The Global Gilded Age

As inequality between countries has fallen, inequality within countries is rising -- with worrying consequences.

There's good news about inequality. If we treat the entire world as one society -- hey, why not? -- then inequality is falling. Hundreds of millions of poor people across the globe have entered the global middle class. But looking at inequality this way also blinds us to one of its biggest costs.

As World Bank economist Branko Milanovic and others have shown, income inequality at the global level is most certainly falling. It's true that people who consider themselves middle class in rich countries may not have moved up much in the past few decades, yet many more people from poor countries have. This is undoubtedly good news, but it's not the whole story.

Another trend has been occurring at the same time. Inequality within countries -- both rich and poor -- has been growing even as inequality between countries has been declining.

To understand why, it helps to consider why poor people have been getting richer in the first place. The short answer is globalization. Poor countries -- especially big ones like China, India, Nigeria, Vietnam, Brazil, Turkey, and Indonesia -- have been opening their doors to the global economy and taking advantage of the opportunities it has to offer.

Hundreds of millions of people have moved off of farms and into cities to take jobs in big factories and service operations. These businesses have adopted technology from around the world in an enormous feat of economic leapfrogging. They've packed a century of industrial development into just a few years.

At the same time, urbanization has made it easier to deliver public services to the masses: health care, education, sanitation, and safety. And they've also received better access to information, energy, and even democracy. These benefits haven't arrived everywhere at the same time and to the same degree, but absolute living standards have undoubtedly risen for a huge number of people.

That's not to say it has been replaced with luxury. Rural subsistence may have been replaced with something a little less precarious, but it many cases these conditions resemble the tenements of Chicago or Glasgow a century ago. That's not too surprising when you consider what's happening at the other end of the spectrum.

The people best able to exploit the opportunities of globalization are those who already have money, education, and connections that reach beyond their countries' borders. They live by the mantra "buy low locally, sell high globally." Compatriots who work in their mines, sweatshops, and call centers may be slightly better off, but the newly globalized super-rich are off the charts.

Countries that used to be poor with a ruling elite are now slightly less poor with an elite of globalized super-rich. They look like the United States in John D. Rockefeller's heyday, complete with light regulation and conglomerates that would be an antitrust regulator's nightmare. All over the world, the Gilded Age has returned.

As we know now, the Gilded Age was not necessarily the most productive period for the United States. Calculations by economists Louis Johnston and Samuel Williamson suggest that the cumulative annual growth rate of real gross domestic product per capita was about 1.8 percent between 1870 and 1910, compared with 2.2 percent in the postwar boom from 1947 to 2007.

That difference of 0.4 percent may not seem like much, but over a span of decades it really adds up. Eventually, we found that competition and meritocracy worked better than robber barons and trusts. This hasn't just been true for the United States over time; it's also a global phenomenon. Countries with less inequality tend to grow faster, all other things being equal.

And it stands to reason. As I've written before, inequality -- particularly the inequality of wealth -- disrupts the efficient allocation of opportunities in an economy. When a stupid rich kid gets a job that a smart poor kid could have done better, the economic pie shrinks for all of us.

As long as inequality within countries persists, so will these inefficiencies. The drop in inequality between countries won't do much at all to mitigate the situation. After all, the fact that a poor Burundian is now closer in income to a poor Bulgarian won't help his chances of winning a seat in parliament or a place at the national university if the incomes of rich Burundians have risen exponentially. These opportunities continue to have a limited supply for specific groups of people, and access to them depends on relative wealth -- as well as absolute living standards. As a result, they are allocated in ways that fail to maximize economic growth.

We don't need a global wealth tax to solve this problem. For one thing, national taxes might work better, since their rates would depend on local rather than global levels of wealth. But if we don't want any new taxes at all, there's a clear alternative: stop wealth from influencing access to opportunities. Of course, getting money out of politics and giving every child an equally strong start in life is easier said than done.

None of this is to say that the drop in global inequality is a bad thing. It's definitely a positive consequence of the rapid growth that the world has been experiencing in the past few decades. But the consequence has been rising inequality within countries -- and if left unchecked, it will keep preventing the world from fulfilling its true economic potential.


National Security

While John Kerry Is on a Plane…

There's a gaping hole at the State Department that needs fixing. Here's how to do it.

