Singapore’s financial rise

• In the 1950s the Bank of China could use 20-year-old architectural designs for its Singapore headquarters near the central post office. From buildings to businesses, things moved slowly in the city-state. Today the picturesque old Bank of China building stands out because little else in Singapore’s financial world stays the same.
• One change is physical. Citigroup has moved its headquarters from the same district as Bank of China, first to Shenton Way, which now serves as one financial centre, and then to another, known as Suntec City. It will soon join Standard Chartered at a third site, Marina Bay, which has been built on reclaimed land. A fourth centre for back-office workers is opening up near the (excellent) airport. In an area near Chinatown once known for brothels, converted shops now house investment firms, lawyers and the like.
• Perhaps the best measure of change is employment. In 1970 Citi could fit every last member of staff, perhaps 100 or so, on a boat for an advertising image. Michael Zink, Citi’s Singapore head, keeps a copy of the ad near his desk as he oversees 9,400 workers and counting.
• The scale of the transformation has been enough to propel Singapore into the ranks of the world’s leading financial centres. As places like London and Switzerland debate whether to welcome bankers or punish them, Singapore has started its own special government school to train private bankers and leased a mansion once used by the British armed forces to UBS to do the same. Credit Suisse has plans for something similar.
• Demand for capable people is unquenchable. More than 2,880 financial institutions have registered with Singapore’s monetary authority for one activity or another. They include the usual big names as well as a vast array of smaller firms.
• One clear thread in Singapore’s rise has been its ability to take consistent advantage of global upheavals, beginning in 1971 when America de-linked the dollar from gold. Singapore was quick to grasp this opportunity to create a regional centre for foreign exchange, says Gerard Lee, the chief executive of Lion Global Investors and a former executive at GIC, Singapore’s sovereign-wealth fund. Things are no different today: Singapore is positioning itself to grab a chunk of offshore trading in yuan as the Chinese currency gradually starts to internationalise.
• Ancillary businesses such as derivatives have thrived. One of the large banks says more than half of Asia’s over-the-counter derivative volume in commodities passes through Singapore. According to Barclays Capital, the trading volume of foreign-exchange-related products has jumped 29-fold since 2005 in retail markets alone, and that of interest-rate-related products 43 times.
• Similarly, Singapore anticipated the effects of the 1997 handover of Hong Kong. In the early 1990s the environment was so hostile for asset-management firms that only a few existed. That changed. It became easier to open firms and, says one private banker, regulations were structured to avoid costly provisions, notably a tax on transactions. As the handover approached, numerous clients took steps to “book” assets in Singapore. It is now home to more institutional assets than Hong Kong.
• To retain those assets, Singapore produced a legal framework enabling trust accounts, once the preserve of Jersey and Bermuda. This was despite the fact that Singapore itself does not tax estates and Singaporeans have no need of the service. Good trust laws combined with strong asset-management and foreign-exchange capabilities make Singapore appealing for wealth-management types everywhere.
• Singapore’s approach is the antithesis of laissez-faire. Broadly speaking, it has kept a tight rein on domestic finance and done what it could to induce international firms to come. Licences can be obtained efficiently and quickly, a blessing in a bureaucratic world. So can work visas for key employees. There are tax breaks for firms considered important, as well as reimbursements for relocation expenses.
• Bankers and hedge-fund managers talk enthusiastically about an environment that is safe, clean and efficient. The speed of the internet, for example, can be 100 times faster than in China, with its many internal firewalls, and eight times faster than in Hong Kong. Singaporean taxes are low and stable, unlike American and European ones. Foreign firms report that it has become more common to see people rejecting promotions to head offices because pay rises would be wiped out by tax.
• Many of these advantages are likely to increase. A widely repeated story in Singapore is that the only people who have read all of America’s gargantuan Dodd-Frank financial-regulation act are American academics, who find it a mess, and the Singapore Monetary Authority, which is mulling the opportunities it might create.
• And yet, for all its strengths, Singapore has had its failures, too. Most notably, its equity market, often but wrongly thought of as a vital core for a financial centre, has sought listings from China only for many of these “S-chips” to become embroiled in scandals. A few companies have recently delisted from Singapore and relisted in Hong Kong, whose appeal as a gateway to the Chinese mainland is hard to beat.
• The Singapore Exchange’s effort to acquire Australia’s exchange was recently rejected on national-interest grounds. That decision may have been partly grounded in the two countries’ different financing cultures—Australia’s use of tiny, cheap offerings to fund mineral exploration, for instance, and its tolerance of a far more permissive media environment.
• Actions in other countries may also constrain Singapore’s growth. Already many financial firms there want nothing to do with affluent Americans, given America’s forceful approach to global taxation. But to get the better of Singapore others will have to provide a safe environment with low taxes and scant bureaucracy. No need to worry, then.

