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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

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

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

FT

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



FT

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’

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

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


FT

Of all the economic dangers to flare up over the past week, the most unsettling was at first glance also the most esoteric: the near default of a high-yield loan product held by a few hundred small-time Chinese investors.

Set against the turmoil in other emerging markets – steep currency falls in Turkey and South Africa that prompted their central banks to raise interest rates, stubbornly high inflation in India and a collapsing currency in Argentina – China appears to be a bastion of economic strength. Even analysts with a bearish bent still expect its growth to come in at about 7 per cent this year. The renminbi is steady against the dollar and inflation is under control. And unlike developing countries faced with cash outflows as the US Federal Reserve winds down its monetary stimulus, China is protected by robust capital controls.

Why then has the saga of Credit Equals Gold No. 1, the Chinese investment product that was rescued from the brink of failure, so captivated global attention? There are both direct and indirect reasons; the latter are especially worrying.

First, the direct risks. Credit Equals Gold No. 1 is just one of a wave of Chinese shadow banking products that will fail to live up to their outlandishly confident names when they mature this year. The drama over repayment will be played out again and again.

Over the past decade, China’s economy has grown ever more reliant on financing outside the formal banking system. Bank loans, which used to account for more than 90 per cent of total credit, fell to little more than half of new financing last year. Lending by shadow banks now totals Rmb47tn, or 84 per cent of gross domestic product, according to JPMorgan.

Reducing the dominance of banks is part of the plan for unleashing more market forces in China – a positive development. But some of the loosely regulated institutions that have plugged the lending gap are simply reckless. It is the most buccaneering of these that are now sowing doubts about China’s financial stability.
Investors who lend to indebted miners are not crazy – they are betting that government-owned banks will bail them out

This week’s story began in 2011 when China Credit Trust loaned Rmb3bn to Wang Pingyan, a coal mine operator in the northern province of Shanxi. Mr Wang made the ill-fated decision to scale up investment dramatically just as coal prices peaked. His company collapsed soon after receiving the loan.

If the pain had been confined to China Credit it would have been bad enough. But making matters worse, the case has shown that there is only a thin dividing wall between shadow banks and the better-regulated parts of the financial sector. China Credit had pitched the loan as an investment product, promising an annual return of 10 per cent. Rather than sell it directly, the product was marketed by Industrial and Commercial Bank of China, the country’s largest lender, to wealthy private banking clients.

The controversy in recent weeks about which party, if any, is responsible for the dud loan has drawn in all involved: the local government in Shanxi, which gave its blessing to Mr Wang’s plan; China Credit, which structured the investment product; and ICBC, which distributed it. In the end an unidentified entity bailed out investors by covering their principal, though not the full interest.

Those wondering where the next big troubled shadow bank loan might lurk need only look down the road from Mr Wang’s failed mine to another in Liulin, the same county in Shanxi province. Xing Libin, a coal tycoon who threw a Rmb70m wedding party for his daughter in 2012, is restructuring his mining company because it could not repay its loans. Among those debts is an Rmb1bn ($164m) investment product – structured by Jilin Trust and distributed by China Construction Bank – that falls due in a few weeks.

In all, there are about $660bn of trust products up for repayment or refinancing this year, according to Bank of America Merrill Lynch. Chinese shadow banks, by definition, have been focused on customers – miners, property developers and local governments – that regulators have deemed too risky for banks, so more problem loans are a certainty.

Shadow banks have not all been pedalling junk. Many trust companies are well run and have demanded ample collateral from borrowers. And where they have been poorly managed, China’s state-owned banks have enough assets to cover much of the damage. Most investors in trust products will walk away unscathed. It is the indirect consequences of this week’s bailout that are more worrying. As rating agency Fitch put it, the rescue of the trust product was a “missed opportunity” to create more risk awareness in the financial sector. This could cast a shadow over Chinese markets for years to come.

Chinese investors who lend money to heavily indebted miners or property developers are not crazy. They are making a calculated gamble – one that has proved mostly correct until now – that the government or state-owned banks will bail them out if they get into trouble. Yet an accumulation of bad investment decisions explains the excess capacity that plagues manufacturers from sportswear companies to steel mills. The perception of ironclad, if implicit, government guarantees is also why overall Chinese debt levels have soared from 130 per cent of GDP in 2008 to more than 200 per cent today. Similarly fast increases have been precursors to financial crises in countries from South Korea to the US.

Hence China’s uncomfortable predicament. Because the government was unwilling to see Credit Equals Gold No. 1 collapse, fears of an imminent economic meltdown are overblown. But for precisely the same reason China’s debt powder keg is only getting more tightly packed.


Simon Rabinovitch


FT

Henry Ford’s low-cost car and Steve Jobs’ iPhone have enriched millions of lives in ways that no one envisioned. Yet neither sprung from groundbreaking scientific advances. Their genius was to use old technology in creative ways. Societies will be richly rewarded if they can find a way to quicken the pace of innovation. Yet misconceptions of the way forward are putting this goal farther out of reach.

A century ago, historians and economists linked innovation to the discoveries of scientists and navigators. As long as scientists were outside the economy – locked in ivory towers or embarking on distant expeditions – productivity gains were seen as beyond the influence of economic policy. The economist and political scientist, Joseph Schumpeter, supposed so for decades.


