Edward Hadas http://blogs.reuters.com/edward-hadas Fri, 07 Oct 2016 10:20:23 +0000 en-US hourly 1 http://wordpress.org/?v=4.2.5 May offers British-style Great Leap Forward http://blogs.reuters.com/edward-hadas/2016/10/07/may-offers-british-style-great-leap-forward/ http://blogs.reuters.com/edward-hadas/2016/10/07/may-offers-british-style-great-leap-forward/#comments Fri, 07 Oct 2016 10:20:23 +0000 http://blogs.reuters.com/edward-hadas/?p=955 The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.

An autocratic ruler of a one-party state unveils a revolutionary economic plan which ignores the advice of experts. The result is a disaster. That, in brief, is the story of China’s Great Leap Forward, introduced by Mao Zedong in 1958. It could also be the story of the UK’s “quiet revolution”, promised by Prime Minister Theresa May in her Oct. 5 speech at the Conservative Party conference.

Of course, the British revolution will not rival the Chinese in the fatality count. The famine caused by Mao’s futile effort to speed up industrialisation at the same time as introducing harmful agricultural techniques probably cost the lives of 5 percent of the nation’s population.

The UK’s departure from the European Union, which is at the heart of May’s revolution, will be a much tamer affair. Even the hardest imaginable Brexit will not bring starvation. If all trade with the EU stopped totally and foreigners suddenly refused to finance the large British trade deficit, British GDP might still only decline by a survivable 10-15 percent. A far less extreme deterioration is more likely. Some sensible economists expect nothing worse than a half a percentage point drop in the British GDP growth rate.

Still, the May approach has some eerie similarities to the Great Helmsman’s. To start, their approaches are almost equally autocratic. Both Chairman Mao and the prime minister were not elected by the people, but both claim a popular mandate. Both rule through their parties, not through parliamentary votes. Both mistrust traditional elites and are willing to ignore economic experts. Both are prone to ridicule any critics as hopeless pessimists. Neither faces any effective opposition.

Mao and May also have a common taste for nationalist hope. They both see countries whose natural position of global greatness has been diminished by foreign domination and previous weak governments. The answer, for each of the leaders, is for active governments to unleash the hidden potential of the masses. Mao thought Chinese peasants could achieve superhuman gains. May is more modest, but she wants to use the freedom provided by Brexit to help simple working people find a better life. It is an opportunity for the nation to “write a new future upon the page”.

Finally, there is the shared taste for economic nonsense. Mao believed that the mass effort of unskilled workers can build modern economies. He also believed that economies, like armies, work better with almost total central control. He was wrong on both counts. His command to construct of millions of backyard steel furnaces led to tonnes of useless steel. Worse, the labour diverted from farming cut down the production of food, contributing to the massive famine.

May also seems to have a fundamental misunderstanding of how modern economies actually work. She seems to believe that both EU membership and economic migration have slowed down the British economy. At the conference, she said that liberation from the EU’s rules would help “build an outward looking, confident, trading nation”.

But if that is really what she wants, she should abandon Brexit right away. For the complex manufactured products and advanced services which the British want to trade, success requires the intimate integration of regulation, finance and worker training. The EU’s single market provides exactly that, as the Japanese government reminded May at the G20 summit in September.

Also, enterprises export more when they are international in their outlook and hiring. British membership of the EU has bred a new generation of people who feel at home in Europe and the world. Migration from and to the EU has reinforced those gains. The newly freed up xenophobic undertones of British anti-immigration sentiment threaten to erase them.

And nations trade best when they have economic clout. The EU will inevitably strike more favourable trade deals than the UK can on its own.

Despite his absolute control of the Communist Party, Mao could not ignore the disaster of the Great Leap Forward for long. The damage from May’s ignorant economic nationalism is likely to be less dramatic, so she may be able to keep up the fiction that Brexit will increase British prosperity for much longer. But business people would do well to remind her frequently of the Great Helmsman’s famous warning: that a revolution is not a dinner party.

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Central banks play with monetary absurdity http://blogs.reuters.com/edward-hadas/2016/09/23/central-banks-play-with-monetary-absurdity/ http://blogs.reuters.com/edward-hadas/2016/09/23/central-banks-play-with-monetary-absurdity/#comments Fri, 23 Sep 2016 10:13:30 +0000 http://blogs.reuters.com/edward-hadas/?p=952 The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.

Monetary policy has become a form of drama, and Haruhiko Kuroda is the latest would-be star. The governor of the Bank of Japan has adopted a style especially suitable to these post-truth times. Call it theatre of the monetary absurd.

Central bankers today deliberate about official interest rates, money printing techniques and regulatory pressures, as they have done for decades. But policymakers’ speeches, promises and body language are now considered key tools in the seemingly endless play of economic stimulation – performed under the looming shadow of financial collapse.

The business is global, but the styles vary. The subtle act of Janet Yellen, the chair of the U.S. Federal Reserve, reflects a painful conflict. As a liberal labour economist, she has a strong but probably vain desire to use monetary policy to help create good jobs. That leads her to soft words and stimulatory policies. But as a veteran of the 2008 financial crisis, she is anxious to bring rates up enough to discourage financial excess. So she promises to be tougher – soon, but not today.

Mario Draghi deserves a prize for his ability to punctuate Italian commedia dell’arte with a hint of German angst. In 2012, the president of the European Central Bank used fine words to to sneak around wary but foolish politicians.  They were overwhelmed by his promise to do “whatever it takes” to preserve the euro.

