sexta-feira, 28 de fevereiro de 2014

quinta-feira, 27 de fevereiro de 2014

Merkel will not banish Britain’s EU demons

Margaret Thatcher was right. Campaigning to keep Britain in the EU, the former Conservative leader declared that Europe opened windows on the world that would otherwise close with the end of empire. To protect and promote its interests around the globe, Britain needed an anchor of authority and influence on its own continent. That was 40 years ago. Nowadays, it falls to Angela Merkel, Germany’s chancellor, to make the case for British engagement.

Thatcher’s argument, offered to the House of Commons before the 1975 referendum on EU membership, is not heard often in today’s Tory party. Hardline eurosceptics, who have wrenched control of policy from David Cameron’s government, shake a fist at geopolitical realities. Unshackled from the EU, they imagine, their plucky island nation would be restored to its rightful role as a global power.

The impact of such delusion is already being felt. There was a small glimpse of this when Ukrainian protesters gathered in Kiev’s Independence Square to overturn the government of Viktor Yanukovich.

A couple of decades ago, to the great credit of John Major’s government, Britain was a powerful champion of the efforts to extend security and democracy eastward. Yet the efforts to mediate in Ukraine devolved to Germany, France and Poland. Britain stood on the margins. Such has been the extraordinary narrowing of strategic focus that Mr Cameron seems more anxious to lock out immigrant workers from the former Communist bloc than to support Ukraine’s claim to a European future.

Ms Merkel was feted this week with lunch in Downing Street, tea with the Queen at Buckingham Palace and a rare audience of both houses of parliament in between times. The contrast with the low-key reception for François Hollande when the French president visited Britain a few weeks ago was no accident.

The German chancellor had been invited to make the case that her host has allowed to go by default. Mr Cameron well knows that she is an indispensable ally. His promise fundamentally to renegotiate the terms of British EU membership was never terribly credible. Without some rhetorical support from the continent’s most powerful leader, it would be entirely threadbare.

This insight has not been lost on Ms Merkel. One senior German official has been heard to remark – only a little unkindly – that she has two European missions: the first to rescue the euro, and the second to save Mr Cameron from his own political miscalculation. The open question is whether he has the political courage to help himself.

The signs are not encouraging. The prime minister has widened the channel separating Britain from the continent by overturning 40 years of British European policy. Hitherto, even when governments stood aside from this or that EU project, they have insisted on a seat at the table. Mr Cameron leaves an empty chair.

He had hoped – naively – that the promise of a second referendum would turn the tide of Tory Europhobia. The reverse has been true. Many sceptics demand changes in the terms of the relationship that they know well can be achieved only through departure. The original sin, you hear them say, was the transfer of sovereignty in the treaty of Rome.

Ms Merkel’s readiness to offer an eloquent counter-argument was not entirely altruistic. For Germany, the most important relationship in Europe will always be that with France. Without the Franco-German axis, the enterprise will founder.

Berlin, however, does not want an exclusive arrangement. It also looks for allies in the more freewheeling north of the continent. Britain is an obvious choice. Berlin worries too about Europe’s standing in the world. Ministers close to Ms Merkel make a telling point: what would it do for European prestige if the EU lost one of its most important, albeit troublesome, members?

So Ms Merkel wants to be helpful. Between the lines of her speech you could read that she will back reforms that promote a more outward-looking, competitive union. Some of the rules on social policy can be revisited and brakes applied to EU intrusions into matters better left to national governments. Protections can be offered to those nations that remain outside the eurozone.

There are, however, limits. Ms Merkel will not accept changes to the treaties or exemptions for Britain that would jeopardise the essential fabric of the union. For his part, Mr Cameron dare not list his demands with any precision for fear of inviting his party’s sceptics to dismiss them as inadequate.

So even as she asks Britain to stay, reprising Thatcher’s arguments about influence in the wider world, the chancellor is making plans against the possibility it will leave. The demarche in Kiev was a sign of things to come: Poland has begun to look a natural substitute for Britain as Germany’s northern ally.

There are lots of reasons why Britain has felt uncomfortable in the EU – why, in the phrase of Lord Patten, the former Tory minister and EU commissioner, it has never really “joined Europe”. Political culture, geography and imperial history have all played their part.

However, what most infuriates those now dragging it towards the exit is the idea of membership of a club Britain does not lead. A US secretary of state got it right some years ago. Never underestimate, Edward Stettinius wrote to president Franklin Roosevelt during the second world war, the difficulty an Englishman faces in adjusting to a secondary role after so long seeing leadership as a national right. As they say in Europe, plus ça change.

Fonte: FT

quarta-feira, 26 de fevereiro de 2014

Editorial do Financial Times, Brazil’s economy: go-go to so-so

O editorialista do FT tem toda razão: demitir o Guido Mantega e colocar em seu lugar alguem com uma visão da economia "market-friendly traria grandes beneficios, mas como ele reconhece isto somente deverá acontecer depois da eleições. Alias, criticas da midia internacional simplesmente ajudam a mante-lo no cargo, já que nenhum governo aceitaria correr o risco de ser acusado de fracote na defesa da honra nacional. Já vimos este filme, quando Berlusconi foi duramente criticado pela The Economist.

It was a horribly public Freudian slip. Last week Brazil announced $19bn of budget cuts designed to shore up the country’s sagging credibility among investors. But during the presentation, the planning minister accidentally called President Dilma Rousseff “President Lula” – her charismatic predecessor who governed the country when it could seemingly do no wrong. Although the mistake was laughed off, it said a lot about Brazil’s transformation from a go-go country into a so-so.

During the boom years, when Mr Lula da Silva was president, Brazil grew on average 4 per cent a year – and in 2010 racked up an impressive 7.5 per cent spurt. Now, by contrast, its $2.2tn economy is teetering on the brink of a technical recession. Worse, nobody sees where future growth might come from. Brazil is even considered one of the “Fragile Five”, a group of countries considered particularly vulnerable should the US Federal Reserve increase interest rates.

Domestically, the country’s consumption boom has run out of steam. Low investment during the boom years has revealed itself as a series of growth-crimping supply bottlenecks. Externally, softening commodity prices have opened up a potentially worrying current account deficit. Equivalent to 4 per cent of gross domestic product, it is covered by foreign investment flows. But for how long? Private equity groups are just the latest investors to pull in their horns.

Ms Rousseff inherited some of these problems from her predecessor. Others stem from the worsening global environment. Yet as she approaches the end of her first term, many are of her making too.

A series of tax breaks and other “supply-side” measures designed to boost industrial production only widened the budget deficit, which was then fudged by creative accounting. She encouraged the central bank to cut interest rates, which stimulated the economy but also increased inflation. In addition, lower rates weakened the currency, which was much needed but provided another inflation boost. Combined with a bossy-boots, Dilma-knows-best style, the end result is that Ms Rousseff and her administration have lost credibility in the eyes of investors, and just when times are getting tough and she needs it most.

Still, all is far from lost – and that is not only true about the Brazilian soccer team’s chances in the World Cup. Almost everyone, in government and outside, agrees that the economy needs to change. The real question is how?

One constraint is October’s presidential election. Ms Rousseff’s popularity has recovered from last year’s street protests and she remains the favourite to win. Nonetheless, most believe she will postpone tough decisions until afterwards. (Few believe Brazil will achieve the mooted budget cuts as the cost of energy subsidies soars due to a long drought that has drained hydroelectric plants.)

Another way is to push ahead with Brazil’s ambitious infrastructure programme and boost growth that way. Yet while some projects now offer investors attractive terms, many others are languishing: an upgrade to São Paulo’s main airport has so far only led to a new car park. Lastly, there is the sheer unwieldiness of Congress. Ms Rousseff, a stern technocrat, lacks Mr Lula’s ability to cajole and push unpopular measures through.

All of this brings her back to square one. How to rebuild credibility? At least the central bank has been given free rein to boost interest rates to curb inflation, while Ms Rousseff has marketed the country, emphasising her commitment to low inflation and fiscal probity. The easiest way, though, might be to shake up her team. Guido Mantega, the finance minister, has long lost investors’ regard. Replacing him with a market-friendly candidate could do wonders. Alas, that is likely to be postponed until after the election too.

Fonte: FT

terça-feira, 25 de fevereiro de 2014

Adam Posen: Abe has good medicine but Japan needs a stronger dose

Japan’s recovery programme is showing promising early results. Last autumn the economy enjoyed its fourth successive quarter of growth, its best performance in more than three years.

Many observers rightly praise the Bank of Japan’s shift to positive inflation targeting for contributing to the country’s recovery. Yet monetary policy is only one of the three “arrows” called for in Prime Minister Shinzo Abe’s programme for the Japanese economy. Also important are fiscal consolidation and structural reform. These initiatives, too, are moving in the right direction with the right priorities. But like monetary policy, they need to be bold to succeed.

This is a stronger endorsement than it may seem. Too often, economic reform programmes fail to deliver. Some get the analysis wrong and end up driving the economy further into the ditch. This was the case in Japan in the 1990s when policy makers failed to recognise the risk of persistent deflation. Arguably, it has been the case with US fiscal policy since the 2009 stimulus.

Others get the analysis right but fail to prioritise, going after too many small goals at once as in Indonesia in 1998 or Greece today. Sometimes this reflects a belief that austerity measures alone will reform the economy. Such misplaced faith lies behind many of the euro area’s failures, as it did in Argentina’s a decade earlier. All too often, even sensible economic policies are undermined by an emphasis on process ahead of substance. For example, policy makers in Italy have long laboured under the self-defeating belief that governance must be reformed before the economy can be tackled.

