Próximo Impuesto: TASA TOBIN (FTT)

The Overselling of Financial Transaction Taxes

 

  

CAMBRIDGE – However November’s presidential election in the United States turns out, one proposal that will likely live on is the introduction of a financial transaction tax (FTT). While by no means a crazy idea, an FTT is hardly the panacea that its hard-left advocates hold it out to be. It is certainly a poor substitute for deeper tax reform aimed at making the system simpler, more transparent, and more progressive. 

As American society ages and domestic inequality worsens, and assuming that interest rates on the national debt eventually rise, taxes will need to go up, urgently on the wealthy but some day on the middle class. There is no magic wand, and the politically expedient idea of a “Robin Hood” tax on trading is being badly oversold.

 

True, a number of advanced countries already use FTTs of one sort or another. The United Kingdom has had a “stamp tax” on stock sales for centuries, and the US had one from 1914 to 1964. The European Union has a controversial plan on the drawing boards that would tax a much broader array of transactions.

The presidential campaign of US Senator Bernie Sanders, which dominates the intellectual debate in the Democratic Party, has argued for a broad-based tax covering stocks, bonds, and derivatives (which include a vast array of more complex instruments such as options and swaps). The claim is that such a tax will help repress the forces that led to the financial crisis, raise a surreal amount of revenue to pay for progressive causes, and barely impact middle-class taxpayers.

So far, Hillary Clinton, the likely Democratic nominee, has embraced a narrower version that would target mainly high-speed traders, who account for a large percentage of all stock transactions, and whose contribution to social welfare is open to question. Clinton, however, may well shift closer to Sanders’s position over time, as she has on other issues. Donald Trump, the presumptive Republican nominee, has not yet articulated a coherent position on the topic, but his views often come down remarkably close to those of Sanders.

The idea of taxing financial transactions dates back to John Maynard Keynes in the 1930s and was taken up by Yale professor and Nobel laureate James Tobin (who, incidentally, was my undergraduate professor) in the 1970s. The idea, in Tobin’s words, was to “throw sand in the wheels” of financial markets to slow them down and make them hew more closely to economic fundamentals.

Unfortunately, this rationale has not held up particularly well either in theory or in practice. Particularly misguided is the idea that FTTs would have significantly muted the buildup to the 2008 financial crisis. Centuries of experience with financial crises, including in countries with FTTs, strongly suggests otherwise.

What is really needed is better regulation of financial markets. The unwieldy and deeply imperfect 2010 Dodd Frank legislation, with its thousands of pages of provisions, is a stopgap measure; few serious people view it as a long-term solution. A far better idea is to force financial firms to issue much more equity (stock), as Stanford University’s Anat Admati has proposed.

The more banks are forced to evaluate risks based on shareholder losses rather than government bailouts, the safer the system will be. (On this score, Boston University professor Laurence Kotlikoff’s more radical ideas for taking leverage out of the financial system merit serious attention, even if his own quixotic presidential campaign otherwise goes unnoticed).

The fundamental problem with FTTs is that they are distortionary; for example, by driving down stock prices, they make raising capital more expensive for firms. In the long run, this lowers labor productivity and wage levels. True, all taxes are distorting, and the government has to raise money somehow. Yet economists view FTTs as particularly troublesome because they distort intermediate activity, which amplifies their effects. A modest tax that is narrowly targeted, like the UK’s, does not seem to cause much harm; but the revenue is modest.

To get more revenue requires casting the net much wider. For this reason, the Sanders plan covers derivative instruments that would circumvent the FTT (for example, by allowing people to trade income streams on assets without trading ownership). But extending the tax to derivatives is a messy business, because their complexities make it difficult to define precisely what should be taxed. And as the impact of the tax expands, it becomes hard to know what the ultimate effects on the real economy will be. 

It is certainly difficult to determine whether the outsize revenue estimates of the Sanders campaign could be realized; many studies suggest otherwise. The claim is that the US can collect more than five times the amount the UK collects on its narrow tax – an amount equal to more than 10% of revenue from personal income tax. The problem is that trading will likely collapse in many areas, and many financial trades will be executed in other countries. If economic growth is affected, eventually other tax revenues will fall, and if government bonds are covered, borrowing costs will rise.

