Finance internship: The Economist invites applications for the 2019 Marjorie Deane internship. Paid for by the Marjorie Deane Financial Journalism Foundation, the award is designed to provide work experience for a promising journalist or would-be journalist, who will spend three months at the London office of The Economist writing about finance and economics. Applicants are asked to write a covering letter and an original article of no more than 500 words suitable for publication in the Finance and Economics section. Applications should be sent to email@example.com by May 3rd. For more information, see www.marjoriedeane.com
THE PUBLICATION six years ago of Thomas Piketty’s “Capital in the Twenty-First Century”—an 800-page tome that has since sold over 2.5m copies—helped reveal the huge increase in inequality in the West since the 1970s. So why has support for welfare spending to counteract it remained so stable over that period? In theory, support for redistribution should increase with the gap between rich and poor, as the envy of the have-nots is stoked. But polls in America and Britain suggest virtually no growth in support for redistribution since 1980.
A new paper* due to be presented on April 7th at the Economic History Society’s annual conference suggests an interesting answer. Rather than the gap between rich and poor being the main influence on attitudes to welfare, the degree of inequality within the upper classes might matter more.
Jonathan Chapman of NYU Abu Dhabi looks at the relationship between inequality and how the poor law, a locally administered welfare system, operated in Victorian England. He compared the generosity and harshness of the conditions of poor-law relief in different areas with the gap between rich and poor, as measured by income from wages, and inequality within the rich, as measured by families’ number of live-in servants. He found that areas of high wage inequality had less harsh rules for claiming poor...
IN 1980, IN his early 20s, Mengistu Maregne began selling soft drinks from a stall in Merkato, Ethiopia’s largest market. To finance the fledgling business he joined an ekub, a rotating savings-and-credit association (ROSCA) that pools contributions from members each week and disburses the pot to the winner of a lottery, with each member winning once over the scheme’s term. Being first to draw the lump sum of 4,000 birr ($140), he put the money away and joined another. Within a year he had bought a home; soon after he bought a shoe shop. “Ekub changed my life,” he says.
Though ROSCAs are found across the developing world they are often assumed to serve the poor. But Ethiopia’s are used across the income scale. They encourage members to save, and enable some to raise business capital or buy pricey items such as cars. Some have hundreds of members, with officers who vet applicants and analyse risks.
ROSCAs are entrenched in Ethiopian culture. But their ubiquity is also an indication of the shortcomings of Ethiopian finance. Though the formal banking sector has grown fivefold in just over a decade, it is still much smaller than in neighbouring countries. Bank assets per person are less than a third the level in Kenya. Ethiopian banks also underperform African peers in business lending. Just 12.9% of Ethiopian firms had...
“IT’S LIKE the Midas effect in reverse,” says Badiul Majumdar of SHUJAN, an anti-corruption pressure group. “Everything the government touches turns not to gold, but rather from gold to dust.” He is talking about Islami Bank Bangladesh, which was rocked in 2017 when the government sent military-intelligence operatives to force out senior executives and board members, and replaced them with figures more to its liking. Fears that the boardroom coup would drag down a comparatively well-managed institution in a sector marred by political meddling and cronyism now appear to have been justified.
Established in 1983 as Bangladesh’s first bank run on Islamic principles, Islami thrived by handling a large share of remittances from emigrant workers and by lending to the booming garment industry. Its troubles stem from its links with Jamaat-e-Islami, Bangladesh’s largest Islamist party, which allied with Pakistan during the war of succession of 1971. One of the first acts of the current prime minister, Sheikh Hasina Wajed, after taking office in 2009 was to set up a court to try war crimes. Leading figures from the Jamaat were sentenced to imprisonment or hanging.
If anything, it is surprising it took Sheikh Hasina and her Awami League eight years to go after Islami—especially given allegations, including from America’s government...
IT’S NOT all bad. In 2008 Lloyds, a large British bank, took over HBOS, a rival that was being sucked beneath the rising waters of the global financial crisis. HBOS nearly dragged Lloyds under with it; £20.3bn (then about $30bn) of public money was needed to keep the combined group afloat. But these days Lloyds is doing all right.
Under António Horta-Osório, its chief executive since 2011, Lloyds has ditched almost all its foreign operations, narrowed its product range and (like many other banks) poured money into digitisation. The state sold its last shares in 2017. Last year the bank’s return on tangible equity (ROTE), a measure of profitability, was a decent 11.7%. This year Mr Horta-Osório is aiming for 14-15%, Brexit notwithstanding.