So far, Abenomics has avoided all of these errors. The economic analysis was correct: a return to inflation will make it easier for taxes to rise and reforms to take hold, as they must if the country is to return to a sustainable path. Mr Abe has prioritised a few key reforms – notably increasing female labour force participation, consolidating farms, breaking down labour market divisions and raising competition in healthcare – which are sensible and feasible. The government has not wasted momentum on administrative initiatives before starting its economic reform efforts.

What is needed now is more of the same. The Abe government already has the right ideas; it does not need to devise new initiatives. Instead, it needs to raise its ambitions for the programmes it is already pursuing.

On the fiscal front, the prime minister’s basic plan can be summarised as follows: do not panic. Raise the consumption tax permanently in steps. Spend for emergencies but make those expenditures temporary. Increase taxation and cut expenditure on the older generation that has already benefited from intergenerational transfers.

But Mr Abe needs to be bolder. On the consumption tax, for example, the limit of his aspirations is to increase the levy to 10 per cent over the next 20 months. Even this may be postponed. The government should commit to do far more – raising the tax to at least 20 per cent over the next several years, a level common in the OECD.

Similarly, increasing female labour force participation is the right priority for structural reform. At least 3m Japanese women who could work are neither in employment nor looking for a job. A few million more are squandering their capabilities in limited roles.

Providing affordable child care, and visibly removing the cultural and institutional barriers that prevent women from advancing in the workplace, are proven approaches for achieving this goal. Mr Abe is right to pursue them. But instead of providing 150,000 new nursery places, the government should be creating as many as 400,000. Instead of setting a target for 30 per cent of public sector managers being women, and voluntary guidance in the private sector, it should be setting a compulsory target of 40 per cent for both.

Likewise in the agricultural sector. Production quotas are being removed, which will raise productivity, but more should be done. Small farms should be merged to make them more efficient. Wage subsidies for new hires should be applied nationally, instead of current measures that loosen hiring rules only in special zones.

In short, the Abe government has understood Japan’s economic problems correctly and concentrated its efforts on areas where it can do most good. But the efforts have been insufficient. Far greater ambition is required. True, half a loaf of reform is better than none. But it is probably not enough to return the Japanese economy to sustained strength.

For Mr Abe and his cabinet, economic revival is a means to an end. They want Japan to remain a vital ally – in both senses, energetic and necessary – to the US and Asian neighbours worried by the potential pressures from China. That would require annual growth of about 2 per cent, and a tax base that permanently closes the structural budget deficit. Mr Abe’s current programme is insufficient to achieve this.

The good news is that meeting an external threat is a stronger impetus for reform than growth alone. The Meiji revolution of 150 years ago was prompted by Japan’s desire to stand up to colonial pressures, such as Admiral Perry’s fleet. It produced an economic transformation. If Mr Abe wants to restore Japan to strength, he needs to raise his ambitions.

Adam Posen is president of the Peterson Institute for International Economics


segunda-feira, 24 de fevereiro de 2014

An east-west battle over Ukraine can be avoided

Amid the tragedy, euphoria and confusion in Ukraine, the risks of renewed confrontation between Russia and the west are rising. An east-west struggle over the fate of Ukraine would be a tragedy for the country – increasing the risks of civil war and partition. But while a brutal arm-wrestling match between the Kremlin and the west – with Ukraine as the prize – is a distinct possibility, it is absolutely not in the interests of Russia or the west. On the contrary, the Russians, Europeans and Americans have a common interest in preserving Ukraine as a unified country that avoids civil war and bankruptcy.

Talk of “common interests” between Russia and the west in Ukraine risks being dismissed as pious and unrealistic. It should not be. Just before the downfall of Viktor Yanukovich as Ukraine’s president, there were promising signs that Russia and the EU could work together. When three EU foreign ministers negotiated a shortlived deal with Mr Yanukovich, they were joined by a Russian representative. Vladimir Lukin, the man sent by President Vladimir Putin’s government, is Russia’s human-rights ombudsman and somebody with a background in liberal politics – not a Kremlin stooge.

Of course, the combustible ingredients for an east-west confrontation over Ukraine are also very visible. Over the weekend, Susan Rice, the US national security adviser, warned that it would be a “grave mistake” for the Russian government to send troops into Ukraine. Meanwhile, Sergei Lavrov, the Russian foreign minister, has expressed anger that the deal witnessed by Moscow’s representative unravelled so quickly, and has accused the crowds in Kiev of being led by “armed extremists and pogromists”, as well as “rampaging hooligans” – the kind of talk that could be used to justify Russian intervention.

Behind this heated rhetoric there is a genuine clash of interests and viewpoints. Many Russians find it hard to accept that Ukraine should even be an independent country in the first place. And while the Putin government has accepted the legal reality of Ukrainian independence, it also sees the country as vital to Russian security and part of its natural sphere of influence and cultural hinterland. The EU has been deeply ambivalent about promising Ukraine eventual membership of the EU – fearing the impact of admitting another large, poor country. But the Europeans and Americans do feel that it is crucial to stand up for the principles of democracy and self-determination in Ukraine.

Both Russia and the western powers have a conspiratorial view of the other side’s role in Ukraine. The Russians see the hand of western intelligence agencies behind the demonstrations in Kiev. The west tends to assume that Mr Yanukovich and his henchmen were simply the puppets of Moscow.

In western capitals, the Kremlin’s operatives are seen as ruthless, corrupt, violent and deeply cynical. In Moscow, western policy makers are portrayed as hypocritical, double-dealing and intent on destroying Russia as a global power, while mouthing liberal pieties. This is not a promising backdrop on which to build international co-operation over Ukraine. And yet that is precisely what needs to be done – in everybody’s interests.

A civil war in Ukraine would be a disaster for Russia: violence and refugees would spill across the border. The fate of Russia’s naval bases in the Crimea, which is part of Ukraine, would immediately come into question. And Russia’s relations with the west would inevitably be poisoned. The country would risk being thrust back into a cold war with the west – but this time without a protective cloak of Soviet satellite states.

A Ukraine at war would be no less of a disaster for the EU. With conflict already raging in Syria, it would mean that the EU now had bloody, civil conflicts on both its southern and eastern borders. The economic collapse of Ukraine and a default on its debts – both distinct possibilities – would also damage both Russia and the EU.

If Russia and the western powers are to work together, they both need to make some concessions to each other’s point of view. The US and the EU could acknowledge Russia’s security concerns by making it clear that Ukraine will not be offered membership of Nato in the foreseeable future. They could even make this a written commitment – since the Russians insist they were double-crossed over informal assurances they claim were given about previous rounds of Nato enlargement.

In return, the Russians should drop their objections to Ukraine’s aspiration to join the EU – and accept that the country’s eventual economic integration with the EU need not be a zero-sum game that damages Russian interests. The Russians might also be reassured by the ample evidence that Brussels is in no hurry to rush Ukraine into the EU club.

Above all, the best way to avoid Ukraine being pulled apart in an east-west tug of war is to accept that the political fate of the country can only be decided by Ukrainians themselves. That means that it is crucial that the presidential elections held in May should be clean and free of outside interference. Since neither Russia nor the EU would trust the other party to guarantee the integrity of the process, the UN – which has experience of running elections all over the world – should be entrusted with the task of overseeing the rebirth of Ukrainian democracy.

Gideon Rachman

Fonte: FT

sexta-feira, 21 de fevereiro de 2014

Low inflation can be a disease not a cure

Calma, calma... ele não esta analisando o cenário brasileiro. A inflação no grande bananão insiste em não convergir para a meta definida pelo Copom. Culpa de quem? Sim, é dele mesmo....

Why are you so grumpy again? What wrong with low inflation?

Nothing, so far – but you can have too much of a good thing. Inflation is also low and edging downwards in the US, Japan and the eurozone. Yet in all these places, interest rates are low and central bankers have printed enough money to get the tinfoil hat brigade screaming about hyperinflation. Such low inflation might be an indication of trouble ahead.

Are you saying that low inflation is a bad thing, or are you saying that low inflation is merely a harbinger of doom?

A bit of both – but mostly I am concerned that low inflation is a bad thing in itself. One issue is that unexpectedly low inflation redistributes from borrowers to creditors.

About time too, most savers will be thinking.

I hear you. Still, borrowers are more likely to be cash-constrained (that’s why they are borrowers) and are more at risk of bankruptcy. That means lower-than-expected inflation may damage the economy as a whole rather than just moving money from one person’s pocket to another’s. And there’s another problem with deflation: the “lower-bound” problem.

What’s that?

It’s a fancy way of saying that nominal interest rates can’t fall below zero. If inflation is, say, 4 per cent then a central bank can give an economy a shot of adrenalin by cutting interest rates after inflation to minus 3 or minus 4 per cent. If inflation is 0.7 per cent – as it’s currently estimated to be in the eurozone – then that’s impossible.

Why would anyone want real interest rates of minus 4 per cent?

Usually we wouldn’t. But, against the backdrop of a slack economy, such rates would be a strong incentive to spend. And if outright deflation took hold, effective interest rates would rise: people would earn money simply by sitting on their cash and waiting for prices to fall. Sounds great but for an economy it’s a disaster. If nobody buys anything there will be a recession and more deflation – a vicious spiral.

