growing. Many countries have similar features of India in terms of demographic transition, urbanization, education and so on. And they’ve managed not to make much of it. So how optimistic are you about the growth of India going forward? And what are the sources of that optimism?

Suman Bery: Well, Ricardo, firstly, thank you for hosting this. And you know, I’m as you sort of, as you mentioned and so discreetly avoided, from the other place from what used to be called the Woodrow Wilson School. And the Kennedy School was always the other pool. So it’s I am in that sense, both pleased but slightly nervous about exposing myself here. But it’s terrific to be on a platform with you because of the enormous respect I have for you and for your very lateral view on the issues of of growth. And let me thank all of those in the room for giving their time to be present. Now, I am now here not as an analyst, not as a think tanker, but frankly, as a member of of my country’s government at a fairly senior level. So what I would say is that. People look at the same data through different prisms, different lenses. So let it be said that, you know, I will indicate the both the reasons for optimism and also to some extent, but not extensively counter why there may be reasons or some of the cases that are put out for a less optimistic view. I think the first where one has to start is with institutions, including political institutions. Well, where one should start is actually from the fact which I became particularly aware of as the chief economist of Shell, which is that over the long run, there are two characteristics of India. And by the long run I mean about 25 years. One, which. While, of course, eclipsed by China. It has been amongst the top ten fastest growing emerging markets for quite a long time. Okay. And this is in the face of various shocks. And I would also say from the yen, now that where we are and you know this well is in response to various to a number of shocks, COVID and the war in Ukraine being the most important. Now, what does that say to me? It said it’s also the case that. The amplitude of Indian growth has narrowed over time, which. Marks a transition from an economy which was very much dominated by weather shocks to an economy which is much more integrated into the world. And that has led to more resilience. And I think a topic that we should discuss is resilience. So I think the first question to ask is, so, you know, why has India continued to be a reasonably strong performer? And I would argue that it is because Indians themselves have a reasonable amount of faith in their institutions, particularly their political institutions. And also, as we were discussing before coming in here, there are other strengths, such as the quality of of the bureaucracy. Now, none of this is. Going to be different into the future. We’ve got to talk about a different future. But what I’m saying is that up till now, India has had full critics of India, some of whom have been associated with the Harvard Kennedy School. Will. On the basis of their own analysis, argue that the recent growth numbers have been overstated. They would argue that Indian institutions are not as strong as they previously were, and we can get into that conversation. But I’m just saying that one metric on these side and I want to hear from you, so let me shut up soon. So the. The reality is that India, which is a very diverse polity, has had five continuous full term parliamentary session. So all the way from 1998 to 2004, they have been parliaments that have completed five terms. And those of you who know your British politics know that in a parliamentary system that’s not something you can take up. So the first point is that there is form and that that reflects faith in Indian institutions. The second point is that. There are so many things that. Keep India from its full potential, that if we have been performing reasonably well with all of these headwinds, with all of these drags, then you need to ask the question of whether the impediments to those have, you know, are being addressed. And I would argue that they are. I would say, though, that at the end of the day, you may want to focus on growth, but I think the real running sore of India over many years has been the issue of employment. So there’s the question of whether in the future we can maintain in a much more troubled global environment a growth of the kind that we have have demonstrated in the past. And then there’s the question about how whether the employment piece will accompany that. And I must say that the Kennedy School and in the work of yourself, Dani Rodrik, Robert Lawrence, I think are making us think about how the development model of the future might be different in terms of trade and manufacturing. And then, of course, the topic we are here to discuss, which is how does the energy transition affect any of this? A long answer to a short question.

Ricardo Hausmann: No, no. Well, it was it was great. So let me make a, I mean I’m tempted to make a very, I would ask you for a very quick answer, but in there is this debate going on whether the world is kind of like de-globalizing and consequently we can be less reliant on outward looking growth and so on. But there are other people who emphasize that the world is moving from trade in goods to trade and tasks and that the business services are growing very significantly and that India actually is a leader in these business services as it has, you know, global players like Wipro, that consultancies and business process outsourcing, increasingly knowledge intensive business process, outsourcing, coding and so on and so forth. So, so that in some sense counts as as a new phase of globalization that we’re where India put its foot in a long time ago. And now the trends are benefiting that that dynamic. It’s true that these tend to generate higher risk of jobs relative to the current endowment of labor in India. But is this or is this sort of like an important engine of growth going forward for India?

Suman Bery: Well, what, I think the deeper point that it raises is that the structure of India’s balance of payments has for some time been quite atypical, quite unlike the rest of Asia. What do I mean by that? We’ve got a floating exchange rate and we bought my boat more or less run the economy for a current account deficit of about 2% of GDP because that’s what we feel we can safely finance. Okay. So the current account you can think of is either the difference between saving and investment or you can think about the various elements on the receipts and the expenditure side. What we have is. A trade deficit of a merchandise trade deficit of around 7% of GDP, which is compensated for by what are called unrequited transfers, remittances and net service exports. Now, why is any of this important? It’s important because it suggests that it’s not necessarily a Dutch disease type of but that the economy has adjusted, including through the trade account, to to what is happening to foreign exchange markets and otherwise. So I’m saying that the balance of payments is advantaged by what’s happening on the services side. It’s less clear how inclusive growth and employment will react. And then the issue becomes what instruments you assign to the employment issue. If you know, if that’s not being delivered to the structure of your balance of payments. And I think, well, it was Brazil a little bit like that as well, namely a large trade deficit, because they had no but but they don’t have service exports.

Ricardo Hausmann: So you’re quite unique in that. But in so a now let’s move closer to the topic at hand. We know that there’s a very strong relationship between a GDP and energy use. And yes, the world is becoming a little bit less intensive in energy, but still there is the dominant factor is that if India is going to grow a lot, it’s going to need more energy. And we’re in the context of this energy transition. So, on balance, would you say that the energy transition complicates India’s life or does the energy transition have a silver lining that might facilitate the growth of output and employment in India?

Suman Bery: First of all, as you said, there is a need for energy because we intend to grow and want to grow. Second. I would say there has been more than I think is appreciated outside India, a very strong commitment to supporting all kinds of non-fossil sources of energy, particularly imported sources of energy. Since we import 80% of our oil and slightly less than that of gas. So from an energy security point of view, India has strong motivations to go down the renewables route. However we have been. Circumspect. From an energy security point of view, and also because of uncertainty in terms of technologies about exactly how fast that should go. And so at the moment, I would say we aren’t hedging our bets, but we are backing a number of technologies while using public policy to initiate experiments in green hydrogen in electric vehicles. Your question is again really about, employment. I think whether India believes that as a consequence of embracing new energy sources. Whether this would actually be substituting for employment in some of the old industries, I would say that. That that is not a clear element of strategy just yet for one final reason, because I know you have to go, which is that India still believes that it cannot abandon the quest for a more vibrant manufacturing sector. Now, why it wants a more vibrant manufacturing sector is something we can talk about. We’ve already discussed that maybe the employment dividends will be somewhat weaker than they have been for past countries. But I think in terms of increases in productivity, in terms of skill levels and frankly, in terms of national security, because you need a strong manufacturing sector to support a domestic defense industry, we are going to continue down that path. So our needs of energy for industry are, if anything, going to rise. And what we are attempting to do through particularly green hydrogen, is to try and find decarbonizing technologies that allow us to reconcile the manufacturing impetus with the with decarbonization. But all of this is relatively new. And another technology that we are working on is carbon capture, utilization and storage. There are. You know, advocates of accelerating the green transition who basically say that they are going to be many more secondary jobs connected with rooftop solar, this, that and the other. I think India is cautious on this rather than betting the ranch on it at this point. But before you leave me, perhaps I could talk about what was in the title of that that I proposed for this talk, which was investment in energy transit, in the energy transition, global and domestic dimensions. Because what I’ve already talked about, the, you know, the particular construction of all of our balance of payments. But underneath the balance of payment are saving and investment growth. To come back to your first question, one reason to be optimistic about growth for the future is that certainly by Latin American standards, India has had a relatively high investment rate. We want to push it even higher. But embracing green technologies is going to mean. A big boost to capital expenditure, even if it substitutes for other capital expenditure, maybe one or two percentage points of GDP. And so the international dimensions are really. Does the world, does the world have the machinery for directing foreign, say, savings to the energy transition? And I think much of the discussion that took place in Washington last week was about financing the green transition, where a lot of it is going to have to be domestic, but a fairly substantial part is going to have to be global. And again, before you leave, I know that you are of the view that there are important opportunities for developing countries. Can I just hear from you why you think that accelerating the transition, rather than being cautious, may be in the interests of countries?

Ricardo Hausmann: Well, my view is that too much attention is being focused on what should each country do to lower its emissions. And not enough attention is focused on what each country can do to help the world lower its emissions. Because the world is going to need a lot of stuff if India is going to do an energy transition, it’s going to need a lot of it’s going to need to electrify many things. It’s going to need to generate that electricity in clean ways. It’s going to need a lot of stuff. Who’s going to make all that stuff? The solar panels, the windmills, the transmission lines, the capacitors, the batteries, etc., etc. And somebody has to do it. And then and those people are going to have a booming market. Who’s going to be in that booming market then? And so far.

Suman Bery: The answer is China. Right.

Ricardo Hausmann: Well. But you know, that’s an interesting question for you that I’ll let Akshay follow-up. But how is India going to play the fact that the world is trying to reduce its dependence on China and is that generating an opportunity for friend-shoring? How friendly do you want to be in the context of a world attempting to lower its dependence on China? But the other thing is that you know the world is going to to need to make things in a greener way. And green energy is very hard to transport. So maybe you want to use green energy where it hits instead of trying to transport the energy, use the energy where it hits. So that, then in, you know, you put solar panels where there’s sun rather than putting them in Germany but where you know capital is cheaper so. So I’m very much interested in hearing your ideas on mechanisms to make more capital available for developing countries so that they can fund whatever investments are needed in a decarbonizing world. But let me ask Akshay to come over and I’ll follow up with you after this session. But it’s a fascinating conversation. You know, the world has this dower attitude and so on. But, you know, when you think of India, it’s hard not to be optimistic.

Suman Bery: I think so.

Akshay Mathur: I’ll ask one question and we’ll open it up, which is this question. The topic today is investments in energy transition. And so the question at the heart of it is the capital. And where, in your mind, global or domestic or both are you seeing capital possibly come from? So in the global, we have multilateral development banks, the big asset managers, possibly some FDI within the domestic. We have our commercial banks, development financial institutions. Where do you see the capital come from for the investments that we need globally and domestically?