Some other European banks also have good stories to tell. The Netherlands’ ING is also a refurbished state-aid case. Its online German bank, ING-DiBa, claims to return over 20%. Spain’s Santander, the euro area’s biggest bank by market capitalisation, sailed through its homeland’s financial storm without a single loss-making quarter. On April 3rd it set out plans to lift its ROTE from 11.7% last year to 13-15% by cutting costs and exploiting digitisation. Nordic banks make bonny returns—although both Danske Bank and Swedbank, beset by money-laundering scandals, have sacked their chief...
LESS THAN a week after the White House described trade talks in Beijing as “candid and constructive”, American and Chinese negotiators met again on April 3rd in Washington, DC. There is talk of a summit between the two countries’ presidents. But amid the upbeat noises are a few discordant notes. Without a deadline, the discussions could drag on, or even stall. Although the contours of a deal seem clear, the final items are always the trickiest. And even if a deal is struck, it may not be a good one.
The two sides have already agreed on provisions relating to currency manipulation, and are hashing out how much more American goods the Chinese will commit to buying. Rules on technology transfer and American companies’ access to the Chinese market are still being discussed. Also on the table will be American demands that China relaxes its attitude to trade in data, which it sees as a threat to national security.
Some in the Trump administration see the negotiations as an opportunity to demand reforms that would also benefit China, such as a more stringent intellectual-property regime or trimmed subsidies. The main objective of the Chinese delegation, led by Liu He, a vice-premier, is simpler: the lifting of the tariffs imposed since last July, which currently cover just over 44% of Chinese exports to America, or goods worth...
OF ALL THE lines of all the characters in all the scenes in “Casablanca”, the ones that resonate most are spoken not by Humphrey Bogart, the leading man, but by Claude Rains, who plays Louis Renault, a cynical police captain. Needing a pretext to shut down Rick’s, the nightclub owned by Bogart’s character, he declares that he is “shocked, shocked to find that gambling is going on in here”.
Renault’s line captures the fake distaste for gambling that lives on in polite circles. It finds expression even in impolite circles, such as finance. Take the market for oil futures. Only the gauche would describe it as anything other than a system for transferring risk. Oil producers sell futures to insure themselves against a price rout that would threaten solvency. Investors earn a risk premium by buying them.
There is something to this characterisation. Producers are indeed short futures much of the time. But often, they are long. Perhaps the real reason for a thriving futures market is that people both inside and outside of the oil business enjoy a punt on the price of crude. If so, that is all to the good. The prices that wash out of these wagers are an invaluable guide to decision-making about production, storage and investment.
The benefits hinge on the relationship between spot prices, futures prices and...
PHYSICISTS’ QUEST for a “theory of everything” is well-known. The equivalent in economics is the hunt for common causes for the rich-world macroeconomic trends of the past decade or so: a shrinking share of the economic pie for workers, disappointing investment and lacklustre productivity growth. These must be reconciled with low interest rates, pockets of technological advance and juicy returns for investors willing to take risks.
The leading economic theory of everything is that competition has weakened as markets have become more concentrated. Unlike firms in competitive markets, monopolies limit production in order to keep prices and profits high. They can therefore be expected to restrain their investment, too. They might still be innovative—with monopoly profits up for grabs, why not be?—but market power usually makes economies less productive overall. And monopolies have many opportunities to take bites out of labour’s share of the pie. Their high profits typically flow to investors, not workers. Their high prices eat into the purchasing power of wages. Their bargaining clout may even allow them to suppress pay directly.
On April 3rd the IMF provided the latest evidence for parts of this theory. In a new study the fund’s economists examined the markups over marginal cost—one proxy for market...
CONSIDER THE task economists have set themselves. The global economy is the outcome of near-constant interaction between billions of unique individuals. To attempt to model even a small corner with a few equations is bold, even foolhardy. That economists have made as much progress as they have is impressive.
Might a radically different approach do better? In February the Boston Review, a quarterly magazine, convened a forum to discuss prospects for an “economics after neoliberalism”. “What we call ‘the economy’”, read one of the entries, “is in fact a highly complex, multi-level system. It must be studied as such.” The authors represent “complexity economics”. Though still a niche within the field, its potential impact is profound.
Most economics is centred on equilibrium: an economy’s natural resting state. Solving a set of equations that describes a market, conceived of as populated by predictably self-interested individuals who face various constraints, yields that equilibrium—the prices that balance supply and demand, say, and the level of welfare generated. A researcher can subject such a toy economy to an external shock, such as a new technology or a change in tax policy, and watch it return to a new equilibrium. But no matter how much these models are perturbed, they cannot generate...