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The contrarian case for emerging markets

Thu, 08/16/2018 - 09:48

TWENTY years ago, on August 17th 1998, the Russian government devalued the rouble, defaulted on its domestic debts and suspended all payments to foreign creditors. It was one of the most dramatic days of a year-long emerging-market crisis that began with the devaluation of the Thai baht. South Korea and Malaysia would suffer brutal recessions. President Suharto of Indonesia was forced to resign after 32 years that May. But it was Russia’s default that shook the world.

Talk of rich-world recession was soon in the air. The Federal Reserve would cut interest rates three times before the year was out. The MSCI index of emerging-market stocks, which had lost 40% of its dollar value in the year leading up to August 1998, dropped by more than a quarter in that month alone.

Emerging-market assets are not as scorned now as they were then. The panic resulting from Turkey’s crisis is not anything like as acute. But there is no shortage of reasons for investors to be wary.

Unloved asset...

Turkey’s crisis is not fundamentally contagious

Thu, 08/16/2018 - 09:48

IN 1546 Girolamo Fracastoro, a doctor and poet, published an elegant theory of contagion. Infections spread in three ways, he argued: by direct contact, via an intermediary, or at a distance, through the air. In medicine, his theory is now considered quaint. In economics, however, it still works pretty well.

On August 10th President Donald Trump sent a pathogenic tweet, announcing a doubling of tariffs on Turkish steel and aluminium. It followed earlier sanctions on two Turkish ministers involved in detaining Andrew Brunson, an American pastor, on dubious charges. The lira, which had already lost 38% of its value since the start of the year, shed another eight percentage points in the tweet’s aftermath.

Early medical scholars believed gluttons were more susceptible to disease than cleaner-living folk. Similarly, Turkey has become vulnerable to financial disorder through macroeconomic intemperance. Businesses have borrowed heavily in foreign currencies. The government, which has...

African governments let too many taxpayers off the hook

Thu, 08/16/2018 - 09:33

A stitch in time

TAX collection in Africa resembles an exasperating fishing expedition, in which the big fish wriggle into tax havens and the tiddlers hide in the informal sector. It is made even harder by a self-inflicted problem. Governments give out a range of exemptions, thereby poking holes in their own nets.

Consider “tax expenditures”, a measure of the revenue lost by deviations from usual tax rates. Taxmen in Kenya and Uganda let about 5% of GDP slip through their fingers in this way, according to the World Bank. In the few African countries where data are available, governments forgo revenues worth a third of those they actually collect. The cost is felt in crowded classrooms and on rutted roads.

Not all that money should, or could, be recouped. The figures include concessions for items like textbooks and medicines. And not every tax expenditure is a giveaway, argues Maya Forstater of the Centre for Global Development, a think-tank. For...

New software helps uncover Mafia crime masked as ordinary business

Thu, 08/16/2018 - 09:33

The code breaks the silence

FOR an inkling of how hard it is for Italian authorities to identify Mafia activity, consider how mobsters disguise the pizzo, or protection payments, they extort. The owner of a business may find that customers have been scared off by a menacing stranger. Within days a mysterious man visits. He may request a regular donation for a poor family, or ask a business to switch to a new supplier. Owners put two and two together, says Daniele Marannano, an anti-Mafia activist in Palermo: “There’s no need for further explanations.”

Such concealment is more common than in decades past, when payments were often collected monthly in cash. That has made it harder to spot extortion by analysing a business’s books, says Antonio Basilicata of the Anti-Mafia Investigation Directorate (DIA) in Rome. But software developed by Crime&tech, a firm in Milan, can still help identify companies with probable Mafia links by crunching...

Life-insurance policies with perks make it to America

Thu, 08/16/2018 - 09:33

PEOPLE only contact their insurers when things go wrong and they need to make a claim. This generally means losses for the insurer. It also means stress and hassle for the customer. In order to mitigate both problems, insurers increasingly offer extra services alongside their bog-standard policies.

Aviva, a British insurer, for instance, installs sensors on customers’ water pipes to detect even minuscule leaks, so that these can be repaired before causing greater damage. This spares Aviva the cost of a bigger claim, and the client the misery of a flooded basement. Other benefits are intended mainly to foster customer loyalty. Porto Seguro, a Brazilian insurer, offers access to locksmiths, electricians and taxi services.

Life insurers have so far been slower to catch on. But that is changing. Often ancillary services nudge people to live more healthily. AXA, a French insurer, gives its customers access to check-ups. Union Life, a Chinese one, guarantees policyholders a place in an...