But that isn’t going to happen. Is it?

Don’t ask me, I’m an economist. We never know what’s going to happen to the economy. But it is a serious enough problem that even a low risk is worth losing sleep over.

Is there a constructive response?

In the case of the US and the UK, there’s always “hope for the best”. Both economies have been growing in a more-or-less encouraging fashion. One could try cutting taxes and raising government spending but it may be too late.

What about this forward guidance business?

Yes, an awkward affair. In principle forward guidance makes sense: the idea is to promise to keep interest rates very low until some condition is met, even if the economy might benefit from higher rates down the track.

Why make such a promise?

Because promising low rates for a long time is the next best thing to cutting rates below zero. Imagine buying a house: a mortgage rate of minus 3 per cent might be nice; but a promise that interest rates will be held artificially low for a while is almost as good, if you believe the promise.

That all makes sense.

Yes, but recent experiments with forward guidance haven’t been a huge success. Bank of England governor Mark Carney tied his forward guidance to unemployment rates, and unemployment rates promptly plummeted, so his attempt to commit to low interest rates ended up meaning very little. Still, it was worth a try.

This all seems flimsy. Are there any other approaches?

Most of these central banks are targeting inflation of 2 per cent, or something along those lines. But four years ago IMF chief economist Olivier Blanchard proposed a sharp break with that tradition. He floated the idea of a 4 per cent inflation target next time round. The thinking makes some sense: as long as interest rates and salaries tend to adjust, a higher target should cause little harm in good times and provide a great deal more room for manoeuvre in severe recessions.

That sounds radical.

Agreed. It’s never going to happen, which is a shame. But from the standpoint of today’s sluggish growth all Mr Blanchard’s advice would amount to is: “Next time let’s start from somewhere else.”

Tim Harford

Fonte: FT

quinta-feira, 20 de fevereiro de 2014

Emerging markets can learn from America’s bank stress tests

Five years ago next Tuesday, an embattled US Treasury announced that it would conduct “stress tests” of America’s largest banks. The idea was to reassure the markets of the stability of solvent institutions, and force weaker ones to repair their balance sheets.

Some academics still question whether this exercise was rigorous enough. There is controversy, for example, about how much capital modern banks need, and how far asset prices can reasonably be expected to fall in the event of another crisis. But one thing is clear: stress tests were surprisingly effective in helping to turn investor confidence around.

In February 2009 bank shares were falling sharply, and a poll by Bank of America Merrill Lynch found that investors were so nervous about global banks that half of them had allocated a smaller proportion of capital to the sector than the industry average.

Today, however, 28 per cent of equity investors are overweight on global bank stocks, after a year in which US banks stocks rallied by 35 per cent. This is the most optimistic reading since the survey began a decade ago and the highest “overweight” of any equity sector. The securities that inspired terror five years ago have become investors’ favourite pick – more popular even than technology stocks.

There are several lessons here. One is that investor sentiment can move in dramatic cycles. Another is that market participants are no longer in the grip of crisis mentality.

It is not only in relation to the banks that investors now have a cheerier view of the world. These days the region of the world most beloved of equity investors is Europe: almost half of all fund managers want to be overweight in this region, since they think the market is undervalued. A separate survey by Deutsche Bank echoes that theme: more than a third of hedge funds apparently deem Europe the most exciting place to invest.

Elsewhere, skies are darkening. Almost a third of fund managers are now underweight in emerging market equities, a record level of pessimism – and a stark contrast to February 2009, when half were overweight. And investors think the biggest threat to growth now comes from China, the former market darling. It is a striking reversal, and one that – painful though it may be at the moment – contains an encouraging moral for emerging markets. If sentiment has swung so dramatically in the past five years, it could swing back sooner than many now foresee.

If you look back at the trajectory of sentiment towards banks, some of the improvement can be attributed to stronger US growth. Recent stabilisation in Europe has been important too. But charts suggest that the turning point in sentiment and share prices was in February 2009. That shows that credible stress tests, accompanied by measures to recapitalise the banks, can be a potent policy tool. This has big implications for Europe, given that it has hitherto produced less-than-credible stress tests (although people such as Axel Weber, head of UBS, insist that the next, third, set of stress tests due later this year will be much tougher than before).

There is a wider point too: at times of investor gloom decisive and credible government policy can sometimes act as a powerful inflection point. It is never easy to tell which event will trigger that sentiment shift; five years ago some observers doubted that the US stress tests would work given that Washington had for months been in denial about the scale of the banks’ problems, and repeatedly botched its efforts to sort them out. Indeed, there was concern the financial crisis could get worse,

But as turmoil bubbles around emerging markets, investors and Group of 20 ministers might do well to ponder that lesson – and ask what it might take for one (or several) of the emerging market governments to repeat the same trick? Is there another set of tangible policy reforms that could be produced and start to turn sentiment around? If so, what might be the 2014 equivalent of a stress test?

Do not expect the answer soon; right now denial and blame is the theme of the day in many emerging markets. But do not ignore the potential for surprises in the next few years. The cure for market turmoil can turn out to be as surprising as the cause.

Gillian Tett


quarta-feira, 19 de fevereiro de 2014

Mexico and Nafta at 20. Why it went wrong for one of ‘Tres Amigos’

Twenty years into Nafta, Mexico has too many criminals and not enough policemen; too many workers earning low wages and not enough skilled jobs; too many false dawns and not enough economic growth.

Such concerns would make for a poor conversational gambit when Enrique Peña Nieto, the Mexican president, proudly hosts his US and Canadian counterparts, Barack Obama and Stephen Harper, in Mexico on Wednesday for their annual check-up on the North American Free Trade Agreement.

So instead he could cast them another way for the so-called “Tres Amigos Summit”. Mexico’s main problems on Nafta’s 20th anniversary, he could say, stem from the fact the country had too many macroeconomists and not enough microeconomists.

That might sound bizarre. Yet, if it was the other way around, Nafta might not be viewed as critically as it is by many now – and Mexican wages (and Mr Peña Nieto’s domestic ratings as opposed to his soaring international standing) might be better too.

Since the three countries inked Nafta in 1994, the US has not suffered “a giant sucking sound” of jobs disappearing south across the border. Canada has also maintained its cultural distinctiveness. But Mexico, while a rising star, has not quite become the developed country it thought it would.

Instead of a process of inexorable convergence, per capita Mexican gross domestic product remains a fifth of that in the US – exactly where it was in 1994. What went wrong?

For one, the world changed dramatically around Mexico.

China rose as a manufacturing power, displacing Mexican manufacturers. The 9/11 terrorist attacks caused the US to boost security, especially along its southern flank (border delays today cost the US and Mexico an estimated $6bn a year).

Mexico also made a transition from one party rule – a boon for democracy, if not always effective governance. Lastly, new technologies such as fracking transformed North American energy markets.

One problem for Mexico is that, even as the world changed around it, Nafta stayed the same. Indeed, for all the growing talk of a united “North America”, Nafta remains a series of often lukewarm bilateral relationships rather than a trilateral one.

On the political front, Mr Harper and Mr Obama have no particular chemistry, while bilateral relations are hung up over the Keystone XL pipeline. Mexico-Canada relations have stiffened since Canada decided Mexican visitors need visas. US-Mexican relations always ebb and flow.

Economic affairs have similarly waxed and waned. Regional supply chains have deepened, yet this process is not reflected in greater intra-regional trade. Today 40 per cent of total North American trade takes place within Nafta, slightly less than in 1993. (In the EU, intra-regional trade is over 60 per cent.)

None of these factors helped Mexican convergence, but they were also largely outside the country’s control. Of more fundamental importance for Mexico’s wellbeing was the huge list of microeconomic reforms it left undone while embracing macroeconomic change.

These include liberalising energy markets and breaking-up local oligopolies, to removing structural bottlenecks, such as a notoriously poor education system, and a high degree of labour informality.

After stonewalling these reforms for 12 years, Mr Peña Nieto’s ruling Institutional Revolutionary Party is now working to make many of them happen, to international if not always local applause.

Industrial policy is also enjoying a new life, in contrast to the mantra 20 years ago that “the best industrial policy is no industrial policy”. Today, there is more talk of “industrial clusters”. These are designed to encourage greater backward linkages into the domestic economy by Mexican manufacturers that more often assemble inputs made elsewhere.

All of these microeconomic policies have a single, crucial vanishing point: to boost Mexican productivity. If Mr Peña Nieto can pull that off, Mexican real wages will rise – as will his domestic popularity.

Fears in Ottawa and Washington about Mexican immigrants would also diminish. Greater prosperity might even reduce the lure of organised crime. And future Nafta summits would more likely be a true meeting of “Three Amigos” rather than an at-times uncomfortable photo-opportunity as they often are now. Who would have thought that microeconomists could play such a large role?

John Paul Rathbone

Fonte: FT

terça-feira, 18 de fevereiro de 2014

Philistines may carp but scientists should reach for the sky

In 1969 Robert Wilson, director of the National Accelerator Laboratory, was testifying before the US Congress. He sought funding for a particle accelerator (forerunner of the Large Hadron Collider at Cern where the Higgs boson was discovered in 2012). Asked by Senator John Pastore how his project would help defeat the Russians, he responded: “It only has to do with the respect with which we regard one another . . . are we good painters, good sculptors, great poets . . . new knowledge has nothing to do directly with defending our country except to help make it worth defending.”

