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Updated: 32 min 11 sec ago

The EFTA countries show how hard Brexit will be for Britain

Wed, 04/12/2017 - 14:51

NORWAY offers much to envy. The food is tasty, public services are great and the people are impossibly good-looking. Its trade policy looks equally desirable. Though it trades heavily with the EU, Norway can also strike trade deals all over the world, either operating in concert with the three other members of the European Free Trade Association (Iceland, Liechtenstein and Switzerland) or on its own. Members of EFTA have dozens of deals, including two with China, with which the EU cannot even start negotiations.

After it leaves the EU, Britain will look much like an EFTA country: a rich economy with close links to Europe, but also seeking trade deals elsewhere. It is superficially an attractive prospect. Yet EFTA’s half-in-half-out relationship with the EU hinders its trade as much as it helps.

EFTA’s flexibility in trade stems from its odd relationship with the EU. Switzerland has a series of bilateral agreements, whereas Norway, Iceland and Liechtenstein are part of the single market through the European Economic Area (though with opt-outs for agriculture and fisheries). Crucially, however, all are outside the EU’s customs union, an agreement which...

Rescuing Myanmar’s farmers from the debt trap

Wed, 04/12/2017 - 14:51

Living on borrowed rice

WHEN Myo Than was a young man, his family had 12 hectares of farmland in Dala, a rural township just across the river from Yangon, Myanmar’s biggest city. His mother sold most of it after his father died. Mr Myo Than grows rice on what’s left, but water shortages mean he reaps just one harvest each year. He borrows money from the Myanmar Agricultural Development Bank (MADB)—1.5m kyats ($1,100) this year, at an annual rate of 8%—to cover planting costs. But rice is a low-return crop. To repay the bank he borrows from local moneylenders at a rate of around 4% each month. Mr Myo Than owes them $7,300. He has given his land deeds to a moneylender as security.

Mr Myo Than’s predicament is not unusual: poor crop returns and usurious loan terms have kept Myanmar’s farmers trapped in poverty and debt. Around 60% of Myanmar’s population are engaged in agriculture. Most are poor, and farm small plots of land using age-old manual techniques. Farmers scythe rice fields; water buffaloes pull wooden ploughs; hay-laden bullock-carts trundle down narrow roads.

Many farmers borrow to cover planting costs, buy equipment or...

East Germany’s population is shrinking

Tue, 04/11/2017 - 17:47

WERE it not for the graffiti on abandoned buildings, Bitterfeld-Wolfen, two towns north of Leipzig joined as one in 2007, would seem devoid of young people. Pharmacies, physiotherapy surgeries and shops selling garden gnomes line the sleepy streets. In its heyday the place had a booming chemical industry. Today “the air is much cleaner and we can finally hang out laundry,” says an elderly local out on a morning stroll. “But many jobs were lost and so few children are left.” He points out a building that was once a school; today it is one of many care homes.

Despite an influx of 1.2m refugees over the past two years, Germany’s population faces near-irreversible decline. According to predictions from the UN in 2015, two in five Germans will be over 60 by 2050 and Europe’s oldest country will have shrunk to 75m from 82m. Since the 1970s, more Germans have been dying than are born. Fewer births and longer lives are a problem for most rich countries. But the consequences are more acute for Germany, where birth rates are lower than in Britain and France.

If Germany is a warning for others, its eastern part is a warning for its west. If it were still a country, East...

Japan's labour market is tight. So why aren’t wages rising?

Thu, 04/06/2017 - 14:42

TRIMLY DRESSED deliverymen, polite and punctual, are ubiquitous in Japan. So it was shocking to see one of them kicking his parcels and hurling his trolley outside a block of Tokyo flats after apparently finding no one at home. Captured on a camera phone last December, this incident of “parcel rage” went viral, forcing Sagawa Express, one of Japan’s biggest delivery companies, to say sorry to its customers. Many Japanese will have felt sympathy, though, for the video’s frazzled star.

Over 10% of the country’s firms admit that some workers frequently put in more than 100 hours of overtime in a month. A manager at a nuclear plant in Fukui prefecture worked twice that long in February 2016 before killing himself two months later. The problem is especially acute in low-skilled service industries. Over the past two decades, e-commerce has vastly increased the number of parcels handled by firms like Sagawa. Last year, one employee committed suicide after being violently bullied by his boss.

