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Finance and economics
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The link between poor harvests and violence

Thu, 07/27/2017 - 14:47

The very dark ages

LAST year over 102,000 people died in nearly 50 armed conflicts across the world, according to the Peace Research Institute Oslo, a think-tank. Much of this violence is caused by tensions between ethnic groups—two-thirds of civil wars have been fought along ethnic lines since 1946. Yet historians differ over whether cultural differences or economic pressures best explain how tensions explode into violence.

A new study* by Robert Warren Anderson, Noel Johnson and Mark Koyama suggests that, historically, economic shocks were more strongly associated with outbreaks of violence directed against Jews than scholars had previously thought. The authors collected data for 1,366 anti-Semitic events involving forced emigration or murderous pogroms in 936 European cities between 1100 and 1800. This was then compared with historical temperature data from a variety of sources, including tree rings, Arctic ice cores and contemporary descriptions...

The closing of American bank branches

Thu, 07/27/2017 - 14:47

WINDSOR, a community of 6,200 people two hours outside Albany in New York state, offers many of the amenities commonly found in a small town, including a bakery, a car-repair outfit and several restaurants. There is just one thing missing: a bank. The town’s only financial institution, First Niagara Bank, shut its doors in October.

Towns like Windsor are becoming ever more common in America. Since the financial crisis, banks have closed over 10,000 branches, an average of three a day. In the first half of 2017 alone, a net 869 brick-and-mortar entities shut their doors, according to S&P Global Market Intelligence, a research firm. Some fret that branch closures risk turning poorer neighbourhoods into “banking deserts”, cut off from current accounts, loans and other basic services.


Making Bitcoin work better

Thu, 07/27/2017 - 14:47

IN DIFFERENT circumstances the two people could be good friends. Each is rather shy and very smart. And each is passionate about bitcoin, a digital currency. One invented hashcash, which foreshadowed components of the crypto-currency; the other is the author of the first Chinese translation of the white paper in which Satoshi Nakamoto, the elusive creator of bitcoin, first described its inner workings.

Adam Back is the chief executive of Blockstream, a British startup, which employs some of the main developers of the software that defines bitcoin’s inner workings. Jihan Wu is the boss of Bitmain, a Chinese firm, which makes about 80% of the chips that power “miners”, specialised computers that keep the bitcoin network secure, confirm payments and mint new digital coins. But far from being fellow-travellers, each represents one of the two main camps in what has come to be called a “bitcoin civil war”, fought over how, if at all, the system should grow.

The worst seems...

Tech stocks have regained their dotcom-era highs

Thu, 07/27/2017 - 14:47

CAST your mind back to when Bill Clinton was president, Tony Blair and Vladimir Putin were fresh-faced new leaders and tweeting was strictly for the birds. That was when technology stocks, as measured by the S&P 500 tech index, last traded at their current levels.

The horrendous decline in share prices that followed the peak in 2000 was the first financial calamity of this millennium. The dotcom crash had much less impact on the broader economy than the mortgage and banking crisis of 2007-08. Nevertheless, the tech revival has caused some twitchiness among investors. Might history be repeating itself?

In the intervening years the world, and the tech industry, have changed a lot. In the late 1990s enthusiasm for tech shares was so great that the sector’s market value rose far faster than its earnings. The gap is nothing like as great today (see chart). Back then, leading firms like Microsoft and Oracle were valued at more than 20 times their annual revenues, let alone...

Pandemic bonds, a new idea

Thu, 07/27/2017 - 14:47

Better coverage needed

WHEN the Ebola virus hit west Africa in 2014, it took months to get together the money needed to combat the outbreak. Donors ended up committing more than $7bn. But the money came too late and too inefficiently, says Tim Evans, who directs the World Bank’s global health practice. Lives that could have been saved were lost. The bank estimates that GDP in Guinea, Liberia and Sierra Leone was reduced by $2.8bn.

Such outbreaks are likely to become more common: they have increased in frequency and diversity over the past 30 years, in step with the increased mobility of people, products and food. The World Bank says the probability of another pandemic in the next 10 to 15 years is high. That is why it has issued $425m in pandemic bonds to support its new Pandemic Emergency Financing Facility (PEF), which is intended to channel funding to countries facing a deadly disease.

The bonds cover six viruses likely to spark...