In Schumpeter’s time, however, scientists were coming inside the economy to engage in projects and innovate at companies from Bayer to DuPont. Economic theorists increasingly thought of the nation’s innovation as governed by a simple mechanism. How much research is conducted, and at what price, is determined by consumers’ demand for innovations and the supply of researchers to make them. If society cuts taxes on profit or boosts the supply of researchers, faster innovation is supposed to follow.

But this mechanist theory has done badly at explaining actual events. America’s slow technical progress since 1970 can now be understood as an effect of slowing innovation. In the mechanist view, this must mean one of two things. Either the profitability of innovations must have fallen, deflating demand; or the availability of researchers has fallen, choking supply. Neither explanation withstands scrutiny. Gross business profit relative to business output is near all-time highs; research spending relative to business output is not so low as to suggest a dearth of researchers. The theory also flunked the great test of history. The birth in about 1815, in Britain and America, of the first modern economies – economies rife with innovation – was not augured by any surge of scientists or of profits as a share of output.

The mechanical view of innovation means new practice, not invention or discovery. Most of it derives from having original ideas about what would be useful or enjoyable – thus using existing technology in new ways. Such leaps of imagination are more likely to come from business people of a practical bent than cloistered scientists.

A true innovation is rarely the result of noticing an opportunity. It depends on a vision of a new product or method, and an insight into how the economy will react to it. These often come from an idiosyncratic blend of experience and knowledge that is hard to convey to a chief executive or a government official.

Trying to innovate is not like planting cotton. It is a leap into the void, with unforeseeable costs and an unknown market reception. Success requires an entrepreneur with the right stuff – and a canny financier to spot him or her.

Most importantly, a high volume of homegrown innovation requires widespread dynamism, across the economy and down to the grassroots – so new ideas can come from anyone and anywhere.

Finally, innovation within a company requires employees, managers and owners who are in it not only for the small chance of a large material reward but also for the non-material rewards of mental stimulation, exploration and personal growth that innovative work usually presents – even if the project fails.

Yet we now see trained economists turning to the mechanist manual for switches to throw to regain lost dynamism. Proposed cuts in profit tax would not obviously coax innovative talent from established companies to start-ups, from which no profit flow is expected soon. It is cuts in capital gains taxes – paid as soon as a founder sells shares – that might give start-ups new blood.

Proponents of expanding government institutes for the advancement of science seem unaware that the explosion of productivity from 1820 to 1940 was driven by grassroots innovation, not big science; forgetful that true discoveries, like innovations, are a shot in the dark; and innocent of the institutional politicking that determines which ideas get funding.

Some mechanists say that if the financial sector will not lend to innovators, let the state supply more finance. Such suggestions are unhistorical: the colossal projects that have won state support have rarely matched the innovation brought by grassroots dynamism. They are also unworldly. Officials lack the insight and experience to know what partners to take on.

The state is no better suited to take a big role in technical innovation than in artistic creation. Nations with once-dynamic economies will be helpless to recover their prosperity as long as they misunderstand what causes economic progress.


Edmund Phelps


FT

The decision late on Tuesday night by the Central Bank of Turkey to increase interest rates substantially has taken many observers by surprise. Yet there was no other way to stem the decline in the currency and alleviate the threat of a damaging exodus of foreign capital. Even so, it may not have been enough. The monetary squeeze buys some time before elections but also intensifies the political and economic crisis. Turkey is not alone in facing these problems. In many ways the country is a dark star in a volatile emerging market firmament.

Turkish economic growth was spectacular in 2010-11. It is pedestrian now. The official forecast that the economy will grow by 4 per cent in 2014, hardly ambitious to begin with, cannot now be met. This matters a lot to investor confidence, and also to a country that needs its economy to grow if it is to supply jobs for young people entering the labour force.

Turkey’s underlying problems are weak savings, rapid credit creation, rising import dependency and an external deficit of 7 per cent of gross domestic product, three-quarters of which is financed by volatile short-term capital flows. Turkey’s currency reserves can satisfy no more than one-fifth of its external financing needs this year. Raising interest rates cannot solve these problems without bringing the economy to its knees. This week’s rate decisiondoes little to address the serious problems that beset the country’s economy.

Turkey has its own script. But it is not alone in being caught between the tightening in US monetary policy and the Chinese economic slowdown. As interest rates rise in the world’s two biggest economies, capital that previously flowed into emerging markets is now leaving. To manage the instability of capital flows and currencies, Brazil and India have also been raising rates; their most recent increases came just before Turkey’s announcement. One day later, South Africa did the same. Other emerging countries will doubtless follow suit.

It is important to consider the broader context. Many emerging markets have arrived at a hiatus after a long period of growth that enabled some to climb up (or into) the middle-income league. But it has become harder to achieve growth while maintaining stability. Building robust and inclusive institutions is essential. Elections this year in Thailand, Turkey, India and Brazil will be scrutinised closely for clues about future policy. So, too, will the reforms promised by the Chinese leadership.

It is true that many emerging markets look stronger today than in the 1990s – they have larger currency reserves and better financial governance. At the same time they are also more vulnerable to shocks. They have lifted their share of global GDP from 40 per cent in 1997 to almost 55 per cent (on a purchasing power parity basis); now more than ever, the impact of a slowdown will be felt around the world. Most emerging economies are sustained by western export markets rather than local demand. This is a strategy that has passed its sell-by date.