The US desperately needs comprehensive tax reform, ideally a progressive tax on consumption. In any case, a properly designed FTT can be no more than a small part of a much larger strategy, whether for reforming the tax system or for regulating financial markets.

Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University.

España debe investigar.

Harnessing the Genomics Revolution

CAMBRIDGE – Just 13 years after the successful completion of the Human Genome Project, the power of genomics applications to spur innovation is already becoming apparent. Indeed, though the genomics revolution is just getting underway, it is becoming a transformative agent in the global economy – one that promises to bring far-reaching social and environmental benefits.

In the United States alone, the $3.8 billion in public funds invested in the Human Genome Project has already generated close to $1 trillion in economic returns and more than 300,000 jobs. According to the OECD, genomics will become a central component of many economic sectors, including health care, the environment, agriculture, animal health, biotechnology, alternative energy, forensics, justice, and security. With the pace of innovation continuing to accelerate, this prediction will likely be fulfilled even sooner than anticipated.

 

The area where genomics-driven innovations have attracted the most attention is health. Rapid progress toward truly “personalized medicine” is occurring, with patients’ DNA profiles being translated into more individualized, predictive, and preventive medical care.

Already, studies to identify genes associated with common diseases – including some that represent significant health, economic, and social burdens, such as cancer, diabetes, cardiovascular disease, and obesity – are beginning to enable doctors to use patient DNA information to inform clinical care. And researchers are identifying genetic variations that influence the effects of drugs, allowing safer and more effective administration of medication to manage pain and treat some cancers, as well as cardiovascular and psychiatric diseases. 

Taking these developments a step further, the Precision Medicine Initiative, launched in the US last year, is pursuing innovative trials of targeted drugs for adult and pediatric cancers, introducing customized combination therapies, and honing its understanding of drug resistance. In the longer term, the project aims to create a research cohort of more than a million volunteers whose shared genetic data, biological samples, and lifestyle information will form the foundation for precision medicine in a large number of human diseases.

But health care is far from the only area influenced by the genomics-driven revolution. There have been game-changing developments in other fields as well, many with proven potential to help address global challenges, such as ensuring food security and safeguarding the environment in the face of a rapidly growing global population, expected to reach 9.6 billion in 35 years.

Selection of high-value traits using genomics is giving farmers, and the food industry in general, the tools to produce more and better foods. Rice crops in Southeast Asia, for example, can now be flood-resistant. Beef, dairy, and swine herds produce higher output. The burgeoning fishery and aquaculture sector is benefiting from species with better yields and greater resistance to disease and stress.

Moreover, by providing detailed information on biodiversity and the interactions within ecosystems, genomics is driving the development of innovative environmental-protection strategies.

Forests are a prime example. By broadening our understanding of commercially valuable traits, such as insect resistance, wood quality, growth rates, and adaptation to climate change, genomics has helped to improve the sustainability of tree breeding and forest management. Canadian and Chinese researchers are also using genomic analysis of the microbial communities living in hydrocarbon deposits to develop new bioprocesses that will make oil and gas extraction greener, by enhancing resource recovery, reducing water and energy use, and minimizing greenhouse-gas emissions. 

The promise of genomics is seemingly limitless. But if that promise is to be fulfilled, major challenges must be overcome. In health care, in particular, we need to continue generating solid evidence of the value of moving personalized medicine into routine practice. Furthermore, rigorous economic analyses are needed to guide policies on health-care coverage and reimbursement. Above all, important questions surrounding patient privacy, technology access, reporting of incidental findings, discrimination, and counseling must be answered, so that thoughtful and forward-looking public policies can be devised. To this end, mechanisms to ensure broad public discussion and participation must be strengthened. 

Even at this early stage, it is clear that genomics is set to transform science and technology and sustain a wave of far-reaching innovation. Now is the time for countries and regions to embrace genomics research and technologies, and to start translating them into effective solutions to major global, regional, and local challenges.

Gerardo Jimenez-Sanchez, Professor of Genomic Medicine, Adjunct Professor of Epidemiology, and Program Director of Genomic Medicine and Bioeconomy at the Harvard T. H. Chan School of Public Health, is Executive President at Global Biotech Consulting Group.

