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Finance and economics
Updated: 23 min 44 sec ago

The world economy looks dependent on booming America

Thu, 10/11/2018 - 09:48

IT HAS been a nervy few days for financial markets. A sell-off in bond markets, prompted by monetary tightening in America, this week infected global stockmarkets, too. The S&P 500 share-price index fell by over 3% on October 10th, its worst day in eight months. Markets in Shanghai hit their lowest level for nearly four years the next day; those in Japan and Hong Kong closed around 3.5% lower.

At first glance, the sell-off seems odd. The world economy is still growing briskly enough: this week the IMF only slightly trimmed its forecast for world GDP growth for 2018, from 3.9% to 3.7%. But investors are right to fret. Whereas acceleration was synchronised across much of the world in 2017, the global economy’s expansion now looks increasingly unbalanced.

Two divides stand out. The first is between emerging markets, which are suffering from particularly volatile financial conditions, and advanced economies. The cause of this divergence is a strong dollar, which is making...

A bail-out for IL&FS raises wider worries about non-bank lenders

Thu, 10/04/2018 - 14:43

CAN a big financial firm’s credit rating fall from AAA one month—good enough for pension funds and life insurers—to junk the next without causing a crash? India’s government decided it did not want to find out. Last week it granted Infrastructure Leasing and Financial Services (IL&FS), one of India’s biggest shadow banks, a parachute. Plenty are worrying that it will not be enough.

As recently as early September, IL&FS raised few concerns. A couple of weeks later it had defaulted on several payments to creditors. By the end of the month it had said it would raise 45bn rupees ($630m) of fresh capital through a rights issue from its owners, including the Life Insurance Corporation of India, a state-owned insurer. On October 1st the government forced out the board and appointed a new one. It was, in effect, a shadow-bank bail-out.

IL&FS is a very Indian beast. It was founded in 1987, with the support of state-owned banks, to provide finance to local governments for infrastructure. It has grown into a vast conglomerate, with 169 group companies. It finances, builds and runs everything from toll roads to “smart cities”, not just in India but abroad. Though it is private, the projects it runs, and the roughly 40% of its equity that is owned by nationalised firms, make it what Indian analysts call “quasi-sovereign”. If it went bust, projects...

Economists care about where they publish—to the cost of the profession

Thu, 10/04/2018 - 14:43

LIKE most academics, economists are obsessed with how many research papers they produce, and where they are published. A new paper by James Heckman and Sidharth Moktan from the University of Chicago shows why—and why that might not be good for the profession.

The authors analyse the career paths and publication records of researchers at 35 highly regarded economics departments in America. They consider the impact on tenure decisions of publications in different journals, assuming that they are cited the same number of times. Young academics who had three papers published in what are universally regarded as the top five journals were nearly five times as likely to gain tenure in a given year as those with papers in less prestigious journals. A single publication in the top five nearly doubles the chance. The impact of a top-five publication is weaker for women, which means they need more publications for the same outcome—though the authors warn that their sample includes only a few women, and...

Loopholes allow some pensioners in the EU to retire tax-free

Thu, 10/04/2018 - 14:43

Tax-free? I don’t believe it!

WHEN the financial crisis hammered Portugal’s economy, hundreds of thousands of its people left, taking advantage of the European Union’s rules on free movement to find work in countries that were hit less hard. Now Portugal is welcoming older people going in the other direction, not for jobs but for a warm, cheap retirement. Well-off baby-boomers are flocking to Lisbon, Sintra and the Algarve, drawn in part by Portugal’s tax exemptions on foreign income. Under its non-habitual-residency scheme, pensions from abroad can be drawn tax-free for a decade.

Bilateral double-taxation agreements are intended to ensure that income does not end up being taxed twice. But some countries, seeking to boost domestic demand by luring wealthy immigrants, have arranged matters so that they can avoid paying any tax on income earned outside their country of residence, such as pensions, capital gains and rent. To qualify, foreign pensioners who move to...

Bought and paid for

Thu, 10/04/2018 - 14:43

IT HAPPENS often enough that it scarcely elicits comment. After an election, some politicians leave government—only to reappear on the payrolls or boards of large companies. Such firms argue that they need to understand the political process and to engage in lobbying so they can extract themselves from a tangle of red tape. Tech giants, in particular, see themselves as champions of innovation and productivity within economies that have too little of either. But precisely because the biggest firms are increasingly dominant and profitable, the connections between the corporate and political worlds merit close scrutiny.

That such connections exist is not necessarily a problem. Firms that use political influence to obtain relief from stifling rules may thereby contribute to growth. Uber’s ride-hailing services often flouted the spirit, and occasionally the letter, of rules governing the hired-car business. To shield itself from legal action, it required influence. To build that influence, it hired...

