Stephen Sacca, SF ’90
Director, MIT Sloan Fellows Program
This is not your grandmother’s government. You could say that about the governing body of almost every nation on earth right now. Technological transformations and economic upheavals have driven sweeping changes in the ways governments govern. Concerns about the bottom line dictate policy, it often seems, more often than quality-of-life issues. And no country operates in a vacuum. More than ever, the governments of the world are navigating an uneasy interdependence, recognizing that they must factor global conditions into almost every decision they make on behalf of their citizens.
In this issue of the newsletter, we reached out to MIT Sloan Fellows alumni around the globe who work in the public sector, and we asked them to tell us about the new realities they face—and the solutions they’re devising. We also spoke with two members of the MIT Sloan faculty to get broader, more global perspectives on the issues facing governments today. From finance to social services to security threats, we have focused an eye-opening lens on governance around the world.
Fifty years ago, governments were relatively independent entities that could make autonomous decisions about their nation’s economic futures. Today, noted economist Otto Scharmer, a senior lecturer at MIT Sloan, sees a new world order in which individual governments no longer enjoy the same kind of economic independence they once had.
A world economy, Scharmer explains, is one in which capital accumulation proceeds throughout the world, while a global economy has the capacity to function as a single unit “in real time on a planetary order.” A world economy has existed for five centuries, he points out, but a global economy has been in place for only the last two decades, driven by new infrastructures built on advances in information and communication technologies.
Political factors also have shaped the new interdependent global economy. Scharmer observes that when the Berlin Wall collapsed in 1989, followed by the disintegration of socialist systems in Central and Eastern Europe and the Soviet Union, general consensus was that the world was ushering in a new era of rampant democracy. While the fall of those systems did indeed launch new democracies, it also launched a new economic order. Since the late 80s, the world has revolved around a common set of economic rules and institutions. [The last issue of this newsletter, which focused on the international dominance of the dollar, provided ample illustrations of this.]
“Even though there are significant differences among the U.S., Japanese, and European governments,” Scharmer notes, “they share some of the same socioeconomic transformations,” including the downsizing of government, the deregulation and privatization of state-owned industries (especially telecom), and the liberalization of financial markets.
In his book Theory U: Leading from the Future as it Emerges, Scharmer observes that “global financial markets and their networks of management are now the nerve centers of capitalism. Because the flow of goods and services tends to produce random patterns of informational turbulence, we have seen severe crises and crashes in recent years: in Mexico (1994), the Asian Pacific (1997), Russia (1998), Brazil (1999), and Argentina (2002).”
The aggregate impact of those crashes? Forty percent of the world’s population has been plunged into deep recession over the last 20 years. Basically, Scharmer believes, the nations of the world will now sink or swim together. Given that their fortunes are so inextricably linked, governments will have to learn to collaborate and function as productive teams to achieve common goals and avert crises. And because very few crises today can be contained within borders, one country’s dilemma may well turn out to be every country’s dilemma—Ebola, for example.
For MIT Sloan Distinguished Professor of Finance Deborah Lucas, the 2008 financial crisis triggered a tectonic shift for policymaking within government financial organizations—or so she hopes. “If you’re looking for silver linings in the 2008 crisis,” says Lucas, “the chance to focus attention on financial literacy and transparency in the public sector is a big one. A large segment of the policy community agrees that we must act now to improve the accuracy of our risk assessments.”
To capitalize on this opportunity, Lucas is focusing her research on the intersection of finance and policy. Her current emphasis is on how the costs and risks of government financial obligations are accounted for and measured. She also directs the new MIT Center for Finance and Policy (CFP), a center she helped create with co-directors Andrew Lo, Robert Merton, and Andrei Kirilenko. The CFP mission is to catalyze innovative, cross-disciplinary, non-partisan research and education that address the unique challenges facing governments—both as financial institutions and as regulators of the financial system.
A former top economist for the Congressional Budget Office, the Council of Economic Advisors, and the Social Security Technical Advisory Panels, Lucas witnessed how governments around the globe significantly underestimated the cost and risk of their credit activities. “Financial guarantees feel cheap,” she explains, “because there are no up-front costs. But entities like Fannie Mae and Freddie Mac and guarantee mechanisms created by the EU and other nations generate huge amounts of unacknowledged risk.” Collectively, public institutions are the world’s largest financial institutions, controlling tens of trillions of USD worldwide with relatively lax reporting standards.
Lucas believes that much of the problem can be traced to the fact that the government leaders who make such allocations tend to be undereducated in how to measure financial risks. “When policymakers perceive guarantees as being free, they are inclined to overprovide them. This concentrates risk on the provider and hijacks massive financial resources when the economy falters—which is precisely when those resources are needed most for other programs.”