John Kerry is on a plane, seemingly every day, trying to put out the surge in global military and diplomatic wildfires. Vladimir Putin and the Ukrainian separatists have bullied and murdered their way onto the front of the foreign-policy agenda. Benjamin Netanyahu and Hamas are busy proving how badly each needs the hostility of the other to stay in power; peace talks have vanished in the rearview mirror. The Islamic State is on the verge of consolidating an extremist Sunni nation (or at least some version of a "look-alike") between Syria and Iraq. Meanwhile, the Syrian conflict grinds on and on, with a toll that has now reached 170,000. Libya is in flames. China and Vietnam are nearly at sword's point. U.S. forces are slowly exiting Afghanistan, leaving corruption and insecurity behind. And Boko Haram spreads like an evil oil slick in Nigeria. It reminds me of the Tom Lehrer song "They're Rioting in Africa."

Imagine the small meetings in the sleeping compartment of Kerry's aircraft, where nobody really sleeps because each briefing has to precede the next crisis awaiting when they land. The whole world is festering, and it seems like the administration has lost its way in a sea of crisis. Kerry must hop from lily pad to lily pad like a frog on fire. And in an era of perpetual crisis, foreign-policy strategy seems like a long-forgotten cousin, waiting patiently and endlessly at the airport to be picked up.

Crisis response is important, but it is not a strategy. And there is a feel of improvisation to the peripatetic move of the secretary of state and an underlying sense of drift in Barack Obama's second term. Just take a look at the sloppy, hasty proposal the U.S. president made to create counterterrorism partnerships with other countries. As I have written, it was developed without programmatic content or a strategic plan, and the $5 billion cost seemed plucked out of the air. Both parties in Congress have been tough on it for good reason

If strategic thinking is dead, then the U.S. foreign-policy machinery is seriously broken, with little or no capacity to implement that plan, whatever it is.

But while Kerry is flying about, an important exercise is under way that might help solve that problem: the second Quadrennial Diplomacy and Development Review (QDDR). The first one, overseen by then Secretary of State Hillary Clinton and reported out at the end of 2010, barely scratched the surface of the problems that America's foreign-policy machinery has, leaving Kerry with the weak strategy and implementation capacities he has today.

If Kerry really wants to leave a legacy that is more than a series of stopgap truces or failed attempts at making peace, the current QDDR process may be the most important thing he does as secretary of state.

So, in the hopes of returning some focus to the long term, here are three key things the QDDR needs to focus on in order to build the capacity for strategic thinking, planning, program development, and implementation.

It's about governance, stupid.

Once upon a time, we talked about "failed states," and we used to think that the military was the only "can-do" organization that could deal with them. This approach was flawed from the start. First, we used Iraq and Afghanistan as the models for replacing unacceptable regimes with ones we deemed more acceptable. Big mistake -- neither state had actually "failed." Rather, disliking the cruel, al Qaeda-supporting Taliban regime and wanting to confront and replace Saddam Hussein, we took it upon ourselves to "fail" the states that were in place by invading and occupying them. Then, for more than a decade, we tried, unsuccessfully, to reassemble the Humpty Dumpties we had broken. Making matters worse, we asked soldiers to do the job, something for which they are manifestly not qualified. And then we kicked the 96-pound State Department weakling for not having enough civilians to govern and reconstruct the economies of whole countries with mixed records of doing either thing.

The model was based on the wrong premise -- that the U.S. military can replace and fix governments elsewhere in the world. But the crises of today, from Ukraine to Syria to Palestine, are largely governance problems: a failure of societies to organize their public spaces, resolve their internal disagreements, and meet the needs of all citizens. Many of these crises would have been less brutal and violent if the governments of these countries were efficient, effective, accountable, and responsive to their citizens. (I did not say democratic; one of the most destructive self-inflicted wounds in U.S. foreign policy is the idea that we can export something called "democracy." These days, one wonders whether we can even do democracy at home.)

First, some humility. The United States cannot fix this governance problem, certainly not alone. Even working with other countries that might help out is an uphill job. A humble attitude is important; it will temper promises of sunny, near-term futures for governance when they may be a mirage. But right now, the United States has no way to address the governance crisis in any meaningful way. The military cannot, and should not, be sent abroad to do this task. It is not the military's mission; the military is not especially good at it; and sending the military out to do that has lit the match under some of the conflagrations we see today.

