Monthly Archives: July 2013

Once again, markets will pay close attention to signals from the US Federal Reserve’s Open Market Committee, which meets this week.

Coming on the heels of a dramatic two-month rollercoaster – as the S&P 500 fell 6 per cent between May 21 and June 24 before recovering to finish last week near its record high – the scope for misinterpretation is far from trivial. So here are seven points investors may wish to keep in mind as they navigate yet another fluid policy phase. Read more

Markets are having a hard time interpreting China’s economic slowdown and evaluating policy options. At one extreme, some observers are talking about a potential dynastic collapse. But most have turned to the notion that economic growth needs to be more consumption driven since the almost universal view is that China’s growth is unbalanced, with consumption as a share of gross domestic product having declined steadily to below 35 per cent – the lowest level of any major economy – while its investment share rose to above 45 per cent, correspondingly the highest.

The reason for this imbalance is often attributed to low interest rates or an undervalued exchange rate. This has been the easy explanatory option since financial markets are comfortable with prices driving outcomes. But in his article in The New York Times last week, Paul Krugman is unique among prominent commentators in getting it right. He notes that China’s unbalanced growth is explained by the Nobel Prize-winning model by Arthur Lewis that shows how the transfer of surplus workers from the rural sector to the modern economy, complemented by rising investment, leads to rapid but unbalanced growth. The model also lays out the conditions when labour supplies tighten, growth slows and China’s economy eventually becomes more balanced – referred to as the “Lewis turning point” – and this as argued by Mr Krugman is causing China to “hit its Great Wall”. Read more

At a Washington press conference earlier this year, a journalist quizzed the Federal Reserve chairman Ben Bernanke about his future role as the US central bank’s exit from its current, unprecedented, monetary policy stance. As you would expect, Mr Bernanke gave away little, but he did make it clear that he felt he was not the only person who could manage that exit.

A credible field of candidates has indeed emerged, should Mr Bernanke choose to step down as expected in January. One thing is clear already: whoever they turn out to be, the chairman – or chairwoman – of the Fed over the coming years will be judged, above all else, on how successfully they manage to steer monetary policy back to something resembling normality. Read more

On becoming prime minister of a troubled Pakistan earlier last month, Nawaz Sharif and his cabinet spent 90 per cent of the first few weeks discussing how to turn around the plunging economy and the 18 hours a day of no electricity that has shut down industry and agriculture.

His first change of track as he realised the depth of the crisis was from defiantly rejecting all help from the International Monetary Fund to accepting a $5.3bn bail-out from the organisation and possibly $4bn more from other institutions such as the World Bank. Read more

It is hard, if not impossible, to hear or read anything optimistic about Egypt these days. Unrest on the streets continues, with an uncomfortably high threat of renewed confrontation involving some combination of the supporters of Mohamed Morsi, the ousted president’s opponents and the military. The political class struggles to coalesce around immediate transitional measures to run the government, let alone those needed to restore the country on the road to A durable democracy. And the economy is in free fall as poverty spreads, shortages grow, inflation rises, unemployment increases and incomes collapse.

There is no denying. Today’s Egypt lacks any robust economic, financial, institutional and political anchors. Even its social anchors are under unprecedented pressure. Read more

The accusations of overcharging for the electronic monitoring of criminals by two of the UK’s largest outsourcing companies have revived questions about the risks and benefits of using the private sector to deliver public services. But it would be wrong to use the cases of G4S and Serco, and their contracts with the Ministry of Justice, to condemn the industry, especially before an investigation of the circumstances has concluded.

In 2008 I led a government review to define and assess the UK’s fast-expanding “public services industry”, the name given to the sector that provides facilities to the government and runs, for example, prisons and social care homes on behalf of the state. It revealed a growth sector with more than 1m workers and an expanding volume of exports. Our review of the research also found that, on average, there is a 10-30 per cent saving on the cost of public services, with no apparent decline in the quality of provision. Indeed, in many cases, the quality of service improved. Read more

Despite the many problems bedevilling the two nations’ friendship, a rich agenda lies just over the horizon in Asia for them both. The US “pivot to Asia” coincides nicely with India’s “look east” policy. In both countries, the strategic elites recognise the need to direct more effort towards aligning policies in the rising east. Several areas of common effort are ripe for consideration. Read more