Worries about the rise of the gig economy are mostly overblown

Thu, 10/04/2018 - 14:43

IT IS a warm morning on Bondi Beach. Simon and Sophia are drinking coffee on a terrace while athleisure-clad millennials stroll by. The young American couple, both management consultants, came to Sydney from New York for a working holiday. Both found work through Expert360, a platform that connects professionals with firms needing help with tasks. They may use the proceeds to travel around Australia—or simply stay by the surf. “Some people think we’re crazy to travel halfway across the world without a job lined up, but the potential of freelance work made us comfortable with the idea,” says Sophia. “It’s one of the best decisions I’ve ever made.”

On a cold day in Turin, 17,000km away, Cecilia sits in her flat. She has just heard from Deliveroo, a food-delivery service, that it does not need her today. She is glad, she says, as she wipes her dripping nose. But it means a day without earning. When asked what she likes about her job as a rider, she pauses for a long time.

Sophia,...

Australia’s biggest banks are in the dock

Thu, 10/04/2018 - 14:43

BANKS often face conflicts of interest when it comes to advising their customers. The regulators who are supposed to stop the abuses that can result are not always up to the job. But when wrongdoing does finally come to light, the penalties can be vast. Financial institutions in Britain have had to lay aside £40bn ($52bn) to compensate customers mis-sold payment protection insurance. Wells Fargo was fined $1bn by American regulators and ordered to reimburse the people to whom it had sold useless insurance or mortgages with inflated fees. Now it is the turn of Australian banks to face a reckoning.

A royal commission has exposed a litany of abuses. Its interim report, published on September 28th, paints the country’s financial institutions as consumer-crushing oligopolies. Lenders charged hidden fees long after providing services, and for some services they never provided at all, on occasion to people who were dead. They siphoned off at least A$1bn ($720m) of compulsory pension savings in excessive charges. And they offered mortgages that they should have known were far too expensive to afford. Their behaviour, said Kenneth Hayne, the head of the inquiry, was not just immoral, but criminal.

The banks have tried to pin the blame on a few rogue staff. In fact the wrongdoing was pervasive—and turbo-charged by government policy. Until relatively recently few...

The IMF appoints a new chief economist

Thu, 10/04/2018 - 14:43

Go, Gita Gopinath

THE International Monetary Fund (IMF) used to be known for its unwavering advocacy of the “Washington consensus”, a set of free-market policies including free capital flows and fiscal consolidation. Nowadays it is a little more introspective—or, perhaps, open-minded. On October 1st the fund announced that Gita Gopinath, a professor at Harvard University, will soon replace Maurice Obstfeld as its top economist. The appointment puts another pillar of orthodoxy—regarding the benefits of flexible exchange rates—on notice.

Born in India, Professor Gopinath studied for her doctorate at Princeton under Kenneth Rogoff, a former occupant of her new job, and Ben Bernanke, who later led the Federal Reserve during the financial crisis. From there she moved to the University of Chicago, and on to Harvard, where she has produced prodigious amounts of research.

Most famous is her work on currency movements. One reason countries have flexible...

Brazil is shaping up for a unique kind of financial crisis

Wed, 10/03/2018 - 16:58

RUDI DORNBUSCH, a renowned economist who died in 2002, said there were two sorts of currency crisis. The pre-1990s kind is slow. It starts with an overvalued exchange rate, which gives rise to a trade deficit. Foreign-exchange reserves are gradually run down to pay for it. When they are gone, the game is up. The currency drops. The finance minister loses his job. But life goes on much as before. The world does not collapse.

The second sort of crisis is the first sort on steroids. A country that might once have blown some World Bank loans on bad policies is able to tap global capital markets for billions of dollars to misuse. Domestic banks join the party. The economy booms. When the flow of capital suddenly reverses, the currency collapses. Bankruptcy is widespread. The damage is big enough to affect others.

Brazil would seem to demand a third category. Elections this month will decide its next president and the character of its congress. They will thus shape the...

Rising oil prices catch emerging economies at a vulnerable moment

Thu, 09/27/2018 - 14:51

OIL prices have a knack of jumping at the most inconvenient times. As in 2007, for instance, when the price of a barrel soared into triple digits, destabilising a world economy already heading for a financial crisis. Or, for that matter, now. At more than $80 per barrel, Brent crude is nearly twice as costly as in the summer of 2017 and three times as pricey as in early 2016 (see chart, left panel). Dear oil does not yet mean a crisis. But it is putting emerging markets, already labouring, under further stress.