Dependency on capital inflows, especially to finance rising local currency borrowing, makes these economies vulnerable to changing conditions in overseas markets. Credit cycles in China, Brazil and other countries are peaking. Commodity prices are falling from record highs. China’s success in exploiting its demographic dividend, or the absorption of a vast pool of former agricultural workers into the industrial workforce, may not be repeated so well elsewhere.

Just as China’s ascendancy had dramatic positive consequences for emerging markets, so its slowdown can be expected to have opposite effects. The challenge of pursuing important economic reforms without eroding the power of the Communist party, and of trying to slow down fast and often weakly regulated credit creation, are China’s principal concerns now. Rising bond yields, illiquidity and instability in financial markets are the early signs.

Dear Bill Gates,

We have never met, but your annual letter (coinciding with your Davos speech) seemed to be addressed directly to me. Your aim is to critique books with titles such as “how rich countries got rich and why poor countries stay poor”, and I did write a book with almost exactly that subtitle. You go on to say “thankfully these are not bestsellers because the basic premise is false”. I am afraid you are right to say my book is not a bestseller, but wrong to say its premise is false.


Taking the year 2001, I used two different measures of whether a country was rich: the market value of per capita output (a measure of productivity) and the average consumption of the inhabitants (a measure of material standard of living). The two rankings differ, though not by much; Switzerland had the highest productivity and the US the highest consumption.

Using either measure to order the countries of the world, the distribution was U-shaped. There were about 20 rich countries (with about a billion people in total), many much poorer countries and few states in between. These intermediate states – such as South Korea and the Czech Republic – tended to be on a trajectory to join the rich list, a transition experienced in Japan and Italy a generation earlier. Rich countries operate at, or close to, the frontier of what is achievable with current technology and advanced commercial and political organisation. And when countries reach that frontier they tend to stay there, with Argentina the most significant exception.

You suggest that this claim might have been true 50 years ago but not now. It is 10 years since my book was published and time to update the calculations. So I did, and established that the hypothesis remains true.

There are some significant changes. The dispersion of productivity among already rich countries has increased. Norway and Switzerland have surged ahead – one due to its oil wealth, the other by the growing and seemingly price insensitive demand for its chemical and engineering exports. But laggards such as Italy – and indeed Britain – have struggled to keep up with the pack. More encouragingly, some additional countries, mostly in eastern Europe and Asia, seem on course to join the rich club.

So what about China and India? Their recent growth performance has been exceptional, but both are still desperately poor countries by the standards set by Switzerland and Norway. The gap will take many generations to eradicate.

One effect of globalisation is that the centres of major cities everywhere now appear similar – the offices of KPMG and the branches of HSBC look much the same across the world. But you do not have to venture far from the centre of Nairobi or Shanghai, and only round the corner in Mumbai, to see sights unimaginable in Norway or Switzerland.
Even if incomes are very unequal, every king needs courtiers, every computer billionaire creates a slew of computer millionaires

I was surprised and disappointed that the data you chose to support your case referred not to the distribution of average incomes across states – the subject of your letter – but to the distribution of household incomes across the world. These are very different things.

The information we have on global household income distribution is poor, but there seem to be plenty of middle income people. Even if incomes are very unequal, every king needs courtiers, every computer billionaire creates a slew of computer millionaires. This might change if, as some people argue, the middle of the skill distribution is hollowed out by robots and computers. But no such change is yet evident.

The major part of my book, Bill, (if I may) was devoted to descriptions of the economic and social institutions that enable some countries to operate near the technological frontier. The failure to establish such institutions, or to operate them effectively, condemns most of the world to levels of productivity and living standards far below what is possible with existing knowledge and techniques. That subject should interest you, and I’ll be happy to send you a copy of the book (though I know you can afford the extremely modest price).

Best wishes




John


The writer’s book, ‘The Truth about Markets’, was published in 2003 – and in the US in 2004 as ‘Culture and Prosperity’




FT

Faced with a dangerous political threat, governments the world over tend to place their faith in the same magic medicine – economic growth. When world leaders try to address the roots of terrorism, for example, they instinctively assume that prosperity and jobs must be the long-term answer. And when a regional conflict threatens to get out of control – in east Asia or the Middle East – the standard political response is to call for greater economic integration. From Europe to China, governments place their faith in economic growth as the key to political and social stability.

But just as doctors fear the emergence of superbugs that will not respond to existing drugs, so world leaders are beginning to witness the emergence of new forms of political conflict that are resistant to their traditional prescriptions – more trade and more investment, washed down with a good dose of structural reform.

Three political superbugs are causing special concern. The first is the spread of conflict in the Middle East. The second is the growing rivalry between China and Japan. The third is rising inequality in the western world – and the threat of social conflict that goes with it.

Delegates at the World Economic Forum in Davos, which ended last week, are the classic believers that capitalism and globalisation are the best antidotes to conflict. This belief is so deeply ingrained that it no longer even needs to be articulated. You can just see it in the way in which a Davos audience responds to political leaders.

This year it was President Hassan Rouhani of Iran who was received with great enthusiasm, largely because he seemed more interested in trade and investment than in nuclear weapons. Mr Rouhani did not shift Iran’s position on the difficult political issues – such as Syria, Israel or nuclear weapons – in any important way. But he sent a significant signal by beginning his speech with a statement of his ambition for Iran to become one of the 10 largest economies in the world. The Iranian leader also stressed the need to improve his nation’s relations with the rest of the world in order to achieve that goal. This emphasis on economics suggested to those in the audience that President Rouhani is literally a man you could do business with.

