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Why an anti-poverty programme in Bangladesh failed

Thu, 06/13/2019 - 14:26

A YEAR AND a half ago The Economist wrote about a promising approach to cutting poverty in Bangladesh (“On their bikes”, January 27th 2018). RDRS, a charity, was offering small loans to more than 100,000 poor farmers on the condition that they migrated temporarily to a city for work. Everything seemed to be set fair. Smaller randomised controlled trials had shown that many men could be persuaded to move while the rice crop is growing, when there is not much work to be done at home. Although the migrants found only low-paid jobs, as rickshaw drivers, building labourers and the like, their fortunes had greatly improved. It looked like a true poverty cure.

Sadly, things soon began to go wrong. Evidence Action, the charity overseeing the scheme, heard rumours that somebody involved with the project may have sought to bribe a government official, though it could not substantiate them. More damningly, as the data came in, it became clear that in 2017 few men had been persuaded to migrate. On June 6th Evidence Action announced it was shutting down the scheme. What looked like a miracle cure for poverty now seems like a warning about the pitfalls of development...

A former official casts doubt on India’s GDP figures

Thu, 06/13/2019 - 14:26

ALMOST TWO years ago Arvind Subramanian, then India’s chief economic adviser, published a little-noticed passage in the finance ministry’s annual economic survey. The previous two years posed a “puzzle”, he wrote. India had reported miracle growth in GDP (averaging 7.5%) despite miserable growth in investment, exports and credit. He looked for comparable examples elsewhere since 1991. He found none. No country had grown faster than 7% in such circumstances. None, in fact, had grown faster than 5%. India’s rapid expansion, he warned, might be hard to sustain.

Or, indeed, hard to believe. Mr Subramanian’s official position meant he could not say that loudly then. But he is saying it now. In a paper published by Harvard University, where he is a visiting fellow, he argues that India’s growth figures have been greatly overstated. From the 2011-12 fiscal year to 2016-17, its economy officially expanded by about 7% a year, eventually outpacing China’s to become the fastest-growing big economy. That boast has helped entice over $350bn of foreign investment in the past seven years. But India’s true growth, Mr Subramanian thinks, is more like 4.5%. Rather than outperforming China, India has underperformed Indonesia.

His paper starts by reporting a variety of indicators that have slowed sharply since 2011-12, even as growth has...

Robert Merton and the effect of time on portfolio choice

Thu, 06/13/2019 - 14:26

FINANCE THEORISTS are, as everybody knows, unworldly people who can scarcely tie their shoelaces, still less change a car tyre. Robert Merton confounds this stereotype. As he talks amiably at the London office of Dimensional Fund Advisors (he is the firm’s “resident scientist”), you sense that here is a man who could fix a flat in no time. He would probably deliver a cheerful lecture on the importance of the correct tyre pressure while he was tightening the wheel nuts.

Mr Merton has always had a bent for engineering, whether financial or mechanical. He bought his first stock aged ten and completed a risk-arbitrage trade (on a takeover by Singer, a maker of sewing-machines) aged 11. He rebuilt his first car aged 15. In 1997 he won the Nobel prize for economics aged 53—a career high. A year later, a career low: LTCM, the hedge fund he co-founded, imploded. These markers of the passing years matter. For Mr Merton’s specialism is the mathematics of time applied to finance.

His first paper on the subject was published almost exactly 50 years ago. Its title—“Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case”—is forbidding. The ten pages of equations that follow are daunting. But for Mr Merton, the equations are tools, no different from a car jack. They allowed him and subsequent researchers to clarify...

The ECB presidency is distinct but not immune from backroom deals

Thu, 06/13/2019 - 14:26

“THE LONGEST lunch in history” is how Jonathan Powell, an adviser to Tony Blair, a former British prime minister, has described the appointment of the first head of the European Central Bank (ECB) in 1998. The French, keen to have their man in the job, had convinced the Germans that Wim Duisenberg, a Dutchman, should serve only half of his eight-year term before making way for a Frenchman. Mr Duisenberg resisted, giving in only after midnight.