Suman Bery: Before I answer that, I think that sort of seduced by the fact that Ricardo was my interlocutor, I may have thrown too much economics at people. Can I just get a sense of, you know, how many people with an economics background are in the audience and stuff? So. So that was not inappropriate. Okay. So the. I’ll build on, as it were, the conceptual framework that I laid out to try and answer your question. Everybody asserts that the world is not short of capital. Everybody asserts that individual green projects in emerging markets meet a rate of return test. So in a world with smooth financial intermediation. The, you know, the pools of capital that exist out there should find their way to high-return projects. And so the question becomes of a, is that set up correct? I mean, is it really the case that there’s a lot of capital chasing good projects and B, you know, what can the global community do to facilitate that? Some of you may have heard Larry Summers talk about secular stagnation. Some of you may have heard of Ben Bernanke 15 years ago. Talk about the savings glut. And I think all of that is quite relevant to the discussion at a global level that we’re having right now. Why do I say that? So. The concept of Bernanke of a savings glut went back to 2006, shortly after a lot of Asia had its difficulties, something called the Asian financial crisis in the late nineties. And the consequence of that, as with most financial crises, was that investment in Asia plummeted because financial crises cause disruptions. And so Bernanke was trying to explain why the U.S. was had a large current account deficit in 2006, but that, as it were, formulation, had stuck around. That formulation is that because. Asia, Japan, China, Some other parts of Southeast Asia are strong savers. That there wasn’t enough. Investment in the rest of the world. And this was why interest rates, real interest rates went to rock bottom for the last 15 years. Now, we all know that that story has changed with the inflation to the last couple of years. But it’s anybody’s guess whether it’s changed permanently or whether we’re still in a world of global excess savings. I’m going to assume that we are in a world of global excess savings. And where we are right now is a kind of transitional shock caused by, you know, the reaction to COVID and tight labor markets and what have you. So. What I understand is that because of issues like country risk, the old country governance risk exchange rate risk, the certification of green projects that the world’s pool of so-called ESG investing is largely being directed to ESG pools in the advanced countries. You’re an asset manager, and maybe you have some view on all you have in an asset manager of how asset managers think about these things. So the that set up then suggests that there are either real or overstated risks and that you need some kind of a set of either intermediaries or structures so that if these are not genuine risks but they are overstated risks, that these be mitigated by some kind of global action so that all the money that’s waiting on the sidelines can find its way to this kind of capital and. You know, in this India is going to be a fairly big enchilada. Okay. So what might be some of these measures? What might be some of the changes? Well, what’s on the table right now is to use the balance sheets of the multilateral lateral development banks to certify the quality of. Of these projects to pool them like housing loans or a pool that came to us to kid. But the concept stays the same. And I believe this happens a lot in Europe and maybe in the US as well. Financial intermediaries pool, as it were, eligible projects. The legal structure is such that the cash flows from these projects are appropriately used to service the debt or whatever that come to them. So it starts to point to a whole range of global reforms and domestic reforms to let the underlying quality of the investments shine through rather than the uncertainties and the risk. So, I mean, that’s the broad structure. But given your, you know, your asset management background, I’d be glad to have a follow-up question from you before we open.

Akshay Mathur: I don’t have a question, but maybe just a remark that I think to your point on developing intermediaries and institutions, there’s been some attempt with the National Investment Infrastructure Fund and other such instruments to be able to create that those intermediaries to plow those capital into more green projects within India, because that was clearly an issue. A separate issue is, I think, which we still have to resolve is greenwashing, but greenwashing that is also being enabled by a lack of a global taxonomy. And some effort has happened with the with the International Sustainability Standards Board coming together. That’s giving a little bit more of a clearer picture. But the process is not complete. So I think that’s also being used as an excuse. But I think you’ve, I think, laid out a framework that should be open it up because I think people can ask follow-up questions to that particular. So should we open it up? If you have I have a set of questions, but I’m happy to.

Suman Bery: If you could just give me some idea of your background.

Akshay Mathur: Please identify yourself and your program.

Attendee: Thanks a lot. I’m Rebecca. Second year MPA/ID and I’m currently on educational leave from the World Bank, so I will go back working on infrastructure finance. And you gave us one examples of what the multilaterals could do, but I wonder if you see also other alternatives of what needs to be done to get private sector investment into the green transition.

Suman Bery: Yeah, Okay. So I mean, there are four players. If you’re talking about an individual country, there are private sources of funds. They are, if you like, official sources of funds. So that’s on the sources of funds side. And then there are private investors on the recipient side, and there is the they are public investors on the recipient side. And so, you know, you you have, as it were, a an assignment issue or at least a classification issue. So what proportion of public demand should come from official sources. What proportion of public demand should come from private sources? What proportion of private demand should come from private sources? Most people tend to think that it would be official to public and private to private. And there are reforms or issues in each one of those. The focus right now is on the multilateral development banks. And this is relevant for India because India is the president of the G20 and these issues are being discussed in the G20 and I can talk about the G20 people. So the discussion in Washington last week was on reform of the multilateral development banks. On a couple of dimensions. One is to sweat their capital so they could expand, so that they could expand lending. And secondly, whether and how to shift that overall mandate from lending for country development to lending for what are called global public goods, of which claim which is is, I think, the one that’s gaining the most attention. And the expectation is that much of the enhanced lending from official sources would go to. Additional investments by the private sector, by the official sector. And let’s be clear at least where India is concerned that those investments may be in mitigation, but they may also be in adaptation. Okay. Now, you know, I’ll take an example from another country, the Netherlands, in which I lived, and they have been preparing the Port of Rotterdam for higher sea levels through the construction of high seawalls and dikes. And, you know, the Dutch are past masters of the stuff and they’ve been thinking ahead. So that’s a case where climate change creates a need for adaptation, additional public investment. And if they were to borrow from the World Bank, then the idea would be that the World Bank designates a portion of its enhanced lending for this adaptation activity. But there are also, as Ricardo was saying, immense needs in terms of upgrading transmission mechanisms in on the mitigation side as you try and revolutionize your whole policies. Still, many of those investments are going to be undertaken by the public sector. And the question is, should all of this be financed by domestic taxpayers or should it be financed with external borrowing? Because there’s a case to use borrowing for something like this because it yields a positive return over a long period of of time. So that’s the kind of set up for enhanced official financing from particularly the multilateral development banks to support climate changed climate change, associated incremental expenditure, particularly investment expenditure by the public sector. Now let’s just talk to the private to private that that’s the discussion that action I was having about bundling, because again, a practical example, our large scale enterprises for all kinds of reasons, partly because it’s economic, partly because they want to be part of global supply chains. Our steel industry has invested heavily in decarbonizing steel and is in the forefront of bringing in hydrogen into the into the steel process. Now, all of this stuff takes money. It repays itself over time. But they. Typically don’t face a capital market or borrowing constraint, but an entity like the IFC at the World Bank, or as it were, other pools of funds. Investor pools of funds could be directed at that. And indeed, India itself has issued so-called green bonds in order to to help, but not so much the private sector, but the government undertake its own green investment. I hope that gives you a sense of the framework within which people are thinking about these things right now.

Attendee: Thank you so much. Thank you. Thank you so much for a wonderful talk. That’s it’s a really fascinating topic. So I know it’s not like you, China, the U.S. So, yo, we promote these Korean files from public sector and private sector. We also implement they like that faith encourage people to heal tax credit to promote that to investment to China. So they are pleased to introduce a leg of that to fiscal policy intervention or, you know, financial policy intervention to promote a basic Korean transition. Thank you so much.

Suman Bery: Well, we’ve had a so-called renewable purchase obligation for all. Distribution companies. An important point I should make is that India, in the cold fossil fuel era generation, was entirely in the public sector, starting from about 1950. India followed the practice of Britain because Britain had been the colonial power. So you may be aware that when a Labor government came into power after the Second World War, they too were very influenced by socialist policies by the Soviet Union. And so one of the first things they did was to nationalize many of their infrastructure industries. And so from 1947 until Margaret Thatcher in 1985, 86. Many of these industries in England were nationalized. India followed suit. And so all of our generation was power generation. Largely coal-fired was done by federal-level and state-level publicly owned power plants. This started to change in the mid-nineties. I think I’m right in saying so. The regulatory system allowed the private sector to start investing in at that time, coal and gas-fired plants, but the dominant ownership remained in the public sector. I’m saying all this because for whatever reason. In the case of renewables. India. The leadership has been with the private sector, so investment in solar investment in wind has been led by private companies, private entrepreneurs, raising their own capital and dependent upon a secure regulatory framework for offtake. And as part of this change, the distribution companies were required to to include a portion of renewables in their mix, because to begin with, renewables were more expensive than than coal-fired power. So that is the equivalent in India of a feed-in tariff, if you like, a renewable purchase obligation. Now. You asked also about outright fiscal incentives. I’m more aware of that in more frontier areas such as green hydrogen and the manufacture of electrolyzers. So the cabinet has just approved a green hydrogen mission or program, which is supported by what we call a product linked incentive scheme for green hydrogen and for the production of Electrolyzers. The idea being that these are new industries for India and that while the government won’t guarantee the market that has to be earned on the basis of competitiveness, it will provide a capital subsidy once production is up and running. Individual states, which are important players, have can have their own fiscal rebate, except for the fact that they don’t tend to have unlike Chinese provinces, they don’t tend to have a lot of fiscal handles because ever, ever since we went to a goods and services tax, the number of taxes over which the state has jurisdiction, the states have jurisdiction has diminished. So the main contribution is in terms of the provision of land. So the provision of land for favored industries is one way that the states can support the green transition.

Attendee: I’m a postdoc here working on energy technology, innovation questions. I am. So you mentioned PLI and Manufacturing, and I’m curious to hear from you how India’s engagement with industrial policy should look like moving forward, given that we have been doing industrial policy for a long time now and there must be there’s been a lot of failures, there’s been some success, particularly in pharmaceuticals. So yeah, what kind of learnings are there and how should that inform future engagement with trying to bring manufacturing capability onshore?