But Kuroda, whose personal manner is restrained, is the star of the moment. Last week he promised to buy, buy, buy government debt until the inflation rate reached – no, exceeded and stayed above – the targeted 2 percent. The yield on 10-year debt, currently slightly negative, would not be allowed to rise above zero until then. This deliberate commitment to monetary madness was worthy of the traditional and highly stylised Japanese Noh theatre.

For the cognoscenti, reading the rhetorical runes can be as fun as a night at the theatre. But as far as policy goes, there is a big problem. All these subtle words and extravagant commitments are unlikely to have much economic effect.

Throughout the developed world, inflation and GDP growth are held back by poorly understood forces. The list includes too much debt, economic fear and competition from low-wage producers. Stagnant or shrinking workforces are also a serious drag. One thing that all these factors have in common is their immunity to the standard practices – and words – of monetary policy-makers. Interest rates and the supply of money are almost irrelevant, and comments about future interest rates and money supply are irrelevance-squared.

Kuroda’s dilemma is especially tragic-comic. He almost certainly cannot prevail against Japan’s especially disinflationary demography. The country’s working-age population is shrinking by about 0.5 percent annually, while the number of lower-spending over-65s is increasing at close to a 3 percent rate. Indeed, in this environment there is a tragic hubris in negative interest rates. They are less likely to encourage young people’s spending and investing than to spur the old and the soon-to-be-old to save more.

Then again, Kuroda’s flourishes amount to a lively fencing match with no opponent. It is hard to see what aggressive monetary policy is supposed to achieve in an economy that is already fully advanced and fairly well functioning. The output per Japanese worker continues to advance steadily, the unemployment rate is low, the current account is pretty much in balance and prices have been stable for more than two decades.

It is easy enough to mock the economic confusion which pervades the central bankers’ verbal dramas. But there is something alarming about these supposedly powerful men and women relying on what professionals soberly call forward guidance. The problem is not merely the declining credibility of promises which are not kept, but absurdly high expectations. Today’s central banks cannot cancel debts, improve workers’ skills or cut job-discouraging taxes and rules. Indeed, as eight years of ultra-low interest rates have made clear, they cannot even do much to pump up spending or investment.

The Bank of England’s Mark Carney has set a realistic precedent. Although he offered great drama in his bleary-eyed appearance early in the morning after the British vote to leave the European Union in June, he was clear that the central bank could do relatively little to mitigate the long-term damage this separation would do the national economy.

Other central bankers would do well to try out similar lines. Performers who exaggerate their powers often end up just looking ridiculous.

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The realist’s approach to Brexit http://blogs.reuters.com/edward-hadas/2016/07/20/the-realists-approach-to-brexit/ http://blogs.reuters.com/edward-hadas/2016/07/20/the-realists-approach-to-brexit/#comments Wed, 20 Jul 2016 09:17:35 +0000 http://blogs.reuters.com/edward-hadas/?p=948 The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.

Boris Johnson is not in charge of the UK’s negotiations to leave the European Union. Yet the new British foreign minister has said one of the most helpful things on the topic so far. “It would be geographically, physically, culturally, emotionally and historically impossible for the UK to leave Europe,” he said on July 14. “That is not our destiny. That is not our future.”

It’s easy enough to think of the things Britain might want to keep after it leaves the union. Access to preferential trade terms, for example. Or a platform for being heard on global issues that matter. Most Brits could agree on those. But if Johnson is right that Britain and Europe – which basically means the EU in practical terms – are bound together, then perhaps the way to think about this is to ask the opposite.

In other words: what is it exactly that Britain wants to give up?

That thought experiment doesn’t provide easy answers. Certainly, Britain wouldn’t want to give up the influence of Europe in its culture. The British economy rests on selling advanced services to other countries, such finance, marketing, law, architecture and design. These are cosmopolitan. Anything that makes Britain less European will gradually weaken the heart of the nation’s economic strength, and its ability to export services that other countries want to buy.

How about migration? That is something many British voters wanted less of. However, leaving the EU will not bring back a peaceful Little England in which nearly everyone, their parents and grandparent were born in the UK. The country is already far too European for that. The Oxford Migration Observatory calculated that 20 percent of residents of England and Wales were either foreign born or had foreign born parents in 2009. The proportion was almost identical in Germany, the Netherlands and Sweden. France is probably not far behind.

By leaving, the British may gain greater control over the number of legal new residents from Romania and other poorer members of the EU. In return, they will lose a seat at the European table when the region tries to deal with the greater difficulties of people moving in a globalised world.

Then there is a third thing Britain might want to give up: the bureaucracy of Brussels. The seat of Europe sets rules and the EU has a budget which transfers some money to poorer members. Many British Eurosceptics would like to abstain from these manifestations of European unity.

The gains from separation, though, would be small. Big bureaucracy is inevitable in modern societies and the EU’s variety adds more than it subtracts for the UK. In order to do business with Europe, Britain would end up copying many of its rules anyway. As for the subsidies, even if they did not eventually help the UK by promoting regional peace and prosperity, they are much too small to make a significant difference to the British way of life.

If European culture, migration and bureaucracy aren’t so bad after all, Britain has a problem. It has opted to swap the status quo for an ideal that doesn’t exist – in the name of getting rid of things it actually doesn’t mind. In that light, Johnson’s statement that leaving Europe is unthinkable isn’t so contradictory after all: what Britain really wants is what it already has.