America’s uncompetitive markets harm its economy

Thu, 07/27/2017 - 14:47

“THE best of all monopoly profits is a quiet life,” wrote Sir John Hicks, a British economist. Without competitors breathing down their necks, monopolists find it easy to make large profits: just ask the 46m American households served by only one fast-broadband provider, who pay high prices for poor service. As a result, trustbusting is one of those rare causes that can unite raging populists with sober academics. So the wonks may well have agreed with the sentiment, if not the fine detail, when Senate Democrats unveiled a fresh pledge on July 24th to make America competitive again as part of their economic agenda. “This economy is rigged,” insisted Senator Elizabeth Warren of Massachusetts. It is not quite that bad. But more than three-quarters of industries are more concentrated than they were two decades ago, and the economy is also seeing less turnover of firms (see charts).

It is easy enough for consumers to see the consequences when monopolists entrench themselves in one industry...

Reform of China’s ailing state-owned firms is emboldening them

Thu, 07/20/2017 - 14:44

ACCORDING to company lore, Yunnan Baiyao, a musty-smelling medical powder, played a vital role during the Long March. As China’s Communist troops fled from attacks in the 1930s, trekking thousands of miles to a new base, they spread its yellow granules on their wounds to stanch bleeding. To this day, instructions on the Yunnan Baiyao bottle recommend application after being shot or stabbed. Many Chinese households keep some in stock to deal with more run-of-the-mill cuts. But the government has recently put its maker into service to treat a different kind of ailment: the financial weakness of state-owned enterprises (SOEs).

Yunnan Baiyao has emerged as a poster-child of China’s new round of SOE reform. The company, previously owned by the south-western province of Yunnan, sold a 50% stake to a private investor earlier this year. The same firm had tried to buy a slice of Yunnan Baiyao in 2009 but was blocked. Its success this time has been held up in the official press as proof that...

The power of populists

Thu, 07/20/2017 - 14:44

WITH the defeat of Marine Le Pen in her bid for the French presidency, establishment politicians in rich countries breathed a sigh of relief. The fortunes of extremist candidates have faltered since the populist surge that put Donald Trump into the White House. But it is hard to be confident that this was populism’s high-water mark without a better understanding of what caused the swell in the first place. The most convincing explanations suggest that populist upswings are not in the past.

It is tempting to dismiss the rise of radicalism as an inevitable after-effect of the global financial crisis. Studies show that the vote shares of extreme parties, particularly on the right, tend to increase in the years after a crisis. The Depression spawned some of the 20th century’s most dangerous and radical populist movements. But the facts do not fit that story precisely. In Europe, for example, populist parties have steadily won more voters since the 1980s. What is more, populist rage is...

Regulating credit unions in Africa

Thu, 07/20/2017 - 14:44

Striking a co-operative note

THE most recent time Moses Kibet Biegon needed a quick loan was when his roof blew away. He got one from the Imarisha Savings and Credit Co-operative, in Kericho in western Kenya. Imarisha channels the savings of its 57,000 members into loans for school fees, business projects or, in Mr Biegon’s case, roof repairs. It runs a fund to help with medical bills. And it pays dividends to its members from its investments, which include a shopping plaza that it opened last year.

Savings and credit co-operatives (SACCOs) like Imarisha are the African version of credit unions: member-owned co-ops, usually organised around a community or workplace. Some are rural self-help groups with a few dozen members and a safe. Others have branch networks and mobile apps. The largest SACCOs rival banks; Mwalimu National, which serves Kenyan teachers, has even bought one.

The co-operative model brings “a more humane face” to finance,...

KKR, a private-equity giant, lays out its succession plan

Thu, 07/20/2017 - 14:44

IN MOST four-decade-old firms run by greying co-founders, investors would have long since demanded clarity on succession. But private equity works differently: the industry has been dominated by its pioneers ever since its origins in the 1970s. So an announcement on July 17th about its future leadership by KKR, one of the world’s largest private-equity firms, puts it a step ahead of its rivals. Its aim of ensuring that the firm has the right structure in place “for decades to come” is not obviously shared across the industry.

KKR has been run since 1976 by two of its founders, Henry Kravis and George Roberts (both in their early 70s). They are staying on as co-chairmen and co-chief executives but with less of a day-to-day role. Lining up behind them are a pair of 40-somethings, Joe Bae and Scott Nuttall, who will join the board and take the titles of co-president and co-chief operating officer.

Such explicit, public succession planning is unusual. Stephen...