As a result, Mr Rouhani is in the novel position, for an Iranian leader, of being regarded as a voice of reason in the Middle East. But the president’s elevated status in the eyes of the Davos crowd is also a sign of how bleak things look elsewhere in the region.

No appeal to economic rationality is likely to end the war in Syria – where both sides are fighting for survival. It is also clear that the jihadists who are flourishing in Syria, Iraq and elsewhere are unmoved by the fruits of globalisation. Unless something goes seriously wrong, they will not be showing up in Davos any time soon.

Many still hope that an improvement in the economic situation of the Middle East will assuage the economic despair on which militant Islam is assumed to flourish. Yet not all jihadists hail from poor countries or impoverished backgrounds. Some of the militants showing up in Syria have travelled from Europe. Others have come from Saudi Arabia or the Gulf states. Jihadism is a disease that does not respond well to the traditional economic drugs.

The rise in tensions between China and Japan is an even more graphic illustration of the fact that economic self-interest is not a cure-all for political problems. China is now Japan’s largest trading partner and the biggest recipient of Japanese foreign investment – facts that many analysts still hope will make conflict between the two nations significantly less likely. Yet in some respects, China’s growing prosperity is actually driving the increase in international tensions in Asia. That is because the rise of China has altered the balance of power between Beijing and Tokyo and – combined with the bitter history between the two countries – that explains why relations are getting worse.

In Europe and North America it is the threat of political and social tensions within nations, rather than international rivalries, that are worrying the global plutocracy. A central element of the Davos creed is the faith that globalisation is good for both the western world and for emerging powers.

However, it is now almost conventional wisdom that the globalisation medicine has had an unpleasant side-effect. Even if it raises overall growth levels it has also powerfully contributed to wage stagnation and increasing inequality in the west. As a result, European politicians are worrying about a possible resurgence of the nationalist right and the radical left. And the Americans are increasingly worried about the gap between the richest 1 per cent and the rest – and the political consequences should the gulf keep widening.

It is easy to mock the global plutocracy – fretting about war and inequality – as they sip fine wines, behind a security perimeter high in the Swiss mountains. Yet global bankers and business people are, at least, largely immune to the viruses of xenophobia and nationalism. Their unofficial slogan is “make money, not war”. And they treat foreigners as potential customers rather than potential enemies.

In that sense, the idea that capitalism and globalisation are the best antidotes to political conflict – for all its flaws – retains a lot of attraction. Even if the old economic treatments for political conflict are losing some of their potency, they are still the best we have.

Gideon Rachman


FT

What will the world look like in 100 years?” wondered Ignacio Palacios-Huerta. Being an economist at the London School of Economics, he put this question to other economists. Admittedly, the profession didn’t foresee the financial crisis but, still, he writes in the introduction to his new book, economists “know more about the laws of human interactions and have reflected more deeply and with better methods than any other human beings”. (Declaration of interest: I once tried to market Palacios-Huerta’s insights into penalty-kicks to football clubs. Nobody ever paid us.)

Economists liked his question. “Hi Ignacio:” emailed Alvin Roth, Nobel laureate of 2012. “To my surprise, I do find your invitation tempting. It’s a sign of old age, I’m afraid.” The economists who volunteered to write chapters included two other Nobel-winners. The resulting book, In 100 Years, suggests some probable contours of our great-grandchildren’s world, among them:

Greater longevity will push us to reshape our lives. Over the past century, life expectancy in the west has risen by about 30 years. In another century the average person could be living to 100 – perhaps even in currently poor countries, which are already making quick gains by saving infants from simple illnesses such as diarrhoea.

Future advances against cancer could match the “cardiovascular revolution” that has reduced deaths from heart disease since the 1970s, says Angus Deaton of Princeton. Health should keep improving, simply “because people want it to improve and are prepared to pay for” innovations.

Roth foresees parents manipulating their children’s genes. Some such methods, he writes, “may come to be seen as part of careful child rearing”. He also thinks people will become more efficient thanks to performance-enhancing drugs that improve “concentration, memory, or intelligence”.

Once humans have more years in good health, they will probably reorder their lives. Roth says that if child rearing takes up less of the lifespan, people may want different spouses for different phases of life. “New forms of polygamy-over-lifetime relationships” could arise, he writes.

Greater longevity will alter careers too. “A typical career” may mean working intensely for 30 years “followed by many years of low-intensity work”, writes Andreu Mas-Colell of the Universitat Pompeu Fabra in Barcelona.

Robots will change far more than just work. Already today, anyone thinking of studying accountancy should consider the chances of the profession lasting her lifetime. Within mere decades, self-driving cars will have replaced taxis and a robot will write my column. In 100 years, writes Robert M Solow, the 1987 Nobel laureate, we could live “the bad dream of an economy in which robots do all the production, including the production of robots”. The remaining jobs will be more interesting, notes Mas-Colell, because everything else will have been automated.

Another consequence of robots: humanity will become more educated. Demand has already plummeted for uneducated workers in rich countries. In 100 years, robots will make that true in poor countries too. Our great-grandchildren will think of us as ignorant, sick, tiny peasants. They will also be better trained in emotional skills than we are, because that’s one realm where they might outcompete robots. As Edward Glaeser of Harvard writes: “I cannot imagine a world where wealthy people are unwilling to pay for pleasant interactions with a capable service provider.”

Based on past trends, an educated population is more likely to demand democracy and live in peace. But terrorists will also have awesome technology.

