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Finance and economics
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The benefits gap between high and low earners is widening

Thu, 11/08/2018 - 10:18

“I SEE PATIENTS every day who are going to have babies because they work at Facebook,” says Peter Klatsky of Spring Fertility clinic in Silicon Valley. Tech giants now include egg-freezing and in vitro fertilisation in their employees’ health coverage. But even as high-earning Americans have the cost of making a baby covered by their companies, many low earners cannot get paid leave to look after theirs.

Since the end of the first world war, American workers have seen a steady rise in benefits. According to the Bureau of Economic Analysis, “supplements” to wages, which include most of today’s benefits but exclude performance bonuses, rose from 1.4% of total compensation in 1917 to 17.5% in 2000. Using a broader measure that includes performance bonuses as well as paid leave, overtime, health insurance and contributions to retirement plans, that share has risen further since: from 27% of compensation in 2000 to 32% now.

When growth in...

Investment platforms vie to capture a share of global remittances

Thu, 11/08/2018 - 10:18

IN 2016 AYO ADEWUNMI, a Nigerian-born agricultural trader living in London, bought a five-hectare farm in his homeland. It has produced little since. “I am not in the country, so I have to rely on third parties. It’s just not good enough,” he says.

Mr Adewunmi has since discovered another, potentially more satisfactory way to make such investments: through FarmCrowdy, a crowdfunding platform that lends to Nigerian farms and provides technical assistance to their owners. The two-year-old startup, which is considering expanding into Ghana, places high hopes in the African diaspora as a source of funds.

The case for such platforms goes beyond agriculture. Global remittances are expected to soar from $468bn in 2010 to $667bn in 2019. They are among the top two foreign-currency sources in several countries, including Kenya and the Philippines. Yet hardly any of the money is invested.

In part, this is because recipients use three-quarters of the money for...

A new commissioner at America’s main securities regulator causes a buzz

Thu, 11/08/2018 - 09:48

Not your regular regulator

FOR ALL the talk about deregulation under President Donald Trump, when it comes to the financial industry the word used by many is “tailoring”—meaning trimming the loose threads of tangled rules, rather than unpicking them. An exception is Hester Peirce, who in January became one of the five commissioners at the Securities and Exchange Commission (SEC), America’s most important financial regulator. Since her appointment she has given a series of speeches with a polite tone and blunt message about the downsides of government intervention.

Though she has yet to gain a large following, her words have not gone unremarked. Her “arrival at the SEC is genuinely exciting”, writes Steven Lofchie, a securities lawyer who runs a popular (within the small world of regulation) blog. It is probably the first time the word has been used in connection with the SEC in years.


The 1MDB saga reaches Goldman Sachs

Thu, 11/08/2018 - 09:48

IN 2010 GOLDMAN SACHS created a “business standards” committee to try to repair the reputational damage the financial crisis had done. Clients and transactions were to be screened for ethical shortcomings. Charges of money-laundering and bribery filed by federal prosecutors in a Brooklyn court on November 1st suggest that the investment bank had diagnosed a real problem, if not found the solution.

The allegations relate to work done by Goldman for 1Malaysia Development Berhad (1MDB), a sovereign-wealth fund set up in 2009, shortly after Najib Razak became Malaysia’s prime minister. Since 2015 investigators in various countries, including America, Singapore, Switzerland and latterly Malaysia itself, have been trying to trace the money it raised and channelled through a maze of financial institutions and shell companies. According to the filing in New York, funds were misappropriated to buy paintings, luxury properties and jewellery (including a necklace costing $27m), and to...

American farmers grapple with falling prices and sinking incomes

Thu, 11/08/2018 - 09:48

A CALM USUALLY descends on America’s farm belt in November. Combines have mostly finished churning across fields; trucks have hauled crops to grain elevators; and farmers retreat to their living rooms to rest. This year, at least by one measure, they should feel particularly content. Randy Sims, a hog-and-grain farmer in western Illinois, produced 75 bushels of soyabeans per acre, a third more than in the past. Indeed American soyabean production in 2018 is expected to reach 4.69bn bushels, a record. But it is unclear who will buy them.

America’s farmers are at the centre of President Donald Trump’s trade war. More than a fifth of agricultural exports face new tariffs. From January to September pork exports to Mexico and China fell by 31% and 36%, respectively. Sales of soyabeans, America’s biggest farm export, to China have plunged by 98% since January (see chart). “It’s a big concern,” says David Williams, who farms 3,800 acres...

Naughty investment banks win more IPO business

Thu, 11/08/2018 - 09:48

PUBLIC OPPROBRIUM ought to be something to avoid. It has laid low mighty men in Hollywood accused of sexual misdeeds and sporting heroes caught pumping drugs. But it is not bad for everyone: for some populist politicians it can be fuel to their supporters’ fire. And a new study* suggests that Wall Street’s sins have a surprising side-effect: press reports of bad behaviour by investment banks during and after the financial crisis were good for business.