Could bond funds break the market?

Thu, 07/20/2017 - 14:44

GOOD generals know that the next war will be fought with different weapons and tactics from the last. Similarly, financial regulators are right to worry that the next crisis may not resemble the credit crunch of 2007-08.

The last crisis arose from the interaction between the market for mortgage-backed securities and the banking system. As investors became unsure of the banks’ exposure to bad debts, they cut back on their lending to the sector, causing a liquidity squeeze. Since then, central banks have insisted that commercial banks improve their capital ratios to ensure they are less vulnerable.

Might the next crisis originate not in the banking system, but in the bond market? That is the subject of a new paper* from the Bank of England. The worry centres on the “liquidity mismatch” between mutual funds, which offer instant redemption to their clients, and the corporate-bond market, where many securities may be hard to trade in a crisis. The danger is that forced...

The Big Mac index

Thu, 07/13/2017 - 15:21

THIRTY-ONE years ago, The Economist created the Big Mac index as a way of gauging how different currencies stacked up against the dollar. The index is based on the theory of purchasing-power parity, the idea that in the long run, exchange rates should adjust so that the price of an identical basket of tradable goods is the same. Our basket contains one item, a Big Mac.

The latest version of the index shows, for example, that a Big Mac costs $5.30 in America, but just ¥380 ($3.36) in Japan. The Japanese yen is thus, by our meaty logic, 37% undervalued against the dollar.


Africa is Islamic banking’s new frontier

Thu, 07/13/2017 - 15:21

IN 2008 Ethiopia’s conservative central bank experimented: it authorised interest-free banking. Interest is prohibited under sharia law, so the move was lauded as a step towards expanding financial services for the country’s large and often poor Muslim minority. But momentum soon stalled. An attempt to launch a fully-fledged Islamic bank foundered. Today most of Ethiopia’s big commercial banks offer a narrow range of Islamic financial products, but to few customers. Islamic finance in Ethiopia was stillborn.

Outside Africa, Islamic finance is in much healthier condition. Between 2007 and 2014, the sector tripled in size (although growth has slowed lately). Total assets are around $1.9trn. Sub-Saharan Africa accounts for less than 2% of this, yet it should be especially fertile territory. The continent’s Muslim population is 250m and growing. And according to the World Bank, as many as 350m Africans do not have a bank account.

Several countries are vying to become...

Climate change and inequality

Thu, 07/13/2017 - 15:21

ON JULY 12, the Larsen C ice shelf in Antarctica disgorged a chunk of ice the size of Delaware, a small state on America’s east coast. America’s government seems unfazed by the possibility that such shifts might one day threaten Delaware itself. Its climate defiance grows not only from the power of its fossil-fuel industry and the scepticism of the Republican party, but also from a sense of insulation from the costs of global warming. This confidence is misplaced. New research indicates not only that climate change will impose heavy costs on the American economy, but also that it will exacerbate inequality.

Calculating the economic effects of climate change is no simple matter. It means working out how a given increase in global temperature affects local weather conditions; how local weather affects things like mortality and crop yields; how those changes add to or subtract from regional GDP; and how thousands of local-level changes in GDP add up nationally or globally. No sweat....

Can the world thrive on 100% renewable energy?

Thu, 07/13/2017 - 15:21

A WIDELY read cover story on the impact of global warming in this week’s New York magazine starts ominously: “It is, I promise, worse than you think.” It goes on to predict temperatures in New York hotter than present-day Bahrain, unprecedented droughts wherever today’s food is produced, the release of diseases like bubonic plague hitherto trapped under Siberian ice, and permanent economic collapse. In the face of such apocalyptic predictions, can the world take solace from those who argue that it can move, relatively quickly and painlessly, to 100% renewable energy?

At first glance, the answer to that question looks depressingly obvious. Despite falling costs, wind and solar still produce only 5.5% of the world’s electricity. Hydropower is a much more significant source of renewable energy, but its costs are rising, and investment is falling. Looking more broadly at energy demand, including that for domestic heating, transport and industry, the share of wind...

A new approach to financial regulation

Thu, 07/13/2017 - 15:21

An inspector Quarles

DONALD TRUMP promised to unshackle America’s financial firms from mounds of stultifying regulation and the grip of bureaucrats with little practical experience of capitalism. One way to put that pledge into practice is to appoint officials with business backgrounds and deregulatory agendas. This element of the Trump strategy was on show this week, with a presidential nomination for a critical job at the Federal Reserve and the first public address by the new head of the Securities and Exchange Commission (SEC), another financial regulator.