But though governance might be the most critical global need we face, neither the State Department nor the U.S. Agency for International Development (USAID) has internalized support for governance as a core mission. U.S. foreign service officers do not see it as a central part of their work in other countries. And though USAID has articulated the desire to make governance a mission, the agency is clearly more focused on economic and social development than it is on strengthening governance. Leading development institutions, such as the World Bank, have come around to realizing that effective and efficient governance is the chicken that lays the egg of successful development.

The first QDDR made a stab at it, but fell short. Instead, the first QDDR led to the creation of the Bureau of Conflict and Stabilization Operations (CSO), with a mission of "breaking cycles of violent conflict and mitigating crises in priority countries" by engaging in "conflict prevention, crisis response and stabilization, aiming to address the underlying causes of destabilizing violence." By creating small teams of experts to deploy to crisis and conflict situations, CSO hopes to end the cycle of violence and restore stability. But there are many problems with CSO: It is too small, is not built into the regional bureau structure at the State Department, is marginalized as far as the foreign service is concerned, and competes with the small USAID Office of Transition Initiatives. At its core, CSO is not focused on the governance mission and is too marginal to be effective. (The State Department's Office of Inspector General made this clear in a highly critical review released this year.)

The new QDDR needs to take on the governance mission and make it central to America's diplomatic task. It should clearly define the competences it thinks the State Department should have, revamping the training and career expectations of the foreign service to include this mission, consolidating USAID and State Department organizations that focus on this issue, and infusing the mission throughout both agencies. Anything short of a full makeover here will condemn the next administration to ineptitude and crisis of the same kind we have already seen for the past 15 years.

Get security assistance under control

The governance problem is closely tied to the need for serious reform in the way the United States assists the security forces of other countries. This is exactly the problem the president's counterterrorism initiative targeted, but in an empty and wrongheaded way. The United States has, for decades, provided weapons, training, and advice on military operations to well over 100 countries, at a cost of over $170 billion (in fiscal 2015 constant dollars). Shoring up friends and allies in the Cold War -- not to mention the likes of Israel, Egypt, and Jordan in the Middle East -- has also gotten Washington into a lot of trouble. Security assistance has driven America's relationship with a number of countries into a military focus; it has linked the United States with regimes of dubious quality, undermining what little attention the programs have given to the need for responsive governance. A focus on security assistance has put the Defense Department in the driver's seat when it comes to U.S. relations with many countries, ranging from Africa to the Middle East. And the Pentagon programs for security assistance have expanded over the past decade, making this trend worse.

The State Department rarely takes its statutory responsibility for security assistance seriously as a core mission. It tends to be neglected in State Department testimony on foreign-policy budgets, though it can constitute as much as 20 percent of the budget request. There has never been a serious, systematic performance evaluation by the State Department or Government Accountability Office of what Washington has gotten for the billions of dollars in security assistance it has provided over the past 60 years. The first QDDR did not even deal with security assistance. But the central problem of governance in weak states is seriously affected by decisions on U.S. assistance to the armies, police, paramilitary forces, border guards, and security ministries of these countries.

And if the United States continues down the road of providing a growing amount of that assistance through the Pentagon and not the State Department, the partner capacity the country will build is one that is best suited to carrying out coups and policing citizens at the barrel of a gun. This destroys credibility at the cost of security. The United States is headed right down that road today in Iraq, Syria, Libya, Afghanistan, Pakistan, and, increasingly, African countries such as Sudan, Mali, Niger, and Nigeria.

The new QDDR needs to put this issue front and center. The overall responsibility for security assistance and cooperation policy -- and the budgets that support it -- need to be centralized at the State Department, with the Pentagon in a supporting, not a leading (or even a co-determining), role. The whole U.S. approach to security-sector support needs to be embedded in a broader strategy that boosts more capable governance, lest the security forces simply overwhelm the broader governance effort in other countries. And the staffing at the State Department needs to be built up to take on this mission. That means taking control of the policy, not conceding it to the Pentagon. It's a big issue; it needs Kerry's leadership, or the drift away from State will continue.

Take planning and budgeting seriously

Thinking through governance and security assistance strategies and resources would be a lot easier if the State Department took strategic planning and comprehensive budgeting more seriously. For decades, the department had no central budgeting process of any kind, just an adding-up of numbers from the various parts of the department. The State Department began to get its act together in 2006 under Secretary Condoleezza Rice, when a budget office was created to centralize planning for foreign assistance programs at the State Department and USAID. Over the past decade, under increasingly strong leadership, that office has gone a long way toward improving budget planning.