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Britain picks the wrong time to play games http://blogs.reuters.com/edward-hadas/2016/06/29/britain-picks-the-wrong-time-to-play-games/ http://blogs.reuters.com/edward-hadas/2016/06/29/britain-picks-the-wrong-time-to-play-games/#comments Wed, 29 Jun 2016 13:56:52 +0000 http://blogs.reuters.com/edward-hadas/?p=945 The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.

Most leading British politicians spent much of June 27, the Monday after the country voted to leave the European Union, congratulating each other for accepting the will of the people. Parliamentarians from both parties took a peculiar pride in having abdicated their responsibility. The winners expressed magnanimity and the losers mostly promised to respect what they called the will of the people. To those watching from the outside, this sort of politics is reckless, bizarre and unnecessary.

It is reckless because the UK faces a tremendous economic and political challenge. Leaving the EU is a gamble, with small possible economic gains and large likely losses. An isolated and mistrusted nation faces the withering away of ties with its largest trading partner. But many Remain partisans are being sucked into the Leave campaigner’s fantasy world, in which perfidious Britain might still get a good deal with the EU. The recovery of the benchmark FTSE 100 above 6,300 points on June 29, back where it was the day before the vote, reflects those idle dreams.

Under the circumstances, the almost unquestioned acceptance of the referendum’s result is bizarre. Why continue down this path? Why alienate already angry voters on both sides? Remain supporters are already furious, and the Leave voters are in for bad news. They face some combination of economic decline and the betrayal of their wish to hide in a fantasy pre-globalisation world.

The best explanation for this peculiar behaviour is not the one Prime Minister David Cameron offered, respect for democracy. It comes from another British tradition – games. We won, you lost. Chin up, take it like a grownup. Shake hands and move on.

Everything is wrong with this approach. The decision to leave or stay in the European Union is not a sporting match with a winner, a loser, clear rules, a referee and a replay next year. This question is complex. It should be answered only by people who are able to make informed and rational judgments. To give the people the opportunity to override the legislature is an insult to the principle of representative democracy.

The British basically invented this stable form of democracy, but they still decided to treat EU membership as a game. But they forgot a basic principle of sports, fair rules. In this referendum, the terms were anything but fair. The Leave campaign did not have to present any plan, any forecast, any concrete explanations of anything. They took full advantage of this un-level playing field by encouraging voters’ illusions, fears and hatred.

In sports, it is acceptable to play by the rules, even when they appear unfair. The Leave campaign, though, actively cheated. The one big number it touted – a saving of 350 million pounds a week in contributions to Europe – was a lie. The assurance that the 1.2 million British people living in the EU had nothing to fear was a lie. The claim that the UK could easily negotiate a good exit deal was a lie. An effective referee would have disqualified the Leave side, and given Remain victory by default. Britain has a watchdog for policing untruths in commercial advertising. It does not have one for political campaigns.

Instead, the match was played to the end and the Leave campaign declared the winner. But in such a closely called election, the numbers aren’t decisive. This was a three-way election, with 28 percent of the electorate not voting, 37 percent in favour of leaving and 35 percent for Remain. If non-voters were younger than the average, and had gone to the polls after all – a question that is now largely academic – Remain may have been the winner.

So a cheating team just manages a draw in a match that was rigged in its favour. There is no reason for the strong Remain majority in parliament to be good sports about a plebiscite they did not lose. The nation’s elected representatives should be looking for the least incendiary way to get around the result. They have a duty to forget the game.

It would have been far better never to have called a referendum. Whatever happens, irreversible damage has already been done to the British reputation, among both potential investors and European governments. The economy has suffered from the uncertainty. The right decision now, to ignore last week’s vote, will add shame and ridicule. It would require careful selling to voters to avoid political unrest. But those are lesser evils than the problems that would come from being good losers.

At least demographics are on the side of Britain in Europe. Remain won decisively among young adults, by a three-to-one margin according to a YouGov poll. That reflects the coming generation’s increasingly global perspective. The elite of this group are almost as much European as British. As they gradually take power, they will want to join the European project, bringing understanding and enthusiasm. The next prime minister would do well to stop playing games and make their path smoother.

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The BRICs are dead. Long live the BRICs! http://blogs.reuters.com/edward-hadas/2015/11/11/the-brics-are-dead-long-live-the-brics/ http://blogs.reuters.com/edward-hadas/2015/11/11/the-brics-are-dead-long-live-the-brics/#comments Wed, 11 Nov 2015 17:53:54 +0000 http://blogs.reuters.com/edward-hadas/?p=941 Brazil, Russia, India, China – BRIC. The acronym was pushed as a hot investment idea in the heady 2000s. Back then, before the financial crisis, steady economic growth was expected to last forever in rich and poor countries alike, with poor countries growing much faster. Jim O’Neill, then of Goldman Sachs, simplified the theme for the investing masses. The four biggest developing economies were on the smooth road to riches, and investors could hop on for a profitable ride.

It has not worked out quite as planned. The GDP growth rate of China, by far the largest of the four economies, has slowed faster than its boosters expected. The Middle Kingdom may now be on the edge of a real estate bust and recession. GDP is currently falling in Brazil and Russia, and India’s rosier numbers have been boosted by generous statistical adjustments.

Foreign investors in BRIC stock markets have not done too badly since O’Neill’s heyday. In the last 10 years, the annual 6.3 percent gross return on the MSCI BRIC index has just about matched the 6.4 percent on the World Index. However, the BRIC index has badly underperformed the world and the broader MSCI emerging market index for the last five, three and one years, mostly going down while developed economy markets went up.