Face-to-face interaction may continue to lose relevance, writes Roth. I’ll continue his thought: in 100 years, instead of Skyping someone, you might invite their hologram into your living room. By then, actual physical proximity may matter (perhaps) only for sex.

As physical proximity loses importance, last century’s trend to urbanisation could reverse. In 100 years, people may be spread out more efficiently across the earth. They may marvel that greater Tokyo once had more inhabitants than Siberia.

Climate change could cause Siberia or northern Canada to fill with people. The economists in this book expect no significant attempts to prevent climate change. People will try to deal with it only after it starts affecting them, suspects Harvard’s Martin Weitzman.

He says we cannot predict the scale of the change. The uncertainty is enormous. But he worries that eventually a desperate country will choose an “unbelievably cheap”, unilateral solution: shooting a “sunshade” of reflective particles into the stratosphere to block some of the sun’s rays. That would cool the planet. It may also have horrendous unintended consequences.

Incomes will probably be much higher worldwide, driven by higher productivity, most of the writers agree. In 100 years, the world’s poorest people may live like today’s middle-class Americans, says Roth. That matters. However, writes Avinash Dixit of Princeton, rising incomes in developed nations matter much less. Theorists of happiness such as Richard Layard argue that once people have about $15,000 a year, more money doesn’t make them happier. Most economists in this book worry less about income levels than about inequality,


‘In 100 Years: Leading Economists Predict the Future’, by Ignacio Palacios-Huerta (ed), MIT Press, $24.95/£17.95


Simon Kuper


FT

The west is in crisis. The advance of China, India and other nations has led to a dramatic shift of economic power. In the political sphere, military adventures in Iraq and Afghanistan have compromised western influence, leading the US to draw back from its “superpower” role. Yet the west’s troubles go deeper than that. It is suffering a moral crisis, a crisis of identity.

Some are now uncomfortable using the term “the west” for fear that it carries the residue of an imperialist and racist past. But that is not the only source of discomfort. The crisis of identity also springs from the challenge of Islam, a creed that can make western liberal secularism seem morally tepid, if not worse. Indeed, the term “liberal” is at risk of becoming a pejorative. In continental Europe it connotes little more than market economics. In parts of the US it is becoming a synonym for “radical”, or even “socialist”.


But who are we, if not liberals? Elusive though it may at times be, this remains the best available description of western attitudes and institutions. We lack a compelling account of their evolution, a story we can plausibly tell ourselves about our moral roots. Our self-image comes dangerously close to equating liberal secularism with non-belief. A sophisticated version of that view is that our political and legal systems aim to achieve “neutrality”. But that does not do justice to the moral content of our tradition.

Accounts of western development usually involve a major discontinuity, captured in the phrase “the middle ages”. Since the Renaissance and the Enlightenment, this period has been represented as one of superstition, social privilege and clerical oppression – the antithesis of liberal secularism. Historians have been tempted to maximise the moral and intellectual distance between the modern world and the middle ages, while minimising the moral and intellectual distance between modern Europe and antiquity.

Describing the ancient world as “secular” – with citizens free from the oppression of priests and an authoritarian church – became an important political weapon during early modern struggles to separate Church and state in Europe. But this account fails to notice that the ancient family, the basic constituent of the city-state, was itself a kind of Church. The paterfamilias was originally both the family’s magistrate and high priest, with his wife, daughters and younger sons having a radically inferior status. Inequality remained the hallmark of the ancient patriarchal family. “Society” was understood as an association of families rather than of individuals.

It was the Christian movement that began to challenge this understanding. Pauline belief in the equality of souls in the eyes of God – the discovery of human freedom and its potential – created a point of view that would transform the meaning of “society”. This began to undercut traditional inequalities of status. It was nothing short of a moral revolution, and it laid the foundation for the social revolution that followed. The individual gradually displaced the family, tribe or caste as the basis of social organisation.

This was a centuries-long process. By the 12th and 13th centuries the Papacy sponsored the creation of a legal system for the Church, founded on the assumption of moral equality. Canon lawyers assumed that the basic organising unit of the legal system was the individual (or “soul”). Working from that assumption, canonists transformed the ancient doctrine of natural law (“everything in its place”) into a theory of natural rights – the forerunner of modern liberal rights theory. By the 15th century these intellectual developments contributed to a reform movement (“Conciliarism”) calling for something like representative government in the Church.

The failure of that reform movement lay behind the outbreak of the Reformation, which led to religious wars and growing pressure across Europe for the separation of Church and state. By the 18th century such pressure had become a virulent anticlericalism, which reshaped the writing of western history and with it our understanding of ourselves.

It is this selective memory of our past that lies behind our failure to see that it was moral intuitions generated by Christianity that were turned against the coercive claims of the Church – intuitions founded on belief in free will, which led to the conclusion that enforced belief is a contradiction in terms. So it is no accident that the west generated a rights-based culture of principles rather than of rules. It is our enormous strength, reflected in the liberation of women and a refusal to accept that apostasy is a crime.

We should acknowledge the religious sources of liberal secularism. That would strengthen the west, making it better able to shape the conversation of mankind.

Larry Siedentop is an emeritus fellow of Keble College, Oxford, and author of ‘Inventing the Individual’

The doom-mongers are wrong: France is modernising and reforming. But it is doing so in its own way. The country regularly comes under fire from those who want it to conform to an economic and social model that is not its own. They would gladly dismiss, with a stroke of the pen, its history and its culture – what sets it apart, its identity. France is changing but in the French way.