In a survey in 2015 by the Japan Institute of Labour Policy and Training, some workers blamed their own lack of ability for why they put in so many extra hours. Others...

Donald Trump’s review of trade deficits is a blast from the past

Thu, 04/06/2017 - 14:42

“WE are in a trade war,” said Wilbur Ross, Donald Trump’s commerce secretary, on March 31st. That day Mr Trump duly loosed off a couple of warning shots, announcing two trade-related executive orders. (He forgot to sign them in the ceremony itself.) As tactics go, this was hardly shock and awe. Rather, it was supposed to suggest that nastier weaponry is on the way.

The first executive order was aimed at making trade rulebreakers “face the consequences”. Some bits were vague: officials have 90 days to develop and implement a plan to combat customs violations. Others seemed trivial. The government has lost $2.3bn of revenue over 14 years from importers going bankrupt before paying duties; almost half of this relates to imports of fresh garlic and preserved mushrooms.

The second executive order seemed more in keeping with Mr Trump’s (trade) warmongering. Officials have 90 days to produce an “omnibus” report, naming the trading partners with which America had a “significant” trade deficit in goods in 2016 and shaming them if the reasons for that deficit are “unfair”. Based on what it finds, Mr Trump promised to “take necessary and lawful action”.

Top of...

How Chávez and Maduro have impoverished Venezuela

Thu, 04/06/2017 - 14:42

IT IS hard to convey the severity of Venezuela’s unfolding crisis. Its extent is astounding: the economy shrank by 10% last year, and will be 23% smaller than in 2013 by the end of this year, according to IMF forecasts. Inflation may exceed 1,600% this year. The human details are more poignant: over the past year around three-quarters of Venezuelans have lost weight, averaging 8.7kg per person, because of a scarcity of food. No war, foreign or civil, is to blame for this catastrophe. Venezuela did this to itself. And its woes are deepening, as the regime of President Nicolás Maduro lurches towards dictatorship. Fifty years ago, Venezuela was an example to the rest of Latin America, a relatively stable democracy and not much poorer than Britain. How did this tragedy occur?

Venezuela’s economy is built on oil—its leaders boast it has the world’s largest proven reserves—and it is tempting to blame fickle crude prices for its woes. Oil accounts for more than 90% of Venezuelan exports. It helps to fund the government budget and provides the foreign exchange that the country needs to import consumer goods. Nearly everything of consequence in the economy, from...

Payday lending is declining

Thu, 04/06/2017 - 14:42

IN MAY 2013 Gloria James borrowed $200 from Loan Till Payday, a lender near her home in Wilmington, Delaware. Rather than take out a one- or two-month loan for a $100 fee, as she had done several times before, she was offered a one-year loan that would set her back $1,620 in interest, equivalent to an annual rate of 838%. Ms James, a housekeeper making $12 an hour, agreed to the high-interest loan but quickly fell behind on her payments. After filing a lawsuit in federal court, a Delaware judge ruled that the loan in question was not only illegal but “unconscionable”.

Her story is remarkably common. Americans who live pay cheque to pay cheque have few places to turn when they are in financial distress. Many rely on high-interest payday loans to stay afloat. But government efforts to crack down on the $40bn industry may be having an effect.

Roughly 2.5m American households, about one in 50, use payday loans each year, according to government statistics. The typical loan is $350, lasts two weeks, and costs $15 for each $100 borrowed. Although payday loans are marketed as a source of short-term cash to be used in financial emergencies, they are often used to meet chronic budget shortfalls—in 2015 more borrowers in California took out ten payday loans than took out one. Critics say the industry dupes its vulnerable customers into paying high fees and...

The president of the Richmond Fed resigns

Thu, 04/06/2017 - 14:42

Lacker has sad finish

FOR almost five years inquiries have sought to establish how Medley Global Advisors, a research firm, revealed details of Federal Reserve minutes a day before they were publicly released in October 2012. On April 4th the saga took a sudden twist when Jeffrey Lacker, president of the Richmond Fed (and hence a member of the committee that sets interest rates), quit over the leak.

Mr Lacker spoke to Medley the day before it published its note, in which it revealed that there was “intense debate” within the Fed over the third stage of its quantitative-easing programme, that the central bank was poised to buy more Treasury bonds at a later date, and that the Fed had mulled a promise not to raise interest rates until unemployment fell below 6.5%. (Both the bond-buying and the promise did later happen.) According to Mr Lacker, who was the meeting’s sole dissenter, when Medley mentioned confidential information on the call he “did not refuse or express his inability to comment and the interview continued”. This, he said, “could have been taken...as an acknowledgment or confirmation of the information.”