The stock market declines reflect the abandonment of the BRIC thesis by investors, and they also perpetuate it. As a sort of death knell, Goldman Sachs has closed down its own dedicated BRIC fund. O’Neill, a former currency economist who has moved on to become a minister in the British government, might be feeling a little sad. Albert Edwards, the perpetually gloomy strategist at Societe Generale, can gloat. In 2011, he said BRIC should stand for Bloody Ridiculous Investment Concept.

That markets have bolstered Edwards’ view is not all that surprising. Share prices may eventually tend to follow GDP growth, but in developed economies the two have often diverged for decades. In poor countries, there are more reasons for stocks to go their own way. The ebbs and flows of both domestic and foreign speculative fervour have an excessive influence on share prices. China is a good example. The most successful companies are newer and less likely to be quoted than in richer countries, while corruption is more likely to keep profits away from outside investors, especially foreigners.

Still, what O’Neill mainly had in mind was something far more durable than any stock market run. He noted that most poor countries were steadily becoming less poor, and that this process was changing the world’s economic balance. That idea is as valid today as it was 15 years ago.

Back then, the longstanding post-colonial economic split was still obvious. For decades, the 20 percent or so of the world’s population living in developed economies had accounted for about 80 percent of the consumption of manufactured goods. The Chinese economy was expanding fast, but it was not yet big enough to tilt the worldwide balance. Per capita GDP in India and the other countries of South Asia had been growing more slowly than in most developed countries. Latin America was a perpetual disappointment.

Three big changes were lurking, though: ideology, demographics and institutions. The fall of the Soviet Union and the success of China and South Korea demonstrated to politicians in many countries that governments needed to promote the private sector for economies to flourish. Smaller families allowed for increased investments in education, without which sustained growth is impossible.

Most important, the quality of institutions was gradually improving. Prosperity increases if and only if private corporations, government agencies, hospitals, schools, universities and less formal groupings of business people are staffed by competent people who do their jobs reasonably well.

Institutions in poor countries remain much weaker than in rich ones – consider China’s corruption, or the unwillingness of non-resident Indians to take on bureaucratic roles in their native lands. But even turning terrible institutions into merely bad ones can create big gains.

That is what is happening, and it is the greatest economic change in a century. As more people in poor countries become more educated, the values and practices which reduce poverty and create wealth become more widespread. As wealth spreads, health and education improve, so the next generation has more to offer than the last. More is invested in physical and human capital. Institutions become stronger.

The financial crisis slowed progress, causing capital to be withdrawn from emerging markets and commodity prices to fall. Old problems have resurfaced. However, the latest economic predictions from the Organisation for Economic Co-operation and Development, often referred to as the rich country club, show the basic BRIC story remains good. GDP for OECD members is expected to increase 2.2 percent in 2016. That is not bad for countries which are already highly prosperous, but it is far below the 4.2 percent predicted for the non-OECD members.

The rate at which the poor are catching up to the rich is slowing, but has been going on for long enough to change the world. The 80-20 of the early 1990s is now more like 85-50 – the 85 percent of the world’s people who live in developing economies consume about 50 percent of total production. The proportion is set to increase in 2016, even if it proves a relatively difficult year for developing countries.

Of course, trends need not last forever. Some development economists anticipate that China and other currently successful countries will be caught in middle-income traps. They are right if society cannot evolve along with the economies, so that corruption or social conflicts undermine growth. Then, the stagnation of the pre-BRIC century could return.

Poorly managed financial systems are another risk. Domestic funds can be badly misallocated, while foreign investors can protect bad governments, undermine good ones and create credit shocks. Financial flows also play an important role in commodity price volatility, a major source of instability in many developing economies.

Even if these risks materialise, there is probably enough extreme poverty left to eradicate, and financial resilience yet to be built, that years of faster growth in poor than in rich countries is still possible. The steady rise of a global middle class is set to continue. In short, the demise of the highest profile BRIC fund does not indicate the end of an era.

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The world would be better off without debt http://blogs.reuters.com/edward-hadas/2015/10/22/the-world-would-be-better-off-without-debt/ http://blogs.reuters.com/edward-hadas/2015/10/22/the-world-would-be-better-off-without-debt/#comments Thu, 22 Oct 2015 15:55:03 +0000 http://blogs.reuters.com/edward-hadas/?p=938 A time traveller from 300 years ago would be awed by new technologies and social changes. But the disoriented extra-temporal visitor would find some aspects of finance very familiar. Many of today’s monetary arrangements are historical relics. Take, for example, debt.

Some 5,000 years after the first recorded examples, debt has thrived. Government borrowings are at record levels in much of the world, while the companies in the U.S. S&P 500 stock index report having as much debt as equity on their balance sheets.

Government debt, at least, hasn’t changed much. Now, as in 1700, or in 500 BC, governments use interest-bearing loans to close the gap between tax revenues and desired expenditures. The only alternative is to clip coins to create new money, or manufacture new paper notes or electronic funds. Such techniques are generally frowned upon, now as always.

That used to make sense, sort of. Borrowing monarchs knew additional taxes would be fiercely resisted, and that debasing coins hurt their image. The only way to go was to cajole rich people to lend. Merchants who lent could get a pretty good income, although sovereign defaults were alarmingly frequent. Powerful creditors kept profligate borrowers in check.

None of those reasons is still valid. Governments now routinely collect 30 percent to 60 percent of the funds which pass through the society in the form of taxes. That is usually enough to pay for needed goods and services. Even in today’s sclerotic and partisan democracies, people will generally accept additional temporary taxes to pay for natural disasters and other emergencies.

