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Where growth is concerned, is population destiny?

The Economist - Tue, 04/16/2019 - 18:44

FOR CENTURIES prior to the Industrial Revolution, Asia’s massively populous societies made the continent the world’s centre of economic gravity. Industrialisation in Europe and North America in the 19th century briefly knocked it from its perch. But now their collective economic might, measured in real output on a purchasing-power-parity basis, is forecast to account for more than half of global production by 2020. Was the West’s period of dominance an anomaly, which could only ever have been short-lived? Is population destiny?

It stands to reason that countries with larger populations might enjoy long-run economic advantages. People are the raw material of economic growth, after all. The more there are, the greater the likelihood that one becomes a Gutenberg or a Watt. In a world without much international trade, populous countries offer the largest markets, and comparatively more opportunity to boost economic output through specialisation and trade. Projecting economic growth rates is fantastically hard even over very short time horizons; over centuries, it is as good as impossible. But there are worse strategies than betting on the places with the most people.

Klaus Desmet of Southern Methodist University, Dávid Krisztián Nagy of CREI, a research institute, and Esteban Rossi-Hansberg of Princeton University...

How HDFC breaks the dismal pattern of Indian banking

The Economist - Thu, 04/11/2019 - 14:40

INDIA’S BANKS have a poor reputation—and for good reason. The state-controlled ones offer cheap credit to the well-connected, have piles of bad loans and are barely accountable. Nor are the private ones flawless. In the past year the bosses of two of the biggest left after concerns were expressed by the Reserve Bank of India: at Axis Bank because of credit problems and at Yes Bank because of governance worries. The head of the second-largest, ICICI, stepped down because of a scandal involving loans to a firm whose shareholder had dealings with her husband.

In this dismal scene one bank, HDFC, consistently shines. In the coming days it is expected to announce the latest in a series of stellar performances. Profits are expected to be around 20% higher than last year. Return on assets is 1.8% and return on equity is around 17%—excellent for a bank. The share price is 286 times what it was in 1995, when the firm went public—and 132 times its 1995 level in dollars. The bank’s market value is over $90bn, and Goldman Sachs thinks that it could exceed $200bn by 2024. That would gain HDFC admittance to a global elite now made up of American and Chinese behemoths.

HDFC Bank is an offshoot of a mortgage company of the same name (the initials stand for “housing development finance corporation”), which was set up in 1977 by Hasmukh...

The World Bank’s new boss will struggle to impose himself

The Economist - Thu, 04/11/2019 - 14:40

WHEN HE WAS nominated to lead the World Bank by President Donald Trump, David Malpass, a former Treasury official, faced no rival for the position. He was approved unanimously by the bank’s board, which represents its 189 member governments, and began work promptly this week. The process could not have been easier. But stiffer resistance lies ahead. Chances are that nothing in the job will become him like the entering it.

The institution he now leads is dedicated to eradicating poverty and fighting inequality. By its estimates, 10% of the world’s population (736m people) lived below the global poverty line in 2015 and perhaps 8.6% did in 2018. It aims to lower that share to 3% by 2030.

Because poverty is falling quickly in India and Bangladesh, most of the people living so uncomfortably now reside in sub-Saharan Africa, especially Nigeria and the Democratic Republic of Congo. They are harder to reach, concentrated in “fragile” regions, afflicted by violence. They would benefit greatly from sound economic policies and rapid GDP growth. But in these settings, the bank cannot always count on governments using its money and advice well. It therefore tends to back tightly monitored projects that benefit the poor directly. A big initiative in Congo, for example, helps women giving birth and vaccinates children against...

Cross-border credit reporting is at last becoming a reality

The Economist - Thu, 04/11/2019 - 14:40

THE WINDOW to submit applications for an H1B visa, a golden ticket for foreigners wishing to work in America, closed on April 5th. Soon the 85,000 winners will take up new jobs in the land of fresh starts. But those lucky few, most of them highly qualified, and many handsomely paid, will leave their credit histories at home, rendering them invisible to financial institutions. They will find it almost impossible to get a credit card, mortgage or any other type of loan.

It is a difficulty that affects millions worldwide. In 2017 immigrants made up 17% of America’s civilian workforce. Despite having free movement of labour as one of its core principles, the European Union has no system for transferring credit records across its internal borders. Banks suffer, too, missing out on potentially lucrative customers.

Building a new credit profile from scratch takes time. But what if you could use a credit report from your home country when applying for a loan abroad? That is the idea behind Nova Credit, a financial-technology startup in San Francisco. It requests data from international credit bureaus such as Experian and Equifax (with the individual’s consent), paying a fee for the service. It then packages the information to be usable by American banks and landlords. Mpower, a student-loan company, is already using Nova Credit...