That oil should once again be causing trouble is a bit of a surprise. Half a decade ago prices in excess of $100 per barrel seemed to be a permanent feature of the economic landscape. But in 2014 prices crashed, as America’s shale boom turned the market on its head. The world quickly embraced the idea of a “new normal” for oil: in which large-scale, flexible shale production in America promised to keep prices stable and moderate. Americans scarcely had an opportunity to swap their...

A scramble to replace LIBOR is under way

Thu, 09/27/2018 - 14:51

SITTING in his office in the Wrigley Building overlooking the Chicago river in 2012, Richard Sandor, who has spent his career inventing financial products, was reading about the scandals surrounding the London Interbank Offered Rate (LIBOR), an array of interest rates set daily by a club of banks in Britain and used to price trillions of dollars’ worth of loans, derivatives and more. “This is stupid,” Mr Sandor recalls saying to a colleague. “Let’s make a bet; LIBOR will lose its pre-eminence.”

Two years later the Federal Reserve reached the same conclusion. It formed a group, the Alternative Rate Reference Committee, which has created a new benchmark dollar interest rate, the Secured Overnight Financing Rate (SOFR). Since April, SOFR has been used for a handful of bond offerings by large institutions including the World Bank, MetLife and Fannie Mae. Central banks in Britain, the euro zone, Japan and Switzerland are also constructing new benchmark rates.

LIBOR is heading for...

American startups have less need to list on the stockmarket

Thu, 09/27/2018 - 14:51

WHATEVER your view of the recent antics of Elon Musk, one thing seems clear. He rather regrets that Tesla, the electric-car maker of which he is boss, ever became a public company. To recap: in August Mr Musk announced that he had secured the funding to take Tesla private. The gyrating stock price is a distraction to staff, he explained. The obligation to report earnings each quarter fosters short-term fixes that may hurt the firm’s long-term health. And being listed makes Tesla prey to short-sellers.

Tesla’s share price rallied. The shorts lost money. It then emerged that the money to buy out shareholders was not quite as secure as Mr Musk may have suggested. Before long, the board confirmed that the firm would not be taken private. Its shares sank back. The company is now under investigation for possible securities fraud.

Whatever these larger consequences, Mr Musk achieved a minor feat. He has drawn fresh attention to some familiar grumbles about public markets....

America is trying to change the way trade rows are settled

Thu, 09/27/2018 - 14:51

This version comes with a whistle

ONE of President Donald Trump’s more improbable achievements has been to make international trade negotiations into front-page news. Less visibly, his officials have turned the legal systems for settling trade disputes into hotly contested topics. Not only is dispute settlement one of the last obstacles between America and Canada reaching a new North American Free Trade Agreement (NAFTA), it is also central to Mr Trump’s assault on the World Trade Organisation (WTO), the guardian of the global rules-based system of trade.

A trade deal is a bit like the rulebook of a game in which the players are of very different sizes and speak a host of different languages, and so may have different ideas of what constitutes fair play. A dispute-settlement system is the referee, deciding whether the rules have been broken. Its very existence may discourage cheating.

The system Canadian and American negotiators are arguing over dates...

American creditors say China should honour pre-Communist debts

Thu, 09/27/2018 - 14:51

Still outstanding

LIKE many Americans, Jonna Bianco believes President Donald Trump to be “a tireless defender of the American people against Chinese economic aggression”. Ms Bianco, a Tennessee cattle-rancher, is president of the American Bondholders Foundation (ABF), which represents more than 20,000 owners of bonds issued by Chinese governments before the Communist revolution in 1949—and which claims that American citizens are owed more than $750bn. Having met Mr Trump at his golf resort in New Jersey last month, Ms Bianco hopes he will press their case.

The ABF’s claim is built on the widely accepted doctrine that governments inherit their predecessors’ debts. Pre-Communist Chinese governments flooded international markets with debt, such as a £25m (then $122m) issue of “gold loan” bonds in 1913. “As a legal matter, those debts still exist,” notes Mitu Gulati of Duke University. “But so too does the statute of limitations.”

Sovereign debtors are...

The IMF agrees to beef up Argentina’s bail-out

Thu, 09/27/2018 - 14:51

All smiles: Dujovne and Lagarde

THE three-year, $50bn credit line agreed on with the IMF on June 7th was intended to halt Argentina’s currency crisis. The peso had lost a quarter of its value against the dollar since the start of the year as investors fled to safe havens. It kept sliding. On August 29th Mauricio Macri, Argentina’s president, asked the IMF to bulk up the package. On September 26th, after three weeks of negotiations, the fund’s managing director, Christine Lagarde, agreed to increase Argentina’s credit line from $50bn to $57.1bn and accelerate its disbursal.

Argentina is on the brink of its second recession since Mr Macri took office in 2015. The peso has now fallen by more than half in 2018, pushing inflation to 34% in August. The central bank has raised interest rates to 60%. Investors worry that a further slide in the peso would leave Argentina unable to service its large pile of foreign-currency debt. Mr Macri’s approval ratings have slumped.