In the world of Keynesian thought, government deficits have become not just standard practice, but actually desirable. If states try to keep budgets balanced, they cannot help the economy absorb shocks as easily. But running deficits is less important than spending the money wisely. And if doing so encourages activity that would otherwise not take place, it should not be too inflationary.

The idea that lenders restrain unruly governments is also no longer true, because banks can provide the authorities with effectively unlimited quantities of money. Eventually, the debt lands in investors’ portfolios. And increased borrowing does not necessarily lead to tougher terms. In Japan, it has been the reverse: the greater the borrowing, the lower the interest rate.

For private borrowers, it’s different. They can’t issue legal tender as an alternative to loans with fixed interest payments and mandatory repayment. However, there is a better way to finance investments – old fashioned equity.

Back in the day, debt was the natural way to structure most investments, because information and trust were scarce. Loan contracts were clear and relatively easy to enforce. In contrast, shares pay dividends at the discretion of the issuer and are never redeemed. Outside shareholders depend on a strong legal system and active secondary markets.

Those are now readily available, so economies can harvest the many superiorities of equity over debt. To start, dividends which vary along with the issuer’s fortunes are more equitable than fixed interest payments. Equity also leads to less financial vulnerability. In bad times, interest and principal payments on loans can become unbearable, while shares just sit there.

The use of equity instead of debt has another advantage – it cuts down on financial crises. Fixed interest-rate debt is a magnet to dangerous speculation. The prospect of huge gains when the price of debt-financed assets rise is hard to resist, but so is the stampede of sellers trying to get out as falling asset prices lead to bad debts. If equity-like capital was used to finance everything from large companies to small apartments, leverage could probably never reach crisis levels.

It is easier to imagine a better world than to improve a worse one. But that’s no reason not to challenge the basic idea that debt is natural or inevitable. Venerable economic traditions such as slavery and animal-powered agriculture have been all but eliminated in the rich world. Debt could follow them on the road to extinction.

That won’t happen, of course, while economists, politicians and businessmen all take the reliance on debt for granted. A global financial crisis and seven subsequent years of overall disappointing growth have not shaken this orthodoxy. More suitable finance may not come until the antiquarian reliance on debt inflicts even more damage.

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Ex-Im deniers miss the real world http://blogs.reuters.com/edward-hadas/2015/10/19/ex-im-deniers-miss-the-real-world/ http://blogs.reuters.com/edward-hadas/2015/10/19/ex-im-deniers-miss-the-real-world/#comments Mon, 19 Oct 2015 13:33:25 +0000 http://blogs.reuters.com/edward-hadas/?p=935 Vehement domestic opposition to a government agency that finances trade is a distinctly American phenomenon. But the misunderstanding of economic reality which underpins the arguments against the U.S. Export-Import Bank is widespread, not confined to zealots like the Tea Party wing of the Republican Party.

Washington’s trade finance bank lost its ability to write new business on June 30. Critics wanting to get the government out of the business prevented a reauthorisation of Ex-Im’s charter. Despite still-ferocious opposition, Ex-Im might regain its lending authority in a vote in Congress as soon as Oct. 26.

Even setting other arguments aside, a true government-hater’s fervour might be better directed elsewhere. The Congressional Budget Office estimated in 2014 that Ex-Im would cost taxpayers a meagre $2 billion over 10 fiscal years, discounted at the less favorable market rate provided by the CBO.

Using the same accounting technique, the bill for the Federal Housing Administration’s single-family mortgage programme is $30 billion over a decade, while student loans may cost the Feds $88 billion. More thoughtful believers in the superiority of markets over governments would start their campaign with attacks on those larger programmes or, perhaps better still, on Fannie Mae and Freddie Mac, the government-backed mortgage giants whose failings before the 2008 financial crisis and $190 billion bailout should have sounded their death knell long ago.

Ex-Im, though, somehow excites more passion. Even if it demonstrates the “crony capitalist nature of Washington, D.C.”, as lobbyists at Heritage Action claim, so do most institutions inside the beltway. As for corporate welfare, Ex-Im is a small provider. True, Boeing is Ex-Im’s largest beneficiary and presumably its closest crony, but the $20 billion of government contracts awarded to the aircraft maker provide far more opportunities for unmerited taxpayer largesse than any trade financier could manage.

Of course, symbols are crucial in politics, and Ex-Im makes a good one. It seems to be doing something private institutions should manage without help. Besides, any subsidies might ultimately go into undeserving foreign pockets. Neither of those claims is really on target, but the detailed debate hides a more basic understanding.

The wrong principle

Right-wingers are not the only people who love free markets and distrust governments. It is a commonplace among economists that competitive markets are the most efficient means of producing and allocating goods and services. Governments, according to this theory, cannot harness as much productive energy as keenly competing enterprises. With no rivals to check their political and legal power, state institutions are prone to sloth and corruption.

While some anti-government ideologues may close their eyes to reality, most economists see clearly that governments are, in fact, by far the largest actors in any modern economy. To start, they provide vital support by running the monetary system, passing and enforcing laws, and setting regulatory standards – the rules, both basic and arcane, that govern markets and other activities of all kinds.

Meanwhile, government spending accounts for 39 percent of U.S. GDP, according to the OECD. It is not surprising that the government is the biggest funder of such crucial parts of the economy as transport, education and healthcare. Since taxes provide almost all of that spending money, tax policy is always at the centre of debates on both prosperity and economic justice.