Mario Draghi’s successor at the ECB has plenty to do

The Economist - Thu, 04/11/2019 - 09:03

THE HEADQUARTERS of the European Central Bank (ECB) tower over the river Main. The institution has been equally imposing in the life of Europe’s monetary union. As its only policymaker, it rescued the euro from financial and sovereign-debt crises, and powered a recovery in 2015-17.

But it cannot rest on its laurels. This year promises to be one of high drama. Three of its six-strong executive board will depart, notably its president, Mario Draghi, and its chief economist, Peter Praet (see graphic). By the end of the year eight of the 19 national central-bank governors on its rate-setting body will have stepped down. The end of Mr Draghi’s eight-year tenure coincides with European elections and the top jobs in Brussels coming up for grabs. That makes the choice to replace him unusually political. Should their quest for the commission or council presidencies fail, the French or Germans could seek to put a compatriot—or in the Germans’ case another hawkish northerner—into the ECB job as a consolation prize.

All this could alter the course of monetary policy. Poor choices could mean blunders in dealing with a slowing economy or too-low inflation. The bank’s hard-won credibility as the guardian of the euro could come under threat.


How not to weaken central banks’ independence

The Economist - Thu, 04/11/2019 - 08:33

THERE ARE more than a few echoes of the Nixon era in the presidency of Donald Trump. Monetary reverberations are among them. Facing re-election in 1972, Richard Nixon felt he needed a strong economy at his back, and made a habit of haranguing Arthur Burns, the chairman of the Federal Reserve at the time. Burns recounted the meetings in his diaries: “The president looked wild; talked like a desperate man; fulminated with hatred against the press; took some of us to task…” Historians reckon Burns was too accommodating of Nixon’s demands, and so helped launch the inflation of the 1970s. Mr Trump is now waging his own assault on the Fed’s independence. He has repeatedly complained about the central bank’s decisions and urged it to take a more doveish stance.

More strikingly Mr Trump, who has already chosen three of the five sitting members of the Fed’s board of governors, has named Stephen Moore and Herman Cain to fill the remaining two vacancies. In contrast to candidates who have come before, both are political activists. But the parallel with the 1970s is less apt than it seems. There are different ways to politicise monetary policy, and Mr Trump’s is particularly poisonous.

Nixon’s inflation helped inform modern ideas of central-bank independence. In 1977 Finn Kydland and Edward Prescott, who won the Nobel prize...

Reserve managers’ relationship with the dollar is unhealthy

The Economist - Wed, 04/10/2019 - 15:20

JAMES M. CAIN’S novel “The Postman Always Rings Twice” portrays a violent love affair between Frank Chambers, a drifter, and Cora Papadakis, a former beauty queen now married to a man she despises. Their romance is doomed from the beginning. Every attempt to find happiness fails. Any attempt at being apart is equally hopeless. “Why did you have to come back?” she hisses after one break-up. “I had to, that’s all,” he replies.

The story comes to mind when contemplating the fate of the managers of the world’s $11trn-worth of foreign-exchange reserves. This is not to say they are obsessives wracked with guilt and paranoia (though a few might be). But rather that, like Frank and Cora, it has probably occurred to them that their dominant relationship, which is with the dollar, may not be entirely good for them.

The latest figures from the IMF show that the share of dollars in global reserves fell to 62% at the end of last year. Reserve managers seem to be for a cooler, less intense affair with the dollar. But eventually, they will find that it is hard to break free. That is not so much because the alternatives to the dollar have flaws (though they do); rather, it is because the pain of a weaker dollar will become too much to bear.

The dollar is the closest thing to a world currency. Commodities that are traded globally...

Fintech takes aim at the steep cost of international money transfers

The Economist - Tue, 04/09/2019 - 18:20

FOR MIGRANT workers, sending money home is an expensive chore. They send plenty: remittances to developing countries are set to reach $550bn this year, beating foreign direct investment, the World Bank said on April 8th. Total cross-border transfers to and from individuals and small businesses come to $10trn a year. But a hefty chunk is taken in fees along the way.

American high-street banks can charge over 5% for smallish transfers between major currencies. MoneyGram, an established money-transfer giant, levies 5% for the hop from Britain (sterling) to Ireland (euros). Fees for minor currencies are swingeing. Wiring $200 from South Africa to Nigeria can take days, and costs over 25%. Cash transfers are even worse value.

