Pygmalion, in the Classroom, Again

President Obama stepped off a bus today, to address an audience at the University of Buffalo, about, among other things, the need to lower the cost of education for the middle class (Mr. Obama nearly always describes his policy initiatives as good for the middle class, even though, four years into his presidency, his cherished class is worse off). He could have done much more, for his new policy thrust to improve America's dismal educational system, had he simply stayed in Washington, and directed the mass circulation - or at least a distribution to the teachers' unions - of a new book on the matter.

 "Simply put, when teachers expect students to do well and show intellectual growth, they do; when teachers do not have such expectations, performance and growth are not so encouraged and may in fact be discouraged in a variety of ways". So wrote James Rhem, a reviewer of the 1968 book, Pygmalion in the Classroom, by Robert Rosenthal and Lenore Jacobson. The book investigated the importance of teacher expectations on student performance. In describing their thesis as having "Pygmalion" in the classroom, the authors were recalling a Greek mythological character, much later popularized in George Bernard Shaw's 1912 play, and then on a (much) simpler basis in the 1956 musical, My Fair Lady, in which a bet is made that a bedraggled Cockney flower girl, Eliza Doolittle, can be trained to pass for a duchess at an ambassador's garden party by teaching her to assume a veneer of gentility. In the myth, the play, and the musical, it worked.

According to a fascinating new book, "The Smartest Kids in the World: And How They Got That Way", by Amanda Ripley, educational excellence really is all about expectation - specifically, what teachers convey to their students as expected. And, according to the research, this is especially true when teachers exude, and are perceived by their students as having, an aura of professionalism. Ms.Ripley is on about the schools, in various countries, that are working - and is withering about those that are not. The trick, it seems, is to teach kids to think critically, rather than to memorize material. But, far more importantly, the idea is to simply expect the very best from every pupil in the classroom, with no regard to, or sympathy, or excuses made, for students' relative wealth, or race, or even daily circumstance. Thus, for example, she cites the extraordinary case of Poland. In 1997, the Minister of Education, Miroslaw Handke, introduced a dramatically new core of school reforms, including both curriculum and testing, and made it mandatory that all teachers demand rigorous work, and that students stay in the same school until they were at least 16, even when some parents and/or administrators were suggesting that some  move to vocational training. Within a few years, Poland has jumped hugely in the internationally-accepted PISA rankings, significantly as a result of high scores from who would have been described in earlier Polish regimes as "non-academic" children.

Ms. Ripley is, nonetheless, quick to note that not every country example of remarkable educational achievement produces happy students. The poster child for the exception is South Korea, nearly illiterate in the 1950's, now regarded as an extreme, educational meritocracy, with one of the highest school-graduation rates in the world. but where students at all levels are often miserable. The pendulum can swing too far, especially when parents are complicit.   

Yet, against such an example of educational extremism, Ms. Ripley cites public school systems not only in Poland, but in Finland and Japan and Canada - though not in America, where sports' achievement is often the goal, or a child's socioeconomic background is given as an excuse for failure - that are exhibiting a simple truth: students rise to rigorous standards.

At least President Obama, in Buffalo, is correct to focus on the essence of education in economic development and prosperity - how else to explain, for example, that tiny Finland (5th in the PISA ranking) sits comfortably in third place in the World Economic Forum's latest ranking of global competitiveness, well above America's seventh, and declining, place.    

Poonch

The 460-mile Kashmir border between South Asia's two nuclear-armed neighbors, India and Pakistan, is heating up, again.  

On August 6th in Poonch,  a remote town and district in the Himalayan, Indian-controlled part of Kashmir, six Indian soldiers on patrol were confronted by a larger group of men in Pakistani army uniforms; minutes later, five of the six Indians were dead. As so many times before, there followed days of back-and-forth rifle and mortar firing - in violation of a generally-held 2003 ceasefire agreement. Then, just today, the Pakistani military reported that one of its officers had been killed by allegedly unprovoked firing by Indian troops. These killings are merely the latest incidents in decades of dispute since August 1947, when Muslim Pakistan was partitioned from Hindu India, when India shed its British masters, and when perhaps millions of displaced Indians and Pakistanis died as refugees attempting to seek secure homes.