This position requires occasional reaffirmation. It is sad that Senator Tom Coburn is stepping down from the Senate because of ill health, but less sad that he is stepping down. The blend the Tea Party brew is rather weak for Mr Coburn, who believes research should be useful and has firm views of what is useful. Research into how we ride bicycles (an interesting subject, in my view: most people can, a few cannot, and neither those who can nor those who cannot really understand how or why). If Mont Hubbard of the University of California at Davis can tell us how, he deserves a medal if not a Nobel Prize, though his bicycling robots are easy to mock.

But Mr Coburn’s greatest ire was reserved for the funding of political science. He believes that people who want to understand politics can watch Fox News – though he conceded that some might prefer to pay attention to CNN and MSNBC. Last year he tagged an amendment to an omnibus bill that blocked grant funding to academic research in this field. But American political scientists are rejoicing this month; the prohibition lapsed in the latest Congressional budget compromise.

Politicians can always win cheap laughs by reading out the titles of research projects they do not understand. In the early years of Margaret Thatcher’s premiership, her minister Sir Keith Joseph tried to abolish the then Social Science Research Council, but a report commissioned from Victor Rothschild failed to deliver the desired verdict.

Rothschild used the example of research on “kinship and sex roles in a Polish village”, a project description that had provoked much merriment in the UK public accounts committee. A respondent pointed out that the work showed how the inefficiency of fragmented land holdings increasingly tended by ageing women gave rise to economic cost and political tensions. We now know that such tensions grew in Poland in the following decade. And then the Berlin Wall came down.

Anthropology helps us understand the world, in ways that are helpful whether we are talking about the internal contradictions of communism or the pathologies of financial crises. And ideas frame the world in which we live. Stalin is supposed to have laughed at Papal criticism, asking how many divisions the Pope had at his disposal. Yet in the long run it was the Pope who proved more powerful.

The British Academy last week published an explanation of the rationale for research in humanities and social sciences. (Full disclosure – I feature in a case study.) But what is the purpose of studying history and literature? Because they make us what we are. Jonathan Bate, the literary scholar, quotes the Duke of Marlborough as saying “the English get their history from Shakespeare and their theology from Milton”, and perhaps they do. No doubt the grain merchants of Athens asked what Plato was doing to improve their harvests, and the goldsmiths of Pisa, their feet firmly on the ground, asked Galileo what use was gravity. The philistine fixation with temporary utility is swamped in the long run by the enduring power of ideas. And just one discovery such as calculus, gravity or democracy will pay for a lot of research.

Of course, there is a lot of bad and useless research. But as the Polish example illustrates, it is difficult to decide which research is useless or how research will influence our lives. The most immediate practical offshoot of particle physics research had nothing to do with particle physics at all: the worldwide web began as a means of enabling the scientists involved to keep in touch.

Pastore, questioning Wilson, was not asking what particle physics would do for the shopkeepers of Rhode Island. He was throwing an easy ball to a scientist whose objectives he supported. We need another Pastore, not another Mr Coburn.

John Kay

Fonte: FT

segunda-feira, 17 de fevereiro de 2014

Renzi will not revive Italy with reforms alone

Matteo Renzi is close to achieving his great ambition. Now what?

Italy’s new prime minister will have the most difficult job in Europe. Once confirmed, he will preside over a country with three fundamental economic problems: it has very large debt; it has no growth; and it is a member of a poorly functioning monetary union.

This situation is economically untenable. Unless Italy returns to growth, its debt will become ever more crippling, ultimately making its position in the eurozone impossible. The premier’s job may be difficult, but it can be stated simply: change one or more of those three variables – without leaving a mess behind.

Naturally, there are different views about what needs to be done. There seems to be some agreement that the outgoing administration did not do enough. I never ceased to be amazed by Enrico Letta’s phlegmatic attitude to reform. It is a year now since the Italian elections, and 10 months since Mr Letta took office. In that time, precious little has happened.

Mr Renzi said many times that the Letta administration was not working properly. The question is whether Mr Renzi has a sufficiently clear understanding of what needs to be done, and whether he has a big enough parliamentary majority to support him through the swamp of economic reform policies. On the former, I am moderately optimistic. On the latter, I am not. The standard answer about what Italy needs to do is some combination of economic reforms and fiscal consolidation.

This is not completely wrong. In Italy, the case for structural reforms is overwhelming, but I doubt it would be sufficient. To see this, recall the sheer scale of Italy’s economic underperformance. According to my calculations Italy’s gross domestic product is now 15 per cent below the trend the economy was on during the 1990s. It is not the financial crisis that did the damage in Italy. It is the euro itself.

If you lose 15 per cent of something, you have to grow by about 18 per cent to get back to where you started. It is a bit like catching a running train. This number is a rough measure of the scale of Mr Renzi’s task.

I do not mean that he should raise GDP by that amount in the next four years. This is impossible. But he could get the country back on to a trajectory that will eventually close the gap – or most of it. Still, even this it is a tall order. It is a bigger adjustment than the one that Germany has gone through or the one that France is just now beginning.

How much can structural reform achieve? An optimist would point to studies such as those by Lusine Lusinyan and Dirk Muir of the International Monetary Fund. Imagine a parallel universe in which Italy implements a wide range of the structural and labour market reforms right this minute. According to the authors, this would eventually increase GDP by 13 per cent over what it would otherwise have been. Interestingly, and contrary to popular perception, labour market reforms matter less than product market measures such as services liberalisation. If you add in fiscal reforms, the impact could be as high as 20 per cent. Job done.

I doubt those numbers are achievable. For a start, reforms never get implemented in totality – certainly not by an Italian coalition government. Even in Germany 10 years ago the reforms were not implemented in the way they were drawn up.

Furthermore, long-term forecasts are always speculative. We do not know that the economy will behave in the same way as in the past, now that interest rates are close to zero and the banking sector is dysfunctional. Longstanding correlations between economic variables may begin to break down.

Reforms, necessary as they may be, cannot do the heavy lifting all on their own. To keep Italy in the eurozone, Mr Renzi will also need help from the European Central Bank. And that means he needs to shift the macroeconomic debate inside the EU.

Four things must happen; not all of them are under Mr Renzi’s control. First, eurozone inflation must be prevented from persistently undershooting the inflation target, as it has been recently. Second, Italy needs lower market interest rates, which would require further unconventional policy measures. Third, shaky banks must be restructured and crumbling ones closed, and a “bad bank” set up to hold the debris. Fourth, massive current surpluses in Germany and the Netherlands will have to fall. These surpluses are making it extremely difficult and painful for the eurozone periphery to adjust. Mr Renzi should channel his rebellious spirit and make this case to his northern neighbours.

For the Italian economy to return to a sustainable path in the eurozone, Mr Renzi will need to sort out the banks and stand up to his European partners. His predecessors may have left it too late. The task may now be simply impossible. To succeed, Mr Renzi will need skill, clarity, determination and, most of all, a lot of luck.

Wolfgang Münchau


sexta-feira, 14 de fevereiro de 2014

Mohamed El-Erian: Emerging-world fashions that change with the seasons

As I prepare to step down from Pimco at the end of March, emerging markets are once again in the news for all the wrong reasons. In Argentina the currency has collapsed, Thailand and Ukraine are riven with political conflict, and Turkey is shaky.

These developments are reminiscent of the turmoil in January 1998 when I first moved to the private financial sector after 15 years at the International Monetary Fund. Then, Thailand was reeling, South Korea was on the ropes, and both Russia and Argentina were on their way to sovereign defaults.

A recurrence of the blues in emerging markets is not what conventional wisdom expected just a short while ago. For years experts had argued that these once-ailing economies had grown strong. Bank balance sheets had been strengthened. International reserves were much larger and government debt lower. Institutions were no longer financing themselves by issuing lots of short term debt that had to be repeatedly refinanced. Governments had enacted sensible reforms. Even in the harsh winds of the 2008 crisis, the emerging world did not catch a dreadful cold.

Excessive enthusiasm for emerging markets is far from the only intellectual fashion that I have seen come and go during the past 16 years. Another was the view that western central banks possessed all the tools necessary to secure a great economic and financial moderation; one that guarantees sustained growth, jobs and price stability. But it is in characterising the role of banks in a modern market economy that commentators have been at their most faddish.

At one time a largely unfettered banking system was seen as providing the most efficient way to channel funds to productive investments that create jobs and prosperity. Since banks were thought to embody strong self-correcting forces, they could be regulated with a light touch. These days, however, the banking industry is regarded more as a leech. Banks are seen as suffering from serious institutional and human imperfections. Their main function is the enrichment of insiders. Weak competition helped. Access to emergency bank funding and insurance paid for by taxpayers gave financiers a cushion when the music stopped. This, anyway, is the currently fashionable view. It, too, is an old one. It prevailed in the 1980s when western banks had to be bailed out after an irresponsible lending spree in Latin America. The 2008 crisis has given it new life.

In some ways today’s financial sector is little different from the one I first got to know decades ago. Markets still get overexcited when things are going well, only to go into a torpor when the skies darken. If anything, an even bigger amount of money turns on significant mood swings, threatening at times to tear the pendulum off its pivot.

Human behaviour plays a role here. Market participants, whether in banks or asset management, have their comfort zones and gut reactions. They are influenced by the quarterly earnings ritual and ever-shorter performance measurement periods. And they move in herds.