The choice in 2011 of the third and current president, Mario Draghi, an Italian, involved less drama. Even so, France and Italy fell out after Lorenzo Bini Smaghi, another Italian on the bank’s six-strong executive board, initially refused to give way to a French national. “What can I do? Shall I kill him?” Silvio Berlusconi, then Italy’s prime minister, asked Nicolas Sarkozy when his French counterpart complained.

Mr Draghi departs in October. What tales will be told of his successor’s selection? The scope for theatrics is greater than ever. The choice is always political: national leaders make nominations and eventually agree on a name. But Mr Draghi’s term ends in the wake of European elections, as they are also deciding other top jobs. At a summit on June 20th-21st the European Council of leaders aspires to pull off a package deal covering the key roles. Succeed or no, the...

Martin Feldstein was a pillar of American economics

Thu, 06/13/2019 - 14:26

FOR A HALF-CENTURY Martin Feldstein was everywhere you looked in American economics. He was an astoundingly prolific columnist, sometimes churning out several a week, for several newspapers, on the big economic stories of the day. He was a fixture at conferences and seminars and the teacher, for two decades, of Harvard University’s introductory economics course. He served presidents of both parties. In short Mr Feldstein, who died on June 11th aged 79, was an American economic institution.

Born in New York City, he spent most of his life in Cambridge, Massachusetts, at Harvard, where he moved in 1967 after a doctorate at Oxford. His early career was remarkably productive. In 1974 he published an influential paper examining how Social Security, America’s public pensions system, affects saving patterns. Astonishingly, he concluded that the programme reduced personal saving by between 30% and 50%; throughout his life he was a staunch advocate for its reform.

In work with Charles Horioka he identified one of the great enigmas in international economics, now known as the Feldstein-Horioka puzzle. Economists reckon that capital free to move should go where returns are highest. There should therefore be little correlation between a country’s savings and domestic-investment rates, since places with too little investment should...

Digital technology will strengthen America’s biggest retail banks

Thu, 06/13/2019 - 14:26

BY ALMOST ANY measure, America’s biggest banks are behemoths. JPMorgan Chase’s balance-sheet weighs in at $2.7trn, Bank of America’s (BofA) at $2.4trn. Citigroup tips the scales at almost $2trn and Wells Fargo at $1.9trn. Their combined market value is nearly $1trn. Last year they raked in over $100bn after tax.

Yet by one gauge, the titans are curiously tiny. Together that quartet holds only about a third of Americans’ deposits (see chart). The biggest names in other rich countries, from Canada to Sweden, have far larger shares. Perhaps only Germany’s market, with its hundreds of municipal and co-operative banks, is similarly fragmented.

Despite years of mergers, including several mid-crisis in 2008-09, America still has over 5,300 banks. Almost 5,000 are “community” banks, mostly with assets below $1bn, which collectively hold 15% of deposits. Even the giants are still filling gaps, the fractured geography of their retail networks reflecting the genealogy of past mergers. BofA opened branches in Pittsburgh only last year and in Salt Lake City in January. The first Chase branches in Boston and Washington opened in late 2018.


The market believes the Fed will cut rates by September. Should it?

Wed, 06/12/2019 - 20:10

THE FEDERAL RESERVE is changing direction. In December it predicted that it would raise the federal funds rate twice in 2019, to 2.75-3.0%. In March it thought it would hold rates steady instead. Investors now think there is a one-in-five chance that it will cut rates at its meeting on June 19th, and a 95% chance that it will do so by September (see chart). Jerome Powell, the Fed’s chairman, has said it is “ready to act”.

The reason for the change is a darkening world economy, caused primarily by the failure of America and China to strike a deal to bring their trade war to an end. Yet for all the ructions, the visible impact on America’s hard economic data has so far been relatively small. True, American firms hired only 75,000 workers in May, on first estimate, well below the recent monthly average. But jobs data are volatile, and the unemployment rate is a very low 3.6%.

