A tax on the poor

AFTER sweating through a day’s work under the hot Dubai sun, the last thing an Indian construction worker wants is to donate a slug of his earnings to a bank or money-transfer outfit. Yet that is what he must do. On average, 6.9 cents of every dollar remitted to India from another country is eaten up by fees and foreign-exchange margins, according to the World Bank. Indians get off relatively lightly. A sub-Saharan African migrant loses an average of 9.7 cents.

In 2009 the G8 pledged to cut the average cost of international remittances to 5% of the sum sent within five years. Rates have since come down, but not by much: the average is now 7.7%. And the implicit tax on remittances is even higher than these figures suggest, since they are based on transfers of $200, but many payments are smaller.

In part, Dilip Ratha of the World Bank blames the exclusive agreements signed by banks and other companies involved in handling remittances. By reducing competition, these keep prices high. Some countries, including India, have banned such tie-ups, but they remain common in Africa. In 2014 the Overseas Development Institute, a think-tank,...

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Like manna from heaven

From Arabia with love

“GULF house”, says Dinesh Kumar every few seconds, gesturing out of the window of a car as it drives through Vennicode, in south-west India. His commentary is hardly necessary. The new houses, built with money sent home by people working in Dubai, Oman and other Gulf countries, flash like gold teeth in this backwater village surrounded by coconut palms. Vennicode has a brand new private school, too, as well as huge advertisements for jewellery shops and much more traffic than its narrow roads can handle. It is a tribute to emigration.

Last year India received $70 billion in remittances—more than any other country in the world. The state of Kerala, where Vennicode is located, got far more than its fair share. A comprehensive household survey organised by Irudaya Rajan of the Centre for Development Studies, a local academic institution, finds that 2.4m Keralites were living and working overseas in 2014. The money they send home is equivalent to fully 36% of the state’s domestic product. “For all practical purposes, it’s a remittance economy,” says C.P. John of the state government.

Economic migration has...

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With great power

WELCOME back from the holidays. After suffering their worst month in more than three years in August, American equities again fell sharply on September 1st, along with shares in Europe and Japan. This sudden bout of turmoil owes much to doubts about the continuation of two great economic experiments. And it also reflects the aftermath of a huge philosophical change about the role that governments should play in the markets.

The first experiment is the Chinese attempt to shift their economy away from an investment- and export-led model towards one based on consumption. The Chinese are also grappling with the consequences of a debt-fuelled boom and with the effect of volatility in their property, equity and currency markets. Many investors fear they will be unable to manage this transition successfully, and the impact on other economies (a sharp fall in South Korea’s exports, disappointing second-quarter growth in Australia) is becoming clear.

Quantitative easing (QE) in the developed world is the other great experiment. Holding down bond yields may have prevented the financial crisis from turning into another Depression. But interest rates have been at rock-...

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Inflated claims

AS THE world’s biggest exporter, China dominates global shipments of everything from smartphones to sofas. Recently, attention has turned to another Chinese export that appears to be washing up on distant shores: deflation. China’s producer-price index (PPI) has been falling for 41 months straight. Economic growth is slowing; many Chinese industries are suffering from overcapacity; its ravenous appetite for commodities is waning. All that slack must surely be putting downward pressure on prices across much of the world.

It is not the first time that China has been accused of exporting deflation. Before the global financial crisis, China’s impact on world prices seemed a good thing, making televisions and fridges more affordable. Now, it is seen as baleful. The worry is that anaemic inflation is hurting the world economy. Consumers have less incentive to spend, companies have less reason to invest and debts, fixed in nominal terms, remain onerous.

Yet several studies show that China was never quite the deflationary force that it was said to be before the crisis—or at least that it caused both inflation and deflation. By...

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Emerging troubles

IN THEORY, HSBC and Standard Chartered, two British banks with large Asian operations, are still mulling whether they should relocate their headquarters somewhere east of Suez. Given the turmoil that has afflicted emerging markets in recent weeks—and a useful tax break from the British government—few now expect the duo to decamp. Having been celebrated by investors for global networks spanning the likes of China, India and Brazil, banks are now being punished for them.

Emerging markets boomed partly on the back of cheap funds that Citigroup, HSBC, StanChart and others helped shovel their way—a flow now operating in reverse. Bankers battled to lend money to firms digging mines, erecting skyscrapers and building factories on the assumption that growth in China would never falter.

Those loans look less canny now that China’s slowing economy and tumbling commodity prices have dimmed the currencies and prospects of many emerging markets. A few customers will undoubtedly default, starting with firms which borrowed in dollars but relied on income in ringgit, rand or rupiah to meet repayments.

Loan losses are starting to creep up. StanChart,...