The ubiquity of government in the economy, however, undermines the theoretical case in favour of market mechanisms. If markets really worked as well as their promoters claim, then policymakers would have long ago been driven out of many important businesses. Ex-Im would never have got off the ground.

Some economists accept that such facts should be allowed to influence theory. They believe that governments can do many things which markets cannot. Others downplay the evidence, seeing no more than a collection of modest market failures and imperfections, combined with officials willing to sacrifice efficiency for such non-economic goals as the universal provision of elementary education. Another of the market advocates’ arguments is that corruption leads governments to use their power to stop markets from working their economic magic.

All these explanations rely on a duality, the idea that there is always a contest between market and government. That is unrealistic. In today’s complex economies, governments and markets are not opposites. They are deeply intertwined, with complementary and overlapping responsibilities. They do not always agree but they mostly work together – as regulators and regulated, as customers and suppliers or, as with Ex-Im and private-sector banks, as providers of different but related services.

Of course, state-run organisations can sometimes be a simple alternative to the private sector. Utilities and hospitals, for example, are sometimes owned by governments and sometimes by shareholders. Pro-market ideologues often exaggerate the differences. Both are typically run as meritocratic bureaucracies. Both are subject to intense regulation and have to please many constituencies. Both are often plagued by self-interested leaders and debilitating traditions.

Even the most ideologically significant division, between private competition and state monopoly, is often less clear on the ground than in theory. Many private companies face limited competition, while many government operations have to jostle with private and state-run rivals.

The finance sector may have more melding of state and private than most. Most remarkably, central banks effectively outsource almost all money creation to commercial banks. In return for that privilege, private banks must hew to particularly detailed rules, which cover both capital structure and their mix of business. Banks and other financial intermediaries are also used as conduits for government policies on interest rates and pensions.

The existence of Ex-Im and many comparable institutions around the world suggests that trade finance is a suitable candidate for some measure of state intervention, too. Actually, governments have a pretty modest role. The World Trade Organization estimates that private institutions control 80 percent of the market.

Governments come into the picture when private-sector banks lack the expertise and patience needed to finance sales of big-ticket items like aircraft to companies in distant countries. In addition, these deals usually have a political aspect – not to mention, in some cases, a hint of needed development help – so both buyers and sellers feel more comfortable with a bit of government support.

Getting it right

In a world free of instability and geopolitical machinations, the U.S. Export-Import Bank might not be needed. In this one, however, it pretty much does what it was designed to do. It genuinely and scrupulously supports U.S. exports. And it does so without harming the business of private banks and credit insurers, to judge from the lack of complaints from these potential rivals.

It’s more worrisome when foreign governments take a more sweeping financial role. Generous lending terms can be alluring for potential customers in poor countries. Done on a large scale, though, this can prevent competitive markets from performing one of their more useful functions, letting rival suppliers compete fairly on quality and price.

Fortunately, many governments have recognised that this sort of escalation ultimately produces no winners. Members of the OECD have limited the scale of their financial support for exports since 1978, when they made an informal agreement. Unfortunately, China and Russia have not signed on. If Ex-Im is resurrected, it may eventually ask Congress to give it room to compete more aggressively.

That, however, is a fight for another day. Up until its charter was allowed to expire, Ex-Im had figured out how to combine a modicum of state support with disciplined bank lending, while providing a service comparable to what many other developed nations offer their exporters. That is not crony capitalism. It is the modern economy working well.

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VW, like BP, took the wrong chances http://blogs.reuters.com/edward-hadas/2015/10/14/vw-like-bp-took-the-wrong-chances/ http://blogs.reuters.com/edward-hadas/2015/10/14/vw-like-bp-took-the-wrong-chances/#comments Wed, 14 Oct 2015 14:53:12 +0000 http://blogs.reuters.com/edward-hadas/?p=933 After an expensive scandal, Volkswagen is just starting the long process of corporate self-analysis. BP has been through it all. The carmaker can learn an important lesson from the oil major.

BP had two major accidents in just over five years, an explosion at the Texas City refinery in March 2005 and a blowout at the Macondo well in the Gulf of Mexico in April 2010. The oil business is always hazardous, but BP seems to have suffered from something worse than bad luck – a faulty corporate culture.

The U.S. government’s Chemical Safety and Hazard Investigation Board weighed in with a 341-page report on the Texas City disaster. It told of the company’s cost-obsessed management, which skimped on staffing and training. Equipment was poorly maintained. The operator on the day of the accident had worked 29 consecutive 12-hour days. Already inadequate official safety procedures were routinely not followed.

As the CSHIB put it, “Beginning in 2002, BP Group and Texas City managers received numerous warning signals about a possible major catastrophe at Texas City.” But instead of responding to those signals, the bosses kept demanding further costs cuts, including a 25 percent reduction in operating expenses in 2005. Texas City management fought back, and were allowed to cut by only half as much. They did not have to deliver on that commitment, after the explosion killed 15 people and injured 180.

Two years later BP got a new chief executive, who promised to “focus like a laser” on safety. There is no reason to doubt Tony Hayward’s sincerity, but studies of the Macondo disaster suggest that not that much actually changed at BP.

One lesson from BP is that there was no single mistake. In a 124-page report, an expert group sponsored by the Center for Catastrophic Risk Management at the University of California at Berkeley listed 26 different decisions that contributed to the disaster. Each one was risky, and none was strictly necessary. The people in charge of drilling made the choices they did largely because they wanted to get on with the job, which was well behind schedule and over budget.