Los Nacionalismos no son soluciones

Reinventing Europe

 

BERLIN – Since 2009, when the financial crisis that started in America in 2008 shook the eurozone to its core, crisis management has become Europe’s new normal. Indeed, crisis has followed crisis in Europe, and this is unlikely to change anytime soon.

Europe has had a financial crisis, a Greek crisis, a Ukraine crisis, and, since the late summer of 2015, a refugee crisis. And now, with the UK, one of the European Union’s strongest member states economically and militarily, holding a referendum on June 23 on whether to leave the EU (so-called Brexit), Europe could soon be facing a secession crisis.

Indeed, a massive crisis of trust vis-à-vis Europe and its institutions has developed in most EU member states, fueling a revival of nationalist political parties and ideas and a slackening of European solidarity. The re-nationalization of Europe is accelerating, making this crisis the most dangerous of all, as it threatens disintegration from within.

The EU’s political leaders – the heads of state and government of the member states and the leaders of the European Council and the European Commission – made a fateful decision in the wake of the financial crisis. They placed their trust in crisis-mode management, rather than developing a vision for Europe and a strategy to achieve it.

Strategic management of Europe would have required making the necessary compromises, which no doubt would have entailed political risks in all member states. Instead, EU leaders chose to let the reality of the various crises do the work for them, placing their faith in the force of circumstances. But this approach, born of cowardice and misplaced cunning, had its price, too: To its citizens, an EU that moves only in crisis mode is the very image of incompetence, unworthy of their confidence – no longer the solution to the old continent’s problems, but simply another problem.

After almost six decades of successful integration, Europe has become a large feature of everyday life – a political, economic, institutional, and legal reality. But all of Europe’s manifestations depend on the vitality of its underlying idea, of its soul. If this idea dies among Europe’s citizens and peoples, the EU will come to an end, not with a bang but with a long, torturous whimper.

Things cannot go on like this; too much – the future of our continent in a world of rapid change – is at stake. A policy of baby steps is no longer enough. Without a renewed vision of Europe and an effective approach to dealing with crises, the continent’s new (and old) nationalists will continue to gain in strength and jeopardize the entire project of peaceful integration on the basis of the rule of law. 

The Brexit referendum will point the way, both for the UK and for the EU as a whole. It will be followed either by sighs of relief (as I hope) or a cataclysm that rocks the EU to its core and brings disaster to the UK. But, however the British decide, Europe’s numerous crises need to be addressed.

The financial crisis is anything but over; it has only taken on a new political guise. Portugal, Spain, and Ireland have shown that democratic majorities are no longer willing to endure the cure-or-kill treatment of austerity politics. And the Greek crisis is coming to a boil again.

The euro might not survive. Despite signs of a moderate economic recovery in the eurozone, the gap between Germany and most other eurozone countries is widening and deepening. There is no longer any talk of convergence in the monetary union, and there hasn’t been for a long time.

And yet it is clear that if the euro fails, the whole European project will fail with it. Europe’s leaders know that the euro is still anything but crisis-proof, despite technical improvements achieved during the previous crisis. Unless a renewed grand compromise is reached between Germany and other eurozone countries, it never will be. In practice, this would mean reforming the eurozone on the basis of deeper political integration – obviously no mean feat.

The same applies to the EU’s joint security, protection of external borders, and a reformed European refugee policy. Here, too, effective political leadership requires a renewed vision for a united Europe in the twenty-first century – what it can and must provide, how it should be constituted, and what institutions and powers it requires. 

There is no reason for Europe to fear crises. They set things in motion and provide an opportunity for the EU to move forward and become stronger, provided one faces them without fear of the accompanying political risks.

Once the UK has spoken this June, Europe must give its answer – courageously and with a vision and real solutions. Nationalism is not the answer. Only genuine Europeans can ensure a peaceful, prosperous future for Europe.

Joschka Fischer was German Foreign Minister and Vice Chancellor from 1998-2005

Un KEYNES altamente rentable. Condición necesaria: identificación de la Inversión.

Managing Debt in an Overleveraged World

 

MILAN – What ever happened to deleveraging? In the years since the 2008 global financial crisis, austerity and balance-sheet repair have been the watchwords of the global economy. And yet today, more than ever, debt is fueling concern about growth prospects worldwide. 