Australia’s lauded private-pension system is under scrutiny

Thu, 08/16/2018 - 09:33

High fees down under

PAUL KEATING, a former prime minister of Australia, calls the country’s superannuation system “the envy of the developed economies”. In many ways, it is. The “super”, as Aussies call their private-pension provision, was a crowning achievement of Mr Keating’s premiership. In 1992 he made it compulsory for employers to set aside 3% of all but the very lowest-income workers’ wages. The payment has since crept up to 9.5%, and, by law, will rise further in 2021.

Today 15m working Australians are sitting on a nest-egg for retirement. With assets of about A$2.6trn ($1.9trn), their private-pension pot has grown into one of the largest in the world. It is almost universal, which should relieve pressure on the means-tested public-pension system. Australia, in other words, has less reason to panic about supporting retiring baby-boomers than most other countries.

Yet pride is not the only emotion the system evokes. In December 2017, prompted...

How to design carbon taxes

Thu, 08/16/2018 - 09:33

ECONOMISTS view pricing greenhouse-gas emissions as an elegant way to reduce them. There are more than 70 national and regional schemes, covering perhaps a fifth of global emissions, which charge polluters for the carbon dioxide they belch out. But that leaves an awful lot of the world to be convinced of the merits of such schemes. Sceptics point to the lacklustre decarbonisation record of places that already price carbon. Higher charges would help; but then the politics also has to add up.

Governments have two ways to price carbon. They can levy a tax on each tonne of CO2 emitted, an approach pioneered by Finland in 1990. Or they can issue a fixed number of pollution permits to companies, which can then trade the permits with others. The European Union (EU), a handful of American states and, starting this year, China have opted for some version of this “cap-and-trade” approach. These schemes have tended to be limited to a few carbon-intensive industries, such as power generation,...

Litigation finance offers investors attractive yields

Thu, 08/16/2018 - 09:33

CONTINGENT fees, in which clients pay lawyers only if a case is won, have long been a feature of America’s legal system. Many other countries used to bar them, wary of importing America’s ambulance-chasing culture. But a belated acceptance of their benefits means they are now widely allowed. “No-win, no-fee” arrangements help shift risks from parties to a suit to their lawyers, and make it less likely that a would-be plaintiff decides not to press a strong case for fear of a big financial loss. 

Around a decade ago, some lawyers took the principle of risk-shifting further. They accepted money from third parties to fund cases in exchange for some of the winnings. Litigation finance has since taken off. Fortune 500 companies and New York’s elite law firms increasingly tap outside capital when pursuing multi-million-dollar suits.

Funds that invest in litigation are on the rise. In the past 18 months some 30 have launched; over $2bn has been raised. Last year Burford Capital, an...

Why the largest group of American corporate bonds is a notch above junk

Thu, 08/09/2018 - 14:50

BY HIS own account Christopher Hitchens, an author who died in 2011, was a poor student. He left Oxford with a third-class degree. This was not for want of ability. Hitchens would become a prolific essayist and fearsome debater. Rather, it was a choice. His tutors warned him about neglecting his studies. But he preferred to divide his time between his social life, political protests, books (other than the prescribed ones) and lively debates with other thinkers.

As Hitchens’s counterexample demonstrates, it is possible to regret the opportunities missed while striving for top grades. It is a lesson that many of America’s biggest companies have grasped. At one time, the sort of company that could tap the bond market for capital would be given an A-grade as a matter of course. These days the typical corporate-bond issuer has a credit-rating of BBB, only a notch above a junk rating (see chart).

That might seem to imply that business has become less efficient or lucrative. Yet profits have...

Is China losing the trade war against America?

Thu, 08/09/2018 - 14:50

WHEN Donald Trump tweeted on August 5th that tariffs were working “big time”, American media sprang into action to test the claim (see article). In China, editors were more circumspect. No major Chinese-language newspaper reported his tweets. One of his claims—that China’s stockmarket has fallen 27% in the past four months—was an exaggeration. But why would any self-respecting propagandist in Beijing dwell on that? Chinese stocks have indeed fallen sharply (see chart), which officials do not wish to emphasise.


Tariffs on steel and aluminium are creating some winners

Thu, 08/09/2018 - 14:50

Flame wars

DONALD TRUMP credits the tariffs he has imposed on steel and aluminium imports, and on a range of Chinese products, with almost magical potency. Either they will force other countries to drop trade barriers and crown him as dealmaker-in-chief, or they will pay down government debt while saving favoured industries. “Plants are opening all over the US, Steelworkers are working again, and big dollars are flowing into our Treasury,” he tweeted on August 4th. How do those claims stack up?