Buried in the voluminous pages of the Dodd-Frank act, an Obama-era law passed in response to the financial crisis, was the creation of a new supervisory job at the Fed. Thus far, this powerful post has been informally delegated to an existing Fed board member, first Daniel Tarullo and, since his departure, Jerome Powell. That is set to change. Randal Quarles was formally nominated for the job—...

How to kill a corporate zombie

Tue, 07/11/2017 - 14:31

WHAT is the best way to kill a zombie? Fans of Daryl Dixon, a character in “The Walking Dead”, a television series, will know the answer: a crossbow bolt to the brain. Getting rid of corporate zombies, however, is a much more complicated process.

Ageing populations mean that the workforces in developed economies are likely to stagnate, or even shrink, in coming decades. That means almost all the burden of economic growth is likely to fall on productivity improvements. There has been a lot of focus on labour-market flexibility as the key to solving this problem, but the flexibility of the corporate sector may be just as important. Indeed, there is a growing belief that the persistence of zombie firms—companies that keep operating despite a poor financial performance—may explain the weak productivity performance of developed economies in recent years.

An inability to kill off failing companies seems to have two main effects. First, the existence of the zombies drives down the average productivity level of businesses. Second, capital and labour are wrongly allocated to such firms. That stops money and workers shifting to more efficient businesses, making it harder for the latter to compete. In a sense, therefore, the corporate zombies are eating healthy firms.

One definition of a zombie company is a business whose...

Economists argue about minimum wages

Thu, 07/06/2017 - 14:50

JUST what is the point of a minimum wage? It seems a straightforward enough question to answer. Minimum wages are designed to protect vulnerable workers who might otherwise lack the bargaining power to command a decent pay package. They are a means to limit severe poverty among those in work.

Yet they also attract opposition from critics who see wage minimums as price controls that discourage firms from hiring as many workers as they otherwise might. For decades, feuding camps of dismal scientists have tussled over whether the good done by minimum wages outweighs the bad. A series of recent minimum-wage increases in America will shine a light on that question and others as well. Indeed, the time may have come for economists to broaden their view of just what a minimum wage is meant to accomplish.

As voter frustration at stagnant pay has grown, politicians on the American left have spotted an opportunity to court popularity by calling for higher minimum wages. Democrats are united behind a demand for a national...

Wanna buy some cash? It will cost you

Thu, 07/06/2017 - 14:50

ALMOST anything can be bought and sold online. Even so, sales of ordinary banknotes at a big premium are puzzling. On a newish e-commerce site in Japan called Mercari, ¥10,000 ($90) notes were on sale earlier this year for as much as ¥13,000. So bizarre was the phenomenon that it created a furore, leading the firm to ban such deals in April. A rival site, Yahoo Auctions, soon followed suit. The buyers were not indulging a passion for rare banknotes. They simply wanted the money. In need of emergency finance, and having used up all their bank limits, they resorted to buying cash with their credit cards.

The ban has prompted some crafty work-arounds. “Valuable portraits” of Yukichi Fukuzawa, a thinker revered as a guiding light of Japan’s 19th-century modernisation, have been on sale for as much as ¥15,000. That is a hefty premium to the highest-denominated banknote, ¥10,000, which happens to be adorned with Fukuzawa’s likeness. Or take the bottles of water claiming to...

The City of London prepares for Brexit

Thu, 07/06/2017 - 14:50

OVER a year has passed since Britons voted to leave the European Union. More than three months have gone by since Britain gave formal notice to quit. Less than 21 months remain until March 29th 2019, the scheduled date of Brexit. Yet banks, insurers, asset managers and other financial firms that use London as a base from which to serve the entire EU are little wiser than they were on referendum day about what Brexit will entail. They must plan for it nonetheless.

The Prudential Regulation Authority (PRA), Britain’s financial supervisor, wants to see their contingency plans by July 14th. The European Central Bank (ECB) has also asked the banks it watches to lay out their post-Brexit strategies. This is probably not demanding for big banks, which are in constant touch with their overseers and already operate both in London and elsewhere in the EU. But some smaller lenders, especially, have work to do. “I think it is fair to say that most banks are not where they should be,” said...