During an...

The history of growth should be all about recessions

Thu, 04/06/2017 - 14:42

“THROUGHOUT history, poverty is the normal condition of man,” wrote Robert Heinlein, a science-fiction writer. Until the 18th century, global GDP per person was stuck between $725 and $1,100, around the same income level as the World Bank’s current poverty line of $1.90 a day. But global income levels per person have since accelerated, from around $1,100 in 1800 to $3,600 in 1950, and over $10,000 today.

Economists have long tried to explain this sudden surge in output. Most theories have focused on the factors driving long-term economic growth such as the quantity and productivity of labour and capital. But a new paper* takes a different tack: faster growth is not due to bigger booms, but to less shrinking in recessions. Stephen Broadberry of Oxford University and John Wallis of the University of Maryland have taken data for 18 countries in Europe and the New World, some from as far back as the 13th century. To their surprise, they found that growth during years of economic expansion has fallen in the recent era—from 3.88% between 1820 and 1870 to 3.06% since 1950—even though average growth across all years in those two periods increased from 1.4% to 2.55%.

Instead, shorter and shallower slumps led to rising long-term growth. Output fell in a third of years between 1820 and 1870 but in only 12% of those since 1950. The rate of decline per...

Ireland’s food industries would be worst hit by a hard Brexit

Thu, 04/06/2017 - 14:42

IN 1962 Tony O’Reilly, head of the Irish Dairy Board, had an idea that would help transform Ireland’s economy. He wanted to create a premium brand for Irish butter to break into the growing British market. The new product, named Kerrygold and backed with a large marketing budget, was sold in half-pound packs in a parchment wrapping so shoppers could inspect the butter’s quality. Its success was an inspiration to other exporters and changed perceptions of Irish business.

Half a century on, the Irish economy has been transformed into a global trading hub. Some 90% of its exports are shipped by multinational companies. Many of these are American giants such as Intel, a chipmaker, and Pfizer, a drugs firm. But some are home-grown food firms, such as Kerry Group. Observers speak of a dual economy: a “modern” capital-intensive part, powered by foreign direct investment (FDI), usually from America; and a “traditional” jobs-intensive food business, which still looks to the British market. The prospect of Brexit is pulling these two parts of the economy in opposing directions.

For decades Ireland has appealed to foreign companies as a low-tax, English...

America’s disproportionate weight in global stockmarket indices

Tue, 04/04/2017 - 14:57

THE aims of a stockmarket index are threefold. First, to reflect what is actually going on in the market; second, to create a benchmark against which professional fund managers can be judged; and third, to allow investors to assemble well-diversified, low-cost portfolios. On all three counts there are reasons to worry about the MSCI All-World Country Index, one of the most widely used gauges of the global stockmarket.

That is because the American market has a weighting of 54% in the index, as high as it has ever been (it reached the same level in 2002). In other words, anyone using the index to monitor the market is seeing a picture heavily distorted by Wall Street. The relative performance of international fund managers against the index will largely depend on how much exposure to America they are willing to take on. Anyone buying a tracking fund is, in effect, making a big bet on the American market. Things are worse if investors track the MSCI World Index, which covers only developed markets. In that benchmark, America’s weight is 60.5%.

There is nothing wrong with the way that MSCI calculates its indices; the weights reflect how America dominates global...

America’s disproportionate weight in global stockmarket indices

Tue, 04/04/2017 - 14:57

THE aims of a stockmarket index are threefold. First, to reflect what is actually going on in the market; second, to create a benchmark against which professional fund managers can be judged; and third, to allow investors to assemble well-diversified, low-cost portfolios. On all three counts there are reasons to worry about the MSCI All-World Country Index, one of the most widely used gauges of the global stockmarket.

That is because the American market has a weighting of 54% in the index, as high as it has ever been (it reached the same level in 2002). In other words, anyone using the index to monitor the market is seeing a picture heavily distorted by Wall Street. The relative performance of international fund managers against the index will largely depend on how much exposure to America they are willing to take on. Anyone buying a tracking fund is, in effect, making a big bet on the American market. Things are worse if investors track the MSCI World Index, which covers only developed markets. In that benchmark, America’s weight is 60.5%.