BRIC: making it a more effective, efficient, and representative

• Focusing on what unites them and putting aside their divisions, the leaders of Brazil, Russia, India, China and, now, South Africa—the so-called BRICS countries—ended a one-day summit on China’s southern resort island of Hainan with a joint statement that calls for far-reaching changes in the global financial and political order.
• The governing structure of international financial institutions, the statement said, “should reflect the changes in the world economy, increasing the voice and representation of emerging economies and developing countries”. The statement also calls for “comprehensive reform” of the United Nations to make the body “more effective, efficient, and representative”.
• Among the more specific actions and recommendations announced were an agreement for development banks in BRICS countries to open mutual credit lines denominated in local currencies; a warning over the potential for “massive” capital inflows from developed nations to destabilise emerging economies; and support for “a broad-based international reserve currency system providing stability and certainty”.
• This last item would imply something of a challenge to the worthiness of the dollar as the leading global reserve currency. Indeed, the thrust of the entire meeting was to urge a realignment of the global order imposed after the end of the second world war and the subsequent ascendancy of the United States.
• Representing around 40% of the world’s population and nearly a quarter of its economic output, the BRICS countries would seem to be well justified in calling for these kinds of changes. Perhaps more to the point, with projections showing that they will account for much of the world’s economic growth in the coming decades, they are in a position to push their claim.
• But the unified front they presented in Hainan masks some serious differences. They will not find it easy to co-ordinate their efforts, even in the short term. Brazil, for example, has begun to fret about the influx both of Chinese investment and cheap Chinese imports, and has joined America and other rich countries in complaining publicly about the undervalued yuan.
• Relations between China and India have long been plagued by tensions over trade, border disputes, and friction due to China’s political and military support for India’s rival, Pakistan. Bilateral trade is a mere fraction of what it might be for the two giant neighbours, each with a population exceeding a billion and together presenting vast potential for trade complementarities. Total trade between the two dynamos is expected to reach only $100 billion by 2015, and the balance falls heavily in China’s favour (India’s trade deficit with China was about $ 20 billion last year).
• In a move that India’s press corps has portrayed as something of a snub to China, its prime minister, Manmohan Singh, chose not to attend the Bo’ao Forum, scheduled a day after and a short distance away from the site of the BRICS summit. But the two sides did use the summit as an occasion to announce a resumption of defence exchanges. These were halted last year in a tiff over China’s reluctance to recognise India’s territorial claims in Kashmir.
• When it comes to the UN Security Council, China may not be in such a rush to see greater representation, at least not among the permanent members. BRICS solidarity notwithstanding, China, together with Russia, enjoys a spot on that exclusive five-member body and will not be keen to see its power there diluted. At the end of the day, there will be no getting around the fact that this new block of BRICS is made up of unequal parts.

Gross external debt

• According to figures from the IMF and the World Bank, gross external debt exceeded 100% of GDP in many rich countries at the end of the final quarter of 2010.
• In Britain, where the latest figures available are for the three months to June 2010, the gross amount owed to foreigners was four times GDP. The biggest chunk of this—more than three-fifths—consisted of the external debt of British banks.
• In the case of Greece, the biggest fraction—just under half—was government debt. Portugal, the latest country in the euro area to request a bail-out, has outstanding debts to foreigners that are over twice its national income.
• Equivalent burdens are smaller in some big emerging countries: Brazil and India had ratios below 20%.
• India’s gross external debt includes 25% from general government, 19% from inter-company debts , remaining from other sources.