Suman Bery: Well… Let me answer historically, then on to contemporaneously. So clearly. Under Prime Minister Nehru and for a long time after until 1990, I would say the dominant view was even though India has had a competent private sector for a long time, there was distrust of the private sector and it was believed that India could only become a significant manufacturing power through the application of industrial policy. And we had hideously complicated rules on the licensing, on the licensing of capacity, on on transfer of technology, walling out the rest of the world, throwing out IBM, Coca-Cola, etc. So that was then that started to change in the late eighties and then in the early 1990s. And from the 1990s onwards, I would say the pendulum swung to the other end where essentially the slogan, if you like, or the mindset was, you know, integrate with the world no matter what, because that’s going to make you strong. And that worked in the work for a while. We had strong growth and developed capability. Historians will judge both for the US and for India with the simultaneous rise of some of a power as substantial as China in this period upset many of those calculations. Certainly politicians have come to that conclusion. I, as an economist, see it slightly differently. I see it that China was such a big, as it were, a force in the global economy to use the economist’s terms of trade. It turned the terms of trade against itself. It generated a lot of employment, but it was really foreigners who benefited as much as the Chinese in that the world got a real income increase from a huge supply of cheap intermediate goods, cheap consumer goods and what have you. So that’s a real income game that the rest of the world gained. But politicians. Don’t necessarily only look to real income gains, even though economists feel they should. They look at employment, they look to industrial capability. And then I think COVID was a wake up moment, I think. In India itself, the so-called hollowing out of our manufacturing was a teaching, a teachable moment. I have to say that a lot of the instincts of the BJP as a government were to believe that domestic strength is measured by domestic manufacturing capability. And so all that led to the rediscovery of industrial policy, symbolized by the phrase almond butter. Articulated by Prime Minister Modi in what would have been May of 2020. No, I think the jury is out on what it takes in terms of domestic political economy to make industrial policy work for you. But let’s not throw the baby out with the bathwater, because where India is in the digital space, where it’s in the pharma space, less perhaps in terms of manufacturing, and there’s a puzzle there. This has reflected nimble policy, intelligent policy, good cooperation between the private and the public sector. I think critics of the PLI worry about two things. One is that in aggregate these are large sums which the government could use otherwise fiscally. And the government response to that is that if we can get these sources of growth going, then they will pay for themselves fiscally. And otherwise. And the second concern is whether the political economy of India will actually allow these schemes to be terminated because they are meant to be time bound or whether the pressure of lobby will be that this again becomes another elephant in the street, you know, sort of argument of forever. But I think India has much more self-confidence now. And so I think a very important part of the evaluation of the alliance, since I’m at the head of meeting, I’ll try and make sure that those that those assessments are honest assessments and then we’ll see.

Akshay Mathur: I think he was also asking about the green Industrial policy. Is that your question?

Attendee [inaudible]

Suman Bery: Yeah, well. I think there’s a balance that the I.R.A. demonstrates, which is that you’ve got a very successful low cost producer of much of the green infrastructure. But nobody wants reliance on a single source of supply. And again, you know, as an economist. You have to accept that there’s been a, well, fair game by all the learning by doing that’s taking place in China so that we get all this infrastructure going down the cost curve much faster than I think it would have otherwise. But do you want to be locked into it? That becomes the issue. And the issue then is who? How do you avoid impairing your competitiveness by going for a higher cost model? What does that then mean for your ability to compete in global markets? And does that then lead which many liberals like myself would not want, is that you end up with different market areas defined by security, you know, sort of carbon clubs and stuff like that. So I mean, there’s an innate logic to liberal economics, which is that you are most competitive if you source from the lowest cost producer. But making that a source of vulnerability is is what you have to avoid. And I think that’s a balancing act that the Europeans are trying to pull off. It’s something we have to think about, but we have much less many fewer fiscal resources. So we can’t match the I.R.A. So we have a low cost labor advantage, but we don’t have the fiscal resources.

Akshay Mathur: How much time do we have around to? We’re done. Okay. Right. We’re finished. Right. Okay. Okay. Well, all that’s left is for me to thank you on behalf of the Growth Lab at Harvard. Ricardo, who I’m impersonating and the staff here, the researchers who make the development talks tick every time. And, of course, students have come from different parts of Harvard.

Suman Bery: And I’m very grateful for all your time. You are cared for, in a sense, devoting as much time. I’m sure that your wife must think I’m a terrific distraction. But thanks for your attentiveness, and I hope I’ve added your knowledge about India, which is my purpose. Thank you very much.

DISCLAIMER: This webinar transcript was loosely edited and there may be inaccuracies.

Konstantin UsovHello and welcome to Dev Talks. I’m Konstantin Usov I’m a student here at HKS doing my MC/MPA mid-career masters. Dev Talks are a series of conversations with senior policymakers and academics working on economics and international development and is organized by the Growth Lab. It is my pleasure to welcome today Vladyslav Rashkovan for the session on the political economy of the postwar reconstruction of Ukraine. Since 2017, Vladyslav is a member of the International Monetary Fund Executive Board. As an alternate executive director, Vladyslav represents Ukraine and 15 other European countries. Prior to IMF, Vladyslav had a distinguished banking career serving as a deputy governor of the Central Bank of Ukraine and being responsible for the banking sector reforms in central bank transformation. Just one more important thing that before joining the NBU in 2014, Vladyslav occupied the position of Chief Financial officer of the UniCredit Bank in Ukraine, also been engaged in the leadership of the group turnaround projects in Central and Eastern Europe. Since the Russia’s invasion of Ukraine, Vladyslav stands in the center of many international projects to provide financial support to Ukraine and plan its postwar reconstruction and modernization. Vlad also serves as a member of the International Advisory Panel for the National Recovery Council. So, Vlad, welcome to the talks and the floor is yours.

Vladyslav Rashkovan And thanks for asking me. First, thanks to Ricardo for inviting you know, we discussed this possibility in May last year and I promise to come for November. But this is only the first week with I managed to find some sort of free weekend. I am here more to represent myself rather than IMF as you understand because IMF is not a development organization but we build the framework for future reconstruction and what I do on reconstruction goes a little bit beyond the IMF, you know, the mandate landscape and small with my cooperation with the government, different think tanks, etc.. You know, for those of you who follow Ukraine deeply might be a little bit surprised of the invasion, but you might know that this is the fifties war between Russia and Ukraine and not the first invasion and not even the first invasion in the in the modern times because the current war started in 2014. There were many others. And I’ve spoken at Yale and Harvard now for different students, especially those who study history clearly, they know it better. The current stage, we are in the war now, It’s more or less already on the seventh stage. There were different moments of initiative coming both from Russia and from Ukraine. Now clearly initiative is on our side. How effective it will be, as Ukrainian, I strongly believe in that it will go as as long as possible and also reaching the, you know, the borders of 1991. But it’s very clear that there are many other potential scenarios on the table. This is what we analyzed with some students. So, you know, there could be you know, the war can end or continue soon, depending on who will have an advantage, you know, in the next in the next months. Clearly Ukrainian, I would say minimum target is to come to the to the war victory, a return to the 1991 borders. But as I said, there are many other options potentially are possible, likewise that are also some more positive, you know, maybe developments, including like a fragmentation of Russia and change of regime in Russia. But the also and the in a much worse situation than like in the First World War and even nuclear war.

I mean, Ukraine does everything possible to be on this side in order to reach this target. And thanks to the West, the Western allies who help us of that. But what is more important is the end of the war is not an obstacle to start the reconstruction because Ukraine controls the major part of its territory. Yes, its many elements are destroyed, but and moreover, the reconstruction has already started. And for that, you know, we need to understand that the reconstruction itself is a very complex project process, and it includes many different elements. You know, we say starting with maybe military, as I said, we still need. Win the war. But also we need to release our prisoners and return deportees. But one of the major elements for the military respect to consider this a potential reparations from Russia. You know, we speak about 300 plus billion dollars of Russian assets frozen in different parts of the world. And there are many groups now who are working in order to develop the solutions on Russian assets that are legal solutions, there are economic, there are financial solutions for that matter. I mean, this situation shows that maybe not so soon, you know, because the political process is complicated. Complicated in Europe, complicated to U.S. So another element is obtaining war insurances, especially for the business. So again, there will be London conference soon, which will also focus on these on this topic, how to get it. It’s very clear that the West became not prepared for the global world, came not prepared for such a big war, and therefore the need of such big insurance in the war. We also need to have some sort of insurance in insuring security guarantees for the future, one of which could be entering NATO.

Vladyslav Rashkovan But not only, you know, there is another working group led by the Rasmussen, you know, the former head of NATO on thinking what kind of security guarantees could be and how these security guarantees would not be the best memorandum for Ukraine, which will not be respected. Diplomatic side on diplomatic side that are clearly some peace building initiatives. As you know, there is a formal of silence key about the peace that is also now on the table, the sheet formula of the peace. And as I predict, there will be a contest of different peace formulas from different players. Clearly something will come from Erdogan, from Netanyahu, from Mbaise in Saudi Arabia. Maybe something will come from United Nations. Macron already President Macron already went to China. They came with some ideas. Something will come from Warsaw of underline, you know, maybe from Pope. I don’t think something will come from Modi because he is a little bit outside. But Lula said he wants to be a part of the peacekeepers from Brazil. And, you know, something will come from U.S. So I think there will be a lot of initiatives. How what could the peace look like after the war? But also another important element is a part of diplomatic efforts. And this is where I also play some role, is updating, updating international aid and coordinating donors. So in terms of the international aid. Last year, Ukraine got $52 billion of international aid that already by this February, Ukraine had 50 plus billion commitments. And as of today, after the spring meetings, the commitments for these year around $42 billion. So and the debt is created the donor coordination platform. I will say a little bit later about that, one of the clear, you know, path of clear, you know, the task for diplomatic side is a Ukrainian building path towards the European Union, which is a strong anchor for Ukraine Postwar reconstruction. Political. I mean, it’s also not easy, you know, postwar topics in terms of the reconstruction, because we speak about something which is not necessary. And I would say slightly later about that, everybody wants to come to Kiev. You know, everybody wants to make the picture. So the Ukrainian leadership in Kiev, but Ukrainians, a decentralized country, you know, and therefore we need to rebuild not only Kiev, we need to rebuild a lot of the cities outside, and we need to build the proper relations between city and center and between regions. And we need to ensure that the regions also have a proper absorption capacity. And you know, money also for the for the reconstruction. Currently, clearly, there is a big gap there.

Vladyslav Rashkovan But not only now, we need to think about the elections, you know, boundaries and martial law in Ukraine. During the martial law, there is no fundamental election. There is no president elections. According to the plan, the parliamentary elections were supposed to be this year and the present elections next year during Marshall law. They therefore they are postponed. So there will be an interesting dialog, how long they will be postponed and what, you know, different players will speak about that, including in Europe. And as we understand also, one of the parts of the war is some sort of censorship, media censorship against Russian propaganda, which I think is absolutely acceptable. We need to return back to more free media after the war. Economic parties, a lot of macro adjustments needs to be done because the economy became shrink by 50% last year. At the same time, the budgetary cost is still very high. You know, the deficit now is very high. The debt is pretty high, public debt.

Vladyslav Rashkovan But we need to come back to the issues of debt relief for the country. And this is also some part of our job, which we are doing, also is an IMF program. Now, there will be a lot done for restoration of infrastructure, postwar economic development. And again, each of these elements, which I am just saying could be a book. You know, postwar economic development. I’m sure that some professors from Harvard books about that, too. You know, likewise, also you know working on how to organize international aid, It’s another book, you know, and there are several of them, about 1990’s, about the 2000’s. And I’m sure they will be one of the case studies in the future. So if you as professors want to analyze it, please do that. Humanitarian part will be also important part, not less important than the restoration of infrastructure, because we need to understand what to do with the refugees, what to do with internally displaced people, and how to integrate them in the reconstruction, postwar reconstruction, how to help them to find the new place, but also how to provide them necessary housing, you know, the schools, medicine, something which they don’t have now because, you know, being part of Ukrainian territory is destroyed. There are more than 700,000 families which completely lost their houses, according to the World Bank. Damage needs assessment. Social. In other part, the important for Ukrainians is how to ensure justice. You know the the issues of potential new tribunal for the for the Russian crimes during the war starting from the soldiers in butcher and they’re paying to the Russian leadership. And there is another another group which is working on setting up these people now, like Nuremberg type tribunal for Russia.