The McKinsey Global Institute, in a study of post-crisis debt trends, notes that gross debt has increased about $60 trillion – or 75% of global GDP – since 2008. China’s debt, for example, has increased fourfold since 2007, and its debt-to-GDP ratio is some 282% – higher than in many other major economies, including the United States.

A global economy that is levering up, while unable to generate enough aggregate demand to achieve potential growth, is on a risky path. But to assess how risky, several factors must be considered.

First, one must consider the composition of the debt across sectors (household, government, non-financial corporate, and the financial sector). After all, distress in these sectors has very different effects on the broader economy.

As it turns out, economies with similar and relatively high levels of gross debt relative to GDP exhibit sharp differences when it comes to the composition of the debt. Excessive household debt is particularly risky, because a shock in the price of assets (especially real estate) translates quickly into reduced consumption, as it weakens growth, employment, and investment. Recovery from such a shock is a long process.

The second factor to consider is nominal growth – that is, real growth plus inflation. Today, real growth is subdued and may even be slowing, while inflation is below target in most places, with some economies even facing the risk of deflation. Because debt is a liability for borrowers and an asset for creditors, these trends have divergent effects, increasing value for the asset holder, while increasing the liability of the debtor. The problem is that, in a low-growth environment, the probability of some form of default rises considerably. In that case, nobody wins. 

The third key factor for assessing the risk of growing debt is monetary policy and interest rates. Though no one knows exactly what a “normal” interest-rate environment might look like in the post-crisis world, it is reasonable to assume that it will not look like it does today, when many economies are keeping rates near zero and some have even moved into negative territory.

Sovereigns with high and/or rising debt levels may find them sustainable now, given aggressively accommodative monetary policy. Unfortunately, though such accommodation cannot be sustained forever, today’s conditions are often viewed as semi-permanent, creating the illusion of stability and reducing the incentive to undertake difficult reforms that promote future growth.

The final, and arguably most important, factor shaping debt risk relates to investment. Increasing debt to sustain current consumption, whether in the household or government sector, is rightly viewed as an unsustainable element of a growth pattern. Here, China’s case is instructive.

In a sense, the frequent refrain that China’s debt is on an unsustainable path is true. After all, high levels of debt increase vulnerability to negative shocks. But, in another sense, this misses the point.

Many governments nowadays are accumulating debt in order to buttress public or private consumption. This approach, if overused, can amount to borrowing future demand; in that case, it is clearly unsustainable. But, if used as a transitional measure to help jump-start an economy or to provide a buffer from negative demand shocks, such efforts can be highly beneficial.

Moreover, in a relatively high-growth economy, ostensibly high debt levels are not necessarily a problem, as long as that debt is being used to fund investments that either yield high returns or create assets worth more than the debt. In the case of sovereign debt, the return on investment can be viewed as the increment to future growth.

The good news is that, in China, much of the accumulated leverage has indeed been used to fund investment, which in principle creates assets that will augment future growth. (Whether the results of the government’s recent decision to increase the fiscal deficit to stimulate the economy follow this long-term growth-enhancing pattern remains to be seen.)

The bad news is that directed lending and the relaxation of credit standards in China, particularly after the crisis, have led to investment in assets in real estate and heavy industry with a value well below the cost of creating them. The return on them is negative.

China’s so-called debt problem is thus not really a debt problem, but an investment problem. To address it, China must reform its investment and financial systems, so that low- or negative-return investments are screened out more reliably. That means tackling the mispricing of risk that results from the government’s backing of the country’s state-owned banks (which surely could not be allowed to fail).

Many developed countries are also failing to invest in high-return assets, but for a different reason: Their tight budgets and rising debts are preventing them from investing much at all. As this weakens growth and reduces inflation, the speed at which their sovereign-debt ratios can be reduced declines considerably.

In order to spur growth and employment, these economies must start paying closer attention to the kind of debt they accumulate. If the debt is financing growth-promoting investment, it may be a very good idea. If, however, it is financing “current operations” and raising short-term aggregate demand, it is highly risky. 

Of course, the situation is not cut and dried. The return to public investment is affected by the presence or absence of complementary reforms, which vary from country to country. And there is some potential for abuse, with expenditures being misclassified as investments.