Now some fintechs are trying to disrupt the cosy status quo. In a world made smaller by Skype and instant messaging, “why does money still go on a donkey?” asks Taavet Hinrikus of TransferWise, a London-based fintech that typically charges a tenth as much as British banks. As yet the newcomers have merely nibbled around the edges. But as incumbents abandon tricky markets, technology improves and financial regulators take aim at unclear pricing, they look set to take a bigger bite.

To send money across borders, banks use “correspondent” accounts they open with each other. When Anna at Bank A wants...

The gloom hanging over the world economy is confined to manufacturing

The Economist - Thu, 04/04/2019 - 14:45

PESSIMISM ABOUT the world economy has grown throughout 2019. Disappointing data, tumbling bond yields, the trade war between China and America and political crisis in Britain have all played a part. The only bright spot has been mostly buoyant stockmarkets. On April 9th the IMF will probably report a downgrade to its forecast for global growth this year, which in January stood at 3.5%. But there has so far been only a deceleration, not a downturn, because economic weakness has been contained mostly to manufacturing, rather than afflicting the service sector (see chart). And a manufacturing rebound might soon lift the global mood.

Manufacturing’s woes can be blamed primarily on falling global trade growth. That is down partly to the trade war, and partly to Chinese policymakers’ attempts to reduce leverage, which slowed domestic growth late last year, curtailing demand for imports. The pain has been felt most in Europe, which is more exposed than America to emerging markets. It has been particularly acute in Germany. On April 1st a survey of German manufacturers, a preview of which buffeted bond markets in March, turned out even worse than expected. Industrial production has slowed even more sharply in Germany than in Italy, which is in recession, note economists at Goldman Sachs, a bank. Yet Germany’s service sector appears to be...

2019 Marjorie Deane finance internship

The Economist - Thu, 04/04/2019 - 14:45

Finance internship: The Economist invites applications for the 2019 Marjorie Deane internship. Paid for by the Marjorie Deane Financial Journalism Foundation, the award is designed to provide work experience for a promising journalist or would-be journalist, who will spend three months at the London office of The Economist writing about finance and economics. Applicants are asked to write a covering letter and an original article of no more than 500 words suitable for publication in the Finance and Economics section. Applications should be sent to deaneintern@economist.com by May 3rd. For more information, see www.marjoriedeane.com

Rising inequality could explain tepid support for redistribution

The Economist - Thu, 04/04/2019 - 14:45

THE PUBLICATION six years ago of Thomas Piketty’s “Capital in the Twenty-First Century”—an 800-page tome that has since sold over 2.5m copies—helped reveal the huge increase in inequality in the West since the 1970s. So why has support for welfare spending to counteract it remained so stable over that period? In theory, support for redistribution should increase with the gap between rich and poor, as the envy of the have-nots is stoked. But polls in America and Britain suggest virtually no growth in support for redistribution since 1980.

A new paper* due to be presented on April 7th at the Economic History Society’s annual conference suggests an interesting answer. Rather than the gap between rich and poor being the main influence on attitudes to welfare, the degree of inequality within the upper classes might matter more.

Jonathan Chapman of NYU Abu Dhabi looks at the relationship between inequality and how the poor law, a locally administered welfare system, operated in Victorian England. He compared the generosity and harshness of the conditions of poor-law relief in different areas with the gap between rich and poor, as measured by income from wages, and inequality within the rich, as measured by families’ number of live-in servants. He found that areas of high wage inequality had less harsh rules for claiming poor...

What self-help lending says about Ethiopian banking

The Economist - Thu, 04/04/2019 - 14:45

IN 1980, IN his early 20s, Mengistu Maregne began selling soft drinks from a stall in Merkato, Ethiopia’s largest market. To finance the fledgling business he joined an ekub, a rotating savings-and-credit association (ROSCA) that pools contributions from members each week and disburses the pot to the winner of a lottery, with each member winning once over the scheme’s term. Being first to draw the lump sum of 4,000 birr ($140), he put the money away and joined another. Within a year he had bought a home; soon after he bought a shoe shop. “Ekub changed my life,” he says.

Though ROSCAs are found across the developing world they are often assumed to serve the poor. But Ethiopia’s are used across the income scale. They encourage members to save, and enable some to raise business capital or buy pricey items such as cars. Some have hundreds of members, with officers who vet applicants and analyse risks.

ROSCAs are entrenched in Ethiopian culture. But their ubiquity is also an indication of the shortcomings of Ethiopian finance. Though the formal banking sector has grown fivefold in just over a decade, it is still much smaller than in neighbouring countries. Bank assets per person are less than a third the level in Kenya. Ethiopian banks also underperform African peers in business lending. Just 12.9% of Ethiopian firms had...