“A sound banker is not one who foresees danger and avoids it,” wrote John Maynard Keynes, “but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.” For too many banks, it still makes more sense to risk failing conventionally than try to succeed unconventionally.

Then there is the influence of internal market dynamics. Market participants react to one another’s trades in ways that cause movements in asset prices that do not seem to reflect their underlying worth.

Innovation and financial globalisation have played a part. It was once difficult for investors to make bets on far-flung corners of the world economy, such as Kazakh banks and Nigerian breweries. Now they can do so through exchange traded funds listed on western stock exchanges. In good times, this helps capital reach more places faster. But it can also make markets more volatile, and make it easier for instability to spread.

Emerging markets are particularly vulnerable to this phenomenon. They are far more reliant on flighty foreign money – unlike western markets, which are deep with capital from domestic savers. This accentuates both the ups and downs.

Financial upheavals reverberate in the real economy. In moments of excessive euphoria, credit flows too freely, bad loans are made and currency appreciation makes domestic producers less competitive. When the tide of money suddenly reverses, the consequences can include a credit crunch, recession and, in the worst cases, widespread insolvency.

Yet not everything has gone full circle. Regulators and shareholders no longer allow banks to make such risky bets, even though they hold more capital. Instead, more credit is extended by institutions that have less systemic importance, and can more easily be allowed to fail. Central banks have found quicker ways to deal with malfunctioning markets. And many more trades now take place under the spotlight of public exchanges.

On the surface, today’s financial system appears much more sophisticated than the one I joined 16 years ago. But because basic human behaviours remain the same, some of its underlying characteristics have not changed much. Today’s banks are still capable of both doing good and also causing damage. Prompted by regulators and public opinion, they have learnt from mistakes. But if they are to strike that still-elusive balance between efficiency, innovation and soundness, they have much left to learn.

Mohamed El-Erian

Fonte: FT

quinta-feira, 13 de fevereiro de 2014

A dose of humility from the central banks

The leading central banks in the developed economies have, of course, been the main actors underpinning the global bull market in risk assets since 2009. For long periods their stance has been unequivocally dovish as they have deliberately tried to strengthen an anaemic global economic recovery by boosting asset prices.

In the past week, we have had major statements of intent from Janet Yellen, the new US Federal Reserve chairwoman; from the European Central Bank; and from the Bank of England. After multiple hours of fuzzy guidance about forward guidance, the clarity of previous years about the global policy stance has become much more murky. Central banks are no longer as obviously friendly to risk assets as they once were – but they have not become outright enemies, and they are unlikely to do so while they are concerned that price and wage inflation will remain too low for a protracted period.

It is now quite difficult to generalise about what central bankers think. However, a few of the necessary pieces of the jigsaw puzzle slotted into place in the past week.

The Federal Reserve

The first point to make about Ms Yellen is that she has declared herself to be the agent of continuity not the harbinger of a significant regime shift at the Fed. Most observers (Tim Duy, for example) would say that this was always obvious but we should not allow the arrival of a new Fed chief to pass without noting that Ms Yellen does not see herself as a game-changer like a Paul Volcker or a William McChesney Martin.

They both took dramatic action to control inflation. In a similar vein, many members of Ms Yellen’s intellectual grouping at Berkeley – Christina and David Romer and Brad DeLong are prominent examples – wanted her to declare a regime shift designed to shock the US economy back towards the pre-2008 trend line. That would have involved targeting a recovery in gross domestic product of 10 per cent or more from present levels.

Why has she not done this? One compelling reason is that the members of the Federal Open Market Committee would not have supported her in sufficient numbers, and she wants to be seen as a “committee person”. Another reason is that President Barack Obama does not come from the same economic mould as FDR, so the fiscal part of such a regime shift is not on the agenda. A final reason is that she does not seem convinced that a further large dose of asset purchases would be successful anyway, in the context of a large drop in both productivity growth and the labour participation rate.

Economists at the Fed, like the Congressional Budget Office, have been moving towards supply-side pessimism, implying that more of the post-2008 output losses are now thought to be permanent. Ms Yellen said on Tuesday that she was not sure how much of the decline in the labour participation rate could be reversed. Her uncertainty about this scarcely supports dramatic policy action either way.

There are also signs of supply-side pessimism at other central banks.

The Bank of England

The BoE’s latest Inflation Report has reduced productivity growth projections, and says that the amount of spare capacity in the economy is only 1-1.5 per cent of GDP, despite the fact that the level of GDP is still below the 2008 peak. To the extent that its latest phase of forward guidance is decipherable, the BoE seems to be eager to reassure markets that the bank rate will rise very gradually, and to a low end point, but it does not fully eliminate the possibility that the first UK interest rate rise will come this year.

The European Central Bank

The ECB also has a pessimistic view of the supply side, which explains why it does not see any urgent need for a big monetary policy change as inflation drops towards zero. That does not mean it will refuse to cut interest rates into negative territory next month. My interpretation of the supposedly “neutral” steer from Mario Draghi’s press conference on Thursday last week is that the ECB president said only that more information would be needed before action would be taken. That information would come in the form of the ECBs inflation forecast for 2016, which would be published earlier than usual.

A sensible guess at that forecast can be made, given that it will depend on market forward rates for oil prices, which are falling. JPMorgan reckons the likely forecast for eurozone inflation in 2016 will be 1.5 per cent, compared with 1.2 per cent in 2015. That seems to offer Mr Draghi enough evidence of a prolonged period of exceptionally low inflation, which is what he needs to get the German Bundesbank to support action. But it does not point to a threat of outright deflation, without which ECB balance sheet expansion looks improbable. Mr Draghi went out of his way to differentiate between these two different states of the economy last week.


If the central banks are becoming more pessimistic about the supply side, this could spell danger for markets that have perhaps already priced in a strong medium-term recovery in GDP towards previous trends. Without the prospect of this GDP recovery, the high share of profits in current GDP could start to pose problems, especially if the central banks are expected to raise short rates within a year or two. Regardless of the path for short rates, asset purchases are petering out everywhere except in Japan, and Chinese liquidity withdrawal is adversely affecting Asian monetary conditions.

Yet the prospect of genuinely hostile central banks for markets still seems some way off. Above all else, policy committees seem highly uncertain about the right path for interest rates now that asset purchases are ending. But there is an emerging degree of consensus that global inflation, notably wage inflation, remains inconsistent with their mandates.

The Romers wrote: “Central bankers should have a balance of humility and hubris.” At present, they seem to be leaning towards humility about what they know and can achieve. In an environment of unavoidable doubts about the labour market constraints that they are facing, it seems that they will let wage inflation increasingly act as the judge and jury for the stance of policy. Their latest refrain is that inflation will return to target, but only over a prolonged period, and that wage inflation will be the crucial signal.

Only when wage inflation starts to rise should markets really start to worry.

Gavyn Davies


quarta-feira, 12 de fevereiro de 2014

Philip Stephens: Yellen, tapering and a moribund G20

So there you have it. The US Federal Reserve sets monetary policy to fit conditions in the US economy. If decisions taken by the Fed cause collateral damage elsewhere, well, tant pis. So much for global governance.

Janet Yellen was loud and clear in her testimony to Congress this week. In so far as the Fed’s policy of withdrawing monetary stimulus had spooked markets in emerging economies, the turbulence did not represent a “substantial risk to the US economic outlook”. Put this another way: the world’s most powerful central bank pays attention to what happens in China, India or Turkey only in so far as it washes back over the US.

In one respect, the Fed chairwoman was offering a statement of both the obvious and the politically prudent. The duty of the Fed is to promote the economic wellbeing of the US. Had Ms Yellen said it was tailoring its tapering programme to the wishes of policy makers in Beijing, Delhi or Ankara, her first appearance before Congress as chairwoman might have been her last. Members of the House of Representatives are not noted for their devotion to multilateralism.

The emerging economies take a different view. Raghuram Rajan, India’s central bank governor, hasattacked the US for its apparent indifference to the global upheaval as rising states have been forced to raise interest rates in the face of Fed tapering. He has half a point: while the west headed into recession after the global financial crash, it was growth in the emerging world that kept the economic show on the road. Now that the US is recovering, it has returned to the old selfish ways.

The snag is that had Mr Rajan been in Ms Yellen’s seat he would have said much the same thing. Like the Fed, the Indian central bank sets interest rates to suit national economic conditions. The governor answers to Indian politicians. They would not applaud a policy framed to accommodate the concerns of central banks elsewhere.

I suspect that Mr Rajan would say the dollar’s position as the world’s reserve currency places a special responsibility on the Fed. But for as long as India, China and the rest remain jealous guardians of national sovereignty, asking the US to adopt a uniquely internationalist stance is futile.

There was a moment in the immediate aftermath of the global financial crash when governments from the advanced and rising states seemed ready to break the cycle of selfishness. In the early meetings of the Group of 20 nations, policy makers recognised their national interest in the mutual endeavour to prevent a slide into a 1930s style-recession.

It did not last. The passing of the immediate crisis has seen meetings of the G20 fall into the familiar pattern of such international gatherings: the responsibility to act in the wider global interest always belongs to someone else. None have been more jealous guardians of national prerogatives than the emerging economies.

The facts of economic interdependence cannot be wished away. At some point turbulence in the rising world may well exact a toll on the US; at which point, presumably, Ms Yellen could argue that countervailing action was in the US national interest. But this represents a strategy of waiting for the damage to be done. What a waste.