Yet, in an environment of low long-term interest rates and deficient short-term aggregate demand (which means there is little risk of crowding out the private sector), it is a mistake not to relax fiscal constraints for investment. In fact, the right kind of public investment would probably spur more private-sector investment. Identifying such investment is where today’s debt debate should be. 

Michael Spence, a Nobel laureate in economics

Europa: UKEXIT, Marine Le Pen, Refugiados,,,,

Welcome to the Twenty-First Century

 

FEB 1, 2016

BERLIN – The start of 2016 has been anything but calm. Falling equity prices in China have destabilized markets worldwide. Emerging economies seem to have stalled. The price of oil has plunged, pushing petroleum producers into crisis. North Korea is flexing its nuclear muscles. And in Europe, the ongoing refugee crisis is fomenting a toxic tide of nationalism, which threatens to tear the European Union apart. Add to this Russia’s neo-imperial ambitions and the threat of Islamic terrorism, and comets streaking across the sky may be the only thing missing from a picture of a year shaping up to be one of prophetic doom.

Wherever one looks, chaos seems to be ascendant. The international order forged in the fires of the twentieth century seems to be disappearing, and we have not had even the faintest glimpse of what will replace it.

It is not difficult to put names to the challenges we face: globalization, digitization, climate change, and so forth. What is not clear is the context in which the response will come – if at all. In which political structures, by whose initiative, and under which rules will these questions be negotiated – or, if negotiation proves impossible, fought over?

Political and economic order – particularly on a global scale – does not simply arise from peaceful consensus or an unchallenged claim by the most powerful. It has always been the result of a struggle for domination – often brutal, bloody, and long – between or among rival powers. Only through conflict are the new pillars, institutions, and players of a new order established.

The liberal Western order in place since the end of World War II was based on the global hegemony of the United States. As the only true global power, it was dominant not only in the realm of hard military power (as well as economically and financially), but in nearly all dimensions of soft power (for example, culture, language, mass media, technology, and fashion).

Today, the Pax Americana that ensured a large degree of global stability has begun to fray – most notably in the Middle East and on the Korean Peninsula. The US may still be the world’s strongest power, but it is no longer able or willing to play the role of the world’s policeman or make the sacrifices needed to guarantee order. Indeed, in a globalized world, with ever closer integration in terms of communication, technology, and – as we have recently seen – the movement of people, the centers of power are diluted and dispersed; by its very nature, a globalized world eludes the imposition of twentieth-century order.

And yet, while a new global order may inevitably emerge, its foundations are not yet indiscernible. A Chinese-led order seems unlikely. China will remain self-absorbed, focused on internal stability and development, and its ambitions are likely to be narrowed to control of its immediate neighborhood and the surrounding seas. Furthermore, China lacks, in nearly every respect, the soft power that would be indispensable if it were to try to become a force for global order.

Nor are these times of turbulent transition likely to end in the emergence of a second Pax Americana. Despite America’s technological dominance, there would be too much resistance by regional powers and potential counter-alliances.

In fact, the main challenge of the coming years is likely to be managing America’s declining influence. There is no framework for the retirement of a hegemon. While a dominant power can be brought down through a struggle for domination, voluntary retreat is not an option, because the resulting power vacuum would endanger the stability of the entire system. Indeed, overseeing the end of Pax Americana is likely to dominate the tenure of America’s next president – whoever that might be.

For Europe, this raises an equally difficult question. Will the decline of Pax Americana, which has served for seven decades as a guarantor of Europe’s internal liberal order, unavoidably lead to crisis, if not conflict? Rising neo-nationalism across the continent seems to point toward such a scenario, with appalling implications.

The bleak prospect of European suicide is no longer unthinkable. What will happen if German Chancellor Angela Merkel is brought down by her refugee policy, if the United Kingdom leaves the European Union, or if the French populist Marine Le Pen captures the presidency? A plunge into the abyss is the most dangerous outcome imaginable, if not the likeliest.

Suicide, of course, can be prevented. But those who are happily chiseling away at Merkel’s position, the UK’s European identity, and France’s Enlightenment values threaten to undermine the ledge on which we’re all standing.