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Still in business

FINANCIAL markets started September as they ended August, with share prices falling and investors fretting about China’s cooling economy. The latest sell-off was triggered by a survey of Chinese purchasing managers which suggested that manufacturing had contracted in August. Nerves were further pinched by grim data on exports from South Korea, on manufacturing from Taiwan and on growth from Brazil. Rich countries are also affected: GDP in Australia, a big exporter of raw materials to China, slowed almost to a standstill.

Amid the misery in emerging markets, one economy stands out for its comparative resilience. Figures released at the end of August showed that GDP rose by 7% in the second quarter, year on year. India’s official growth rate is thus on a par with China’s and much stronger than that of trouble spots such as Brazil, Russia and South Africa (see chart).

As in China, the GDP figures probably overstate how well the economy is doing (in India’s...

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Off the block

THE first item sold on eBay, an online marketplace, was a broken laser pointer, which was snapped up for $14.83 in September 1995. By 2002 eBay had hosted nearly $15 billion of transactions and had more registered users than Britain had people. Yet the fad for online auctions faded almost as quickly as it appeared. Only 20% of sales on eBay, which turns 20 on September 3rd, now involve auctions.

At eBay’s inception, users could sell things only by auction. This was tremendously exciting for economists, who love the things for their ability to magic prices out of thin air and to allocate goods efficiently by determining who values them most highly. The main obstacle to holding auctions is the cost of bringing together enough interested buyers and sellers. But eBay made connecting buyers and sellers cheap. Without it, that broken laser pointer may well have languished unsold.

EBay also benefited from a first-mover advantage. Buyers want to go where there are lots of competing sellers, and sellers will flock to wherever they can find the most eager customers. The size of eBay’s network was its own, self-perpetuating...

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The kindness of neighbours

Turning his back

IN THE semi-arid lowlands of Mufindi, in southern Tanzania, water is hard to come by. Villagers rely on irrigation to grow maize, potatoes and spinach. Informal and often woolly codes govern how much water each farmer diverts to their own fields, and how much they leave for their neighbours downstream. Some farmers, naturally, turn out to be more grasping than others. Economists typically see such decisions as irreducible: there is no accounting for individuals’ values and preferences. But a new study* investigates why there is such variation in generosity among Mufindi’s farmers.

The researchers asked other villagers to rank each farmer’s social status on a scale of one to four. Then they invited the farmers to take part in a game in which participants had to decide how much water they would take under different scenarios. Participants were paid small sums, which varied according to how well they did in the game. They received more money if they reaped a bigger harvest by taking more than their share of water, for instance, but less if the other villagers fined them for violating water-sharing norms....

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Wheelbarrows to the rescue

YOU might think Godwin Emefiele, the governor of Nigeria’s central bank, had problems enough. The collapsing oil price has slashed Nigeria’s export earnings. Foreign reserves have fallen from more than $40 billion early last year to just over $30 billion now. In response Mr Emefiele (pictured) devalued the local currency, the naira, in November and again in February. The devaluations are stoking inflation. Like many other central bankers in commodity-exporting countries, he is faced with the unenviable choice of raising rates despite the damage to an already faltering economy, or leaving them be despite rising inflation and a swooning currency. Unlike other central bankers, however, Mr Emefiele has decided to compound the awkwardness of his position by getting involved in industrial policy as well.

In June the central bank said it would not provide foreign exchange for 41 categories of imports, ranging from wheelbarrows to private jets. The idea, Mr Emefiele says, is both to conserve dollars and to stimulate local manufacturing. “Central banks in developing countries like ours cannot sit idly by and concentrate only on price and monetary stability...

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Non-profit paradise

Frond management

JUST off the west coast of Florida lies the sun-drenched island of Little Bokeelia. It is blessed with cascading waterfalls, tennis courts, pools and a Spanish-style villa. Despite such enticing features, the island languished on the market for three years, before selling in July for a mere $14.5m—half the original asking price.

Little Bokeelia is not the only island that is proving hard to shift. In the Bahamas, where prices per acre are among the world’s highest, hundreds of atolls lie unbought. The price of undeveloped islands, which make up around 80% of the market, has dropped roughly by half since the financial crisis, says Farhad Vladi, a private-island broker.

In the early 2000s private islands were the trophy of choice for millionaires but the recession sapped demand. Building on an island is much pricier than on a mainland plot, and there are many potential pitfalls. It is not for the faint-hearted, says Edward Childs of Smiths Gore, an estate agent in the British Virgin Islands. Mega-yachts and private jets are seen as more predictable investments. As a result private islands...