But this small office does not and cannot do for the State Department and USAID what the Pentagon's planning and budget offices do regularly: integrate strategy, plans, and programs across the full range of the agencies' activities. Why not?

First, because the first QDDR did not give the Office of U.S. Foreign Assistance Resources ("F" as it is known at the department, headed by a director) any responsibility for strategic or program planning or for its investments in people and management support -- just the budget numbers themselves. The State Department doesn't really do strategic planning, though it has something called a "strategic plan" jointly with USAID. The latest version of this plan consists of multiple priorities that end up being all the things that anybody at the department does, stapled together like a deck of cards. And this plan is produced by an office at the department that is not organically linked to the budget process at F; this office, instead, reports to the undersecretary of state for management. So what strategic planning is done plays little or no role in how foreign assistance budgets are put together.

To make matters worse, the State Department's budget is split in two. F does the foreign assistance budgets and reports to the secretary, while the administrative budgets (people, buildings, embassy security, communications, information technology investments) are all done over in the stovepipe that reports to the management undersecretary.

The first QDDR did nothing to fix this split among foreign assistance program funds, strategic planning, and the State Department's investment in management. This QDDR needs to fix both problems by integrating the full spectrum of strategic planning, program budgets, and management budgets in one office reporting directly to the secretary. That might help the department figure out more coherently how to shape overall strategic goals and put the right resources behind the programs and capabilities that can carry them out.

Second, the foreign assistance office does not have responsibility for planning and budgeting the full range of U.S. foreign assistance programs. For one thing, there is the USAID/State problem. While F was created to integrate State Department and USAID foreign assistance budgeting (and took on board all the USAID personnel doing budgets), the first QDDR reversed this trend, re-creating a separate budget office at USAID. The tension that had always existed between an autonomous USAID and State Department was reinforced by this organizational U-turn, making foreign assistance planning more complex, not more integrated.

The good people at USAID -- not to mention their private-sector supporters and contractors -- like the agency's autonomy and fear that closer ties with the State Department will corrupt the purity of "development" assistance, as opposed to the department's orientation toward using foreign assistance dollars to reinforce diplomatic and political relationships.

I am willing to bet that Rajiv Shah, the USAID administrator, will resist further integration with the State Department through the new QDDR and that Kerry will not want to take on the fight. In my view, he should, however, because greater coherence in foreign assistance planning will reinforce the State Department's capacity to deliver on issues like governance and development.

Then there is the problem created by what I call the even broader "diaspora" of federal agencies that provide foreign assistance, including such separate agencies as the Millennium Challenge Corporation, the Treasury Department (which handles all the World Bank, International Monetary Fund, and regional development bank funding), and even the Defense Department, whose funding for foreign assistance-like programs has surged in the last decade. The State Department ducked this issue in the first QDDR; it looks likely to dodge it again in the current effort. But some formal coordination mechanism is badly needed to reverse the impact of the diaspora on the coherence of U.S. overseas engagement.

Third, the secretary needs to take steps to institutionalize the planning and budgeting processes it has begun to carry out. The QDDR itself is a voluntary effort -- there is no statutory requirement that it happen (unlike the Defense Department's Quadrennial Defense Review). The next secretary of state, after Kerry, could just decide not to do it. But as Dwight Eisenhower once said, "Plans are worthless, but planning is everything."

Moreover, the "F" office also lacks statutory existence; it is advisory to the secretary, but does not have the institutional heft of an office like the Pentagon's Comptroller. Again, a new secretary could just wipe it out. If the State Department is going to take strategic planning and budgeting seriously, the QDDR should recommend that this "voluntary" status be replaced by a statutory status, both for itself and for foreign assistance planning.

Kerry has to step up

Governance, security assistance, and integrated planning and budgeting are already a tall agenda for the QDDR. But there is one, and only one, key to making the QDDR a success: getting and sustaining the attention and leadership of one of the busiest frequent fliers in the world today: John Kerry. The able deputy in charge, Heather Higginbottom, and the QDDR director, former member of Congress Tom Perriello, can labor mightily to produce change, but if the secretary sees the QDDR as management tinkering beneath his pay grade, the stakeholders in business as usual at the State Department and USAID will rise up and defeat the noblest effort. Kerry may be flying endlessly around the globe trying single-handedly to resolve the world's quarrels, but those efforts will fail if he does not fully back the effort to build a strong foreign-policy institution, making the tough decisions that will be needed to leave a real legacy to the next administration.

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