Joschka Fischer was German Foreign Minister and Vice Chancellor from 1998-2005, a term marked by Germany's strong support for NATO’s intervention in Kosovo in 1999, followed by its opposition to the war in Iraq.

para temblar... ¿está en posesión de armas químicas DAESH?

Syria’s Continuing Chemical Fallout

Mapa publicado por el Daesh muestra su supuesto dominio en el mundo en 2020

 

FEB 1, 2016

 

THE HAGUE – The international community’s failure to bring the Syrian civil war to an end is a tragedy – especially for the country’s long-suffering people. In one respect, multilateral action has had a clearly positive impact: the elimination of the Syrian government’s chemical-weapons program. And yet there are persistent reports that chemical weapons, including sulfur mustard (commonly known as mustard gas) and chlorine bombs deployed against civilians, continue to be used in Syria.

The stakes could not be higher. The perpetrators of these attacks must be identified and brought to justice. Allowing the use of chemical weapons to go unpunished not only could reverse one of the few promising developments in the Syrian conflict; it also threatens to undermine international norms on the use of toxic gas and nerve agents, increasing the possibility that they will be used in terrorist attacks.

In August 2013, rockets containing deadly sarin gas struck Ghouta, a rebel-controlled suburb near Damascus. Horrific images of women and children dying in agony mobilized international consensus against the use of these types of weapons. In October 2013, following Syria’s accession to the Chemical Weapons Convention, a joint mission of the Organisation for the Prohibition of Chemical Weapons (OPCW) and the United Nations was tasked with eliminating the country’s chemical arsenal and production facilities.

Less than a year later, the mission accomplished what no military intervention could have achieved; the strategic threat from Syria’s chemical weapons was effectively eliminated. Work to clarify certain aspects of the government’s initial declaration about its weapons program is ongoing; but 1,300 metric tons of chemical weapons, including sulfur mustard and precursors for deadly nerve agents, have been accounted for and destroyed under the watchful eyes of OPCW inspectors.

This achievement must not be allowed to be rolled back. The Chemical Weapons Convention is one of mankind’s most successful disarmament efforts. Since 1997, 192 countries have agreed to be bound by its provisions, and 91% of the world’s declared chemical weapons have been destroyed. The continued use of chemical weapons in the Syrian conflict is not only causing terrible suffering among the country’s civilian population; it also risks eroding the convention’s credibility.

A fact-finding mission established by the OPCW in April 2014 found “compelling confirmation” that a toxic chemical – most likely chlorine gas – was used “systematically and repeatedly” as a weapon in villages in northern Syria. It was on the basis of these findings that the UN Security Council agreed in August 2015 to create a joint investigative mechanism of the OPCW and the UN and task it with identifying those responsible for the use of chemical weapons in the conflict.

The fog of war cannot be allowed to create a fog of responsibility. 

The perpetrators of chemical attacks must be held to account, whoever they are. International investigators deployed in Syria bring vital expertise to this important mission. It is crucial that political leaders express confidence in their impartiality, allow them to carry out their work unobstructed, and not second-guess their conclusions. 

Once those responsible for the use of chemical weapons have been identified, the international community must ensure that they are prosecuted, in order to send a clear signal about the inviolability of the global ban.

Persistent allegations that non-state actors are using chemical weapons in Syria and northern Iraq are of particular concern, as they raise the possibility of toxic chemicals being used in terrorist attacks. Manufacturing nerve agents is a complex process, but extremists can easily deploy toxic industrial chemicals – such as chlorine gas – if they have them in their possession. A conventional attack against a chemical facility is another potentially devastating risk – one that is not beyond the capabilities of a well-funded terrorist group.

Nearly two decades after the Chemical Weapons Convention entered into force, the treaty is facing a major test. The threat that toxic gas or nerve agents will be deployed in a conflict between countries has been all but eliminated. Failure to punish their use in the Syrian civil war risks undermining the regime that has brought us to the threshold of a chemical weapons-free world.

Ahmet Üzümcü is Director-General at the Organisation for the Prohibition of Chemical Weapons.

¿De verdad quieren estar al dia las EMPRESAS?

Should Business Travel Be Obsolete?