Tariffs are taxes on imports and so will bring some cash to treasury coffers. But comparatively little. In 2017 America’s government borrowed around 3.5% of GDP. Had the new tariffs been in place, and under the (extreme) assumption that the same goods had been imported despite costing more, they would have raised only 0.08% of GDP. Even including all Chinese imports, the number would have risen to just 0.7% of GDP. And that is before considering tariffs’ depressive effects on...

Why is macroeconomics so hard to teach?

Thu, 08/09/2018 - 14:50

LAST month Nick Rowe had a bad dream. It was five minutes before the first class of the autumn term at Carleton University in Ottawa, where he has long taught macroeconomics. But he could not find the classroom. Then he woke up and remembered with relief that he had just retired.

Learning macro is a source of anxiety for many students. Teaching it can give their professors the jitters, too. The subject is notoriously difficult to explain well. During his 37 years at Carleton Mr Rowe remained, by his own admission, “fairly low down the totem pole” as a researcher. But he became a thunderbird at conveying macroeconomic intuition. In the past decade this served him well in his second intellectual career, contributing to Worthwhile Canadian Initiative, an economics blog. Many a controversy has benefited from one of his ingenious analogies or numerical parables, usually involving some kind of fruit.

Professors may find themselves ill-prepared for the macro classroom. To become...

Factor-based investing spreads from stocks to bonds

Thu, 08/09/2018 - 14:50

COMPARED with equity investing, bond investing can seem stuck in the dark ages. As hedge funds and asset managers use whizzy algorithms to trade shares automatically, bond-fund managers still often call traders by phone. So when new investing strategies do arise, they make an even bigger splash. “Factor” investing is the latest example.

This is the idea, credited to economists Eugene Fama and Kenneth French, that predictable, persistent factors explain long-term asset returns. Their 1992 model for equities used the size of firms and what became known as “value” (the tendency for cheap assets to outperform pricey ones). Later models added factors such as “momentum” (the tendency of prices to keep moving in the same direction). Factor-based analysis has squeezed active managers (since it explains much of their returns) and helped drive the rise of passive investing. Investors can access factors in equities, often called “smart beta”, through cheap index-tracking funds or exchange-...

Blockchains could breathe new life into prediction markets

Thu, 08/09/2018 - 14:50

WILL a Democrat win America’s next presidential election? Will Tesla file for bankruptcy by the end of 2019? Punters now have a new option for such bets: Augur, an online prediction market. Whether it takes off will be a gauge of the viability not only of such markets but of decentralised applications built on blockchains, the databases underlying crypto-currencies.

Augur is not the first online service that allows people to buy and sell predictions like shares. Since 1988 it has been possible to bet on American elections via Iowa Electronic Markets (IEM), run by the University of Iowa. PredictIt, a site based in New Zealand but with a largely American audience, and Betfair Exchange, a British service, also let users bet on political events. Some firms run such markets internally, for instance to predict demand for a product. All have the same goal: to gain insights into the future by giving those who hold useful information an incentive to reveal it.

But legal barriers have long...

Our cities house-price index suggests the property market is slowing

Thu, 08/09/2018 - 09:48

FROM Auckland to Amsterdam, Sydney to San Francisco, house prices in the best locations have gone through the roof. The Economist’s new house-price index covers 22 of the world’s most vibrant cities (see table). They are home to 163m people, with an economic output equal to Germany and Japan combined. The average price of a home in these cities rose by 34% in real terms over the past five years. In seven cities it rose by more than half.

Some of this is a rebound from the global financial crisis, which started with a housing bust. Prices in our cities fell by an average of 22% in real terms, peak to trough—in Dublin by 62%, and in San Francisco by 42%. But they have since risen by an average of 56%, in real terms, from their lowest points. In 14 cities prices are above their pre-crisis peak—by an average of 45%.

Before the crisis, city and national prices broadly rose in tandem. They fell together, too, after the bust. But when they started to rise again,...

Myanmar’s state-owned enterprises show how much reform is still needed

Thu, 08/02/2018 - 16:07

NOTHING has been made in the engine factory in Thagaya, in the south of Myanmar, since April last year. Yet around 350 employees still turn up each day. In 2016 government-owned factories like this one made a loss of more than $200m.