Less than two months in to 2014, parallels with events a century ago, when the first world war put an end to an earlier era of globalisation, are already wearing thin. In an eloquent speech in London the other day, Christine Lagarde, the managing director of the International Monetary Fund, suggested that policy makers should focus instead on another anniversary.

The 44 nations who gathered at Bretton Woods in 1944, Ms Lagarde observed in her BBC Dimbleby lecture, understood the connection between interdependence and collective action. The architects of the IMF and the World Bank looked beyond the deceptive lure of unvarnished sovereignty.

At this, the original multilateral moment, the representatives of 44 nations, Ms Lagarde recalled, “were determined to set a new course – based on mutual trust and co-operation, on the principle that peace and prosperity flow from the font of co-operation, on the belief that the broad global interest trumps narrow self-interest”.

Now there’s a manifesto for the G20.

Philip Stephens

Fonte: FT

terça-feira, 11 de fevereiro de 2014

Martin Wolf: Enslave the robots and free the poor

In 1955, Walter Reuther, head of the US car workers’ union, told of a visit to a new automatically operated Ford plant. Pointing to all the robots, his host asked: “How are you going to collect union dues from those guys?” Mr Reuther replied: “And how are you going to get them to buy Fords?” Automation is not new. Neither is the debate about its effects. How far, then, does what Erik Brynjolfsson and Andrew McAfee call The Second Machine Age alter the questions or the answers?

I laid out the core argument last week. I noted that the rise of information technology coincides with increasing income inequality. Lawrence Mishel of the Washington-based Economic Policy Institute challenges the notion that the former has been the principal cause of the latter. Mr Mishel notes: “Rising executive pay and the expansion of, and better pay in, the financial sector can account for two-thirds of increased incomes at the top.” Changing social norms, the rise of stock-based remuneration and the extraordinary expansion of the financial sector also contributed. While it was a factor, technology has not determined economic outcomes.

Yet technology could become far more important. Professor Brynjolfsson and Mr McAfee also argue that it will make us more prosperous; and it will shift the distribution of opportunities among workers and between workers and owners of capital.

The economic impacts of new technologies are many and complex. They include: new services, such as Facebook; disintermediation of old systems of distribution via iTunes or Amazon; new products, such as smartphones; and new machines, such as robots. The latter awaken fears that intelligent machines will render a vast number of people redundant. A recent paper by Carl Frey and Michael Osborne of Oxford university concludes that 47 per cent of US jobs are at high risk from automation. In the 19th century, they argue, machines replaced artisans and benefited unskilled labour. In the 20th century, computers replaced middle-income jobs, creating a polarised labour market. Over the next decades, however, “most workers in transport and logistics occupations, together with the bulk of office and administrative support workers, and labour in production occupations, are likely to be substituted by computer capital”. Moreover, “computerisation will mainly substitute for low-skill and low-wage jobs in the near future. By contrast, high-skill and high-wage occupations are the least susceptible to computer capital.” This, then, would exacerbate inequality.

Jeffrey Sachs of Columbia university and Laurence Kotlikoff of Boston university even argue that the rise in productivity might make future generations worse off in aggregate. The replacement of workers by robots could shift income from the former to the robots’ owners, most of whom will be retired and are assumed to save less than the young. This would lower investment in human capital because the young could no longer afford to pay for it; and in machines because savings in this economy would fall.

The argument that a rise in potential productivity would make us permanently worse off is ingenious. More plausible, to me at least, are other possibilities: there could be a large adjustment shock as workers are laid off; the market wages of unskilled people might fall far below a socially acceptable minimum; and, combined with other new technologies, robots might make the distribution of income far more unequal than it is already.

So what should be done?

First, the new technologies will bring good and bad. We can shape the good and manage the bad.

Second, education is not a magic wand. One reason is that we do not know what skills will be demanded three decades hence. Also, if Mr Frey and Prof Osborne are right, so many low- to middle-skilled jobs are at risk that it may already be too late for anybody much over 18 and many children. Finally, even if the demand for creative, entrepreneurial and high-level knowledge services were to grow on the required scale, which is highly unlikely, turning us all into the happy few is surely a fantasy.

Third, we must reconsider leisure. For a long time the wealthiest lived a life of leisure at the expense of the toiling masses. The rise of intelligent machines makes it possible for many more people to live such lives without exploiting others. Today’s triumphant puritanism finds such idleness abhorrent. Well, then, let people enjoy themselves busily. What else is the true goal of the vast increases in prosperity we have created?

Fourth, we will need to redistribute income and wealth. Such redistribution could take the form of a basic income for every adult, together with funding of education and training at any stage in a person’s life. In this way, the potential for a more enjoyable life might become a reality. The revenue could come from taxes on bads (pollution, for example) or on rents (including land and, above all, intellectual property). Property rights are a social creation. The idea that a small minority should overwhelming benefit from new technologies should be reconsidered. It would be possible, for example, for the state to obtain an automatic share in the income from the intellectual property it protects.

Finally, if labour shedding does accelerate, it will be essential to ensure that demand expands in tandem with the rise in potential supply. If we succeed, many of the worries over a lack of jobs will fade away. Given the failure to achieve this in the past seven years, That may well not happen. But we could do better if we wanted to.

The rise of intelligent machines is a moment in history. It will change many things, including our economy. But their potential is clear: they will make it possible for human beings to live far better lives. Whether they end up doing so depends on how the gains are produced and distributed. It is possible that the ultimate result will be a tiny minority of huge winners and a vast number of losers. But such an outcome would be a choice not a destiny. A form of techno-feudalism is unnecessary. Above all, technology itself does not dictate the outcomes. Economic and political institutions do. If the ones we have do not give the results we want, we must change them.

Martin Wolf

Fonte: FT

segunda-feira, 10 de fevereiro de 2014

Courts, voters and the threat of another euro crisis

Germany has surrendered and the euro is saved. That seems to be the markets’ interpretation of last week’s ruling by the German constitutional court on the European Central Bank’s “whatever it takes” policy to save the single currency. The judges’ ruling essentially boiled down to this: “We don’t like what the ECB is doing. We think it illegal. But only the European Court of Justice can strike it down.”

Since the European Court is highly unlikely to accept this invitation, the ECB will be able to preserve its policy of Outright Monetary Transactions – essentially a promise to be the buyer of last resort for the bonds issued by eurozone countries. Had the German courts struck down the ECB’s policy last week you would have seen chaos on the markets. Instead, calm prevailed.

The ECB’s initial announcement of its bond-buying policy in mid-2012 was, without doubt, a turning point in the euro crisis – preventing the borrowing costs of Italy and Spain from soaring to unbearable levels. Now the ECB may be tempted to go even further. With the threat of deflation haunting Europe, the bank is under pressure to launch a European version of quantitative easing, imitating the US, Japanese and British authorities. Mario Draghi, the ECB president, wary of the reaction in Germany, has hitherto suggested that such a policy would be illegal. But now that he knows the German courts are likely to refer any such decision to the more integrationist ECJ, he may decide to be a bit bolder.

The court’s ruling has profound political implications. Germany seems essentially to have accepted that, even though the euro is Germany’s currency, its management is not subject to control by German institutions. Since the German representative on the ECB board is easily outvoted by the board members from the rest of Europe, German eurosceptics feel checkmated.

But European integrationists should restrain their cheers. They could pay a heavy political price for victories of this sort. The cost could be a steady undermining of the legitimacy of the European project and the euro in Germany, the EU’s largest state and strongest economy.

Two of the most respected institutions in Germany, the Bundesbank and the constitutional court, are now on record as registering profound objections to the policies underpinning the euro.

As long as the German economy is strong, such laments are unlikely to churn up mainstream German politics. But when things get tough, as they inevitably will at some point, the intellectual groundwork has been laid for a “stab-in-the-back” theory that will explain Germany’s problems by reference to the illegal and improvident acts of the European institutions.

In European countries that are already suffering economically, the political backlash against the EU and the euro is already rising. The EU’s own polls show the popularity of the union plummeting in core countries such as France, Italy and Spain. Henri Guaino, a close adviser to Nicolas Sarkozy when he was president of France, recently gave an interview in which he speculated gloomily: “Monetary policy mistakes can destroy a society.”

May’s European elections will provide a test of strength for anti-EU parties across the continent. Discontent with a weak economy and the euro is likely to merge with the growing backlash against free movement of people within the EU. This was shown in the weekend’s referendum that rejected the policy in Switzerland, which is not a member of the EU but is part of the free-movement zone.

The results of the European elections in May are likely to be a shock, with anti-European or borderline racist parties, such as the French National Front, winning or coming close to victory in France, the Netherlands, Greece, the UK and Austria. Such dramatic results could destabilise markets and will make it harder for centrist politicians to make the compromises that are always needed to keep Europe going.

In response to this Doomsday scenario, an optimistic pro-European could point out that, even if the anti-EU parties make big gains, there will still be a safe pro-euro and pro-EU majority in the European parliament once the centre-right and centre-left parties group together. As economies gradually recover, so the strength of anti-European forces could recede. Ultimately, the euro will not only have survived, it will emerge strengthened from the crisis, since key institutions, in particular the ECB, will have gained the powers they need to make it work.

That is certainly one way things could work out. But there is also a different, darker interpretation that I find more convincing. This holds that the economic crisis has gravely damaged the euro. It has stripped the project of support and legitimacy and exposed the design flaws in the single currency. The biggest flaw remains the lack of a large central budget and a transfer union of the sort that makes other federal currencies, such as the dollar, work.