There is nothing wrong with the way that MSCI calculates its indices; the weights reflect how America dominates global...

Banks’ equity-research operations are in decline

Thu, 03/30/2017 - 14:48

EQUITY research, the business of providing analysis of companies’ financial performance, may be a stodgy industry but it is not a simple one. Regulators fret about the sector’s Byzantine payment structure: investment banks dominate the market, but do not charge for it. They dole it out free to clients in the hope of future trading business. The understandable fear is that this set-up produces conflicts. Banks may be wary of issuing reports critical of companies; fund managers may end up choosing banks because of their research rather than the efficiency of their brokerage services. New regulations will overturn this model entirely.

MiFID 2, an ambitious set of European financial rules coming into effect next January, will force asset managers to disclose how much they spend on research. So banks will have to “unbundle” their services, billing clients for research and trading separately. Although the rules are being introduced by European regulators, banks across the world will have to change their pricing practices to comply.

These rules will be hugely, and beneficially, disruptive to a grossly inefficient industry. At present, banks blast...

Lacklustre power demand in Asia throws a cloud over coal

Thu, 03/30/2017 - 14:48

THE Hazelwood power station in Australia’s state of Victoria started generating electricity 52 years ago. The stark symbol of an era when coal was king, Hazelwood was one of Australia’s dirtiest: its fuel was the Latrobe valley’s brown coal, a bigger polluter than the black sort. The station was due finally to close on March 31st. Days earlier, chimney stacks were demolished at Munmorah, a black-coal station north of Sydney, already closed. Australia has shut ten coal-fired power stations over the past seven years, yet coal still generates about three-quarters of its electricity.

This fits a pattern across much of Asia, which accounts for two-thirds of the world’s coal demand. The biggest economies besides Japan, which hopes to replace nuclear with “clean” coal, are either closing down old plants or rethinking plans to build new ones. This is casting a deepening cloud over the coal industry.

Two reasons explain the looming overcapacity in countries ranging from China and India to Australia (South-East Asia remains hooked on coal). Firstly, electricity demand is stagnant, falling or growing less strongly than expected, which has put considerable financial...

Stockmarkets give up some of their Trump bump

Thu, 03/30/2017 - 14:48

HONEYMOONS don’t last for ever. Having been a reluctant bride to President Donald Trump when courted in the run-up to November’s election, the American stockmarket quickly melted into a mood of romantic euphoria. Shares rose by 12% between election day and March 1st (see chart). But in recent days, sentiment has dimmed. There is talk of the “Trump-disappointment trade”.

For the markets to experience some kind of sell-off is hardly a surprise. The S&P 500 index had gone more than 100 days without a 1% decline, the longest such streak since 1995. And the setback should not be exaggerated. The S&P 500 remains well above its pre-election level, compared with the dollar, which has given up around half its gains. The ten-year Treasury-bond yield, which hit 2.62% on March 13th, has dropped back to 2.38%.

The immediate cause of the retreat seemed to be the failure of Mr Trump to repeal his predecessor’s health-care bill. That logic was hardly a great advertisement for capitalism, implying that the fewer Americans had access to health insurance, the happier investors would be. But the broader rationale seemed to be that, if the Republicans...

An improbable global shortage: sand

Thu, 03/30/2017 - 14:48

INDIA’S “sand mafia” is doing a roaring trade. The Times of India estimates that the illicit market for sand is worth around 150bn rupees ($2.3bn) a year; at one site in Tamil Nadu alone, 50,000 lorryloads are mined every day and smuggled to nearby states. Gangs around the country frequently turn to violence as they vie to continue cashing in on a building boom.

Much of the modern global economy depends on sand. Most of it pours into the construction industry, where it is used to make concrete and asphalt. A smaller quantity of fine-grade sand is used to produce glass and electronics, and, particularly in America, to extract oil from shale in the fracking industry. No wonder, then, that sand and gravel are the most extracted materials in the world. A 2014 report by the United Nations Environment Programme (UNEP) estimates they account for up to 85% by weight of everything mined globally each year.

With house-building in the West yet to recover fully from the 2007-08 crisis, Asia has been, by far, the main source of demand. Figures from the Freedonia Group, a market-research firm, suggest that, of the 13.7bn tonnes of sand mined...