But the timing of these latest skirmishes is significant. Prime Minister Singh of India, and Prime Minister Sharif of Pakistan, are scheduled to meet in New York next month during the meeting of the UN General Assembly. Both leaders have indicated a strong desire for reconciliation - the newly-elected Sharif has even been outspoken about normalizing ties. Skeptics, and even Mr. Singh himself, have suggested that it was terrorists on both sides of the Kashmir border, looking to scuttle the September meeting, who instigated the latest violence. And in Pakistan, even critics of its army don't blame its soldiers for the August 6th killings; home-grown militants are regarded as the more likely culprits, and together with the instability in Afghanistan, are seen as far more pressing concerns than those posed by India.

Both countries need improved mutual economic relations; bi-lateral trade, for example, is far below a normal flow. Closer economic ties between South Asia's giants are no doubt the best way to foster peaceful co-existence. The pending New York meeting is, thus, crucial.  

The Worst Corner

Considering all the social unrest that, it seems, morphs every day into violence in the Middle East and Northern Africa, one "country" stands out as being at the very bottom of such consideration. Somalia - in the Horn of Africa, bordered to the south and west by Kenya and Ethiopia, and to the north, just at the entrance to the Gulf of Aden and thereon to the Red Sea and the Suez Canal - has a UN-backed government in its capital, Mogadishu. This is the first Somalian government in more than two decades to be recognized by, among others, the African Union, America, and the International Monetary Fund.

So, this is significant, in a country that has long been regarded as the poster child for failed states, and has been distinguished by its particular comparative advantage - piracy on the open seas. But, events continue to suggest that President Hassan Sheikh Mohamud's Mogadishu government is hardly a national authority. Two decades of clan warfare and intermittent Islamist rule seem to persist in much of the country outside of the capital region.

Thus, two recent developments seem especially discouraging. First, the international medical humanitarian organization Médecins Sans Frontières (MSF)  announced yesterday the closure of all its programs in Somalia, the result of regular attacks on its staff in an environment where armed groups and even civilian leaders have supported or tolerated the killing and assaulting of MSF humanitarian aid workers. As MSF itself put it, "over its 22-year history in Somalia, MSF has negotiated with armed actors and authorities on all sides. The exceptional humanitarian needs in the country have pushed the organization and its staff to tolerate unparalleled levels of risk – much of it borne by MSF’s Somali colleagues  - and to accept serious compromises to its operational principles of independence and impartiality". Given this, MSF is leaving Somalia.

Then, today, the UN warned of a severe outbreak of polio in the country. At least 105 cases have been recorded this year, nearly half the number of cases in the world last year (compared to 350,000 cases in 1988). The World Health Organization reports that polio is nearly eradicated world-wide, and was considered eliminated in Somalia six years ago. So even a few new cases anywhere are a significant set-back. Without MSF, in many parts of Somalia the only provider of health care at any level, the highly infectious polio virus will surely spread rapidly, especially given the widespread lack of clean water in the country. This is yet just another development adding to the overall misery of Somalians, and to the opportunity of Islamist terrorists - in Somalia, known as al-Shabab - to exploit such misery.

Reserves, Again

Last week, this writer commented on China's international reserves - at over $3.4 trillion, the largest in the world, and roughly equivalent to the size of the German economy. Such a hoard of foreign currencies (mostly US dollar-denominated assets), accumulated from years of large trade surpluses, allows Chinese policy-makers considerable flexibility to not just meet liquidity needs and manage the yuan exchange rate, but also to pursue strategic investments abroad, particularly in the resource sectors.