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Core concern

AFTER two years of remission, Japan seems likely to sink back into the “chronic disease” of deflation, as Haruhiko Kuroda, the governor of the Bank of Japan (BoJ), calls it. New data are expected to show on August 28th that core CPI, the central bank’s preferred indicator of inflation, turned negative in July for the first time since the bank launched a big programme of quantitative easing (printing money to buy bonds) in April 2013 (see chart). At the time, it pledged to lift inflation to 2% in two years.

The news will heap further pressure on the BoJ to ease monetary policy yet more this year, as will worries about Chinese growth. The fact that Japan’s economy shrank by 1.6% in the second quarter on an annualised basis adds to the concerns. The central bank is currently buying about ¥80 trillion ($670 billion) of long-term Japanese government bonds (JGBs) a year, or twice the annual issuance. It now holds over ¥300 trillion of JGBs, or nearly a third of all outstanding bonds.

Mr Kuroda’s excuse for deflation’s apparent return is that the falling oil price has pushed down core CPI, which excludes fresh food but includes energy. In the longer...

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Building works

IT IS hard to exaggerate the decrepitude of infrastructure in much of the rich world. One in three railway bridges in Germany is over 100 years old, as are half of London’s water mains. In America the average bridge is 42 years old and the average dam 52. The American Society of Civil Engineers rates around 14,000 of the country’s dams as “high hazard” and 151,238 of its bridges as “deficient”. This crumbling infrastructure is both dangerous and expensive: traffic jams on urban highways cost America over $100 billion in wasted time and fuel each year; congestion at airports costs $22 billion and another $150 billion is lost to power outages.

The B20, the business arm of the G20, a club of big economies, estimates that the global backlog of spending needed to bring infrastructure up to scratch will reach $15 trillion-20 trillion by 2030. McKinsey, a consultancy, reckons that in 2007-12 investment in infrastructure in rich countries was about 2.5% of GDP a year when it should have been 3.5%. If anything, the problem is becoming more acute as some governments whose finances have been racked by the crisis cut back. In 2013 in the euro zone, general...

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Tinkering around the edges

 

 

 

 

AT FIRST sight, it was a triumph. After months of negotiations Ukraine and a committee of its creditors (which include Franklin Templeton, an American investment house and BTG Pactual, a Brazilian one) reached a deal this week to restructure the country’s international bonds, as well as a smattering of other sorts of debt, worth about $18 billion. Payments have been pushed back, meaning that the government will not need to cough up any principal or interest on the debts in question until 2019. The principal on the bonds will also be cut by 20% on average.

This is a better deal for Ukraine than many were expecting. It is rare for a country to get a haircut on its debts without also defaulting (one exception is Greece). When the negotiations began, the creditors had refused even to consider writing off any of...

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Nafta naphtha

WHEN the economics textbooks of the future are written, America’s ban on crude-oil exports will be a fine example of the perverse effects of protectionism. Similarly, a decision by Barack Obama’s administration on August 14th to allow American firms to swap some oil with Mexico, so easing the restraint, will earn an honourable footnote in the story of the ban’s inevitable demise.

Geology, engineering, economics and politics are all at play. In 1975, just after the first oil shock, America banned crude-oil exports in order to stabilise domestic prices. The country’s oil refineries are still configured to deal with the heavy, sulphur-laden crude oil it used to import. Now, thanks to the shale revolution, oil imports have plunged as production has soared. Oil from shale is lighter and less sulphuric. There are not many refineries in America that can deal with it efficiently. Yet the ban means it cannot be exported, either.

This archaic rule now keeps the price of domestically produced oil, signalled by the West Texas Intermediate (WTI) benchmark, at a hefty discount to the world price—currently over $6 per barrel. That has become...

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EU hypocrites!

BLACKLISTS have been a feature of tax diplomacy ever since an internationally co-ordinated assault on tax havens began in the late 1990s. One of the first lists, produced by a global anti-money-laundering body, included, among others, Panama. The Central American country rattled the only sabre it had—its canal—and was promptly taken off the list after some Western governments squealed that their companies might lose engineering contracts.

Politicised though blacklisting may be, it is no less popular today. Pressure to name and shame is high in a time of post-crisis austerity. The latest such list, published in June by the European Union (EU), points the finger at 30 countries it views as “non-co-operative” on tax.

The targets (see table) have cried foul. Far from being exhaustively researched, the list is an aggregation of national lists: it includes any country blacklisted by ten or more EU members. Not only does that strike many as arbitrary, but the criteria for inclusion differ from EU state to state: some consider a low tax rate alone sufficient grounds, others require secrecy and opacity too. The most avid...

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Nice gig

But what’s in the bush?