Vladyslav Rashkovan In general, mediating postwar reconciliation between people, between people who were in the occupation, who left the country, between the people from territories which will which will be needed to be integrated, let’s say, in Donbas. When we regain Donbas, this will be very important topic, again, a topic for the projects which could be led by the Harvard researcher, Harvard professors, for sure. And there will be a lot of initiatives coming from, you say, from the US government, to finance, finance this institutional also institutional process. Institutional element is important is how to build this absorption capacity, how to I said yesterday during the panel that the agency, which now is created for reconstruction is in the past was managing around $5 billion per year, a little bit more than $5 billion budget and the needs are hot 400. So you can easily say about 80 years if only this agency will work. So it’s very clear that you need to enhance capacity, how to enhance capacity in private sector, in the government, in this agency, outside of this agency, how to experiment with different agencies, how to do it from outside of Ukraine, inside of Ukraine. Again, this is a topic both for research but important for implementation, technological. You know, what we discussed yesterday during the panel is you need to get lead from post-Soviet standards, acknowledges go more to European standards, which is a big and you need to do it faster if you want to enter fast in the fast track to European Union. But what is important, we need also to leapfrog. We cannot go to the same path like Poland or Hungary, Slovakia, Slovenia, when 20 years ago, if we want, we need not to look to the Poland of 20 years ago.

Vladyslav Rashkovan We need to look at the European Union 15 years from us today. So European Union in 2035, how it looks like because we need to try to get there rebuilding our institutions and that’s why we cannot do it without leapfrogging. Otherwise we will be left behind, lagging behind for so many years. In general. I mean, speaking about, yeah, what is important is that we need to work. Reconstruction means factually all this together in parallel, not consequently. You know, we really need to work on this simultaneously. In general, when we speak about definitions. We speak about the fast recovery which is going now. You know, there is the need for fast recovery this year, around $14 billion. We speak about reconstruction, which is more physical infrastructure, reconstructing physical infrastructure. We speak about modernization, which is more about institutions. But also, you know, the approach is cultural changes in the country. We speak about the structural reforms which are needed, and we speak about EU accession as anchor for us. Again, all of these together, not in parallel, not consequential. Speaking about the figures, we need to understand that our figures of damages, losses, you know, and the reconstruction needs. And what I said yesterday, and this is done now by both by Kiev School of Economics and World Bank assessment that the damages until the war and expected at least on the level of $500 billion as of today after one year of the war, we have $155 billion already recorded, which means factually documented fact of damages for Ukrainian economy. 60%, $60 billion is a loss of our GDP. You know, 290 billion is expected loss of the potential GDP because of low productivity, because of the refugees, because of the damages of infrastructure and economic capacity.

Vladyslav Rashkovan $105 billion is the immediate needs, what the World Bank estimated last time for the next 56 months. And the 14 billion I think is more capacity for this year. What they expect from the government and the and and and the private sector totally. The last assessment is 1411, $411 billion as the reconstruction needs for Ukraine. Together with Barry Eichengreen, together with Genco, we estimated that the reconstruction needs will be at least $750 billion. But if you speak about investment needs for the leapfrogging also to get more than $1 trillion, you know, and this is us yesterday was saying it’s ten plus ten, 15 years at least the job is at the best. What is important and this is another book was differentiating about that , whatever is needs, whatever Ukraine is requesting, what is pledged by the, you know, institutions and the national national countries, what is committed and what is disbursed to a completely different figures. And they are also different from absorption capacity. If you put today hundred billion dollars on the table for Ukrainian reconstruction, there is no way to to to use it for from any perspective, not institutionally operational, even banking sector will not be able to adjust these this amount. Therefore, we need this to maximize, but we also need to maximize these and to to decrease the gap between the figures.

Vladyslav Rashkovan Speaking about the main part. You know, the and this is what we discussed with Ricardo last year during the conference, which we had organized together in the School of Economics in May. There are many embedded conflicts or I would say crossroads for the Ukrainian reconstruction. And they are actually the base for the political economy debates in the country. And I’m sure we can add much, many more, but this is I see much major ones. So the first one is who is driving the reconstruction. I mean, on modernization of the country, is it Western? Was it driven by the by the Ukrainians? I mean, Ukrainians say it’s our country, we are sovereign. So, you know, we will have our future. We own our vision. We own our future. The West says, guys. but we already saw it, already saw it in other countries. How it’s going Iraq, Afghanistan, Iraq, Afghanistan, maybe not the best cases of the, say, you know, but nevertheless, there are other cases, Hurricane Katrina later, they say, about Indonesia. And in addition, in Nepal, Mozambique, Sri Lanka, you know, there are many different cases, some remember Salvador and Colombia, you know, so there are many cases where you can learn something. So it’s not a unique case of the reconstruction after the war. And I think the answer should be clearly there should be Ukrainian ownership and the vision should come from Ukraine, but there should be strong cooperation with other donors. The second is about the the conflict between short term needs and the long term vision. You can have a long term vision that you will have, as we discussed yesterday, Amsterdam instead of Kiev. But you need to fix the roof for hundreds of thousands of people who are staying as internally displaced people and actually not 100,000, but they are 8 million. And you need to find solutions for them. You need to find for them modular housing today. And this is what you and is doing. We are habitat is doing, UNHCR are doing in Ukraine today. Red Cross is doing finding the possibility for interim temporary housing.

Vladyslav Rashkovan As you understand this one, as we have temporary housing with me, let me stay forever. So you need to understand how to balance these in the short term needs with a longer term vision. Later, there is a some sort of rivalry between national players like European Union. We will run the reconstruction you exercise and we. What about us? Canada says. We also want to participate. Turkey says we also participate, you know, and the institutional support in the World Bank says or EIB European Investment Bank will be ready We will be the champions of the of Ukrainian reconstruction find none of them has a capital to do that if you are seeking for a capital. European Investment bank is seeking for capital allocation for Ukraine, World Bank has limits. So factually they also cannot cannot do it. And we need to have more coordination here. And clearly we need to strive for the modernization of the country. There are many other topics. So should we speak more of donors and therefore potentially expecting only the grandson, which is clearly more, you know, desirable for the reconstruction. But there is also a problem of Dutch disease. So if you have an only grandson, you know that you don’t need to work. You expect that others will finance you. Therefore, or you have loans which easier to give. But you need to think what to do in the future. Already. Debt to GDP. Public debt to GDP in Ukraine more than 70% because GDP went down. And last year the combination of loans and debt and brand grants was like the 65 to 55 last year out of these $52 billion. Clearly, what I strongly believe is not loans or guarantees or or grants, the Ukraine can be reconstructed only way of private capital in future, only with investments and how to bring this investment.

Vladyslav Rashkovan This would be the major task for the government. That’s why the structural reforms is so important. I already said about the centralized country versus decentralized, you know, strong capital of western regions. Ukraine is a decentralized country It should be clearly kept. So how to build the capacity in the regions is a big question. Democracy strong hand during COVID. Strong can during the war. I mean, clearly, I mean or democracy and freedom. I strongly believe in democracy and freedom. You know, therefore, it should be preserved after the war. And also what we see now, there is an increase during COVID and during the war, strong increase of the of this of the state, the state’s role in the economy. And I mean this if we if we to put it to the limit and therefore everything will be state economy will be small state economy versus big state economy on the on the nature of small stuff, the economy will always lose to the state, the state economy. So for the small, open liberal economy, supported by the, you know, economic freedoms clearly will win towards the, you know, the state economy. Last year we developed these more or less mechanism. We’ve we’ve Ricardo in London so that I’m like frame which many people found it is as relevant. There are some prerequisites which are needed for reconstruction. Everybody speaks about the principles of reconstruction is again, the EU as a as  as anchoring. There should be clearly transparency, Ukrainian ownership. If you put all people together who wrote about principles, we can have a big book already about that vision. This is what I said yesterday. So far as missing vision should come from Ukraine. But Ukraine now is more focused on the short term needs again and also on military, how to win the war, the long term vision So far as missing EU accession frame, there is a process to you reframed the junior departments or those department which is working on the neighboring countries, and they’re developing a plan together with Ukrainians recovery plan was there was some attempt to develop it last year before Lugano conference in July. Unfortunately, there was not much  traction about this plan. There is more now fast recovery topics, but other elements which are more important is how to finance, how to build the implementation capacity, how to build the, you know, the governance around the reconstruction, how to coordinate donors. You know, I will be happy to to answer, your questions. There are some slides which you probably will will use for that answer. And one of the question is, do we need to have some real champions or Mr. or Mr. Marshall, you know, in the future? This is a good question. I don’t know what it should be individual, personalized leadership. And this is about the leadership classes of people, or it should be a more institutional leadership in the current world. This is a I don’t know, but the politicians will play a big role in that because unfortunately, they will have to make so many choices and they will need to think either they will sacrifice their careers or they will make their careers. Maybe someone will make a career also doing the reconstruction well.

Konstantin Usov Thanks for this presentation, Vlad. Let’s follow it up with several questions and then open it up for the audience. You mentioned that the reconstruction in Ukraine has already started. I’m aware of this, but as this fact probably surprises many. Could you elaborate on who has begun the reconstruction? Where? Who pays for it?

Vladyslav Rashkovan Yeah. There are several levels. I’ll give you an example. You know, it was recently in Kiev and I went to two European, which is a city now by Kiev. And you might remember the the bridge which it was on there, all the pictures on the fiscal march seats where people were evacuating from Europe and they were under the bridge totally.

I think something like 90,000 people moved from European to to Kiev under this bridge in the next days. So I was staying in front of this bridge and I created such like a metaphor, which I think Ukraine looks like this bridge today. So the the main bridge is still destroyed, like Ukraine. On the right side, the Ukraine, Ukrainian authorities, Kiev authorities, European authorities, they built an interim road there on the the bottom of the of the river. It’s a very, very small, very narrow. But it’s there the cars they’re using, it is how Ukraine is tackling fast recovery today. And on the left side of this bridge, the new bridge is already under the construction. You know, and this is how Ukraine already starting is still far from palatial. But this is how Ukraine already started. There are only two questions. When this bridge was started building, was there proper tender process? I simply don’t know. And the second is, and the builder is a Turkish company, which is also interesting. You know, just in general, we appreciate all the investors. And the second part is, is this bridge built according to the 21st century standards on ecology. Will this road be prepared for self-driving cars in the future? You know how many CO2 emission was spent, you know, for the you know, for this bridge? I think nobody was asking these questions. And this is not a modernization. You know, this is going back. What we actually tried to recover the bridge, which was before. I mean, spending money, if we do that, as I said yesterday, I think it would be the the crime of the 21st century. We really need a chance to rebuild the rainy weather.