At the other end of the reserves spectrum, there is Egypt. With the country once again in the firm grip of the military, with yesterday's declaration of a state of emergency and the institution of a national curfew, and with the Arab spring political process towards inclusion and democracy apparently dead, at least for now, Egypt's already precarious financial position can only worsen. The International Monetary Fund has been standing ready for months. It has agreed in principle to disperse an emergency loan of $4.2 billion, but such funds will not be advanced until certain budgetary conditions are implemented (Egypt's budget deficit is estimated to be equivalent to 13% of GDP in 2013, a clearly unsustainable level). With its focus now almost solely on containing domestic unrest, General Sisi's military government is hardly likely to introduce measures restraining government expenditures, such as subsidies for bread and petrol. In the interim, certain Gulf states, notably the United Arab Emirates and Saudi Arabia - traditionally enemies of the Muslim Brotherhood - have been funneling financial support - reportedly as much as $12 billion - into Egypt, particularly since the army removed President Morsi from power on July 3. As a result, Egypt's reserves, which had been declining since the beginning of 2011 and had reached a critically low level in recent months, have risen, from the low of $13.4 billion last Spring to nearly $19 billion at the end of July. But even this improved level is barely sufficient to cover 3 months of imports. And as tourists and foreign private investors (the major sources, other than foreign loans, of hard currency) continue to withdraw from the country - especially after yesterday's events - Egypt's reserves will remain under pressure. More broadly, respite for the battered economy looks more unlikely than ever.   

America's response to yesterday's brutal military crackdown (over 500 are estimated to have been killed, and thousands wounded) will be crucial. President Obama, who so far has declined to use the word "coup" to describe Morsi's overthrow last month, spoke this morning from his vacation home on Martha's Vineyard. He condemned the military government's use of violence, but announced what can only be considered another minimalist, tepid reaction, cancelling planned, bi-annual joint military exercises. However, in the coming days, it seems likely that, short of withdrawing all its aid to Egypt, America will initiate a substantive, if nuanced, approach, such as a comprehensive "review" of its entire aid program accompanied by a delay in disbursing the next tranche. Much will depend on whether some sense of order can be restored in Egypt, difficult to imagine given that Islamists have already vowed new protests.

A Wealthy Neighbour

Detroit's filing last month for Chapter 9 bankruptcy is yet to be approved by a federal bankruptcy court. But spillover effects are already evident.

Just within the state of Michigan, various government issuers looking to tap the muni bond market are meeting considerable market resistance. Thus, Genesee County, the City of Battle Creek and, just yesterday, Saginaw County, have all delayed multimillion offerings. This is because yields on the deals would have been much higher than planned (which means that offering prices acceptable to markets would be too far below what city and county finance officials deemed necessary). Markets aren't being perverse. It's simply that the potential Michigan offerings were to be limited tax, general obligation (GO) bonds associated with the funding of the respective governments' pension systems. This would not be unusual, under normal market conditions. But Detroit's emergency manager, Kevyn Orr, has changed everything in this segment of the muni bond market; under the Chapter 9 filing, he is proposing to treat GO City of Detroit bonds as unsecured debt. If the court agrees, this would be the first occurrence, in the $3.7 trillion American muni market, some 40 per cent of which is comprised of GO bonds, where such bonds are normally considered secure, even sacrosanct. Not surprisingly, net outflows from muni funds have been considerable over the past several weeks. And issuers who have nonetheless proceeded in the post-Detroit bankruptcy filing environment have been forced to offer up yields that the market hasn't seen, or is likely to see in other markets, for a long time - Puerto Rico's Electric Power Authority, for example, just issued $673 million of 30-year bonds requiring a price level equivalent to a 7.12 per cent yield. Demand was strong.

But in a classic example of how markets discriminate, not all Michigan issuers are being punished. Oakland County, immediately adjacent to the northern boundaries of Detroit, and ranked in the top ten counties in America by income, is planning an issue of $300 million taxable retiree health-care bonds next month. The county, with a triple-A rating, expects to achieve a yield some 0.95% above comparable term Treasurys. America's city, county and state finance officials will be watching closely, fully aware that even triple-A rated government entities like Oakland County may face considerably more expensive financing in the wake of Detroit's misery.