The life and times of an Italian non-performing loan

Thu, 03/30/2017 - 14:48

MARIO (not his real name) from the pretty Italian city of Vicenza opened an account at a local bank in 1992. It afforded him an overdraft of the equivalent of €10,000. He needed it to pay the bills of his wholesale textiles company. Over the years his firm’s cash problems worsened. In 2013, after Mario had exceeded his overdraft limit by €7,000 ($9,300), the bank gave him an unsecured loan of €50,000.

The first repayment was due in January 2014, yet by June Mario had filed for voluntary bankruptcy. The bank—now owed €70,300—presented itself to the court as a creditor. It entered into an arrangement, but in December sold the loan for 5% of its book value to Banca IFIS, an Italian lender building a portfolio of soured debts. Banca IFIS employed an external debt collector and by the following April, Mario had repaid €17,000. Having made a tidy profit on its investment, Banca IFIS told the bankruptcy court the debt had been cleared.

It seems puzzling that Mario was granted a loan after being overdrawn for so long. Andrea Clamer, head of Banca IFIS’s bad-loans division, says such mysteries are central to understanding Italy’s bad-loan mountain....

Indonesia’s tax amnesty passes its deadline

Thu, 03/30/2017 - 14:48

LAST year Indonesia’s finance minister, Sri Mulyani Indrawati, invited chief executives, directors and shareholders from the country’s leading industries to banquets at her ministry. As they munched, she would give presentations setting out who among them had—and, by omission, who had not—signed up to the government’s tax amnesty. “This may be the most expensive dinner in your lifetime,” the 54-year-old economist recalls telling them.

Indonesia’s tax amnesty, which began in July 2016, ended on March 31st. More than 800,000 evaders declared 4,700trn rupiah ($350bn) in assets previously hidden from the authorities. That is a staggering sum, equivalent to 40% of Indonesia’s GDP and 90% of the money supply, and revealing of the epic scale of tax-dodging.

The willingness of tax cheats to come clean partly reflects the generous terms on offer. Assets declared in the first three months were taxed at just 2-4%, compared with the individual income-tax rate of up to 30%. Those declared in the next three months were taxed at 3-6%, and those in the final three months at 5-10%. The government collected additional revenue of 125trn rupiah, equivalent to less than 3% of the...

Will robots displace humans as motorised vehicles replaced horses?

Wed, 03/29/2017 - 17:57

IN THE early 20th century the future seemed bright for horse employment. Within 50 years cars and tractors made short work of equine livelihoods. Some futurists see a cautionary tale for humanity in the fate of the horse: it was economically indispensable until it wasn’t. The common retort to such concerns is that humans are far more cognitively adaptable than beasts of burden. Yet as robots grow more nimble, humans look increasingly vulnerable. A new working paper concludes that, between 1990 and 2007, each industrial robot added per thousand workers reduced employment in America by nearly six workers. Humanity may not be sent out to pasture, but the parallel with horses is still uncomfortably close.

Robots are just one small part of the technological wave squeezing people. The International Federation of Robotics defines industrial robots as machines that are automatically controlled and re-programmable; single-purpose equipment does not count. The worldwide population of such creatures is below 2m; America has slightly fewer than two robots per 1,000 workers (Europe has a bit more than two). But their numbers are growing, as is the range of tasks they can tackle,...

The investigation into the Bangladesh Bank heist continues

Thu, 03/23/2017 - 15:44

A YEAR after one of the most spectacular robberies of modern times, the authorities in Bangladesh are still trying to crack the case. Hackers into the country’s central bank sent instructions through SWIFT, a messaging network for cross-border payments, to transfer funds from the bank’s account with the New York Federal Reserve to private accounts in Sri Lanka and the Philippines. Much of the stolen $101m has yet to be retrieved; the masterminds are yet to be identified. But the probe reveals the strikingly sophisticated, and international, nature of the crime.

After sifting 60 hard drives and thousands of pieces of paper, and interviewing dozens of people, investigators, talking anonymously in Dhaka, say they are confident about some details of the heist. They believe foreign hackers acted with inside help. The attackers’ coding style has raised suspicions of involvement by North Korea. This week the New York Times reported that American federal prosecutors were examining this possibility.

Egregious violations of the bank’s security procedures have also been uncovered. On the day of the robbery, its security cameras were...

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