India v China

• MORGAN STANLEY thinks it could happen in 2013; the World Bank thinks it might happen next year. Many pundits have speculated about when India’s growth might outpace China’s. But the IMF’s World Economic Outlook says it’s already happened—without fuss, fanfare or felicitation. China grew by 10.3% last year; India by 10.4%. How can that be?
• There are two idiosyncrasies in the way India typically reports its GDP figures. It calculates growth for the fiscal year, not the calendar year. More important, it reports its GDP “at factor cost”. That means it adds up all the income earned (by labour, capital and other “factors of production”) in the course of producing the country’s goods and services. By that measure, its GDP grew by 8.6% in 2010.
• But other countries, including China, normally report their GDP “by expenditure”, adding up all the spending on domestically produced stuff. In principle, expenditure should equate to income. But taxes and subsidies get in the way.
• A sales tax adds to the amount you have to spend on a good, boosting measures of GDP by expenditure. A subsidy has the opposite effect. In India net indirect taxes seem to have risen from 7.5% of output in 2009 to 9.2% in 2010. That was enough to lift India’s growth by expenditure to 10.36% in 2010, fully 0.06 percentage points faster than China’s.
• Some bloggers have suggested the 10.4% figure is an artefact of inflation or exchange rates. Not so. GDP was measured in rupees, not dollars, at the prices prevailing in the 2004-05 fiscal year. Nor is the figure an IMF concoction. It drew its data from India’s Central Statistics Office (CSO), which estimates GDP using both methods. The country’s statisticians prefer GDP by factor cost because it is less prone to revision. The CSO still finds it easier to track production in farms, factories and offices than to track consumer spending or investment.
• As India struggles to count its GDP the way most other countries do, China has begun to report its growth rate the way America does (comparing one quarter’s GDP with the previous quarter, rather than the same quarter of the previous year). So China grew by 9.7% in the year to the first quarter under its old method of reporting, but by just 2.1%, or 8.7% at an annualised rate, under the new methodology. That is the kind of pace India might well match or surpass, however you measure it.