The way forward, in Lucas’ view, is to train future government leaders in the framework of modern finance. “At MIT Sloan, we’ve designed our core finance course to give students a working knowledge of the power of financial reasoning,” she says. “We equip them with the tools they need to analyze novel problems holistically and fashion solutions based on fundamental principles.”
Lucas believes that a broader understanding of financial fundamentals also would promote transparency and accountability in the public sector—characteristics that are necessary to progress. “Our goal is to develop the capacity of leaders to base decisions on realistic assessments of their governments’ capacity to balance costs and risks. MIT Sloan excels at addressing these types of problems—which is one of the main reasons I’m here. We’re setting the pace among major universities by preparing our students for the next generation of policy challenges.”
Switzerland’s philanthropic tradition reaches back hundreds of years, and the country continues to be one of the world’s most generous nations. It boasts one of the highest per capita densities of foundations on the planet—roughly 12,500 by one recent estimate. For Swiss Vice General Consul and swissnex China Executive Director Pascal Marmier, SF ’08, this rich tradition is something to be respected and challenged.
Marmier offers his county’s early adoption of public-private partnerships, or PPPs, as a case in point. “In Switzerland, PPPs represented a significant advance over traditional individual and foundation-based philanthropy,” he says. “PPPs enabled individual funders, as well as science and innovation agencies and universities, to expand their impact using the established infrastructures of government entities. Private foundations achieved greater democratic legitimacy as a result of public involvement, which increased the breadth and influence of their undertakings.”
On the side of government, agencies gained access to desperately needed start-up capital in an era of tight budget constraints. “We created a new business model that transcended the typical budget cycles. We also benefited from the independence of our private and institutional partners—it gave us more latitude to experiment with pilot projects and adopt unproven, but promising, business models,” explains Marmier.
Building on the success of PPPs, Marmier helped launch Switzerland’s next PPP innovation, swissnex. Conceived as the world’s first “scientific consulate,” swissnex was designed by government officials and funded by private Geneva bankers. “The vision,” Marmier says, “was quite simple in concept—put education, research, and innovation at the top of our diplomatic agenda. Then we created a new form of consulate based on these priorities.”
The first swissnex office opened for business in Cambridge, Massachusetts, in 2000. Its revolutionary agenda offered a new form of diplomacy based on robust information exchange for the sake of knowledge creation and innovation rather than on privileged access to carefully guarded information. Today, the swissnex network comprises offices in Boston, San Francisco, Singapore, Bangalore, and Shanghai—Marmier’s current base of operations.
As a recent government report notes, this “network of sites facilitates a ‘brain circulation’ that allows Swiss researchers and entrepreneurs to interact with the best minds from around the world, and in doing so, to realize new research projects or shape new start-ups.” As for Marmier, he continues to plan for what’s next. “In collaboration with our academic partners, we’re exploring ways to leverage new digital communication tools to better connect Swiss startups and multinationals to the local innovation ecosystems in the U.S., India, and Asia.”
Listening to Kiren Kumar, SF ’12, it’s quickly apparent that Singapore is determined not to become a victim of its success. “Over the last 50 years of Singapore’s independence,” he says, “we’ve attracted investment and jobs by being cheaper, better, faster. We were a perfect host for many companies’ manufacturing headquarters. But we’ve also been aware of the fact that we can’t maintain this particular value proposition indefinitely.”
As Director of InfoComms & Media at the Singapore Economic Development Board (EDB), one of Kumar’s jobs is to change how Singaporeans look at Singapore. “We’re proud of what we’ve achieved,” he explains, “but there’s a risk in becoming too comfortable in the niche we’ve carved out for ourselves—especially when the pace of change in our region is accelerating so rapidly.”
Kumar notes that rapid growth and increased quality of life in his country have pushed cost structures closer to those in the U.S., the EU, and other developed countries. “Clearly, our value proposition has to evolve in order for our economy to develop further. Our vision is to become an innovation hub for Asia by uncovering, creating, and capturing new value that affects the top line of multinational companies doing business in the region.”
In the broadest sense, Kumar’s job description has always been to steer his government’s resources toward ensuring that Singapore remains economically dynamic. That said, his roles and strategies have shifted according to conditions on the ground. “When I joined the EDB in 2001,” he says, “my focus was on manpower policies and resource development. Today, I’m dedicated to making sure our growth is built on capabilities that are relevant to the future of Asia and the wider world—robotics, e-commerce, data analytics, and 3D printing, for example.”