Thomas Roulet, of Cambridge University’s Judge Business School, sifted all the editorial and opinion articles about the financial industry in the New York Times, Wall Street Journal and Washington Post published between 2006 and 2011. He built a list of 204 terms of reproach, signifying greed (eg, “avarice”), violence (“rapacity”), extreme risk-taking (“gambling”) or opacity (“manipulation”). He then searched...

Why house prices in global cities are falling

Thu, 11/08/2018 - 09:48

CENTRE POINT, a tower that looms over central London, was empty for so long in the 1970s that it lent its name to a homelessness charity. Recently it was converted from offices to flats. Half are yet to find buyers. So the developer has taken them off the market pending a clearing of the political fog over Britain. Its boss complained to Estates Gazette, a trade paper, of bids that were “detached from reality”. One-bedroom flats were on sale for £1.8m ($2.4m).

Even flats with less hefty price tags have been hard to shift lately. Property prices in London are falling. Sellers are waiting for better prices. It is tempting to put all the blame on Brexit, but that would ignore the broader picture. House prices in big global cities increasingly move together. What happens in London has a growing influence on what happens in New York, Toronto and Sydney—and vice versa. And trouble is brewing in some of these other markets, too.

Property used...

An Italian budget showdown underlines the need for euro-zone reform

Thu, 11/08/2018 - 09:18

THE FATE of the euro was always going to depend on Italy. With annual GDP of more than €1.6trn ($1.9trn), about 15% of euro-area output and debt of nearly €2.3trn, it poses a challenge to the single currency that Europe seems unable to manage but cannot avoid. Matters are now coming to a head, as Italy’s new coalition government instigates a showdown over the European Union’s fiscal rules. The disagreement might well become disastrous. But it is also an opportunity for the euro zone to begin building a better, more durable approach to fiscal policy.

Trouble began earlier this year when the populist Five Star movement, led by Luigi Di Maio, formed a government with the right-wing Northern League, led by Matteo Salvini. Both promised budget goodies: Mr Salvini a hefty tax cut and Mr Di Maio a basic minimum income. Such largesse may test the deficit limit of 3% set by the EU’s stability and growth pact. And it seems certain to break other fiscal rules set by the bloc: the government’s initial budget plan is...

How the big emerging economies climbed the World Bank business ranking

Thu, 11/01/2018 - 16:40

THE CENTRAL SPORTHOTEL in Davos usually plays host to skiers intent on picturesque descents. But during the World Economic Forum in January it celebrated an eye-catching ascent. One side wall was bedecked with a poster of Narendra Modi, India’s prime minister. Its caption boasted that India had climbed 30 places in the previous year’s World Bank ranking of the easiest places to do business.

China’s prime minister, Li Keqiang, lacks Mr Modi’s flair for self-promotion. But at the next gathering in Davos, he will have an even prouder boast. In the latest World Bank report, published on October 31st, China rose 32 places.

How did they do it? And how credible is their progress? In an ideal world, countries would rise in the World Bank ranking as a welcome by-product of reforms undertaken for their own sake. But India and China are among the 60-plus countries that have government units dedicated to moving upwards, almost as if it were an end in itself.

China’s comprises about 40 people; India’s perhaps 200, plus others working on state-level scorecards. Many teams visit the bank to learn precisely how the scores are calculated. India’s now thinks it could mark its own exam. It announced, long before the bank’s official assessment, the score it felt it “should” receive.

The rankings also loom large in Russia....

Watchdogs are worrying about a booming corporate-credit market

Thu, 11/01/2018 - 16:40

INVENTORS OF FINANCIAL terminology have little love for language. “Leveraged loans” are at first sight a tautology: in fact they are loans, usually arranged by banks among a syndicate of lenders, to highly indebted companies. “Collateralised loan obligations” (CLOS) are another mouthful. These are not abstract nouns but legal entities, run by asset managers, private-equity firms, hedge funds or others, that own more than half of American leveraged loans. CLO managers chop the loans into slices and sell the parts to match their investors’ appetites for risk.

However ugly its terms, both borrowers and investors have discovered beauty in the market for leveraged loans. Some financial watchdogs, with memories of the crisis of 2007-08 still fresh, fear that the loans will soon lose their looks. In recent days Janet Yellen, who headed the Federal Reserve until January, and Daniel Tarullo, the Fed’s chief bank supervisor after the crisis, have joined the chorus of concern.