JAN 20, 2016

 

COLOMBO – Think about it: You can call, email, and even watch your counterparty on FaceTime, Skype, or GoToMeeting. So why do companies fork out more than $1.2 trillion a year – a full 1.5% of the world’s GDP – for international business travel?

The expense is not only huge; it is also growing – at 6.5% per year, almost twice the rate of global economic growth and almost as fast as information and telecommunication services. Computing power has moved from our laptops and cellphones to the cloud, and we are all better off for it. So why do we need to move brains instead of letting those brains stay put and just sending them bytes? Why waste precious work time in the air, at security checks, and waiting for our luggage?

Before anyone starts slashing travel budgets, let’s try to understand why we need to move people rather than information. Thanks to a research collaboration on inclusive growth with MasterCard and an anonymized donation of data to the Center for International Development at Harvard University, we are starting to shed some light on this mystery. In ongoing work with Dany Bahar, Michele Coscia, and Frank Neffke, we have been able to establish some interesting stylized facts.

More populous countries have more business travel in both directions, but the volume is less than proportional to their population: a country with 100% more population than another has only about 70% more business travel. This suggests that there are economies of scale in running businesses that favor large countries.

By contrast, a country with a per capita income that is 100% higher than another receives 130% more business travelers and sends 170% more people abroad. This means that business travel tends to grow more than proportionally with the level of development.

While businesspeople travel in order to trade or invest, more than half of international business travel seems to be related to the management of foreign subsidiaries. The global economy is increasingly characterized by global firms, which need to deploy their know-how to their different locations around the world. The data show that there is almost twice the amount of travel from headquarters to subsidiaries as there is in the opposite direction. Exporters also travel twice as much as importers.

But why do we need to move the brain, not just the bytes? I can think of at least two reasons.

First, the brain has a capacity to absorb information, identify patterns, and solve problems without us being aware of how it does it. That is why we can, for example, infer other people’s goals and intentions from facial expressions, body language, intonation, and other subtle indicators that we gather unconsciously.

When we attend a meeting in person, we can listen to the body language, not just the spoken word, and we can choose where to look, not just the particular angle that the video screen shows. As a consequence, we are better able to evaluate, empathize, and bond in person than we can with today’s telecom technologies.

Second, the brain is designed to work in parallel with other brains. Many problem-solving tasks require parallel computing with brains that possess different software and information but that can coordinate their thoughts. That is why we have design teams, advisory boards, inter-agency taskforces, and other forms of group interaction.

Conference calls try to match this interaction, but it is hard to speak in turn or to see one another’s expressions when someone is talking. Conference calls have trouble replicating the intricacy of human conscious and unconscious group interactions that are critical to solve problems and accomplish tasks.

The amount of travel should then be related to the amount of know-how that needs to be moved around. Countries differ in the amount of know-how they possess, and industries differ in the amount of know-how they require. Controlling for population and per capita income, travel is significantly more intense to and from countries and industries that possess or use more know-how.

The countries that account for the most travel abroad, controlling for population, are all in Western Europe: Germany, Denmark, Belgium, Norway, and the Netherlands. Outside of Europe, the most travel-intensive countries are Canada, Israel, Singapore, and the United States, a reflection of the fact that they need to deploy many brains to make use of their diverse know-how.

Interestingly, countries in the developing world differ substantially in the amount of know-how they receive through business travel. For example, countries such as South Africa, Bulgaria, Morocco, and Mauritius receive much more know-how than countries at similar levels of development such as Peru, Colombia, Chile, Indonesia, or Sri Lanka.

The fact that firms incur the cost of business travel suggests that, for some key tasks, it is easier to move brains than it is to move the relevant information to the brains. Moreover, the fact that business travel is growing faster than the global economy suggests that output is becoming more intensive in know-how and that know-how is diffusing through brain mobility. And, finally, the huge diversity of business travel intensity suggests that some countries are deploying or demanding much more know-how than others.

Rather than celebrate their thrift, countries that are out of the business travel loop should be worried. They may be missing out on more than frequent flyer miles.

 

Ricardo Hausmann, a former minister of planning of Venezuela and former Chief Economist of the Inter-American Development Bank, is Professor of the Practice of Economic Development at Harvard University, where he is also Director of the Center for International Development.