“We’ve invested heavily in making sure our universities and research institutions are aligned to help global companies innovate for Asia. We’re also thinking comprehensively about education policies, unemployment benefits, taxation, and workforce development.
That’s how we will become a hub for regional market intelligence and a trusted partner in the development of new Asian business models. For multinationals looking to implement a hub-and-spoke model in this part of the world, the choice is between Hong Kong and us. Hong Kong is a great location for northern Asia, but I believe Singapore is the best city for a pan-Asia headquarters. My job now is to spread the word, keep building momentum, and make sure that we execute our strategies faster than the competition.”
The career arc of Lynne Dovey, SF ’02, may be emblematic of a growing trend in government agencies. After five and a half years as a director of New Zealand’s Ministry of Economic Development, Dovey was recruited into the Ministry of Social Development in 2013 by Chief Executive Brendan Boyle, SF ’00. “I was brought on board,” Dovey explains, “for a very specific purpose—to create an investment strategy for the purchase of social services.”
Much like its peer agencies in other countries, New Zealand’s social development activities are geared toward the care and protection of vulnerable children and young people, employment, income support, superannuation (social security) services, student allowances and loans, and social housing assessments. “We use a significant portion of our discretionary budget, roughly NZ $600 million, to contract services from not-for-profit and for-profit providers,” she says. “And like social services agencies around the world, we haven’t always known how to measure the outcomes for individuals and families. To put it another way, we don’t always understand the return on our investment.”
A common critique in the developed world is that public agencies allocate monies to various programs in the hope that well-intentioned expenditures will lead to incremental improvement in people’s lives. It has not been the norm, however, to try and correlate dollars spent with outcomes achieved. From Dovey’s perspective, this criticism appears to have triggered change. “We’ve seen a massive shift in mindsets around the world. The push is toward evidence-based solutions that can be measured against clearly defined objectives.”
To implement these new models, Dovey believes, “we need solid data streams that help us improve our decision-making on a continuous basis. We also need innovative ways of solving difficult social problems.” Dovey has helped lead the development of a new strategy for the purchase of social services in which both government and the not-for-profit sectors work together to achieve a specific outcome.
Like many other countries, New Zealand has launched a range of trial initiatives to improve outcomes for specific child and family populations. “This requires a change from output-based contracting to outcomes-focused purchasing or commissioning,” says Dovey. “Purchasing is a much more deliberate approach based on the evidence available to address a specific issue or concern.”
One of the most interesting trials Dovey worked on was a social benefit bond (SSB), also called impact bonds. An SBB is a financial instrument that pays a return on the accomplishment of agreed social objectives. They typically target tenacious problems such as reducing repeat criminal offenses or supporting the restoration of children in care to their families. Instead of governments trying to tackle such complex issues alone, SSBs enable social investors, financial markets, and not-for-profit organizations to create new ways of addressing these challenges collaboratively.
“Putting together an SSB,” explains Dovey, “requires a new set of essential skills—the same skills that a venture capital banker has but applied with full knowledge of and empathy for social outcomes. Whether we’re using an SSB or another evidence-based approach, the fundamental need is to establish objective measures and gather data for served populations and, when possible, non-served control groups. It’s early days for our new strategies, but I can already report that the new data we’ve gathered has added significantly to our understanding of what approaches are most effective.”
Having successfully completed her mission at the Ministry of Social Development, Dovey will be joining the social services team at the New Zealand Productivity Commission in January 2015. She’ll be working on an inquiry into the purchase of social services right across government with the view to improving the well being of New Zealanders.
“Sustaining the effectiveness and agility of a large organization is a continuous challenge in any realm,” says Eric Jones, SF ’05, executive assistant to the Coast Guard’s Deputy Commandant for Operations Vice Admiral Charles Michel. “Just consider how many venerable companies have failed to follow the geometric growth of technology or fast-paced developments in consumer markets.” The inability to adapt to a rapidly changing competitive landscape has doomed many seemingly unstoppable business giants.”
“Then consider,” Jones continues, “the additional hurdles facing a large government organization like the U.S. Coast Guard. If the maritime sector is functioning safely and efficiently, there is little reason for industry to interact with the Coast Guard. In fact, most mariners hope they never need us. And yet we must be prepared to perform to our full capabilities at any time of day, every day of the year, in unpredictable and often perilous conditions.” And that’s before taking into account the constant external forces at play in the 21st century like transnational organized crime (TOC) networks, climate change, the fossil fuel renaissance, and the need for greater maritime governance resulting from continuing expansion in global trade.