Strong growth data obscure a probable slowdown to come

Thu, 11/01/2018 - 16:40

FINANCIAL MARKETS may have wobbled in recent weeks—the S&P 500 fell by 7.3% in October. But America’s real economy still seems to be in rude health. Figures released on October 26th showed economic growth of 3.5%, at an annualised rate, in the third quarter of 2018. Most economists had expected a sharper slowdown after the 4.2% expansion recorded in the preceding three months. On just one other occasion since the financial crisis, in 2014, has America clocked up two consecutive quarters of such speedy growth. Can it last?

Some fear not. The economy has been given temporary fizz by President Donald Trump’s tax cuts. Though these will be in place for some time, the impact on growth may not last. Together with February’s budget bill, they will boost annual GDP growth by 0.6-0.8 percentage points by the end of 2018. But the impact will fade to 0.3 percentage points in 2019 at best, estimate Karen Dynan and Jason Furman of the...

India’s central bank faces a major test of its independence

Thu, 11/01/2018 - 16:40

CENTRAL BANKERS are not normally fiery types. But on October 26th Viral Acharya, the deputy governor of the Reserve Bank of India (RBI), brought a dispute between it and India’s government into the open with a flaming speech. Mr Acharya said that “governments that do not respect central-bank independence will sooner or later incur the wrath of financial markets, ignite economic fire and come to rue the day they undermined an important regulatory institution.” His words, which he made clear had been approved by his boss, Urjit Patel, have had incendiary effects.

Arun Jaitley, the finance minister, seems to have taken them as an invitation to a trial of strength. “The nation that is India is higher than any institution,” he said the following day. Local papers reported that the government had invoked a law dating to the establishment of the RBI in 1934, never before used, that allows it to issue directions to the governor. As The Economist went to press, rumours were flying that Mr Patel might step down.

The row, which has simmered in private for months, threatens to wreck one of the government’s main policy achievements. Three years ago, after a short bout of double-digit inflation, the RBI and the government agreed on a target for annual inflation of 4% and created a monetary-policy committee to...

Cash is replacing other forms of aid, even in conflict zones

Thu, 11/01/2018 - 16:40

IN 2011 WAR and drought plunged Somalia into famine. Aid was held at the border, for fear of it being stolen. A few NGOs decided to try something different: giving people cash instead of bringing in sacks of food. They used hawala networks—a traditional Muslim form of money transfer—to get cash to aid workers, who handed it out. But most charities hung back, afraid of accidentally running afoul of American anti-terrorism laws.

By the time drought returned to Somalia last year, the spread of mobile-money transfers meant that cash could be sent directly to phones. In April 2017 alone $35m was given out to 2.4m people (a sixth of the population). Individual merchants found ways to bring food in to supply this ready market. Famine was averted.

Cash handouts were not the only reason: the fighting was less fierce than in 2011. But the difference between the two interventions illustrates both the...

The social costs of ride-hailing may be larger than previously thought

Thu, 11/01/2018 - 16:40

ECONOMISTS HAVE always been fond of Uber. Its willingness to battle incumbents, use of technology to match buyers and sellers, and embrace of “surge” pricing to balance supply and demand make the ride-hailing giant a dismal scientist’s dream. Steven Levitt, the author of the bestselling “Freakonomics”, called it “the embodiment of what the economists would like the economy to look like”. But if economists subjected Uber and its competitors to a cost-benefit analysis, they might not be so impressed.

This might surprise customers. A study in 2016 by researchers from Oxford University, the University of Chicago and Uber itself found sizeable benefits from ride-hailing services for consumers. Using data from 48m Uber trips taken in four American cities in 2015, they estimated the difference between how much customers were willing to pay and their actual fare. Each $1 spent on UberX rides generated a “consumer surplus” of $1.60. Across America, that surplus was estimated to be $6.8bn a year.

Drivers also benefit. Few sign up for lack of anything else, as is true of some gig work: in America roughly eight in ten have left another job to get behind the wheel. The typical American Uber driver makes $16 per hour ($10 after expenses), higher than the federal minimum wage. In London earnings after expenses come to £11 ($14) per...

China hopes a big new expo will fix its reputation for protectionism

Thu, 11/01/2018 - 16:40

Anti-protectionist species

UNDERSTANDING DONALD TRUMP’s intentions has bedevilled China since he took office. So it continued this week when the American president made comments that could signal a big escalation in the two countries’ trade war—or that a resolution is near. “I think we’ll make a great deal with China,” he told Fox News in an interview. But, he added, if talks sputter, America will impose tariffs on all goods from China. Having already hit $250bn-worth of annual Chinese imports with tariffs, America could target the remaining $267bn.