Where the pain of the trade war has shown up is mainly in financial markets. The ten-year Treasury yield, for instance, was 2.5% in early May but has since fallen to 2.1% as investors have rushed to safety and anticipated rate cuts. Large moves like these raise an uncomfortable question for the Fed. Should it yield to the market, thereby risking the appearance that monetary policy is set by traders? Or should it consider only backward-looking economic...

How compatible are democracy and capitalism?

Tue, 06/11/2019 - 16:36

OF LATE THE world’s older democracies have begun to look more vulnerable than venerable. America seems destined for a constitutional showdown between the executive and the legislature. Brexit has mired Britain in a constitutional morass of its own. Such troubles could be mistaken for a comeuppance. In recent years political economists have argued that rising inequality in the Anglo-American world must eventually threaten the foundations of democracy; a book on the theme by Thomas Piketty, a French economist, has sold well over a million copies. That argument channels a time-worn view, held by thinkers from Karl Marx to Friedrich Hayek, that democracy and capitalism may prove incompatible.

As powerfully as such arguments are made, the past century or so tells a different story. The club of rich democracies is not easy to join, but those who get in tend to stay there. Since the dawn of industrialisation, no advanced capitalist democracy has fallen out of the ranks of high-income countries or regressed permanently into authoritarianism. This is not a coincidence, say Torben Iversen of Harvard University and David Soskice of the London School of Economics, in their recent book, “Democracy and Prosperity”. Rather, they write, in advanced economies democracy and capitalism tend to reinforce each other. It is a reassuring message, but one...

How to stop governments borrowing behind their people’s backs

Mon, 06/10/2019 - 11:04

IN 2016 THE government of Mozambique confessed to secret debts of $1.4bn, or 11% of GDP, mostly as loan guarantees for state-backed companies. Growth faltered, the currency slumped and foreign donors pulled back. The results have been “devastating”, says Denise Namburete, a civil-society activist, describing health centres that have gone two years without medicines. American prosecutors are pursuing eight people involved in the scandal, including three foreign bankers and a former finance minister, on charges of money-laundering and fraud.

The Mozambique case may be unusual—or not. Even the IMF is scratching its head about how much governments truly owe. In some places the mystery is loans from China and other emerging lenders. In others it is advance payments from oil traders, liabilities from public-private partnerships or hidden loans from commercial banks. The Institute of International Finance (IIF), a group of banks and financial institutions, has responded to mounting concern by drafting principles on debt transparency. Finance ministers of G20 countries endorsed them at a summit in Fukuoka, in Japan, on June 8th-9th.

The IIF principles are voluntary and would apply only to lending from the private sector, not from states. Lenders would disclose any loans they make to low-income governments or state firms within...

LIBOR is due to die in 2021. Hurry up and drop it, say regulators

Thu, 06/06/2019 - 14:34

JUST DROP off the key. Yes, it means breaking a complicated yet rewarding long-term relationship: $240trn-worth of derivatives, loans and bonds are priced off LIBOR, the London Interbank Offered Rate; $200trn-odd are in dollars alone. But this key interest rate is due to die. Almost two years ago Andrew Bailey, the head of Britain’s Financial Conduct Authority (FCA), LIBOR’s regulator, in effect said it would expire at the end of 2021. In recent days American and British supervisors have again urged banks: hop on the bus.

A few years ago LIBOR was undermined by a rate-rigging scandal which highlighted ills that might anyway have proved fatal. Notionally, it is the rate at which banks can borrow from each other, for up to a year, in dollars, sterling, Swiss francs, yen and euros. It is calculated from daily submissions of panels of 11 to 16 banks. But banks now scarcely tap interbank markets. On June 5th Sir Dave Ramsden, a deputy governor of the Bank of England, said that in the first quarter of 2019 on average only nine deposits totalling just £81m ($105m) a day underpinned six-month sterling LIBOR.

Regulators want markets to move to new benchmarks based on overnight rates and a far richer seam of transactions. America’s Alternative Reference Rates Committee (ARRC), a group of market participants convened by the...