Islami Bank Bangladesh has declined since a boardroom coup in 2017

The Economist - Thu, 04/04/2019 - 14:45

“IT’S LIKE the Midas effect in reverse,” says Badiul Majumdar of SHUJAN, an anti-corruption pressure group. “Everything the government touches turns not to gold, but rather from gold to dust.” He is talking about Islami Bank Bangladesh, which was rocked in 2017 when the government sent military-intelligence operatives to force out senior executives and board members, and replaced them with figures more to its liking. Fears that the boardroom coup would drag down a comparatively well-managed institution in a sector marred by political meddling and cronyism now appear to have been justified.

Established in 1983 as Bangladesh’s first bank run on Islamic principles, Islami thrived by handling a large share of remittances from emigrant workers and by lending to the booming garment industry. Its troubles stem from its links with Jamaat-e-Islami, Bangladesh’s largest Islamist party, which allied with Pakistan during the war of succession of 1971. One of the first acts of the current prime minister, Sheikh Hasina Wajed, after taking office in 2009 was to set up a court to try war crimes. Leading figures from the Jamaat were sentenced to imprisonment or hanging.

If anything, it is surprising it took Sheikh Hasina and her Awami League eight years to go after Islami—especially given allegations, including from America’s government...

How to fix Europe’s lenders

The Economist - Thu, 04/04/2019 - 14:45

IT’S NOT all bad. In 2008 Lloyds, a large British bank, took over HBOS, a rival that was being sucked beneath the rising waters of the global financial crisis. HBOS nearly dragged Lloyds under with it; £20.3bn (then about $30bn) of public money was needed to keep the combined group afloat. But these days Lloyds is doing all right.

Under António Horta-Osório, its chief executive since 2011, Lloyds has ditched almost all its foreign operations, narrowed its product range and (like many other banks) poured money into digitisation. The state sold its last shares in 2017. Last year the bank’s return on tangible equity (ROTE), a measure of profitability, was a decent 11.7%. This year Mr Horta-Osório is aiming for 14-15%, Brexit notwithstanding.

Some other European banks also have good stories to tell. The Netherlands’ ING is also a refurbished state-aid case. Its online German bank, ING-DiBa, claims to return over 20%. Spain’s Santander, the euro area’s biggest bank by market capitalisation, sailed through its homeland’s financial storm without a single loss-making quarter. On April 3rd it set out plans to lift its ROTE from 11.7% last year to 13-15% by cutting costs and exploiting digitisation. Nordic banks make bonny returns—although both Danske Bank and Swedbank, beset by money-laundering scandals, have sacked their chief...

Trade talks will probably end with tariffs still in place

The Economist - Thu, 04/04/2019 - 14:45

LESS THAN a week after the White House described trade talks in Beijing as “candid and constructive”, American and Chinese negotiators met again on April 3rd in Washington, DC. There is talk of a summit between the two countries’ presidents. But amid the upbeat noises are a few discordant notes. Without a deadline, the discussions could drag on, or even stall. Although the contours of a deal seem clear, the final items are always the trickiest. And even if a deal is struck, it may not be a good one.

The two sides have already agreed on provisions relating to currency manipulation, and are hashing out how much more American goods the Chinese will commit to buying. Rules on technology transfer and American companies’ access to the Chinese market are still being discussed. Also on the table will be American demands that China relaxes its attitude to trade in data, which it sees as a threat to national security.

Some in the Trump administration see the negotiations as an opportunity to demand reforms that would also benefit China, such as a more stringent intellectual-property regime or trimmed subsidies. The main objective of the Chinese delegation, led by Liu He, a vice-premier, is simpler: the lifting of the tariffs imposed since last July, which currently cover just over 44% of Chinese exports to America, or goods worth...

How betting on oil prices greases the industry’s wheels

The Economist - Wed, 04/03/2019 - 14:37

OF ALL THE lines of all the characters in all the scenes in “Casablanca”, the ones that resonate most are spoken not by Humphrey Bogart, the leading man, but by Claude Rains, who plays Louis Renault, a cynical police captain. Needing a pretext to shut down Rick’s, the nightclub owned by Bogart’s character, he declares that he is “shocked, shocked to find that gambling is going on in here”.

Renault’s line captures the fake distaste for gambling that lives on in polite circles. It finds expression even in impolite circles, such as finance. Take the market for oil futures. Only the gauche would describe it as anything other than a system for transferring risk. Oil producers sell futures to insure themselves against a price rout that would threaten solvency. Investors earn a risk premium by buying them.

There is something to this characterisation. Producers are indeed short futures much of the time. But often, they are long. Perhaps the real reason for a thriving futures market is that people both inside and outside of the oil business enjoy a punt on the price of crude. If so, that is all to the good. The prices that wash out of these wagers are an invaluable guide to decision-making about production, storage and investment.