Vladyslav Rashkovan So if there will be no this faster recovery, which is starting with energy. You know, the Depression was attacking them for their missiles, were attacking the Ukrainian energy system, and only one of the November 11, there was one go out of the generation and the city was damaged was if this will not be recovered before going to Connecticut, will not be investing in the recovery. And they will, with the money of the government, with most of the money of the dollars. Yes, there will still be too many of the you know, if they will not do it, there will be very strong electricity shortages in some parts of the country. If a few days ago you started the export of which you suggest. So it is, you know, while in December we had a huge this huge you know, so we are what I mean we are recovering that you know you know, recovery is fast recovery. No single foreign leader will be able to come to give but train by the car because it was well, if there will be no recovery, it will be very into the mobile connection because the Russians were getting also the the thought was about power. So all these are being done by the private sector. There didn’t up we were in Kiev and the ceremony when you were met with visas, one person from business said I had the these two warehouses total value of 70 million. The site both ruined one. I will use money for another one for the new project. This is one of the projects of mega you know, of ensuring and you investments in one of the part of this and in I was I have one company we are ready to build office.

Vladyslav Rashkovan So these are not only the economy, but also the investments by the companies. So both businesses got a one from the budget and the financing from the economies. If this part of the economy is contributing in fostering a female cycle, you cannot rebuild the country with female cycles. We still have some longer than we want to do.

Konstantin Usov Just to clarify, are you aware of Spain from the bridge? The capital loan? Got it. My question to you, should there be capital expenditures in a quickly engineered and quickly designed capital projects in Ukraine? At this stage with my which might end up as being as outdated as something that has been destroyed before.

Vladyslav Rashkovan The answer to this question is a little could be a little bit provocative. I would say even more. Even if there is a huge risk that this may be even destroyed tomorrow. It’s still to be built. Okay, You know, because, I mean, you should do it. You cannot wait. What if there will be a missile tomorrow? You need to act. What if you win tomorrow? Not if there will be a missile tomorrow. So therefore, I mean, do you need to invest as if this is like the old technology? So, again, I told you about this conflict between the first, the first needs and the longer term vision. If we will stick to only to the first answer, you know, therefore only for the immediate danger. And we do of everything only for immediate need. So there will be a, you know, a problem for the future. We will spend a lot of money, but we will not rebuild the country for the future.

Vladyslav Rashkovan I give you again, we’re speaking about the political economy. Therefore it’s more choices of people. Give you an example. You are internally displaced person one Internally displaced. Person two Internally Displaced persons one go to temporary house, modular house. So now you build a new house. Who will you bring that house? That who doesn’t have a house or who has a modular house is a choice.

Konstantin Usov Just another piece of information. So there is there was no traditional peaceful due process to procure the construction of that bridge that you mentioned. What’s your stance on this balance of meeting the sense of urgency versus meeting the due process that would, in its turn, project our readiness to be transparent better than yesterday and reliable?

Vladyslav Rashkovan Yeah, you know, the this is a again, a very interesting question when you look at today for today today for today, you always say for sure it’s important to build today. Because you still need it. Therefore, your choice would be Let’s do without any tender procurement, any, any contracts, etc. If you find yourself with any tab mod that that moment of life for you, will all of us choose that option because we need to do it today. If you start including a little bit of, I will show you what exactly these elements are, which is my model of the Public Financial Investment Management. PMA. This is our development, see, you know, including climate. This is the model which I developed, but it is actually including several models. So we start from this assessment today. You do the strategy improvization today, for the future. You know, you do programing. So you’re saying we need to build city number X or we need to build them. You need to build the the airports.

So if you start today asking, do we need to rebuild this city or this airport? I would tell you, let’s think one second more. Let’s put people, urban planners from Harvard, let’s put the you know, the the people who do strategy from, you know, MIT Media Lab, CityLab. Let’s put someone from Amsterdam putting them together as a team to think of it. And then when you say, well, we said there is no time, I will tell you that this already 14 months of the war and 13 months ago we had already, who should have started that? Not today, but if we didn’t do it 13 months ago. We need to start it today in order to be able to to build it, because this process, because procurement only goes here. Point number nine. Before that you should have done a lot of reprocess that bridge probably for interim. You didn’t need any thinking more, but for the main bridge, probably you need.

Konstantin Usov Just to build up what you’ve mentioned. So the Harvard Growth Lab institutions like these ones, what should be their role in designing the policy, implementing the policy and supporting Ukraine’s efforts to recaim itself? And the fact the second part of it is a little bit more provocative, do you think that there is enough open mindedness in Ukrainian wartime government to build a cooperation with such organizations?

Vladyslav Rashkovan Answer to the second question for sure, yes. Because when you say government, I hope you don’t. I don’t mean only central government, because I said a few minutes ago it should go also on the regional level and therefore to the mayors, you know, and the mayors, why not? The mayor of Kharkiv would not be interested in cooperating and thinking about it, it’s future planning. You know, but speaking what can be done. And this is a more practical question, but it’s not “what if.” There are 50 plus think tanks in the world already engaged in Ukrainian reconstruction? Some would do that. We were discussing with Ricardo how that can be implemented. There were some ideas before about the the evidence based policies, about the thinking about future European Union integration and therefore, which regions of Ukraine may be more integrated to the European value chains and therefore trying to work together in a targeted way with a with the company staff.

Konstantin Usov But just for the sake of truth, the Harvard is not engaged yet.

Vladyslav Rashkovan Yeah. And this is what I’m what I was saying about the the championship, you know, So this is like a do we need a champion, you know? And the academy remember part of this slide, you know, from last year, But you see the number of faces increasing, you know, so there are different people who can who can play some sort of role. What EFA is a question I don’t know if you’re if you know that and again, taking out all the potential, you know, association which probably that time it was not super successful. But in the early nineties there was a Harvard Institute for reforms in the emerging markets and it had a pretty big budget and they were trying to convey the messages about the different economic policies which need to be done in the country. And the true saying that time I think it was a some conflict between the IMF and this institute in terms of messaging about the reforms. But for reconstruction, we don’t have such an institute, we don’t have such a champion outside of Ukraine, which would be a intellectual center for the for the reconstruction of Ukraine, for modernization of Ukraine.

Vladyslav Rashkovan Why it cannot be and I would not say Harvard. I would say Harvard is here about the science pool, you know, because it should be still, we are not in Marshall plan concept because we still have European Union in the US. Why not? And this center could be properly financed, could play a role as intellectual center for the reconstruction. And who could unite all those think tanks outside of the country of who would help, you know, other countries like European Commission and the IMF, World Bank, EIB, to build this kind of intellectual support, because intellect is here, politicians are there and intellect is here.

Konstantin Usov I was so glad to hear that mayors are ready. Is central government ready?

Vladyslav Rashkovan Yes, sir. Also, we were discussing this during the spring meetings, we had several discussions on the topic. So far, the initiative is coming more from companies like BlackRock, Jp morgan, Goldman Sachs, and other than from Harvard, Yale or M.I.T. But I do hope and I do my part of the job in order to institutions, to academia, also to come to play the role.

Konstantin Usov Thanks Vlad. So we’ll now open the floor to questions. If you have any. Just raise your hand, please, and make sure to introduce yourself.

Attendee Hello. Hi. Thank you very much for the talk. I’m from the Growth Lab. And I was wondering about the one aspect that I don’t think you’ve delved into so much, which is maybe what you would call the demographic reconstruction of the country. You know, beyond the unfortunate casualties of the war. There’s a lot of people who have left their countries, especially women and children. Now these people are building lives of their own wherever they can. I was wondering how you think about the role of this new Ukrainian diaspora in reconstruction and how you would want to engage the world So, you know, just build a case for them to participate in that reconstruction.

Vladyslav Rashkovan You’re more thinking after the war ends. Yeah, we discussed this issue slightly yesterday during the during the panel, and I was sorry for for not mentioning this. I mean, and I said yesterday that as a result of the war, clearly we will have several important new social groups. One will come from veterans. And we may speak about probably a million people including volunteers, some veterans. We will speak about the families of the fallen soldiers. We don’t know the figure today, but it would be small. We will speak about the internally displaced people, which is around 8 million people, and we will speak about refugees. These four groups, I mean, they will create another conflict between socialism and capitalism and our crossroad, because clearly there needs to be most is social. And the government and politicians will tend to address their immediate needs rather than to create out to think more about the longer term because the immediate needs of these people will prevail. And I understand politicians. For the refugees. What you could you ask specifically the I’m working with UNHCR, which is doing with help of some Ukrainian social sociologist service but permanently you know, in different countries what they are going to do. The figures are showing that more people will spell the broad spend abroad, the more they will make a choice for their kids. The. And to give and what they need back. They need security. They need housing. They need jobs. They need medicine and schools. All of these things. And again, as I said about the social things you can try to do faster, but even fast, it will not be fast. You know, unfortunately, you know, but you can do it really fast trying to do this.

Vladyslav Rashkovan Like for schools, you need to build down schools or rebuild the schools to make the bomb shelters. Because people come back, and especially those who are out of the country, they are putting those people in the schools to be open that they need to have. But at the same time, I think what is slightly missing is an essential. So, you know, you may eat the grains because in the case we are more online. Online schooling, how to do this is the question.

Attendee Do you also have proposals, you know, how to what are the lessons from other case, other conflicts or how to keep students, you know, kids integrated with Ukraine or over the country of the conflict?

Vladyslav Rashkovan Uh, in the longer term, even if they stay outside is the question is a task you know, for the, for more for academia, for research and, and the politicians to take a decision. Politicians can take emotional decisions, but hopefully they can make decisions which would be in all the evidence based and based on the some previous research. Answer to your question what to do next, though? I don’t think the answer is how to work with diaspora. So I think our factor is that anything which can bring people back. The answer for me is the opportunity. So for the for the parents, you will need to make sure that they will they will be a job for them. Plus all what I said before. And as soon as you do these things which we discuss about political economy, you you are politicians. So who will you prefer first? Those who already stayed in Ukraine or who left the Ukraine to build one house? Who you will give it to? One who was in Kiev staying during all the years, during all the year of the war or the one who left the country? It’s a question for political choice because maybe you will not have $2 to build two houses, or at least you will not have $2 in the of the moment of time you will have one after another. And it’s still a political choice. How you sell this political choice is another after how you work with your European colleagues in Poland, who is really happy to have a million of Ukrainian workers there and ready to integrate them in the all the economic policy in button in Poland, in Germany as well. Secondly, your study kids who know German or Polish. It will be more and more difficult to reintegrate them again and search for this opportunity and opportunity link for reconstruction. We discussed that, that this will be a huge challenge and for any professional, it would be a dream to participate in this such a big project, especially if you are patriotic and want to help your country and also if it’s paid for.