There are many differences between the two accidents, and one crucial similarity: BP’s safety culture was inadequate. In the five years since Macondo, it has not been involved in any disasters. Everyone must hope that the ingrained culture may have finally changed.

Volkswagen’s cultural problem isn’t safety related. The investigations into the defeat device which gave faulty emissions-test readings on 11 million cars are just beginning, so it is too soon to draw firm conclusions. However, there are some problems that echo BP. One is the belated recognition of problems that go back years. The deceptive software was first put in cars in 2009.

There is also a tendency to miss obvious questions in the name of getting the job done. The engineering challenge – matching low emissions with good fuel economy – was a central concern to the company. Many of the company’s talented engineers surely wondered why VW’s specialists seemed able to solve this problem so cheaply.

If the company culture was alert to regulatory risks in the same way that it was to, for example, Chinese demand or performance engineering, it is highly unlikely that the cheat would have been hidden for more than five years. But people often do not listen to things that they don’t want to hear.

The right thing for BP to do was to develop a true safety culture. The right thing for VW is to find a passionate love for low emissions. However, these shifts do not come easily, or for free. When one target becomes more important, others necessarily receive less attention.

So what should the tradeoff be? Boards of directors, leading shareholders and top executives are inevitably those who have to decide. In these fundamental matters, worthy missives to employees and slick training videos are not enough. Cultures are shaped and changed by hard decisions, like firing people for taking safety risks to meet production targets or telling shareholders that profits will be down this quarter, but safety comes first.

Volkswagen’s new chairman and chief executive will have to make honest relations with pollution regulators non-negotiable. They should start by recognising the scale of the problem. The scandal shows that the urge to dodge the rules is deeply ingrained, perhaps unconsciously. Unless VW can make environmental soundness as fundamental to the company’s identity as making fine and competitively-priced cars, it might have to follow BP in the two-time hall of corporate shame.

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The limits of the sharing economy http://blogs.reuters.com/edward-hadas/2015/10/07/the-limits-of-the-sharing-economy/ http://blogs.reuters.com/edward-hadas/2015/10/07/the-limits-of-the-sharing-economy/#comments Wed, 07 Oct 2015 15:26:45 +0000 http://blogs.reuters.com/edward-hadas/?p=930 The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The Catholic Church and the United Nations sometimes sound like idle dreamers. But Pope Francis’ concern for “the well-being of individuals and of peoples”, as he put it to the U.S. Congress last month, is actually quite practical. So are the 69 U.N. Sustainable Development Goals. Both target the area where economics and finance have so far failed.

For anyone who thinks all people deserve the same opportunities, the state of the world is scandalous. One-fifth of the global population suffers from hunger and malnutrition. Larger portions lack clean water, have little education and live in the midst of toxic levels of pollution.

The components of prosperity are well enough understood to end all of these global-scale tragedies. But people just don’t think globally. Resources, products, ideas and human beings move more or less freely around the world, but economic solidarity still doesn’t.

Consider a prosperous family in a Detroit suburb. Its economic community is global. It extends well past inner city Motown. It reaches to India, Iraq and Mexico, the countries which Global Detroit consultants say contribute the largest number of immigrants to the region. Indeed, it reaches to anywhere in the world the prosperous family might consider visiting.

Suburban Detroiters might say they already struggle to find much solidarity with poor Detroit city, just a few miles away. They are quite right. It is always a struggle to think bigger. It is more natural to think selfishly, or to promote the good of a smaller community – a family, a tribe, a nation or some shareholders. Technology companies like AirBnB and eBay get people to think of distant strangers as peers, but where overall prosperity is concerned the sharing economy still runs up against limits.

The welfare state shows that people can learn to expand their horizons. Systems designed to protect, nurture and equalise take the idea of solidarity and extend it to everyone inside the national borders.

Mobile phones are another example. While nations once jealously guarded domestic producers and technology, the industry is now global. The same mobile handsets are sold almost everywhere, and the raw materials, parts and expertise which create those phones are gathered from almost everywhere. Apple and Samsung design smartphones to be used in Angola as well as America. A similar reliance on global commonality is seen in aircraft, mining, cars, software and pharmaceuticals.

Finance, meanwhile, hasn’t lived up to expectations. Institutions which can safely move funds from place to place have been supporting traders for centuries. More recently, banks and other intermediaries have become more global in their approach to investments. But the record is mixed. Financial globalisation has been marred by recurring problems with trade imbalances, excessive third-world debts, and rapacious demands on poor countries.

Organisations can do more. The United Nations, the World Bank and many specialised bodies are already quite global. In the economy, they spread cash, high standards and noble aspirations. The new Sustainable Development Goals are a good example of the last. These multinational institutions can be expanded. They can also be encouraged to focus on the most needy. If every leading university and research institute adopted a counterpart in a poor country, the gains could be significant. Funds would be found once the global solidarity mindset prevailed.

Multinational companies already do a lot of global sharing, but they too could do more. Shareholders would have to get used to getting only cash left over after increased spending on solidarity. That already happens in the mining sector, where most governments only approve projects which include expensive commitments to local communities. Even if shareholder value purists may not like to admit it, companies already have obligations to their communities which take precedence over profit-seeking. For example, shareholders only get the cash left over after taxes are paid.

There are undoubtedly many other ways to help bring the economic world closer together. Ideas will really start flowing freely when most people decide that global solidarity is more of an obligation than an aspiration. The warm welcome Germany is giving to refugees from Syria and Afghanistan is a moving example of how an enlarged definition of “who we are” changes behaviour.