The government is working round the clock to turn the economy round, and it knows that it must speed up the pace. We did think that we would pull out of the crisis faster. We have achieved results but they are still precarious. Our economy is growing again but not fast enough. Unemployment is slowing but it is still too high, and taxes and social security contributions may be hampering long-term growth.

This is why President François Hollande asked us last week to launch a new phase under the rallying cry “faster, further and stronger”. Building on policy implemented in the past 18 months, it will take the battle for jobs to a new level, with clear objectives in mind: making life easier for businesses, cutting red tape, decreasing public spending and boosting employment.

France will take a multipronged approach to improving things for businesses. By 2017, we will eliminate €30bn in employer contributions for family allowances; business regulations will be radically streamlined; and we have a detailed plan for putting an end to France’s impenetrable and disorienting tax environment.

Moreover, not only is France borrowing at historically low rates, but the government has pledged to cut public spending by €50bn between 2015 and 2017 – in addition to the €15bn in savings scheduled for 2014.

These measures will be enacted with clear timelines. Politically, their legitimacy will be reinforced by a vote of confidence in parliament.

These reforms all point towards one goal: bolstering growth and stimulating job creation. It is possible to be progressive and still turn to the private sector to help stem unemployment. One can be French and take fiscal consolidation seriously. There is no contradiction between being a social democrat and being fully committed to restoring competitiveness.

Our renewed zeal will come as no surprise to those who, free of preconceptions and bias, have been observing France over the past 20 months. It is merely the next stage in our strategy. Since President Hollande came to power in 2012 we have cut deficits at a pace that has maintained growth and allowed us to finance our key policies.

Labour market reforms in May last year introduced a groundbreaking, and very French, concoction of flexibility for businesses and job security. I myself led efforts to restructure how France finances its economy by establishing a Public Investment Bank – an idea that is now about to be implemented in the UK. In addition, for the first time, the country’s abundant private savings are being used to bolster our manufacturing industry. This is a clear policy line that will be implemented with a firm hand.


As in any democracy, our plans have their champions and their opponents. Political opposition, however, is not the same thing as a knee-jerk rejection of a country that still has great appeal and credibility. This is borne out by the fact that France is America’s first choice for European investment: the total stock of foreign direct investment currently stands at €60bn.

These reforms are not and will not be carried out by slashing our social safety net. This is not a sign of weakness but rather a reflection of France’s commitment to its values. Our refusal to apply ready-made solutions does not reflect a lack of ambition but our belief that France needs to give voice, both in Europe and beyond, to the words of the national motto: liberté, égalité, fraternité. In economic terms: freedom, fairness, solidarity.

We are moving forwards and we will do so even faster in the coming year. France is a great nation. It has great infrastructure, high productivity and a dynamic population: it is equipped for the future. We are the world’s fifth-largest economy and the second-largest in Europe.

We will remain and thrive in this position if we can successfully carry out the reforms that will make us even more competitive. This is the desire of Mr Hollande and it is the government’s responsibility. France deserves better than being subject to preconceived ideas and French-bashing – it deserves the world’s trust.

Pierre Moscovici is finance minister of France

FT

In their patter song in The Pirates of Penzance, Gilbert and Sullivan satirised the notion of an educated “modern major-general”. Today they might satirise academic central bankers, of which Ben Bernanke – soon to be ex-chairman of the Federal Reserve – is the very model. As a distinguished scholar, he brought to the Fed a brilliant and well-informed mind. His knowledge of economic history helped him halt a terrifying panic. But he also made mistakes. History will probably judge him kindly. But there is much to be learnt from his time at the Fed.

Mr Bernanke was hugely influential even before he became chairman, in 2006. As governor from 2002, he made notable contributions, including his 2002 “Making Sure ‘It’ [Japanese-style deflation] Doesn’t Happen Here”, and his 2004 celebration of the “Great Moderation”. Before this, not least in a 1999 paper co-authored with Mark Gertler of New York University, he had argued that “the best policy framework for attaining [price and financial stability] is a regime of flexible inflation targeting”. This is the core dogma of modern central banking.

In a valedictory this month, Mr Bernanke started with “transparency and accountability”, pointing to the fact that, in January 2012, the Federal Open Market Committee “established, for the first time, an explicit longer-run goal for inflation of 2 per cent”. He added that the Fed’s transparency and accountability proved “critical in a quite different sphere – namely, in supporting the institution’s democratic legitimacy”. He was surely right. Central banks wield great power. Transparency and accountability are vital if its exercise is to be both effective and legitimate.

Another area on which Mr Bernanke focused was financial stability. Here, in the run-up to the crisis, he made two mistakes.

First, in his 2004 praise for the great moderation, the vainglorious label given to the performance of the US economy before the largest financial and economic crisis for 80 years, Mr Bernanke claimed that “better monetary policy may have been a major contributor to increased economic stability”. In this, he displayed the blinkers of his profession. As the disregarded economist Hyman Minsky tried to tell us, stability destabilises. An active and enterprising financial system creates risk, often by raising leverage dramatically in good times.

Second, he missed the implications of subprime mortgages. Thus, in May 2007, he remarked that “we believe the effect of the troubles in the subprime sector on the broader housing market will probably be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system”.