Konstantin Usov Real quick, since so since my family’s here and we are really considering and I’m going back for sure the summer and I’m also considering taking them home, I would say that the the the factor that I’m hugely analyzing is a factor of certainty. So I would say that I would ask you, do jobs together with housing, together with education, health care constitute the notion of certainty? Or there is something more to it?

Vladyslav Rashkovan I think we live in the world where certainty becomes this word, very rare in general. So we live more in a very vulnerable and uncertain world, longer with further to go in the future, more uncertainty. It doesn’t mean that you don’t need to plan, though. You know, as I said, that you need to strategize more. You need to have more scenario approaches to be ready for a good scenario and better to not need to have a contingency planning what you do before. But what I see is Ukraine is fighting not only for its own independence, as we know, you know, because if Ukraine loses this war and the scenarios are different, you know, we believe as Ukrainians, it will not happen. You know, but the it is very clear that the West will lose as well, you know, And therefore, we I think everybody understands in the West it’s not only our war, it’s really the war of the West and of the humanity of humanitarian values. You know, the the open liberal ideas and the democracy against of everything, which is could be antonym to that.

Vladyslav Rashkovan Therefore, I strongly believe nobody will want to live in Syria type or Aleppo type in the country in the center of Europe. And there will be a huge exercise for European Union also to contribute for its own, you know, rebuilding, because it will be, let’s be frank, it will be a big business for the European business financed by European capitals, you know, by by different types of bonds which can be issued or or other things. Again, it will be a topic for European politicians how they want to behave and participate, position themselves in the future history. You know, so far, most of them probably except the few leaders that clearly show that they want to be on the right side of the history. And I think after the after victory, they will continue to do that as well.

Konstantin Usov More questions for Vlad? Professor Hausmann.

Ricardo Hausmann So thank you. Thank you very much for a very broad and encompassing presentation of the many, many issues. We last met in person last May. Since last May it’s been, say, ten more months of war or 11 more months of war and and also of articulation of the international community. Questions. In the last, whatever, 14 months of the war, what have we learned about the willingness of the international community to support Ukraine? And what does that tell us a little bit in terms of a is how solid is this report? Before the plan just shared with us?

Vladyslav Rashkovan Because of the all the all the reasons which we discussed with you last year, all month, it was about the, you know, the rest of this. Nevertheless, Ukraine got $52 billion in support last year. Last May we were only pretending that it will be $5 billion in mothballs. And even if Ukraine did not receive any single month, $5 billion. The maximum was, I think, 4.4. Nonetheless, $52 billion was there and already for this year and last my last May, we didn’t have any perspective so far. We need only we knew only the amount. What we need now, already in February, 50 plus billion dollars was committed for this year. Now in the in we are in April 2004, 11 months later we have IMF program which last May was not possible. The fund never financed the country in the active part of the war. And you may say about the period of 2015 when the fund did finance Ukraine, but that time the concept, the Western concept, was that the war already finished and there is some conflict on the east, which is, I think, one of the misconceptions of the West. Then I was telling today that in the morning to the poor, the Ukrainian students and therefore but the $15.6 billion of Ukrainian support is almost nothing against the total package which the Western countries already committed as a anchoring government program of total $115 billion for the next four years, which already committed and embedded in IMF program. So there is a $115 billion commitment from the G7 leaders to finance Ukraine in the baseline scenario. In the downsides to that and beyond is a dream written in the IMF documents. This is one thing which is done. The second element which is done, and we were discussing last year about the need of coordination of donors. And you remember how donors were saying there is no need of coordination. We are very well coordinated. They were not. But these December G7, after our push for many months, the G7 leaders said there is a need of coordination. And in general the G7 multi-donor coordination platform has been created for Ukraine. There are already two meetings. It still to be improved, but the process is there. And without this platform to be very hard now to coordinate the the international aid for Ukraine. The European Union, Ukraine in last May didn’t have any perspective for European Union. It became, though, the candidate for European Union with some expectation of the plan, which is hopefully will come this year. And there is an intensive discussion. And there, as I said, the Junior Department of Labor and the neighboring countries in the European Union, European Commission, they recently restructuring to have really, you know, a lot of people to be focusing on the Ukrainian integration, Ukrainian accession and also on Ukrainian reconstruction. So there efforts, US..where they discussed last year grants versus loans, U.S. asked grants and they provided grants we discussed through which we’d cost will be IMF World Bank special because Ukraine does give money directly. They use the World Bank multi-donor fund of the World Bank last year it was not there and they use the instrument. Moreover, the IMF created administrative account for that and they are $5 billion for that account.

You know, a lot of money went through the World Bank account. And the more a World Bank does the certification of this money. They work well as a unit which works with the Ukrainian government in order to to cooperate, you know, to to certify the money. And they later certified this to the Congress. And only after the certification from World Bank that the money spent, according to the guidelines from the Congress, the next tranche is coming. The US created the inspector general. You know, there are four inspectors general who already came to Kiev separately. At least there is a report from January. I think they came twice to Ukraine, maybe once or twice, you know, and there is a teams which are built now for the for the inspector for analysis of the of the support function is the support of Ukraine. So there is a lot of institutional building around the construction process is ongoing. In Ukraine you have vice prime minister on reconstruction who became a direct counterparty for both for you asked for European Commission. You know, there is the agency created for reconstruction. We discussed last year how it’s better to be done. We wrote about it in the article about that, how  to build this agency. Yes. Is built not outside of Ukraine, but inside the Ukraine. But they know that article impact that creation and agency. And I worked with a directive of a head of agency in order to structure it, you know, now. So there is a lot of institutional process behind the the money came. Money will be there. Also, there is some portion of money already committed for reconstruction itself. There’s $1.5 billion from U.S. that is 1 billion from you, 400 million from Japan.

Vladyslav Rashkovan So there is a process these money are not compatible with, you know, the needs of 111 billion. But as I said, there are also the working groups on Russian assets on the on on on other elements of the reconstruction. Therefore, you know, a lot of things changed from last May. And it seems that it looks like the West is ready to support and commit to the Ukrainian reconstruction.

Ricardo Hausmann Any comment on within the West who are the outperformers in war, the disappointments?

Vladyslav Rashkovan We have thanking all international partners for support. And I would love to have a topic maybe here at Harvard, the role of Asia for Ukrainian reconstruction or the role of Middle East for Ukrainian reconstruction, because so far it’s really in the West. I mean, within the West, you go to the IMF now to the Ministry of Finance website, and you see clearly a few figures. First is the is money from U.S. and the European Union. The first investor I mean, first of all, of Ukraine, today’s IMF, Japan now committed $5.5 billion to the G7 president, which will be which will be disbursed for quarter this year, first quarter next year. U.K. did a lot and Germany provided 1 billion grant last year and other contributions for European Union World Bank money. And later, you have EBIT in AIB, but they are mostly financing the enterprises. And one of the elements which I said also today to the students, to Ukrainian students, is we need to build a proper digital system to track money because so far we can track only the central government money. But we don’t have a view on what is given like between Twin Cities in in-kind support, for example, or even like money to the state owned enterprises as loans. We don’t see the in the in the government official statistics.

Attendee Hi. Hello. My name is Felicia, also the growth research fellow originally from Moldova. So thank you for for your presentation. So my question was kind of related to to your last point that of there has been a lot of support from the West. There has also been bilateral support, institutional support. At the same time, there have been some fragmentation within even the European Union. You know, we recently saw Poland or Hungary kind of implementing those unilateral bans on grains. There was obviously also some criticism regarding allocation of aid towards Ukraine at the expense of other either countries or, you know, instances that will not be receiving about aid and that have been asking for it for quite a while. So how does this reconstruction plan kind of take into account what you’re suggesting in your opinion on how does that take into account what the losses might be, both among the West, but also on how it’s incorporating some of that criticism from outside of the West? Thank you.

Vladyslav Rashkovan Yeah, it’s a good question. Speaking about Moldova, you should know that Moldova, in all the programs now and the West goes Ukraine and Moldova. And then this again about the political economy. You know, in the different countries in Poland, you have elections this year. So you make a choice between the local domestic political battles and the some optics of Ukrainian support. Are there any countries which are benefiting from the Ukrainian war in Europe? I mean, you should simply think about two things. If tomorrow there is still ongoing war in Ukraine for a long time and there is a conflict which is ongoing, every 1% of the European GDP is $100 billion, which will be needed to invest, for example, for military.

Vladyslav Rashkovan These are money which will be not invested in the medical, in health, in education and social support of people. And all of these what politicians now saying about the grain that this will be completely wiped out, you know, all the potential short term benefits. And this again, between the short term and the longer term, longer term vision. Hungary is a little bit on different side. You know, they they they chose politically to be on another side of the history. And this could be a longer term problem for European Union because for many aspects, it looking like Europeans Ukrainians are more Europeans now than others since few others. And you know so it’s a complicated. But even with Hungary, you know if we want to be in the same house with European Union, we need to find a dialog dialog with the Hungarian minorities. I mean, if there is a dialog. So if European Union finds a way for a dialog with Hungary and giving on not giving European Union funds to Hungary. So I think we also need to find that do dialog on other issues some more because I think Bulgaria also came today with ideas about the ground and they used the case of decreasing the grain prices, which is actually Ukraine helped Europe with inflation also providing the grain. But now the local producers are not so happy, but the grain is going down in most of the markets. So is the question more about local politics, how they wanted to use the case of Ukraine? They say the politicians say that we will do only the transit means that we will work on transit. You know, there is still a live in so many countries which need the grain. In Africa, which are really seeking for rain. But we will work on that. So I think it’s more short term political, you know, battle, you know, to show more domestically, you know, rather than a longer, longer term problem. On the longer term is this issue between the peaceful plans, between, you know, Ukraine and and between difference between China, between the Zelensky plan and plan XI in plans formula of peace was announced is written that we need to have a possibility to export free and then in in XI plan in St and to facilitate the Ukrainian export especially grain facilitate means what is going on today when you need to agree with Russia you know in Turkey about the what will be done there will be inspections. This is not you know, supporting longer term because it’s limiting our export and including that our export is not only grain, we also export metallurgy and many other elements. We also import many things, you know, and it’s clear that if you import them by buy by ships, it’s easy. It is easier than to do it, to bring it by make trucks. So I think this will be a diplomatic topic is one of the diplomatic one. There is a path to recovery and we will do this, you know, numerous time.

Attendee Thank you. My name’s Bob Powell. I’m a fellow at the Harvard Advanced Leadership Institute. Urban planner by background. I’m really interested in what you were saying about decentralization and the cities and the combination of needing to create a vision ahead of all the projects. So if is all the institutions in place during the war and martial law at the city level to allow that to happen? I mean, if if funds were available to an individual city right now, could that city get all of the right stakeholders together to create that vision so that you then got the platform for all of the rest of the process?