However, as yet such neighbourly sentiment rarely crosses political borders. That could change. A good way to start the process is to plan to tear down some of the national walls around welfare states. That might sound a stretch. French voters, for example, would never approve combining their government-funded medical system with the comparable arrangement in Bangladesh.

Still, smaller steps towards a welfare world-state are quite possible. A large universal fund for disaster relief might be a good start. The misery caused by floods and wars brings sympathy in rich countries and drags down development in poor ones. Besides, the World Bank has already started, with a Disaster Risk Financing and Insurance facility. It could be expanded. A more ambitious initiative would be a global medical training plan, funded by national contributions set according to wealth and disbursed across the nations according to need. Cross-border migration could be another frontier for shared global policies and funding.

Global welfare might sound like a pipe dream. Then again, universal national pensions, healthcare and unemployment benefits were considered crackpot notions not that long ago. These days, people are encouraged to think big. Nothing in the economy is bigger or better than global solidarity.

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VW shows two sides of pushy culture http://blogs.reuters.com/edward-hadas/2015/10/02/vw-shows-two-sides-of-pushy-culture/ http://blogs.reuters.com/edward-hadas/2015/10/02/vw-shows-two-sides-of-pushy-culture/#comments Fri, 02 Oct 2015 09:39:43 +0000 http://blogs.reuters.com/edward-hadas/?p=928 The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The scandal at Volkswagen might look like the sort of stupid mistake that could easily have been avoided. Not so. The carmaker’s installation of unauthorised and illegal software capable of falsifying emissions test results in 11.5 million vehicles is the sort of problem that highly successful companies find very difficult to avoid.

Start with an obvious point: fiddling emissions was clearly not a good idea. Such defeat devices were explicitly banned in the European Union in 2007 and had not been tolerated by U.S. regulators for decades. VW itself had a run-in with the Environmental Protection Agency on a switch that limited emissions back in 1973, the Wall Street Journal reported. Then there was a 2007 letter from parts supplier Bosch warning of possible foul play, as reported in the German newspaper Bild am Sonntag. In 2011, VW’s supervisory board received warnings of manipulation, the Frankfurter Allgemeine Sonntagszeitung reported.

So how was it allowed it happen? Look to the corporate culture. The feuding cousins at the top of Volkswagen and Porsche promoted people with the same basic management style. In that kind of environment, three things tend to occur. Talented and arrogant executives do well. Bosses fail to delegate important decisions. Subordinates are expected to succeed, not to moan about problems which they cannot solve.

The hard style naturally travelled from top to bottom. So it is easy to imagine the pressure on the engineers who had been ordered to find a low-price way to keep diesel emissions down on a new engine model. The company’s reputation for technical excellence was on the line. So was the strategy in the crucial North American market, where VW was struggling. Failure was not an option.

The investigation now taking place at Volkswagen will reveal more details. But it is easy to imagine the reluctance of superiors, all the way up the line, to listen too closely to any hints of foul play. Asking probing questions could cost them their jobs long before any warnings saved the company from a great deal of trouble.

For anyone who has studied the numerous trading scandals at investment banks, the pressure to perform and the reward for closed eyes will sound familiar. At the banks, the desire for higher profits was much greater than the interest in a pure culture. Besides, in an environment where people were regularly fired for no obvious reason, asking hard questions promised more pain than gain. So few hard questions were asked.

In any company, a narrow focus and a lack of strong internal controls are an invitation for trouble. However, single-mindedness is not all bad. On the contrary, it is hard to think that Volkswagen would have grown into the world’s largest car company by revenue with the sort of cautious and open culture in which emissions cheating would be neither tempting not tolerated. More sensitive bosses probably would not have pushed as hard for technological pre-eminence or made the big bets on acquisitions and investments which pushed VW far ahead of its European peers.

Supreme self-confidence is especially important when companies challenge accepted ways of doing business. Uber would still be a small car service in San Francisco if Travis Kalanick spent much time wondering whether he was doing the right thing. But the strong hand of the now-global company’s founder comes with all sorts of risks, including a regulatory crackdown.

A few enterprises have managed to maintain cultures which combine aggression and ambition with unflinching rectitude and constant self-examination, at least for a while. General Electric is a definite contender for the global all-round prize. Fans of VW’s more luxurious German rival BMW might put it forward, but corporate life is generally easier for producers of luxury products with high profit margins than for mass-market players. Toyota was once the exception to this principle, but rapid expansion eventually compromised the Japanese company’s commitment to excellence.

Volkswagen has vowed to change its ways. In resigning as chief executive, Martin Winterkorn said the company needed a “fresh start”. Toyota promised much the same after getting into trouble over hiding problems with unwanted acceleration. Even Uber’s Kalanick sounds a bit less pushy these days. For most big companies, a single-minded focus on growth or profitability brings unacceptably large risks to shareholders, customers and the community. From the perspective of society, such firms cannot really afford to be reckless.

Cautious cultures can be installed by empowering bureaucracies to limit all sorts of risky behaviour. When these are present, companies are safe and dull. Rather than reshape industries, they generally keep doing what they always have been. Executives may emit a lot of rhetoric about change and excitement, but in practice stability usually rules. That is basically where banks are now, and where carmakers are probably heading.

The corporate tedium at is basically a good thing in the complex and already-rich economies of the developed world. The risks from malfunction outweigh the gains from too much radical action. As Volkswagen has learned, determination is a strength – but overplayed, it becomes a great weakness.

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