The eurozone financial crisis has lasted so long and been managed so poorly because policy makers have disregarded some fundamental aspects of the way in which financial markets work. In fact, the euro was created under the assumption – or rather the illusion – that financial crises would never happen because markets would discipline member states’ budgets. Furthermore, when the first problems emerged in Greece, the risk of contagion to other countries was ignored and the crisis was addressed in a piecemeal approach. Only when contagion became apparent and threatened the integrity of the eurozone was an agreement reached to create a safety net. Read more

In a little-noticed paragraph of its final report, the British Parliamentary Commission on Banking Standards took aim at one of the shibboleths of bank risk management: the “three lines of defence” model. Ask any chief risk officer in a major financial institution these days how risk management and oversight are organised and it is a safe bet that they will soon begin to talk about “three lines of defence”. It has become almost ubiquitous, and not only because the UK Financial Services Authority, as was, blessed it with the regulatory equivalent of holy water. A 2003 paper recommended it as a useful template for banks to use.

Since then accountants and consultants have made a good living advising companies on how to put it in place. Roughly, the first line is supposed to be in the business itself, where line managers and risk folk are required to monitor the risks they are taking. The second line is made up of central risk managers, and the finance and human resources functions, who typically report to the chief executive, or the board, and not to business unit heads. The third line consists of the auditors, internal and external, bringing an independent perspective: they are the guys who tour the battlefield, after the carnage is over, bayonetting the wounded. The whole assembly is overseen by a committee of the board, now usually made up of non-executive directors. Read more

The eurozone periphery is on a risky path to end fiscal austerity and accept larger budget deficits. Portugal is the most recent dramatic shift in that direction; Italy, Spain and even France are also abandoning plans to cut spending and raise taxes.

This move away from budget discipline reflects a combination of popular political pressure, more accommodating bond markets and encouragement from the International Monetary Fund. Read more

Lurking in the background of the imminent US-China strategic dialogue are concerns about what role, if any, the world’s second-largest economy will play in the Trans-Pacific Partnership and how the that trade grouping will compete with or complement the Regional Comprehensive Economic Partnership. Getting the details of these mega-regional trade deals wrong could seriously damage Asia’s regional economic infrastructure – a point which is often overlooked. Preventing this will require both China and the US to take more active positions. Read more

No one is satisfied with the US corporate tax system. From one perspective, the main problem is that, while corporate profits are extraordinarily high relative to gross domestic product, tax collections are very low. Many very successful companies pay little or nothing in taxes at a time when the budget deficit is a serious concern; and when hundreds of thousands of defence workers are being furloughed, or sent on unpaid leave; and when lotteries are being held to determine which families cease to receive help from the Head Start pre-school education programme. Read more

Events are moving so far and fast in Egypt that it is difficult to follow, much less take stock of, what is transpiring. But stock-taking is needed all the same as what is said and done (and not said and not done) in the coming hours and days could prove crucial to developments there and beyond.

The just-ousted President, Mohamed Morsi, often spoke about how his legitimacy stemmed from victory at the polls. What he failed to understand is that legitimacy in a democracy transcends the ballot box; elections are necessary but hardly sufficient. In the way he ruled over the past year, Mr Morsi squandered his legitimacy and his opportunity alike. Millions of Egyptians protested in the streets as they felt excluded from meaningful political participation and fearful that Egypt’s first real election would prove to be its last. Read more

M y experience has taught me that the hardest thing in politics is to say you have changed your mind. Politicians instinctively hate u-turns as they denote fallibility and, they think, weakness. But reversals can be a sign of strength and courage. I once supported High Speed 2, a proposed rail link from London to the north which the Labour government of which I was a member first put forward. There are no simple options when it comes to transport – but I now fear HS2 could be an expensive mistake.

In any decision of the magnitude of HS2, understanding of the costs and benefits involved will evolve. Politicians should not be afraid to think again about a project whose estimated cost has just risen again by a quarter, to £42.6bn. In 2010, when the then Labour government decided to back HS2, we did so based on the best estimates of what it would involve. But these were almost entirely speculative. The decision was also partly politically driven. In addition to the projected cost, we gave insufficient attention to the massive disruption to many people’s lives construction would bring. Why? Not because we were indifferent but because we believed the national interest required such bold commitment to modernisation. Read more