Vladyslav Rashkovan There are few answers to this question. If you go to Kiev, absolutely, yes. Moreover, key is Kiev now worked with UK consulting company, one of the big four on designing the strategy of the of the postwar reconstruction of Kiev city. It is true that he was not so damaged, but still I think it was the right approach to do it now. I was participating, you know, from the first days on these. The result, I was not super happy with the result, but what was go to the strategy. But I think it is better to have it, not to have it. When you speak about other cities you come to, The first issue is a demand. The demand is there. The second question is absorption capacity. If you go to training, if I’m sure you will not find mostly anyone to speak with you. But yesterday, while I was on the panel here at Harvard, I missed the call, which we organized with the School of Economics in Kiev and donors to design the program, which would bring people both in Ukraine and outside of Ukraine to train, to speak on the topics which you said both city planning, strategy, project management, speaking, European Union language, what means to be build back better managers. And this is again, if Harvard wants to play a part of that role, it also would be interesting, you know, because you also need leaders for that as well, you know, but you much more will need people on the lower levels to do that. And the the process will will go. Now, I would say the cities of the second, third year, they missed that element of the absorption capacity. It should be developed for sure and will be developed. So thank you to everyone for your thoughtful questions and contribution.

Konstantin Usov Thank you, Vladyslav Rashkovan, for your for sharing your views and opinions. And I hope that we can all we will all stand for Ukraine and please, please contribute to that.

DISCLAIMER: This webinar transcript was loosely edited and there may be inaccuracies.

Mamo Mihretu: What I thought I would do is maybe I’ll take 15 minutes, 20 minutes. Talk about the economic reform program that we are implementing currently in Ethiopia and the challenge that we’re facing, and what the future prospects and maybe what I thought would be useful is also talk a little bit about lessons about policymaking. I mean, the technical thing know, I’m sure the theory and everything you learn it here, but you know, in practical terms it did what you know, how the policies formulated and what are the challenges. And I want to just try to share in a few lessons on that as well. But I think a good place to start would be, as Andy mentioned, to talk a little bit about Ethiopia’s economic development gains, because here we are at the public school. You know, let’s talk about development. So I think it’s very good to start by acknowledging the gains that we’ve made over the course of the past two decades, before we talk about the challenges. In the past 25 years, Ethiopia made significant progress in terms of development. Our economy has increased significantly over the past 25 years by almost 15 fold. Now, the Egyptian economy is the third largest economy in sub-Saharan Africa. Next to, I believe, Nigeria and South Africa is the 3rd biggest economy in the African continent. And this is not just growth. This growth was translated into meaningful gains in terms of, for example, human capital, in terms of access to basic services. So it’s not just growth. There is also real impact in terms of other indicators, particularly poverty reduction. So, for example, 25 years ago, poverty rate in Ethiopia was close to 46%. Now that has declined to 20%, less than 20%. So there is meaningful progress in that regard as well. Areas of life expectancy over the course of the past 25 years. Life expectancy has we have achieved across the ten years increase in life expectancy. And again, this is not small achievements and it just grows. It is actually affecting the lives of everyone in Ethiopia. In terms of education outcome. If one looks at increasing literacy rate, there is substantial improvement as well. You know, 20 years ago it was close to t27% and now that has improved to 60%. There are also significant improvements in terms of making and access to electricity reachable to Ethiopians, and it increased from 15% now to almost 50%, five zero. And, you know, 50% of our population now have electricity. And that is because of the significant investment that went into the power sector, into the energy sector in Ethiopia. You know, Ethiopia is currently, as you know, building the largest hydroelectric dam in Africa, the Grand Renaissance Dam, which is an important project. And that would substantially increase access to electricity, electricity to not just to people in Ethiopia, but also beyond Ethiopia, to the neighboring countries. The project is more or less completed. It’s 91% complete. Now, it costs us close to, you know, 5.5 billion USD, and it will be fully completed next year. And when is completely completed, it will generate close to 5000 megawatt energy that would fundamentally transform the energy sector in Ethiopia and in the region. So a significant investment in access to electricity.

Mamo Mihretu: As with the agriculture sector, we’ve made substantial progress. Most agricultural output and productivity has increased, particularly in maize and wheat. This year, you know, more or less we’ve achieved with self-sufficiency part of it because of the crisis in Ukraine. You know, you have to look inward inside and we’ve made substantial effort in terms of mechanization and cluster farming and really inputs supply. And that led to significant improvement in with production. And we are able to travel to achieve self-sufficiency substantially in that regard. So there is substantial development gain over the course of the past ten years. Now, a key question to ask is we know what is the driver of economic growth in Ethiopia over the course of the past two decades? You know, how do we finance our development? I think that’s a very important issue. And in our analysis, for most part, the economic success was made possible through mobilization of financial resources for what you consider to be priority sector and public projects. And internally, for most of the projects that we implemented, particularly public infrastructure projects that we implemented, the source of finance was the largest state-owned bank, the commercial bank of Ethiopia, which by far is the biggest financial institution in the country. So we were able to mobilize resources, saving from the public and channel those resources into priority sector and in the public projects. Second thing is we also borrowed significantly from external sources. So there was significant external borrowing, particularly from Chinese development financial institutions. So there was significant borrowing from Chinese EXIM Bank. Some extent it’s not as big as China’s EXIM Bank, but there is some borrowing from China’s development bank as well. So financing, external financing from Chinese Development Bank. In addition to domestic finances, lead to significant increase in public infrastructure projects in Ethiopia. And that led to, as you know, significant growth. And we were able to sustain that growth for a while. But, of course, you know, this model of financing development at some point reached its limit, and that was reflected in the macro imbalances that we experienced. You know, for example, the projects that we financed through domestic finance and external borrowing largely served the domestic economy and didn’t generate sufficient foreign currency. And because of that, we had faced some difficulty, you know, some liquidity challenge in terms of servicing our external debt. That was one of the problems that we faced. Second thing is in terms of the finances of budgets, we resorted to monetary financing. So the National Bank of Japan was financing part of the budget deficit. That led to inflationary pressure as well. A third thing because much of the credit in the economy was going to priority sectors and also to the public sector. The growth and the investment for the most part was driven by capital accumulation as opposed to, you know, productivity. Particularly the role and the participation of the private sector in the economy was not significant. Which directly affects our job creation agenda. So we have this problem of access to finance, particularly to the private sector. So this was the problem that we faced, although there was a positive story of development, although there was a positive story of that growth translating into meaningful poverty reduction and a meaningful investment in human capital and public infrastructure projects. At some point it reached its limits. So at that time, you know, coincidentally in Ethiopia, there was a change in government. This is very important to note. Not everything is technical, but there was a change in government. And with the new administration, there was opening and pragmatism to look at things afresh and with new attitude of pragmatism and sort of experimental mindset. There was an opening to confront our problems, particularly the problems that I outlined. And that led to some reflection and some diagnosis to really to develop a strategy and economic reform plan that would address some of the macro imbalances that I described. So what we did at that time was that was some time In 2018, April 2018, we started thinking through, you know, what is it that we are facing and what we should be doing? And a team was formed, you know, from experts, from the Prime Minister’s office. At that time. I used to work at the office of the Prime Minister and experts from the Ministry of Finance, the National Bank, jointly. We came up with a strategy of trying to understand today a meaningful diagnosis of our problem. So that process led to the conceptualize of what you called at that time the Homegrown Economic Reform Program. So we developed an economic reform program, sort of medium economic reform program. And the objective of that program was really to address the macro imbalances, including the foreign currency imbalance, the high risk of external debt distress and also vulnerability in the financial sector. Because remember, I was saying that much of the domestic projects in Ethiopia were financed through the Commercial Bank of Ethiopia and eventually the inability of the public commercial companies to pay back their debt led to financial sector vulnerability as well. And the high inflation, and lastly, the limited access of credit to the private sector. So those were the challenge that we identified that we told at that time is that we need to find a solution for. So basically, the Homegrown Economic Reform Program that we developed at that time was aimed at addressing these imbalances and these concerns. So we developed the economic reform program, and essentially the reform program, unlike previous programs in Ethiopia, attempted to be comprehensive. We had developed different elements, different pillars to the reform program. The first element of it is to look at the macro issues, you know, what to call the macro pillar of the reform.

Mamo Mihretu: Second thing is to look at the structural issues and third we want to look at the sectoral issues because we want to really look at sectors that are growth enhancing and we want to do additional work in terms of stimulating the productivity of this sector. So as a macro element to it, you know, structural element to it and also central element to it. On the macro front, our goal was, first of all, we want to step up efforts to improve public sector finance. We also did a number of activities to correct the foreign currency imbalance. And at the National Bank, there was effort to modernize the monetary policy framework, which I would explain a little bit. And also strengthening the financial sector, particularly the biggest bank in the country, the Commercial Bank of Ethiopia. So in regulating the financial sector and effectively towards financial sector, vulnerability was an important part of the reform effort. And finally, we want to develop capital in financial markets broadly. So this where. You know, elements of the reform programs that were clearly outlined that we had a clear strategy for. On the structural reform aspect. Basically, the goal was to try to, first of all, is to let private sector participate in the economy. And we thought we would do that effectively by improving the investment climate in Ethiopia, by addressing regulatory policy, administrative barrier to much robust participation of the private sector in the economy. So there was a broader agenda of improving the investment climate, you know, things like the cutting, the cost of business registration, improving access to credit, you know, generally trying to rationalize and streamline the bureaucracy to support the private sector. Also in Ethiopia, there are two important sectors that would, you know, important play in terms of enabling the private sector. These are the energy sector and the telecom sector. So again, we did we did a lot of work in those two sectors.

Mamo Mihretu: In the telecom for a long time in Ethiopia, there was only one telecom company that was effectively a monopoly in the economy. So we followed the strategy of giving new license to global telecom operators. And also now we are in the process of partially privatizing an incumbent telecom company. The idea would be to support digitization in Ethiopia in that respect were fairly successful. Power sector is an area where there was a lot of investment in Ethiopia. Much of this aid, much of the domestic borrowing and external borrowing goes into constructing new hydro projects. But there was a deal that needed to happen in terms of tariff reform because Ethiopia electricity tariff was cheap. So we want to make the state owned public energy company competitive. So we undertake a tariff reform program which is still continuing. There are also other said sector reform program. So in short. We had a problem that we need to confront. I think we looked at it properly and in response to that, we came up with a different reform program. That was substantially different in terms of its orientation, in terms of its content and in terms of its comprehensiveness. I say that because in terms of in terms of orientation, the goal was to move to what is an economic model that has a healthy balance of private and public participation. In the past it was dominated mainly through public investment. Now we want to increase the participation of the private sector as orientation towards more productivity, towards more active participation of the private sector. By content, I mean we we didn’t really confine ourselves in terms of macro reforms to also try to look at structural and sectoral reforms. And by comprehensive and integration. What I was referring is just not to look at, for example, reform of the vehicle sector. We want to integrate the effects of reform with the fiscal reform, with the monetary policy reform, so everything has to tie together. So that kind of approach is what we followed. But of course, you know, having a great plan, perfect plan is the easiest part of, you know, the reform journey. And I’m sure when you go back, whatever you want to go back after finishing, you’re still here. You’ll immediately see this easy to develop reform program, it’s easy to identify what the concepts and the problems are. But when it comes to implementation, all sorts of things happen. I mean, nearly every time you start implementing a reform program, things go. You know differently. Nothing goes according to plan. So I mean, I remember, you know, the sentiment that it had, the images that we had and the ambition and the hope that we had when we developed and conceptualized the reform program. Once we did that. I would say six months in the implementation of the economic reform program.