When Myanmar moved from military dictatorship to a form of democracy, its new government embarked on a series of reforms. Since 2011 it has passed at least two dozen laws related to the economy. Foreign investment, much of it from China, has helped the economy to grow at around 7% a year. But it remains one of the region’s poorest countries. And vast swathes of the economy remain untouched.

State-owned enterprises (SOEs) employ about 145,000 people and provide about half of government revenue, excluding foreign aid. They collect around 12% of GDP in fiscal revenue and spend about the same. But the junta-era law that regulates them is a vaguely worded two-page document that is silent on what they are supposed to do. It simply states which sectors are...

A milestone is reached with the first zero-cost tracker funds

Thu, 08/02/2018 - 16:07

SINCE 1975, when the first retail investment fund that aimed simply to mimic a stockmarket index was launched by Vanguard, such “passive” funds have squeezed margins and profits right across the asset-management industry. On August 1st that trend reached its logical endpoint with the launch of two zero-cost tracker funds by Fidelity, a Boston-based firm built on active investing that is the industry’s fourth-largest, with $2.5trn under management. With no minimum investment required and an expense ratio (that is, net cost to investors) of zero, it will further shake up an industry that was already undergoing a major structural shift.

Fidelity’s competitors immediately felt the heat. Shares in BlackRock, the world’s largest asset manager and largest provider of passive exchange-traded funds (ETFs), closed 4.7% down on the day, as shareholders digested the implications for its business model. Those in Invesco, the fourth-largest ETF provider, dropped by 4.2%, and those in State Street...

Tech startups are reviving point-of-sale lending

Thu, 08/02/2018 - 16:07

AMERICANS shopping for a mattress online may find the selection at Casper, a New York-based mattress startup, somewhat lacking. Unlike brick-and-mortar shops, which offer dozens of models, the startup sells just three. And yet Casper’s customers are spoiled for choice at the till. Those who cannot afford to pay with a debit or credit card, or PayPal, can pay by instalments over six to 12 months. Those who make payments on time can enjoy the service free.

Such “point-of-sale” loans, which have been around for decades in one form or another, are becoming increasingly popular in America. Consumers who might previously have financed big-ticket purchases such as furniture, electronics or home-improvement projects with a credit card are now opting to borrow at the checkout, often with an initial 0% interest rate. These short-term credit products were once the domain of big banks like Wells Fargo, which finances consumer purchases, and Synchrony Financial, an issuer of store-branded credit cards. Now tech startups are entering the market with innovative techniques for underwriting and approving potential borrowers, often in seconds.

Demand is driven, in part, by younger consumers. Many young Americans tell pollsters that they dislike big banks. And they seem to have been scared off revolving credit by the financial crisis; according to the Federal Reserve...

The Industrial Revolution could shed light on modern productivity

Thu, 08/02/2018 - 16:07

HOW much yarn per day could an 18th-century British woman spin? Such questions are catnip for economic historians, whose debates typically unfold unnoticed by anyone outside their field. But a running debate concerning the productivity of pre-industrial spinners, and related questions, is spilling beyond academia. Each probably produced between a quarter of a pound and a pound of yarn a day, the historians have concluded. But at issue is something much more profound: a disagreement regarding the nature of technological progress that has important implications for the world economy.

Economic growth of the sort familiar today is a staggering departure from the pattern of pre-industrial human history. More than a century of study has not resolved the question of why it began where and when it did. This is a matter of more than historical interest. Weak growth in productivity has economists asking whether humanity is running out of ideas, and whether it is losing its ability to turn new...

Greece exits its bail-out programme, but its marathon has further to go

Thu, 08/02/2018 - 16:07

“NO ONE buys furniture in a crisis,” laments Konstantinos Vourvoulakis. He and his father used to sell handmade furniture, but as customers became strapped for cash, they shut up shop in 2014. A chatty man with a sunny disposition, he started driving a taxi instead, ferrying tourists around Athens and offering travel tips. But he doubts he will be able to afford a holiday himself any time soon.

Greece’s public-debt woes triggered an economic collapse that lasted longer than the Great Depression in America. In 2009 the new prime minister admitted that budget-deficit figures had been understated for years, and were perhaps double those originally reported. Ratings agencies downgraded its debt. Interest rates surged. In 2010 the government turned to the euro zone and the IMF for help. Their loans had strings attached: that Greece implement deep spending cuts and structural reforms.

On August 20th Greece exits the last of three bail-out packages. Both its creditors and its government...