The Federal Reserve is reviewing its monetary-policy framework

Thu, 06/06/2019 - 14:34

“MOST OF AMERICA thinks the Federal Reserve is a national forest.” That reminder that the general public has little idea what a central banker does was offered by an incumbent governor of the Federal Reserve to Alan Blinder when he joined in 1994. He passed it on 25 years later, on June 4th, to a star-studded group of economists and policymakers gathered at the Federal Reserve Bank of Chicago to discuss the Fed’s first public review of its framework.

The review is a year-long exploration of how the Fed should adapt to trying economic times. It typically slashes interest rates by around five percentage points in a recession. But chronically low rates mean that it now has less than half of that room for manoeuvre. The Fed is seeking to answer three questions. Should it update its forward-looking inflation target to consider past inflation too? Should its toolkit be expanded? And could it communicate and implement its policies better?

What connects all three is the difficulty of managing expectations. At the effective lower bound, where interest rates are at or very near to zero, the Fed cannot simply slash short-term rates. It must either try other sorts of interventions in financial markets—or make promises and hope they are believed. In theoretical models, such expectation management can be extraordinarily powerful. If...

In its second term, will India’s ruling coalition be bolder about reform?

Thu, 06/06/2019 - 14:34

INDIA’S NEW finance minister, Nirmala Sitharaman (pictured below), is an unusual figure in the country’s politics. She is the first woman to head the finance ministry since Indira Gandhi seized the post (while also serving as prime minister) 50 years ago, after nationalising many of India’s banks. She is an economist. But unlike most in her Bharatiya Janata Party (BJP) she hails from the country’s south, having grown up in Tamil Nadu, one of the few big states to resist the BJP’s advances in the recent election. She claims a humbler background than her predecessor, Arun Jaitley. Her father worked for India’s railways and she spent a month selling home furnishings at Habitat, a shop in London.

Ms Sitharaman thus embodies the BJP’s broadening appeal to aspirational Indians outside its traditional heartlands. But will she help it fulfil those aspirations? On the day she was appointed, India’s statistical authority reported that growth in the first quarter of the year had slipped to 5.8%, its slowest since Narendra Modi was elected prime minister in 2014 (see chart). The government also belatedly released a report it had withheld showing that unemployment had risen to 6.1% in the year ending June 2018. In India, the jobless are often not the poorest, who cannot afford not to work, but the newly educated, qualified for better jobs that...

Indians are switching to digital payments in droves

Thu, 06/06/2019 - 14:34

THE ALLEYS of the 150-year-old Chor (Thieves’) Bazaar, a colourfully named flea market in Mumbai, are crammed with goats, used tyres, speakers, drills and other assorted ephemera. But even in this unlikely place, modern payment methods are gaining a foothold. In stalls abutting the market, bags of sand can be paid for by providing a phone number or scanning a QR (quick response) code. Many countries have seen digital payments take off in the past few years; in India, where little over a decade ago a cheque could take more than two weeks to clear, it feels like a revolution.

It is one that has been shaped, not always intentionally, by government policies. September 2010 saw the arrival of Aadhaar, a system of biometric IDs that could be used to open a bank account. After becoming prime minister in 2014, Narendra Modi chivvied bankers to open accounts for everyone. Around 360m basic “Jan Dhan” (people’s wealth) accounts were opened, adding to the 243m accounts already in existence. But many sat empty, or held just a rupee or two put in by banks under government pressure to reduce the number of zero-balance accounts. 

Two further developments gave those unused accounts a purpose. The first was the launch in 2016 of the Unified Payments Interface (UPI), an interbank money-transfer system. The second was “demonetisation...

President Donald Trump is trashing deals in favour of tariffs

Thu, 06/06/2019 - 14:34

NEW FRONTS in President Donald Trump’s assault on the global trading system are opening up by the day. On May 30th he dropped a bombshell on Mexico, threatening a 5% tariff on all its exports to America, rising to 25% by October if immigration flows do not fall (see article). On May 31st he turned to India, announcing the end of longstanding trade preferences on around $6bn-worth of its exports to America. A proposal is being considered to enable the administration to increase tariffs on imports from countries deemed to be manipulating their currencies. The appointment of judges to the court of appeals of the World Trade Organisation (WTO) is being blocked. Japan and the European Union are on notice that America may impose tariffs on their cars. Meanwhile the biggest trade fight of all, with China, is getting bloodier.