Mamo Mihretu: All sorts of things happened in Ethiopia and broadly in the world. I mean, the first thing was the COVID pandemic. The COVID pandemic happened six months after the start of the implementation of the reform program. So things that we didn’t expect came up. So we have to really think of, you know, what are the risks? What are the unknowns? You know, what with would this reform program go wrong? Should be consistently embedded in your thinking. And that’s exactly what happened in our case. So in short you know, after the development of the program, we faced a cocktail of compounding challenges. Something we never expected happen. So like I said, we talked about the COVID pandemic, but some of it are external focus, some are domestic focus. Some are short term by nature. Some are structural. So I would list, for example, you know, the pandemic, the COVID pandemic, and then immediately after that, unfortunate for us in Ethiopia, a very tragic civil conflict and a protracted civil conflict that started immediately after Covid. So that also really, in some respect probably a conflict in, which of course, nobody could really anticipate. And then, of course, the disruption of the global supply chain and transport network. And after COVID globally, you know, China closing down and everything that follows had a significant impact on the Ethiopian economy. Of course, most recently the Russia-Ukraine conflict and its intended impact on the price of fertilizer, on the price of fuel had a significant impact on our economy. And, of course, you know, because we live in the part of the world that’s prone to climate shock. We have recurrent droughts. So this long term challenge of climate shock invariably affected us. So this crisis. It will never go away. So, I mean, surely there is a suspicion that we will address it. But I think now we are used to this kind of crisis. So all of this compounding challenges affected the pace of our reform program. So it has it has caused a heavy toll affecting, number one, domestic economic activity. Clearly, it affected prices, but so inflation become a structural and persistent macro challenge in Ethiopia. It affected our budgetary outlays. It affected monetary development. And finally, of course, it’s also affected balance of payment. And so there was this this this impact that we have to grapple, we have to confront to try to, you know, take the economy on the growth path. So the impact of these reforms inevitably played out, as I say, in the balance of payment, making the structural reforms and improvements of the policy framework even more urgent. But very, very difficult task. There is buzzword, resilience, you know, building the framework for long term growth. Those things are becoming really, really important because the reality is once you start a new reform program, you know how things turn would be completely different. So this crisis upon crisis had had a significant impact on our reform program despite our initial ambition, given the immense scale of the shocks that we faced. We had to adjust and we have to constantly improvise. For example. You know, once we started the reform program, there was a plan to move towards the powers of fiscal consolidation. But the degree of fiscal consolidation has been less than initially planned due to exceptional spending needs as a result of COVID. And that’s in our unique case, is a result of the conflict. So we went exactly opposite direction of what we thought we would achieve.

Mamo Mihretu: So as the reform program. In terms of planned monetary restraint. You know, the goal was to exercise restraint, to have a disciplined monetary stance because we want to address the inflationary pressure. But that was not possible in the context of COVID and because the context of high government domestic financing needs, again, there was shortcoming and the shortfall, in that regard. Of course, balance of payments development deviated sharply from our initial plan, partly because of the conflict, and the conflict lead to a significant deterioration of our external engagement and relationship with international partners. The lack of financing from our international partners, international lenders mean it will have significant impact on our balance of payment return. So I say all that, all of this to say that. This kind of unexpected focus would lead to limited fiscal space. And that inevitably will lead to difficult policy tradeoffs. So do we focus on growth or do you focus on tackling inflation? Or do you focus on achieving financial sector health and stability? I mean, these are difficult issues that have clear trade-offs. And all this happened because of, as I said, unexpected crisis upon crisis that we faced. But having said that, I mean, it’s not just a story of, you know, challenged and that we are not in implementing our reforms at all. We also tried our best, you know, to implement reforms that we initially discussed as part of our economic reform programs. I’m going to list a few of them. First thing is, we try to undertake a difficult subsidy reform. So there was wasteful subsidy in the food sector. There was a wasteful subsidy in the oil sector, wasteful subsidy in wheat sector. We more or less, you know, eliminated subsidies in the sectors. And that has a positive impact in terms of minimizing the fiscal risk. We also followed a tight management of new borrowing, and we avoided completely non-concessional debt because, you know, because we really want to address a debt risk. And after this government came into power, we haven’t borrowed even a single dollar in terms of an non-concessional loan. And as a result of that result of this, our debt-to-GDP ratio has significantly decreased. So no to commercial loan for the past four years, essentially. Also in terms of fiscal policy. We developed a Treasury bill auction market that was successfully launched and that provided for us the space to develop a market-based system of financing the market. Because in the past, whenever there’s a budget deficit, the tendency was to go to the National Bank for monetary financing. So we want to reverse that. And we’ve developed a Treasury bill market to really follow a market-based financing of the budget.

Mamo Mihretu: We also created new institutions. We developed a new Capital Markets Authority, and we are about to launch and establish a stock exchange in Ethiopia, which would we hope will provide long term finance to companies. So we are creating new institutions in that regard. There was we also created a new entity, the Ethiopian Investment Holdings, which Andy mentioned, which basically because remember, like when you are in the policy space, when you think about growth, you always are constantly thinking about how do I finance growth? You know, what is the source of finance for growth? So one thing is to go to multilateral financial institutions, but this is not really a sustainable way of financing growth. So we need to find out, find out and come up with an imaginative solution to finance growth and our solutions. That would be to establish a new entity that would take all the public commercial companies. And instill discipline, corporate discipline. So is that the value can be generated both just from new investment, but also by better managing existing assets that we have. This can completely transform the economy because so much there is so much value that can be created by changing the way we do things. So we created this entity as a sovereign wealth fund, basically taking all the public commercial companies and properly professionalizing the management of the companies so that value can be created from existing projects. Value can be created from existing operation of companies. Finally, we opened up the banking sector to voting participation, which was really a decisive reform in Ethiopian context simply because the sector was closed forever. And this, we hope, will address long-standing weakness in the scope, depth and accessibility of modern financial services. So it’s a sort of challenge, but is a story of resilience because we’ve taken a number of reforms that we hope would help assist in the growth of the economy. Just quickly, because I don’t have time so that’s where we are now. This conflict that I told you about is over. You know, we had a sort of peace agreement. Now we are at a stage where we are trying to resume the reform programs that we’ve started. We are in the phase where we’re trying to address long-term structural reform issues. On the back of a peaceful settlement of an active conflict that we had in Ethiopia. And this a good moment really, to deepen those reforms and in doing transform Ethiopian economy and unlock the potential of the economy.

Mamo Mihretu: So my last point, what are the lessons? I’m not talking about economics, but the lessons, practical lessons. Maybe I’ll try to talk about three important lessons. First thing is, in the context of developed markets. When you think of reform, it’s driving the car. Just think of car as an institution is driving a car using existing levers such as the levers of the machine to optimize across variables. But in the context of a developing country, when you think of reform, it’s not just driving a car. It’s actually like building the car, as you drive on the road, that’s not fully completed, while you are arguing with your spouse about the direction. This is a complicated thing, so it’s not like you are working on an existing system in the process. You have to actually build the institution itself and in this case, the car. And it’s not like there is a shared understanding of what the reform would be. You have to constantly discuss and engage with different parties. So it’s really important to talk about not only the technical part of the reform. I think we need to you need to think about how do you mobilize people around you, how do you engage with other people? So take courses in group dynamics, you know, take leadership that’s very important for MPA/ID students. Second thing is and is the second thing is, you know, policymakers need to know how to sit with ambiguity and uncertainty. You know, not everything will pick up and not everything becomes clear immediately. So I think it’s very we need to have the stomach to observe.

Mamo Mihretu: And just 2 minutes and I’ll finish. So to to really absorb and sit with ambiguity and conflict within the group less internally as with. So I think this is an important skill develop. Not everything becomes clear immediately. So I think living with uncertainty, living with ambiguity would be an important skill to have. Something I would say is, you know, most of the problems that we face in developing countries by nature are complex problems. So do not believe anybody who says they have an easy solution for the problems that we are facing. There is no easy solution that some to take solution calculation. And I think it’s very, very important that we learn how to work in a group and that we realize that, you know, most of these issues can be addressed through collective efforts. And you talk about, you know, before, you know, this sense of us, you know, having a sort of a shared understanding, that’s very, very critical because if people are not, we use very, very difficult to solve this problem and most of these things will not solve immediately. It will take significant amount of time. So we can only solve them through time. So in some ways, you know, in our in my experience, solving developmental challenges is a process. It’s a journey, and it’s also a process of both conservation and the process of change. So that is element of conserving what you’ve have achieved. And there’s also note of change because in our case, for example, we tried to build on the past gains. You know, we didn’t really try to sit everything out. So I mean, there was significant progress that had been in the past, but we tried to, you know, identify in areas where that needs correction and we build on it and we try to change it so that it’s keeping it and plus changing it is an important part of a reform program. And I think it’s very important to keep systems in the sense of us, particularly in the countries that is very, very critical. I mean, we try to, you know, start big massive public projects such as the Grand Renaissance Dam. We started the project like, you know, Green Legacy Project. We are planting close to 5 million trees.

Mamo Mihretu: All these projects, in addition to their economic value will be important in terms of forging that sense of us, that sense of that we are in this together and that we will do this together. So in in some ways, the development process is not just a technical process. The development process is a political process because you have to bring people together with you to be able to make progress. Finally, I think it’s very important to realize and the that crisis will never leave us. You know, we are constantly confronting one crisis after another crisis, and I think we have to be comfortable with living with the crisis. And I think the critical thing is to try to build the foundation for future resilient growth so solving crises will not be possible. And finally, as public servants, as leaders in the public space, we need to have experimental mindset because, you know, when you develop our economic reform program, we never thought that, you know, all this thing will go wrong. But the reality is everything went wrong. So in those cases, I think the most important skill to have is to try to, you know, to learn how to improvise, you know, try to learn how to adapt, to make change here and there so that, you know, your ultimate objective with escrows was poverty reduction. That is just, you know, whatever it is, you can stay on the course. I think experimental mindset you’re trying to do to make decisions, learning from them and really trying to build a resilient system would be an important part of this. And there are more lessons to leave, but I think my last thing would be I that my biggest thing would be development, you know, just not a technical process. It’s a political process. You have to learn how to work with other people. You have to learn how to work people who have differing viewpoint than you. I think that would be an important skill to have. Again, thank you so much.