Fortunately, when it became evident that this judgment was in gross error, the Bernanke Fed acted decisively and effectively, slashing interest rates and sustaining credit. As panic-fighter Mr Bernanke followed the guidance of the great Victorian economic journalist Walter Bagehot, who urged unrestricted lending by central banks to solvent institutions in times of crisis. This is a world of manias and panics. Happily, Mr Bernanke knew this.

Having prevented the seizure of financial markets, the Fed focused on the moribund economy. As Mr Bernanke explains, “to provide additional monetary policy accommodation despite the constraint imposed by the effective lower bound on interest rates, the Federal Reserve turned to two alternative tools: enhanced forward guidance regarding the likely path of the federal funds rate and large-scale purchases of longer-term securities for the Federal Reserve’s portfolio”.

Such actions were widely condemned for risking hyperinflation or thwarting a desirable liquidation of pre-crisis excesses. These criticisms were nonsense. Fear of hyperinflation was based on a mechanistic model of the links between central bank reserves and bank lending, which is irrelevant to contemporary banking. Banks are constrained not by reserves but by their perception of the risks and rewards of additional lending. The former had soared and the latter collapsed in the crisis, which is why the central bank had to intervene. The calls for liquidation failed to understand that an unchecked panic could cause mass bankruptcy and another Great Depression.

Many have also expressed concern over the exit from these exceptional policies. Again, this concern is misplaced. Tools exist for managing or eliminating excess reserves. Many complain, too, about over-reliance on monetary policy. But the determination of Congress to impose a grotesquely ill-timed fiscal squeeze left the Fed the only actor.

In all, the Fed managed to deal with the crisis and its aftermath in fraught circumstances. For this, Mr Bernanke deserves great credit.

Where, however, does Mr Bernanke leave finance and monetary policy? The answer is: in great uncertainty. There are two huge challenges, both related to pre-crisis errors.

The first is how far it will be possible to combine inflation-targeting monetary policy with financial stability. Pulling this off depends on making a new idea – macroprudential policy – effective. Nobody really knows whether this can be made to work.

The second is whether enough has been done to make the financial system less fragile. I remain concerned. Yes, regulation and oversight have improved. But, in essence, today’s financial system is the same as before. Worse, it is yet more dominated by a small number of thinly capitalised, complex, global behemoths. The notion that such institutions could be “resolved” in a panic without triggering panic remains untested and, partly for this reason, government promises not to bail them out are not credible. This is a highly troubling legacy.

Mr Bernanke will surely be regarded as one of the Fed’s most significant chairmen. Yet the fact that such hyperactivity was needed to save the world from economic ruin tells us how fragile was the bright new global financial system and how ill-judged the confidence in its stability. Mr Bernanke saved the day. But he also leaves behind unresolved questions about the future of central banking, money and finance. We should not forget them. They matter.


Martin Wolf


FT

The official theme for this year’s World Economic Forum is predictably bland – “Reshaping the World”. But the unofficial slogan will be “America is back”. Predictions that the US economy will grow by 3 per cent this year – added to worries about emerging markets – mean that Davos is likely to be bullish on America for the first time in years.

But a revival of the US economy should not be confused with a resurgence of America’s role as the “sole superpower”. On the contrary, the most important emerging theme in world politics is America’s slow retreat from its role as global policeman.

Some of America’s closest partners now talk openly of a diminished US global presence. Laurent Fabius, the French foreign minister, recently gave a speech in which he said: “The United States gives the impression of no longer wanting to get drawn into crises.” As a result, he said, America’s allies are “increasingly factoring in their calculations . . . the possibility that they will be left to their own devices in managing crises”. Even Israel is adjusting. Its foreign minister, Avigdor Lieberman, recently remarked: “Ties between Israel and the US are weakening . . . The Americans today are dealing with too many challenges.” The Israeli analysis is shared by America’s other key ally in the Middle East, Saudi Arabia, which is furious at what it regards as US disengagement.

The deep reluctance of Barack Obama’s administration to get involved militarily in the Syrian conflict has fuelled accusations that America is pulling back from the Middle East. But European policy makers are also worried. They are concerned that America’s famous “pivot” to Asia will mean less attention to Nato and its European partners.

Meanwhile, America’s Asian allies seem no more satisfied. Japan thinks that the US was not firm enough in responding to China’s declaration of an “air defence identification zone” in the East China Sea, while the Philippines feels it was left in the lurch when China established effective control of the disputed Scarborough shoal.

Obama administration officials complain that all this talk of disengagement is wildly overdone. They point out that America is taking the lead in the Syrian peace negotiations, as well as in the Iran nuclear talks and the Israeli-Palestinian saga. The US also remains the main guarantor of the security arrangements of Europe, Asia-Pacific and the Middle East.

And yet, America under President Obama is clearly more reluctant actually to use its military muscle. When Congress debated missile strikes on Syria, Washington quickly became aware that opinion back home was strongly against. The spread of a new semi-isolationist mood was confirmed last week in a poll for the Pew Research Center. Some 52 per cent of Americans agreed that “the US should mind its own business internationally and let other countries get along the best way they can, on their own”; only 38 per cent disagreed. As Bruce Stokes of Pew points out, this is “the most lopsided balance in favour of the US minding its own business” in the nearly 50 years that pollsters have asked this question.

Mr Stokes calls this “an unprecedented lack of support for American engagement with the rest of the world”. What is more, this scepticism about foreign entanglements now reaches into the US policy making elite. When Pew polled members of the Council on Foreign Relations, an elite think-tank, they found their views roughly in line with those of the general public.