That weakness can only be remedied by the creation of something much closer to a European state. But the crisis has profoundly undermined the pro-European sentiment that would be necessary to build a United States of Europe. Even in Germany, which has historically supported the European ideal, the country’s most respected institutions are crying foul.

As a result, the euro is stuck with a floundering economy, inadequate institutions and weak support. That does not sound like a long-term recipe for success to me.

Gideon Rachman


sexta-feira, 7 de fevereiro de 2014

The markets’ bumpy ride need not become a crash

Financial markets began 2014 in an ebullient mood. Omens of economic recovery in the developed world buoyed investors across the globe. Troubles in emerging markets, it was thought, would amount only to a handful of little local difficulties.

It did not last.

In developed markets, the past three weeks have seen the steepest falls in equity prices since mid-2013, when fears that the US Federal Reserve would begin phasing out its massive bond-buying programme caused interest rates to surge. This time, however, there has been no rise in short-term interest rates in the US or Europe, and bond yields have fallen slightly. There has been no change then in the market’s reading of the Fed or the European Central Bank’s policy stance.

Instead, traders have been rattled by the indications that global economic demand is weaker than thought. Inflation now stands at about a paltry 1 per cent in the US and Europe, and there has been a string of disappointing data on US economic activity.

In previous years, this combination of events might already have had the Fed signalling a willingness to use monetary policy to stimulate the economy. But so far in 2014 the silence has been deafening.

Investors have long believed that under Alan Greenspan and then Ben Bernanke, the Fed deliberately shielded the stock market from losses by using monetary policy to lift share prices whenever they suffered steep falls. Now investors are debating whether Janet Yellen, the incoming chairwoman, will do the same. Many are nervous. Ms Yellen has been silent on all the main issues for almost a year. Stanley Fischer, the likely vice-chairman, is thought to be sceptical about some of the most dovish aspects of recent Fed orthodoxy.

None of this would matter if the US economy had maintained the healthy rates of growth seen in late 2013. But growth seems to have dipped to about 2 per cent in the current quarter, from 3.5 per cent in the second half of last year. Markets had been cheered by a recent outbreak of sanity in Congress, which has slowed the pace of spending cuts compared to last year and now seems less likely to take America back to the brink of technical default. But now the fear is that this will not be enough. The economy might return to earth with a thud, as it did after a short spurt of growth in 2009-10.

The Fed plans to taper its asset purchases only very gradually. Yields on long-term bonds may be affected by as little as 1 per cent. If the US economy proved unable to withstand even this featherweight touch, market optimists would lose their nerve. The stock market has risen a very long way – shares are currently selling for fairly high multiples of company profits, by historical standards. A bear market could ensue.

Yet these fears seem overblown. The January weakness in US employment data, and in the ISM manufacturing survey, shocked the markets, but other statistics have painted a brighter picture. The slowdown may turn out to be a blip, caused by a one-off pause while companies run down excess inventories, or the effects of extraordinary weather. If this view proves correct – and I think it will – the recovery will strengthen later in the year.

This sanguine assessment does not, however, apply to the emerging markets, where a storm is brewing.

Since the Fed began its quantitative easing, investors who could no longer earn their keep buying US government debt have ventured further afield. This has resulted in a huge influx of capital into countries such as Turkey and Brazil. But the ensuing credit bubbles were not sufficiently controlled by monetary authorities, and now that policy is being tightened in the west, they threaten to burst. Central banks in emerging markets have been pleading for help. But these calls have been politely dismissed by both the Fed and ECB, whose job is to look after their economy at home.

Now China has decided to reverse its own huge monetary stimulus. Both of the world’s major economic powers are therefore pulling in the wrong direction for most emerging nations. They have not been helped by the collapse in the yen, which in effect cuts the price of Japanese products, or the euro area’s growing trade surplus. They have little option but to let their currencies slide, with rising interest rates and slowing growth rates looking inevitable.

In many emerging markets, monetary conditions are tightening sharply – just what these economies do not need. In the wake of a boom fuelled by cheap credit, the spectre of widespread insolvency looms.

All eyes are now on China. Few, if any, major economies have emerged intact from a credit bubble as intensive as the one in China’s shadow banking sector today. But no country has had $3.5tn of liquid reserves to fall back on either.

China’s decision in December to bail out an investment product distributed by its largest bank shows that for now the authorities would rather absorb the losses of the private sector than sow panic among investors. But before this is over there will be failures in financial institutions, just as there were in 1998 when Premier Zhu Rongji allowed the collapse of Gitic to serve as a lesson to others.

Investors are asking whether the markets can survive tapering by the Fed. The harder question is whether they can survive a monetary tightening by the People’s Bank of China. Many are betting on a bumpy landing, but one that does not involve a serious recession. They may be right, but China is where the unknown unknowns in the global economy currently lurk.

Gavyn Davies


quinta-feira, 6 de fevereiro de 2014

Baby boomers have failed a doomed generation

Throughout the developed world, record levels of youth unemployment are spreading feelings of hopelessness across an entire generation. Yet what is striking is that policy makers hardly seem to care.

It is only part of the answer to observe that not everyone is suffering equally: for much of wealthy northern Europe, for instance, it hardly registers. And although it is true that in some of the badly affected countries the figures have been pretty high for several decades now, the crisis has made them much worse. The real problem is not economic; it is political. An epoch of some two centuries is ending, and the young are the main losers.

The rise of modern states coincided with a valorisation of youth. Napoleon marked the change. After him, age came to be associated with the ancien regime, youth with the hope of something better. Scarcely out of university, the great Polish poet, Adam Mickiewicz, wrote his “Ode to Youth” in 1820, perhaps the best-known expression of this attitude. Founded a decade later, Giuseppe Mazzini’s Young Italy generated endless spin-offs – there was a Young Germany and a Young Poland, not to mention Young Ottomans and later Young Turks. A radical umbrella group, Young Europe, briefly brought many of them together, turning the name of the continent into the emblem of a fairer, more peaceful and more brotherly age ahead. The contrast is striking with what Europe has now come to stand for – a vision dreamt up by old men, now out of touch and increasingly out of mind.

In the 19th century such groups spoke about the future but seemed a long way from being able to shape it as their successors did in the century that followed. Communism spawned a new superpower, the Soviet Union, a state dedicated to creating a new man cast in the image of athletic fitness and health. The Communist party called upon a new generation, untainted by past loyalties, to build what the Soviets called “really existing socialism”. Purges weeded out the old, providing opportunities for the young. As Leni Riefenstahl’s films testify, the far right had an equally obsessive fixation on youth. Schoolchildren were mobilised for the party; dictators such as Mussolini were always ripping open their shirts to demonstrate their virility.

Written off by their critics as gerontocracies, the interwar democracies started to see their young people as a national resource as well. Looking back from the perspective of the 2008 financial crisis – with its paltry regulatory or legislative response – one is struck by how far western societies moved after the 1929 Wall Street crash. They did not change course immediately, but over a period of two decades they brought in welfare policies – in health, public housing and industrial relations – that transformed generational prospects.

From the 1940s onwards, they focused more and more on the young. The new generation had shown itself to be indispensable in the most important way of all: modern warfare was inconceivable without armies of the young. Two world wars and the sacrifice of millions of youths cemented a new kind of social guarantee across the developed world. From the 1950s the young came to possess life chances – through schooling, expanded access to university and the demand created by near full employment – that had been enjoyed by no previous generation. That this era coincided with America’s rise to global supremacy was no coincidence, for this was a superpower that flaunted its youth, a country where Eisenhower’s years of experience were no virtue, and JFK’s youth one of his greatest assets.

Today things look different. Heirs of the Golden Age still run the show, and septuagenarian rock stars hog the limelight. Meanwhile the young face dismal employment prospects, insecurity if they do land a job, and soaring bills for their housing and education. Their plight is an extraordinary generational triumph for their parents’ cohort. In the US, escalating college tuition fees have prompted little protest. Occupy Wall Street was supposed to spur a larger social revolt on the debt question but it failed. In countries on the front line of the eurozone crisis, a doomed generation – facing something in the region of 65 per cent youth unemployment – backs neither the existing parties nor any of the radical alternatives, seeing in all of them, indeed in politics itself, the expressions of the era that got them into this mess.

Understandable as this attitude might be, it is also self-defeating. For until the grievances of the young can assume a political expression more threatening to the established order, the sad truth is that nothing much will change. Modern warfare requires few soldiers. There is no ideology of youth any more, and it is not just the unemployed under-25s who have lost faith in the future. From the point of view of the modern state and its politicians, who needs the young?

Mark Mazower is professor of history at Columbia University and author of ‘Governing the World: The History of an Idea’

quarta-feira, 5 de fevereiro de 2014

Mohamed El - Erian : The shrinking significance of the US jobs report

For some time, the monthly release of the US unemployment rate has been seen as much more than a snapshot of conditions in the real economy. It has also provided important insights on the likely actions of the Federal Reserve, America’s most important economic policymaker and the world’s most powerful central bank.

This situation is evolving on both fronts, and the implications are widespread.