The trade element of Trumponomics is a striking departure from previous administrations’ policies, and a stiff challenge to the multilateral trading system. But critics must face some uncomfortable truths. The first is that some of America’s frustrations with its trading partners are justified. China’s system of subsidies and state-directed capitalism harms competing firms elsewhere, and raises questions about surveillance and security. India’s...

The long-term decline in bond yields enters a new phase

Wed, 06/05/2019 - 20:24

AT THE END of 1989, an American in London received a call from a friend back home. The caller had watched the fall of the Berlin Wall and the toppling of Nicolae Ceausescu in Romania with growing dismay. He was at the end of a four-year course in Russian Studies at an elite university with hefty tuition fees. He had learned all the Kremlinology a would-be cold warrior could need—but not that the cold war might suddenly end. “I just took a $60,000 bath,” he said.

This story comes to mind not so much because of fears of a new cold war, this time with China, but because of the bond market’s recent response to such fears. Long-term interest rates have tumbled almost as swiftly as communism fell in Europe. The yield on a ten-year Treasury bond has plunged from 2.5% to 2.1% in the past month. Ten-year Bund yields have turned negative again and have reached a new all-time low.

What happens to long-term interest rates in large part reflects what is expected to happen to short-term rates. The bond market’s Kremlinologists expect the Federal Reserve to cut them soon. Other central banks will seek to keep money easy. One consequence is that the secular decline in real interest rates is unlikely to reverse soon (see chart). The implications are far-reaching: the whole edifice of asset prices is founded on a low-rate regime. But what if...

Advertising may make people miserable, but it still has its uses

Tue, 06/04/2019 - 15:17

EVERY YEAR, as Americans polish off their Thanksgiving feasts, a particular genre of advertisement begins to air. The details vary, but the plot does not: one family member surprises another with the Christmas gift of a luxury car, often adorned with a cartoonishly large bow. The recipient never betrays a hint of the dismay one might expect of someone whose partner has spent tens of thousands of dollars without consultation. Such a car can easily cost more than the median annual income of an American household, and most people who see these ads will not be able to afford one. But the envy such spots induce serves an economic purpose, even as it leaves the majority feeling worse about themselves.

Ads and other forms of marketing ostensibly serve a straightforward economic role. Firms selling goods and services need to tell consumers about the availability and desirability of their wares, and spend on advertising to do so. By informing consumers about the relative merits of various products, ads improve the quality of purchasing decisions and, conceivably, leave both firms and shoppers better off than they would be in an ad-free world.

Yet advertising might fall short of this ideal in many ways. It need not be honest or representative of the full range of available products, for example. Some firms target impressionable...

Bank supervision in America is unfit for the digital age

Thu, 05/30/2019 - 10:33

HERE COME the Germans. On May 21st Raisin, a “deposit marketplace” from Berlin, declared its intention to set up shop in America. Within a year Raisin hopes to follow its compatriot, N26, a mobile bank that is due to open there soon. Yet neither will, technically, be a bank. Remarkably, no such startup yet has a national banking charter in America, although the country is a hotbed of financial technology, spawning innovators from PayPal to Quicken Loans.

Both Raisin and N26 will rely, at least at first, on the charters and deposit insurance of local “sponsor” banks. That route is “fastest to market”, says Nicolas Kopp of N26. It is also common. Sponsors such as the Bancorp Bank, Cross River Bank and WebBank stand behind fintechs and others wanting to offer banking services. (They often supply technology, too.)