It is not hard to identify the reasons for America’s inward turn. The economic crisis persuaded Mr Obama to concentrate on “nation-building at home”. Meanwhile, the trauma of the Iraq and Afghanistan wars has led to an understandable disinclination to put America’s hand back into the Middle Eastern mangle. And there are also more positive reasons for America’s neo-isolationism. The shale-gas revolution has raised the prospect of American “energy independence”. By 2015 the US will once again be the world’s largest oil producer. Gyrations in the world energy market could still profoundly affect the US economy. But energy security is no longer such a compelling argument for global engagement.

It is possible that America’s isolationist mood will simply be a phase. The US went through similar, inward-looking periods after the first world war and after Vietnam. In both cases, international events compelled America to plunge back into global affairs. An economic resurgence in the US may create a more outward-looking mood. But it is also possible that, this time, the shift towards non-intervention is structural rather than cyclical – reflecting a US that is quietly adjusting to the rise of other major powers, in particular China.

For the moment, however, it is the rest of the world that is adjusting to an emerging political and security vacuum. The Clintonite slogan that America is the “indispensable nation” may have been vainglorious, but it also turns out to have been true. As Mr Fabius, the French foreign minister, acknowledges: “Nobody can take over from the Americans from a military point of view.” And, if the Americans cannot or will not act, he says, there is a “risk of letting major crises fester on their own”.

The truth of that proposition is currently on display from Syria to the Senkaku Islands to the Central African Republic. Who knows – it is a thought that might even disturb a few dinners at Davos.

Gideon Rachman

FT

The other day, I started Alex Ferguson’s autobiography three times. Not that I was distracted or that the life story of the long-time Manchester United manager failed to hold my interest. One cannot help starting the book three times because the book actually starts three times. In his “introduction” Sir Alex describes how “several years ago I began gathering my thoughts for this book . . .” A few pages later is a “preface” in which he begins at the beginning, the 1980s, when he “walked through that tunnel and on to the pitch for my first home game . . .” But then in chapter 1, a few pages on, we learn that those were actually false starts, and that Sir Alex really wants to get the story rolling with his final match last May. (“If I needed a result to epitomise what Manchester United were about it came to me in Game No. 1,500 …”)

The cluttering up of books with introductions and other “front matter” is a widespread problem. Sir Alex, a man famed for his directness, is only a mild offender. Other books have multiple prefaces, forewords, multipage acknowledgments, translator’s notes and so on. These obstacles stand like so many thickets, moats, snake pits and battlements separating the reader from the citadel of the main narrative.

The best way for an author to start a book about X is to say: “This is a book about X . . .” Thorstein Veblen does this in his Theory of the Leisure Class (1899): “It is the purpose of this book,” he begins, “to discuss the place and value of the leisure class in modern life” – and 300 words later we are in the thick of it. Lord Macaulay begins his History of England (1848): “I propose to write a history of England . . .”

But the problem is not a new one. Before computerised typesetting, the front and back ends of a book were the only place where authors could afford to fix errors and air second thoughts. They almost never used this space wisely. I recently looked at the second edition (1874) of James Fitzjames Stephen’s Liberty, Equality, Fraternity. Stephen was trying to bring himself to prominence by attacking John Stuart Mill’s On Liberty. Unfortunately for both of them, Mill died just as the first edition (1873) was being published. Stephen used the first 49 pages of the second edition to battle not Mill but various nit-picking reviewers. He might as well have sprayed his book with reader-repellent.

Today’s authors tend to waste readers’ time with similar hemming and hawing. They do it for a variety of reasons.

One is that influential American journalism schools tend to teach the “soft lead”. The best US journalism is built on a granite ledge of fact. But this makes US journalism a bore to precisely those literary-minded readers it most seeks to impress. So almost all writers are trained to sugar their dull stories by opening with pointless anecdotes.

A lot of people become authors because they have a story to tell – their own. But their readers want to hear a different one. Two or three pages of reminiscence about how the author first became interested in, say, Abraham Lincoln, might be as much autobiographical self-indulgence as the traffic will bear. Most publishers do not mind letting authors indulge themselves this way. In our audiovisual age, the stillness surrounding a book is eerie to some people. Chit-chat gives a sense of festivity, and of being on personal terms with the writer.

Finally, much of today’s serious writing is done either in academia or its immediate environs. Book-selling is influenced by university fads and politics. Fastidiously long lists of acknowledgments, which can add half a dozen pages to a book, originated in academic publishing, where gestures of gratitude are indistinguishable from shots across the bow. Assistant professor X will thank Doctor Y, who teaches at the University of Z – and, potential reviewers will hardly need to be told, controls all the grant money in the discipline.

In the internet age, explanatory stuff tends to become disaggregated from what it explains. MP3s do not naturally accommodate liner notes the way records and CDs did. This is not such a loss – the best record covers and liner notes from years past are usually available on the internet. Similarly, it is unlikely the tradition of cumbersome front matter will last long. There are some beautiful forewords in modern literature, but they would all be better as afterwords. And certainly no one will miss those literary essays that “introduce” classic page-turners by giving away the plot. A reader subjected to a lot of choppy, off-topic, preliminary prose has reason to be suspicious. It is often the sign of a book that is explaining something that should have been explained elsewhere, bullying the reader into reading the book in a certain spirit or insisting there is order in a narrative where there is none.

Christopher Caldwellis a senior editor at The Weekly Standard

Fonte: FT