Many more people now recognise that the unemployment rate is only a partial and imperfect measure of the health of the labour market. Specifically, the information content of U3 — which measures the number of unemployed people as a percentage of the civilian labour force, and has fallen steadily from a high of 10 per cent in October 2009 to 6.7 per cent today — is undermined by significant changes in the labour participation rate and the stubborn persistence of long-term joblessness. No wonder the Federal Open Market Committee observed in the minutes published on January 8 that, notwithstanding the decline in the unemployment rate: “A range of other indicators had shown less progress towards levels consistent with a full recovery in the labor market.”

These limitations do more than reduce the value of the unemployment rate as a widely followed lagging indicator. They also undermine its effectiveness as a leading indicator of macroeconomic policy changes.

You can already see this in the extent to which the Fed is trying to wean markets away from focusing excessively on the unemployment “threshold” that the institution itself put out there as influential in determining changes its policy stance. Instead, the Fed is slowly extending the concept of thresholds to a wider array of variables, including more holistic measures of the labour market and, more importantly, inflation targets that are in excess of the current (and projected) rate.

There are two other reasons why the unemployment rate is now a less effective predictor of policy changes.

First, Fed policy has been placed largely on autopilot. Consistent with Fed signals, we should expect a regular “measured reduction” in asset purchases at forthcoming policy meetings so that the institution is out of the quantitative easing business by the end of the year. Indeed, only major turbulence at home would prompt the Fed to override this autopilot course.

Second, and now that the economic recovery appears better entrenched, officials have greater flexibility to consider the potential negative consequences of prolonged reliance on experimental policies, including the impact on asset prices, the functioning of markets and asset allocations.

All this suggests that, in deciding how to react to new economic data, Fed policy will place less emphasis on the unemployment threshold as such and more on inflation and other real economy indicators. So what does this mean for the usual rituals – and great anticipation – associated with the monthly release of the US employment report?

Certainly, the fanfare around this data release will not end. “Employment Friday” will remain – at least for a while – one of the most widely followed data releases, not only nationally but also internationally. Yet, unless analysts get their forecasts really wrong, we should expect the report as a standalone to have a diminishing role as a notable mover of asset prices and policies.

Mohamed El - Erian


terça-feira, 4 de fevereiro de 2014

Willem Buiter: The Fed’s bad manners risk offending foreigners

People are responsible for the foreseeable consequences of their actions, whether or not they intend to cause them. The Federal Open Market Committee, which sets monetary policy in the US, is no exception.

Many have expressed surprise at the Fed’s silence on the financial turmoil in emerging markets. Its statements since June 19 2013 have made no reference to economic conditions outside the US. They could have been written by the central bank of a closed economy.

Following the Fed’s premature announcement on May 22 that it would begin to scale back its $85bn-a-month bond-buying programme, many emerging markets experienced a sudden reversal of capital inflows followed by sharp exchange rate depreciations, large increases in longer-duration domestic currency bond yields and significant stock market declines. These effects were especially pronounced in India, Indonesia, Brazil, South Africa and Turkey.

On September 18 the Fed changed its mind, and announced that it would not yet taper its asset purchases after all. This led to a partial reversal of the exodus of capital from emerging markets and a partial recovery in asset prices. In the past month, however, there has been a second bout of unrest. In part this was the result of political instability and economic mismanagement in countries such as Turkey and Argentina. But it was exacerbated by renewed worries about tapering and fears that the Fed might raise interest rates sooner than previously expected.

Some argue that the Fed should not worry about the effects its actions have on emerging economies. Its mandate is to promote maximum employment, stable prices and moderate long-term interest rates. The Federal Reserve Act does not specifically add: “ . . . in the USA”. But this is clearly what is meant. If the Fed were to attach any intrinsic weight to the effect of its actions on the rest of the world, it might be in violation of its legal mandate.

Even if one accepts this, however, it should not prevent the Fed from taking account of the external impact of its actions to the extent that these feed back into the US economy. Through trade and financial linkages, financial and economic distress in foreign markets can come home to roost. This should be reason enough to worry about the foreign repercussions of US monetary policy. The Fed’s silence on the external impact of its policies may indicate that it believes there are no external effects. This view is untenable.

To argue that the Fed has contributed to economic and financial turmoil in emerging markets since the middle of 2013 is not to deny that many of the afflicted countries bear much of the responsibility for their predicament. Their recent structural reform efforts have been nugatory. In many places, economic policy has proved startlingly inept since the beginning of the era of low interest rates and extraordinary liquidity measures.

Nor is this to say that the Fed’s actions have been misguided. It is not even to say that an alternative Fed policy would have been better from the point of view of emerging markets themselves. It is merely to acknowledge the interconnectedness of the global financial system, and the vulnerability of most emerging markets to the monetary policy actions of the central banks of large western economies.

Raghuram Rajan, governor of the Reserve Bank of India, is right to call for more international co-operation between central banks. US policy makers should display wisdom and good manners. If the Fed creates the impression that it does not care about the consequences of its actions, it will sow anger in the emerging world. If it appears not even to understand the consequences, it will also sow fear. Neither is in America’s interest.

Willem Buiter is chief economist at Citi

segunda-feira, 3 de fevereiro de 2014

Gideon Rachman:The future still belongs to the emerging markets

In 1996 a friend of mine called Jim Rohwer published a book called Asia Rising. A few months later, Asia crashed. The financial crisis of 1997 made my colleague’s book look foolish. I thought of Jim Rohwer (who died prematurely in 2001) last week as a I listened to another Jim – Jim O’Neill, formerly of Goldman Sachs – defending his bullish views on emerging markets in a radio interview.

Mr O’Neill coined the term Brics for Brazil, Russia, India and China, just before the emerging market boom of the past decade really got going. He was rewarded for his prescience, and his ability to coin a good acronym, with guru status. Now Mr O’Neill is back, talking up the delicious-sounding Mints (Mexico, Indonesia, Nigeria, Turkey) as the next group of rising economic powers. But this year his timing is a bit off. Investors are panicking about emerging markets and Turkey – the pay-off in the Mint – is at the forefront of the crisis

One moral of these stories is that in punditry, as in investment, timing is everything. It is possible to be right at the wrong time – and that is what happened to Rohwer. His bullishness about Asia was fully vindicated in the 17 years after the appearance of his book. It just looked badly wrong in the crucial months after publication, as the International Monetary Fund was forced to bail out South Korea, Thailand and Indonesia.

The speed of the recovery in Asia was just as startling as the speed of the collapse. South Korea is once again regarded as a model economy, and its per capita gross domestic product has almost tripled since the near disaster of 1997. Thailand and Indonesia also bounced back.

Those stories are worth remembering amid the current panic. The next year could make boosters of emerging markets, such as Mr O’Neill, look like false prophets. But over the course of the next decade, they will be proved right – again.

The reason for this is that the factors that have propelled the rise of non-western economies in the past 40 years still apply. These include lower labour costs, rising productivity, huge improvements in the communications and transport that connect them to global markets, a rising middle class, a boom in world trade as tariffs have fallen and the spread of best practice in everything from management techniques to macroeconomic policy. Added to this is the drive of people all over the world – from factory hands to entrepreneurs – who have realised that they are not condemned to poverty, and that a better life is there for the taking.
The rise of non-western economies is a deeply rooted historic shift that can survive any number of shocks

In the past half century, these powerful forces have allowed emerging markets (or developing nations or rising powers, if you prefer) to grow much faster than the developed world. In their recent book, Emerging Markets, Ayhan Kose and Eswar Prasad show that the economies of a group of the most prominent emerging markets (including China, India and Brazil) have grown by about 600 per cent since 1960 – compared with 300 per cent for the richer, industrialised nations. Even over the past 20 years, they write, “emerging markets’ share of world GDP, private consumption, investment and trade nearly doubled”.

The effect has been to transform the global economy. Michael Spence, a Nobel Prize-winning economist, writes that in 1950 only about 15 per cent of the world’s population lived in developed economies. In the intervening 65 years, the benefits of industrialisation, trade and rapid economic growth have spread to large parts of Asia, Latin America – and now Africa.

The story is far from over. Professor Spence argues that we are in the midst of a “century-long journey in the global economy. The end point is likely to be a world in which perhaps 75 per cent or more of the world’s people live in advanced countries.” If anything, the pace is likely to increase as the implications of the communications revolution become clearer and more entrenched.

The rise of the emerging markets will, however, be punctuated by crises such as the one we are experiencing today. These, too, have been part of the story all along. The Asian financial crisis of 1997 was not an isolated event. There was the tequila crisis in Mexico in 1994 and the Indian financial crisis of 1991. If you enter the words “Latin American financial crisis” into Google, it helpfully offers to complete the phrase with the dates – 1980, 1990s, 1998 and 2002. Yet despite all this, most of the leading economies of Latin America – Brazil, Mexico, Chile and others – have experienced real improvements in living standards and reductions in poverty.

The emerging markets have also sometimes been rocked by political crises that led investors to panic. Most dramatically of all, there were the protests in Beijing’s Tiananmen Square and subsequent massacre in 1989. Who at the time would have predicted that – in spite of all this political turmoil – the Chinese economy would more than double in size over the next decade, and then do the same again in the decade after that?

The moral of the story is that the rise of non-western economies is a deeply rooted historic shift that can survive any number of economic and political shocks. It would be a big mistake to confuse a temporary crisis with a change to this powerful trend. The bursting of the dotcom bubble in 2001 did not mean that the internet was massively overhyped, even though some people jumped to that conclusion at the time. In the same way, today’s turmoil will not change the fact that emerging markets will grow faster than the developed world for decades to come.

Gideon Rachman