Varo Bank, of Salt Lake City (hitherto a partner of Bancorp), is likely to be the first purely mobile bank with a national charter. Last August the Office of the Comptroller of the Currency (OCC), a supervisor, gave Varo preliminary approval, subject to its raising $104m in capital and other conditions. Varo will also need a nod from the Federal Deposit Insurance Corporation (FDIC), which it first approached in early 2017. Robinhood, an online wealth-manager, has also applied to the OCC and Square, which handles...

Jokowi wants to improve the quality of Indonesia’s labour force

Thu, 05/30/2019 - 10:33

VICTORIA OPAI, a teacher in a remote part of West Kalimantan, Indonesia’s slice of Borneo, is charmed by the new road connecting her school to Putussibau, the nearest town. It is smooth, reasonably straight and cuts through swathes of jungle. It used to take three hours to get into town, she says. Now it takes 40 minutes.

Over the past five years new roads, airports and railways have popped up across Indonesia. Reviving its ailing infrastructure was a pledge of Joko Widodo, the president, known as Jokowi, during his first term. Along with poverty-reduction measures, it helped him win re-election on April 17th. In his first term Indonesia grew by 5.1% annually; last year the IMF said ambitious economic reforms could enable Indonesia to grow at 6.5% by 2022. Jokowi promises to improve “human resources”, meaning education and the quality of the labour force. In a speech on April 30th he talked about “upskilling” Indonesia.

In 2003 the constitution was amended to require the government to spend 20% of its budget on education. Previously it had spent about half that. And the share of 13- to 18-year-olds enrolled in school has risen over the past two decades, to 88%. But outcomes are poor. Over half of those who finish school are functionally illiterate. Between 2003 and 2015 Indonesia’s scores in the PISA tests run by the...

Have regulators created a new type of financial monster?

Thu, 05/30/2019 - 10:33

GRIMSTAD, NORWAY, is an unlikely setting for financial-market shenanigans. But the fishing town is home to Einar Aas, a trader who took huge bets on Scandinavian energy markets. His 15 minutes of infamy came in September 2018, when his bets went spectacularly wrong. Unable to cover his losses, he blew a €114m ($133m) hole in the capital buffers of Nasdaq Clearing, which handled his trades. Other members of the clearing house—mostly banks and energy-trading companies—were called upon to replenish its buffers.

The affair sent shivers down regulators’ spines everywhere. In the midst of the global financial crisis in 2009, leaders at the G20 summit in Pittsburgh decided that the chaotic world of derivatives needed to be made safer by ensuring that they were centrally cleared. A decade later the notional value of all derivatives outstanding globally stands at a trifling $639trn, of which 68% are centrally cleared through a handful of clearing houses. Collectively these institutions contain one of the biggest concentrations of financial risk on the planet.

Regulators fret most about a murky subset of derivatives: those that are traded over the counter by dealers and investors, rather than on exchanges. The notional value of these OTC derivatives is $544trn, of which 62% are centrally cleared (see chart). That is up from just...

Will the trade war spell the end of Chinese stock listings in America?

Thu, 05/30/2019 - 10:33

AMERICAN INVESTORS wanting a piece of Chinese firms, whether state-owned oil majors or tech stars, need not stray beyond Wall Street. Over the past two decades some 200 Chinese firms have gone public in America, more than from any other foreign country. (Most have their main listing there; a few have a “secondary” one, with a main listing in China.) These firms’ total market value is more than $1trn. For America’s stock exchanges, that is a great triumph. But trade hawks are starting to describe it as a great liability.

In a letter in April a bipartisan group of politicians led by Marco Rubio, a Republican senator, said American investors faced risks because of exposure to Chinese companies “that pose national-security dangers or are complicit in human-rights abuses”. Steve Bannon, President Donald Trump’s former chief strategist, expanded the focus to all Chinese stocks in America in an interview published on May 22nd in the South China Morning Post. “The next move we make is to cut off all the IPOs [initial public offerings], unwind all the pension funds and insurance companies in the US that provide capital to the Chinese Communist Party,” he said.

Those threats might be dismissed as idle, but for the actions of a couple of their targets. On May 24th Semiconductor Manufacturing International...