The benefits hinge on the relationship between spot prices, futures prices and...

The IMF adds to a chorus of concern about competition

The Economist - Wed, 04/03/2019 - 14:08

PHYSICISTS’ QUEST for a “theory of everything” is well-known. The equivalent in economics is the hunt for common causes for the rich-world macroeconomic trends of the past decade or so: a shrinking share of the economic pie for workers, disappointing investment and lacklustre productivity growth. These must be reconciled with low interest rates, pockets of technological advance and juicy returns for investors willing to take risks.

The leading economic theory of everything is that competition has weakened as markets have become more concentrated. Unlike firms in competitive markets, monopolies limit production in order to keep prices and profits high. They can therefore be expected to restrain their investment, too. They might still be innovative—with monopoly profits up for grabs, why not be?—but market power usually makes economies less productive overall. And monopolies have many opportunities to take bites out of labour’s share of the pie. Their high profits typically flow to investors, not workers. Their high prices eat into the purchasing power of wages. Their bargaining clout may even allow them to suppress pay directly.

On April 3rd the IMF provided the latest evidence for parts of this theory. In a new study the fund’s economists examined the markups over marginal cost—one proxy for market...

Simple interactions can have unpredictable consequences

The Economist - Tue, 04/02/2019 - 15:22

CONSIDER THE task economists have set themselves. The global economy is the outcome of near-constant interaction between billions of unique individuals. To attempt to model even a small corner with a few equations is bold, even foolhardy. That economists have made as much progress as they have is impressive.

Might a radically different approach do better? In February the Boston Review, a quarterly magazine, convened a forum to discuss prospects for an “economics after neoliberalism”. “What we call ‘the economy’”, read one of the entries, “is in fact a highly complex, multi-level system. It must be studied as such.” The authors represent “complexity economics”. Though still a niche within the field, its potential impact is profound.

Most economics is centred on equilibrium: an economy’s natural resting state. Solving a set of equations that describes a market, conceived of as populated by predictably self-interested individuals who face various constraints, yields that equilibrium—the prices that balance supply and demand, say, and the level of welfare generated. A researcher can subject such a toy economy to an external shock, such as a new technology or a change in tax policy, and watch it return to a new equilibrium. But no matter how much these models are perturbed, they cannot generate...

A money-laundering scandal costs Swedbank’s boss her job

The Economist - Thu, 03/28/2019 - 17:59

“NORDIC NOIR” crime fiction portrays the dark underbelly of societies which appear on the surface to be staid, comfortable and law-abiding. The region’s financial systems, too, have a surprisingly seedy side. The long-held notion that Scandinavian banks are among the world’s least susceptible to financial crime has been shattered in recent months, as big banks in Denmark, Finland and Sweden have become embroiled in money-laundering scandals and seen their share prices duly hammered.

On March 28th the board of Swedbank fired its chief executive, Birgitte Bonnesen, over concerns that the Baltic branches of Sweden’s oldest lender may have handled billions of dollars of iffy money from Russia and other former Soviet states. Ms Bonnesen is the second head of a Scandinavian bank to have recently been defenestrated. In September Thomas Borgen was forced out of Danske Bank, Denmark’s largest lender, after it acknowledged that more than $200bn, much of it suspicious and originating in Russia...

How emerging-market local-currency bonds might fit in your portfolio

The Economist - Thu, 03/28/2019 - 15:42

IN THE FIRST episode of “Cheers”, a 1980s television comedy, Diane Chambers, a graduate student, intends to elope with Sumner Sloan, a literature professor. In stark contrast to the genial barflies at Cheers, a Boston watering-hole, Sloan is well-educated and middle-class—but also, it turns out, vain and deceitful. He’s goofy, says Sam Malone, the bartender whose on-off romance with Diane is the show’s dramatic axis. “He’s everything you’re not,” she retorts.

And so is Diane. That she and Sam are dissimilar in personality and social background is one reason why “Cheers” is so funny. The yoking of opposites is a dependable ploy in situation comedies. It is also a useful trick in investing. The injunction not to put all your eggs in one basket can be found in any finance textbook. But there is more to diversification than that. The ideal diversifier is not just something other than what you own, but something that contrasts with it.

Suppose your investments are tilted heavily towards the S&P 500 index of America’s leading shares, a principal character in global capital markets. Where can you find a Diane Chambers to balance your Sam Malone? Emerging-market government bonds in the issuer’s own currency may be the contrast you are seeking. They are not stocks, they are not denominated in dollars and they are not widely...