Jones has frontline experience in the management of vast and complex entities. After two years as Assistant Superintendent of the U.S. Coast Guard Academy, he was called to his current assignment in Washington with Vice Admiral Michel. “With a DC-based staff of 1,600,” he explains, “we are responsible for the operational policies of an organization numbering more than 80,000 people. Our theater of operation comprises the three U.S. coastlines, the world’s oceans, the Arctic region, and numerous international partners, and our responsibilities include defense, law enforcement, search and rescue, marine safety and other missions as well as intergovernmental and international engagements.”
Given the increasing demand for services, it’s remarkable to learn that the Coast Guard is experiencing a slow and troubling decrease of its waterborne assets. For every 12 ships that are retired, only eight new ones are being supplied. “New technologies like DCS radios and auto-identification systems for GPS devices are incredible,” notes Jones, “but we’re still in the position of having to do a lot more with much less.”
In addition to boosting tech savvy and cyber literacy across its entire force, the Coast Guard pursues an educational mission within the halls of government to help drive change. “In the current environment of fiscal constraints and budget negotiations,” Jones says, “we have to do our utmost to explain the complexity of the challenges we face. Take the problem of unaccompanied immigrant children. You see one aspect of it on the evening news, but we need policymakers to better understand the deeper causes of this migration. The massive drug habit of the U.S. and Europe, for example, fuels the criminal organizations that destabilize the governments and social support systems in the communities where these children live. When we establish that level of understanding, it makes us all better stewards of tax dollars and enables us to maintain the consummate level of public service we continually strive to deliver.”
For the last two decades, Hazem ElWassimy, SF’09, has been working for and with government entities to generate investments and spark innovations that help countries modernize and expand economic and educational opportunities. As the Middle East North Africa regional manager for the Sectoral Competitiveness Program of the International Finance Corporation (IFC), he also is on the front lines of an historic transformation at the World Bank Group (WBG). “Given the evolving demographics of poverty and prosperity, climate change, and economic interconnectivity,” ElWassimy says, “we have to change the way the bank operates to remain relevant.”
The WGB comprises five primary institutions: the International Bank for Reconstruction and Development, International Development Association, Multilateral Investment Guarantee Agency, International Centre for Settlement of Investment Disputes, and IFC. Until recently, these five institutions worked somewhat independently of one another. But global trends related to income inequality, financial system disruptions, and environmental concerns have inspired the bank to reinvent itself.
The new WBG is structured around two ambitious goals—end extreme poverty by reducing the percentage of people living on less than $1.25 per day to three percent by 2030, and promote shared prosperity by fostering income growth of the bottom 40 percent of the population in every country. “This new shared vision,” says ElWassimy, “promotes the sense of a unified, solutions-driven World Bank Group—we see ourselves as one WBG. On a practical level, that means developing WBG-wide strategies that integrate the capabilities of all five institutions. We also are establishing global best practices in areas like energy, education, finance, and competiveness.”
Within the new WBG, ElWassimy’s IFC team leads cluster development initiatives in Morocco, Tunisia, Egypt, Jordan, and Pakistan. “Our focus,” explains ElWassimy, “includes projects related to renewable energy and energy efficiency, education and youth skills, agribusiness, and logistics. We work hand-in-hand with government agencies, large and small private companies, and NGOs to mobilize investments that boost the competitiveness of a locality’s most promising industries.”
“As we transition from a project-focused model to an integrated-practice model, we are managing our talent and knowledge generation WBG-wide. We’re sharing expertise and experience across disciplines to a much greater degree. In the process, the WBG is becoming more innovative and risk-taking. The challenges are great. But if we align our internal resources well and expand synergies among our various teams, the full capabilities of the WBG will produce transformational outcomes.”
See the World Bank Group Strategy: October 2013 report to learn more about how the new WBG will partner with countries to end extreme poverty and promote shared and sustainable prosperity.
We’re already at work on the next MIT Sloan Fellows Program Newsletter. Please drop us a line at firstname.lastname@example.org if you have ideas about themes and news items for future issues.
Stephen Sacca, Director
Laurel Aroian, Associate Director
Mary Marshall, Associate Director
Marc O’Mansky, Assistant Director
Cathryn Noyes, Admissions Associate
Libby Dilling, Marketing Associate
Saul Horowitz, Program Coordinator
Michelle Pierce, Program Coordinator
Elizabeth Mackell, Program Assistant II
Davin Schnappauf, Program Assistant II
MIT Sloan is a registered trademark. All trademarks are the property of their respective owners.
© MIT Sloan. All rights reserved