BANK of Bird-in-Hand sounds like a prudent name for a lender, perhaps suitably for the first bank to be founded in the aftermath of the financial crisis. Its name is no marketing ploy, however; it is merely taken from the southern Pennsylvania town that is home to this one-branch outfit. What really marks the bank out is the clientele it caters to, the local Amish community, a religious group sceptical of modern technology and, it turns out, a rather good credit. Since opening in 2013, Bank of Bird-in-Hand has never had to write off a loan.

Bill O’Brien, one of its founders, claims this is no coincidence. Though he is not Amish himself, Mr O’Brien has been lending to farmers in this traditionalist community since moving to the area 26 years ago. Many know his phone number and call him directly when they need a loan (phones are forbidden inside Amish homes, but communal phone shanties can be used to conduct business). Others prefer to use the bank’s drive-through window, large enough for a horse and carriage.

Losses are rare because loans extended to the Amish community are well...

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Graduate stock

DEBATES over how to fund higher education never lie dormant for long. In Britain, recently, there have been reforms about twice a decade; the last one, which hiked tuition fees, all but killed off the Liberal Democrats, members of the previous coalition government. In America, concerns abound over soaring costs and towering student debts. As a result, presidential candidates have been weighing in with plans to overhaul the system.

Why should the state support students in the first place? One argument is that society benefits from educated citizens, who pay more taxes, generate more jobs and help to advance human knowledge. Typically, such social gains justify subsidies. But the private returns to many degrees are juicy enough to encourage would-be students without a subsidy. The New York Fed reckons that a bachelor’s degree provides a 15% return on investment.

A better argument is that a purely private market for funding college would probably struggle. Despite the rosy averages, not all graduates succeed, so borrowing to pay for college is a gamble. Students do not know what job opportunities they will have later on; lenders must...

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Goodbye to all that

IT WAS only a decade or so ago that Scotland was hit by the “Great Drain Robbery”, the disappearance of 50 manhole covers in Fife. It gave an inkling of the emergence of a new era in commodity markets, spurred by insatiable demand from China. Scrap-metal prices—and so scrap-metal thefts—soared. Africa was over-run by Chinese engineers; Australia elected a Mandarin-speaking prime minister; and emerging markets from Argentina to Zambia relished the rising values of their farmland and mines. The boom was fanned by a weak American dollar, the currency in which most stuff that comes out of the ground is priced.

The gears have now gone into reverse. A resurgent dollar has hammered commodity prices: many have recently fallen below their levels of a decade ago. That is a fate not shared by other tradeable assets: not since the late 1990s have commodity prices been so weak compared with shares (see chart 1). The American economy is strengthening, but by no means enough to encourage thieves to filch bronze bells from Chinese temples to send as scrap to the United States. The impact of its recovery is dwarfed by slowing demand in China, which still consumes...

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Forking hell

“FEDERAL Reserve deeply split. Renegade group of board members to create separate American dollar.” Such a headline seems highly unlikely, but this in essence is what is happening in the land of Bitcoin, a digital currency. On August 15th two of its main developers released a competing version of the software that powers the currency. With no easy way to resolve feuds, some are warning that this “fork” could result in a full-blown schism.

The dispute is predictably arcane. The bone of contention is the size of a “block”, the name given to the batches into which Bitcoin transactions are assembled before they are processed. Satoshi Nakamoto, the crypto-buff who created the currency before disappearing from view in 2011, limited the block size to one megabyte. That is enough to handle about 300,000 transactions per day—suitable for a currency used mainly by geeks, as Bitcoin once was, but nowhere near enough to satisfy the growth aspirations of its boosters. Conventional payment systems like Visa and MasterCard can process tens of thousands of payments per second if needed.

By how much and when to increase this limit has long been...

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Whom to trust

AMERICAN banks typically drum up new borrowers by bombarding anyone with a decent credit score with junk mail offering credit cards and ignoring everyone else. A host of new competitors, however, are much more imaginative about how they recruit new customers.

Take Kabbage, a startup based in Atlanta which began lending to small companies online in 2011. A third of their applicants did not qualify for business loans because they had not yet started operations, had insufficient revenue or no formal legal structure. Many of them, however, did qualify for personal loans. So in September Kabbage launched a subsidiary called Karrot to give personal loans of up to $30,000 at interest rates of 6% to 26%.

Karrot worries less about borrowers’ credit history—the conventional approach—than about their cash flow. Customers must allow Karrot to monitor their current accounts and other financial data, such as credit-card bills. A big decline in income prompts an inquiry about an extended payment plan (to pre-empt a default); an increase prompts an offer of more credit. The initial evaluation takes only four minutes. Growth has been impressive: Karrot expects to lend $1 billion this year. Its default rate is 5%.

Upstart, based in Palo Alto, is another firm learning to look beyond the credit record, in this case to borrowers’ educational history—an indicator of...

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