...

The trade deal between America and South Korea has barely changed

Thu, 09/27/2018 - 14:51

“IT’S a horrible deal. It was a Hillary Clinton disaster, a deal that should’ve never been made,” said America’s president in April 2017. Donald Trump was threatening to scrap his country’s free-trade agreement with South Korea, known as KORUS, claiming that it had left America “destroyed”. On September 24th, after he and Moon Jae-in, his South Korean counterpart, had signed a revised deal on the sidelines of the UN General Assembly in New York, Mr Trump sounded much more emollient. “This is a great day for the United States and a great day for South Korea,” he said, having hailed a “basic redoing” of the old, “unfair” version.

In fact, KORUS has undergone something well short of a full overhaul. Most of the original 24 chapters were untouched. KORUS is just the first of many pacts Mr Trump has said he wants to negotiate; on September 26th, for example, Mr Trump announced his intention to start formal talks with Japan. The Japanese may hope the results are similarly shallow.

...

The beleaguered BRICS can be proud of their bank

Thu, 09/27/2018 - 14:51

AS STORM clouds gather over emerging markets, the BRICS countries that were supposed to be the building blocks of a new globalised economy are instead in various degrees of trouble. Brazil and Russia are recovering only slowly from downturns. A sharp fall in the rupee reflects jitters about India. China is mired in a trade war with America. South Africa has slipped into a recession. Those who dismissed the BRICS as little more than a marketing acronym might feel justified in their cynicism. But at this moment of weakness, their most tangible creation—a bank that aims to reshape the world of development finance—is making surprising headway.

The New Development Bank (NDB), which is based in Shanghai, was founded just over three years ago. It has received far less attention than another multilateral lender launched a short time later, the Asian Infrastructure Investment Bank (AIIB) in Beijing. Take The Economist’s own coverage: a dozen articles have mentioned...

A radical idea for reducing inequality deserves more attention

Thu, 09/20/2018 - 14:46

RECENT decades have not been particularly good ones for those who toil on, rather than own, the means of production. Labour markets have made a slow and incomplete recovery from the trauma of the Great Recession. The crisis only briefly dislodged corporate profits as a share of GDP from historically high levels. Across much of the world, the share of national income flowing to labour has fallen over the past 40 years.

Taxing the rich in order to fund spending on the poor is a straightforward solution to inequality. But the well-heeled are adept at squeezing through tax loopholes, and at marshalling the political clout needed to chip away at high tax rates. Those frustrated by enduring levels of inequality are contemplating ever bolder ways to redress the lopsided balance between owners and workers.

In an ideal world, untrammelled markets would ensure that every firm and every worker earned precisely what they deserved. But as economists since Adam Smith have recognised, markets...

Extreme poverty is growing rarer

Thu, 09/20/2018 - 14:46

HANS ROSLING, a Swedish academic who died in 2017, became famous for telling people that the world was faring better than they believed. One of his favourite examples was the rapid decline in extreme poverty. Sadly, just as Rosling’s elegant charts and YouTube talks drilled that story into people’s minds, the facts began to change.

On September 19th the World Bank released estimates for extreme poverty in 2015, defined as living on less than $1.90 a day at 2011 purchasing-power parity. The good, Roslingish news is that poverty continued to diminish (see chart). In 2015 the extreme poor numbered 736m people, or 10% of the world. The Bank’s best guess for 2018 is 8.6%.

The bad news is that poverty is becoming harder to tackle. Over the past few decades, rapid economic growth and the expansion of welfare in Asia have borne down on extreme want there. That leaves sub-Saharan Africans as a growing majority of paupers. African poverty is especially intractable because of...

Asia is not immune to emerging-market woe

Thu, 09/20/2018 - 14:46

THERE are many ways to defend a currency. Ayam Geprek Juara, an Indonesian restaurant chain that serves crushed fried chicken, has offered free meals this month to customers who can show they have sold dollars for rupiah that day. The restaurant has provided more than 80 meals to these “rupiah warriors”, according to Reuters, a news agency.

Perhaps it should extend the offer to the staff of Bank Indonesia, the country’s central bank, which is only about 20 minutes away from one of the restaurant’s branches. To defend the rupiah, it has been selling billions of dollars of foreign-currency reserves, which have fallen from over $125bn in January to less than $112bn in August. Despite these sales, and four interest-rate rises since May, the rupiah has lost almost 10% of its value against the dollar this year, returning to levels last seen during the Asian financial crisis of 1997-98.

India’s rupee has fared even worse, reaching a record low against the dollar. And even where Asia’s...

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