A bilateral meeting between Mr Trump and Xi Jinping, China’s president, later this month at a G20 summit in Buenos Aires should determine which outcome is more likely. First, though, Mr Xi will be pressing China’s case in the court of global opinion. On November 5th he will open a huge trade show in Shanghai designed to demonstrate to the world that China’s...

The path to economic development is growing more treacherous, again

Thu, 11/01/2018 - 16:40

IN THE 1990S economists had almost given up on the developing world. Although individual countries, like Singapore or South Korea, occasionally scaled the income ladder, the overall picture was, in the words of Lant Pritchett, a development economist at Harvard University, “divergence, big-time” between advanced economies and the rest. Then the scene changed. From the late 1990s global trade grew explosively, and the gap between the rich and the rest closed fast. Poverty tumbled. The share of people living on no more than $1.90 a day (at purchasing-power parity) fell from 36% in 1990 to just 10% in 2015. It would be the best of news if this trend could be maintained. Sadly, convergence seems to be slowing. That is bad news for Africa in particular.

The path to becoming a rich country usually runs through industrialisation, supported by opening up to trade and developing export industries. Trade facilitates technology transfer. Global markets weed out all but the most productive firms and allow even companies from small countries to scale up using techniques such as mass production.

Historically, few poor countries had stable, growth-oriented governments for long enough to build a broad, competitive industrial base. But in recent decades the once-exclusive club of fast-growing economies welcomed scores of new members,...

Japan’s stockmarket is poised for a comeback

Wed, 10/31/2018 - 16:12

THE BIG hair, shoulder pads, splashy videos and tinny recordings were hard to escape at the time. But where are the pop stars of the 1980s now? At an arena near you, most probably. Though the waists are thicker and the hair is thinner, the singers and their songs are recognisably the same. In their own minds, they are still big stars. It was the music business that got small.

No sub-genre of pop is so lamentable that it cannot be resold to the nostalgic. Might such marketing magic also be applied to Japan’s stockmarket? In the 1980s asset prices in Japan reached a level of excess that made the cocaine-addled pop stars of the era seem like choirboys. By 1990 the Nikkei index of stocks was trading at 60 times company earnings. Then came the fall. But after a long time in rehab, Japanese stocks are creeping back into the spotlight.

Like other mooted revivals, this one attracts plenty of scorn....

Does ethical investment withhold capital from those that most need it?

Thu, 10/25/2018 - 14:44

WHAT DOES ESG stand for? To most people it refers to the environmental, social and governance standards that guide a growing number of ethical investors. But Charlie Robertson of Renaissance Capital, an investment bank, reckons ESG risks becoming code for something else: an excuse for investors to put all of their money in Scandinavia.

Prosperous havens rate highly on the criteria ESG investors employ. By contrast, the emerging economies that interest Mr Robertson do badly. They are often dirty and corrupt—at least compared with Sweden.Their most liquid companies tend to be national champions or sprawling conglomerates that neglect minority shareholders and jump into bed with the government. Often emerging-market sovereigns default on their duty to protect human rights. Saudi Arabia, for example, will enter MSCI’s emerging-market equity index in June. That will oblige many investors to plough funds into the kingdom, whatever they...

The wealth of the top 1% may have peaked

Thu, 10/25/2018 - 14:44

LEE SHAU KEE moved to Hong Kong from mainland China in 1948, the year before China’s Communist Party seized control. In 1976 he set up a property company, Henderson Land Development, which helped to develop the tallest building on Hong Kong island and the hotel where Edward Snowden spilled America’s national-security secrets. Mr Lee is now the world’s 27th-richest person, according to Forbes, a business magazine. He and the 26 richer individuals have a combined worth of $1.39trn—more than the entire wealth of the poorest half of humanity.

This kind of startling comparison between the world’s most and least pecunious has been popularised by Oxfam, a charity. It draws on Forbes’s regular rankings of the world’s billionaires and the Credit Suisse Research Institute’s annual reports on household wealth. But the precision implied by such comparisons is spurious. The data on...

The agony of the value investor

Thu, 10/25/2018 - 14:44

IN APRIL 1962, Joan Whitney Payson watched the New York Mets, a collection of cast-offs from rival baseball teams, lose their first ever game. Mrs Payson, the Mets’ owner, soon left for a summer in Greece. News of further defeats reached her by telegram. So she asked that she be told only when the Mets won. “That was about the last word I heard from America,” she recalled. The Mets lost 120 of their games that year.

One of the worse things about a losing streak, noted Mrs Payson, is you can never tell when it will end. Investors in “value” stocks know the feeling. These stocks, which are distinguished by a low price relative to the book value of a firm’s assets, have fared badly in the past decade (see chart). A longer run of history, as well as intuition, suggests that buying shares that are cheap relative to their intrinsic worth should eventually pay off. But it can be a long wait before the telegram arrives.