France,a psychologically exhausted nation

• Behind the bustling terrace cafés and bright municipal blooms of springtime, France today is not a happy place. Tense, fearful and beset by self-doubt, the French seem in a state of defiant hostility: towards their president, political parties, Islam, immigrants, the euro, globalisation, business bosses and more. Such is France’s despondency that its people face “burnout”, said the national ombudsman recently; previously, he had described the nation as “psychologically exhausted”.
• It is a sign of French disgruntlement that the publishing sensation of the past six months has been “Indignez-vous!” (“Time for Outrage!”), a pamphlet by a 93-year-old urging his fellow countrymen to revolt. Indeed, the French currently rank among the world’s most pessimistic. Only 15% told a global poll that they expect things to get better in 2011, a far smaller percentage than of Germans or even Afghans and Iraqis.
• French malaise shows up in various forms. President Nicolas Sarkozy’s popularity has sunk to a record low, just 22% last month, according to TNS Sofres, a polling group. This is a level never matched by either François Mitterrand or Valéry Giscard d’Estaing, two previous presidents, and beaten only by Jacques Chirac towards the end of his second term. Fully three-quarters of those polled this month said that they did not want Mr Sarkozy to be re-elected president next year.
• The politician who ran up the steps of the Elysée Palace in 2007 in jogging shorts, promising to modernise France, has become a damaged brand, weakened by his own errors of judgment and style, as well as those of so many of his ministers. Even Mr Sarkozy’s brave attempt to restore French diplomatic credibility with muscular military action in Libya and Côte d’Ivoire, although popular, seems unlikely to improve his standing at home.
• If French gloom were confined to just a personal rejection of Mr Sarkozy, the opposition Socialist Party would be enjoying a revival. But French disaffection reaches across the political divide. The Socialists are seen as divided and out of touch. Almost alone, the far-right National Front, under its savvy new leader, Marine Le Pen, is thriving, largely because it is grumpy about everything too. It complains about immigration and Islam, in a country with Europe’s biggest Muslim minority, and about the mainstream political parties, both on the left and the right. Repeated polls suggest that Ms Le Pen could defeat Mr Sarkozy to take his place in the 2012 presidential run-off, just as her father, Jean-Marie, eliminated the Socialist candidate, Lionel Jospin, in 2002.
• The French seem simply to doubt their politicians’ ability to do much to improve anything. The economy is emerging only slowly from the recession, with GDP growth this year forecast to reach 1.7%, compared with 2.5% in Germany. Joblessness, at 9.6%, is high, and even more so for the under-25s. Although the government has embarked on fiscal consolidation, public finances remain under strain, with a deficit of 7.7% last year. Ordinary working people keep hearing that their high-tax, high-spending model provides them with one of the world’s most generous social systems; yet even the middle class feels a squeeze at the end of each month.
• The upshot is a fatalistic France that seems to have set its sights on little better than controlled decline: a middling economic power, whose people cling to their social model and curse globalisation, while failing to get to grips with either. Considering what they hear from politicians, this attitude is perhaps not surprising. The Socialist Party promises, with a straight face, to restore retirement at 60 (the age was recently raised to 62) and urges greater European protectionism as a response to globalisation. Ms Le Pen vows to withdraw France from the euro and put back border controls. Mr Sarkozy’s political day-trip of choice is to a metal-bashing factory—although only 13% of jobs are in industry—where he surrounds himself with workers in overalls and hard hats, telling them they need to be protected from globalisation and other ills.
• One conclusion from all this is that France and its politicians are irredeemably conservative. Indeed, France often seems to be in semi-permanent revolt, arms crossed and heels dug in against change. Only last autumn, unions and oil workers led weeks of strikes and blockades in protest at Mr Sarkozy’s modest raising of the minimum retirement age. On a single day, up to 3.5m protesters took to the streets; petrol pumps ran dry across the country. “Why France is impossible to reform”, lamented L’Express, a news-magazine.
• But if the French really are so allergic to change, how come the pension reform not only went through but has now been accepted, even forgotten? Only weeks after the new law reached the statute books in November, the matter did not rank among the nation’s top ten subjects of conversation, according to a poll for Paris-Match. France seemed to go through a painful spasm of rebellion, then to shrug it all off and resume business as usual. “We were able to demonstrate to the French people that there are things that a government just has to do,” argues Christine Lagarde, France’s finance minister. “For once, the government did not give in to the street.”
• Various factors explain how pension reform passed: the modest ambition of the plan itself; a sense of crisis prompted by the Greek bail-out; the dwindling power of unions even in France to force retreat. As Guy Groux, an industrial-relations specialist at Sciences-Po university, points out, the last time French street protests forced a government to abandon a reform was five years ago, when Dominique de Villepin, then prime minister, tried to bring in a more flexible labour contract for the young. Protests in France are in part a theatrical ritual: a festive occasion for venting frustrations and making a point.
• Another reason, though, is that there is a second side to France. By holding firm, and ignoring charges of political deafness, Mr Sarkozy appealed over the heads of those on the streets to the silent majority. He took a bet that this invisible France would quietly back change, and prevail over the rest. For, in reality, two halves of the country co-exist. One half, mostly, but not only, in the public-sector, is led by hard-talking trade unionists promising to prolong benefits for privileged “insiders” and entrench rigid labour laws. The other half, mostly found in the more dynamic, private sector, is plugged into global markets and just as despairing of its strike-happy fellow countrymen as anybody else.
• This is the France that does not go on strike, that defies disruptions to struggle into work, and whose voice is seldom heard. It is found among the 92% of workers who do not belong to a union. It is the small traders and artisans who are up before dawn scrubbing their shop-front windows. It is the workforce whose productivity per hour worked is higher than that in Germany and Britain, and which helped to make France the world’s third highest destination for foreign direct investment in 2010. It is the third of private-sector employees who work for a foreign firm. It is France’s leading global companies—Vivendi, L’Oréal, Michelin, LVMH—which busily reap the benefits of globalisation, a force that the French say they deplore.
• This voiceless France, more adaptable and forward-looking, seldom permeates the national conversation. Yet a glance at the France behind the headlines hints at a picture that is a lot less glum. Shops are full, markets busy and consumer spending is buoyant. Property prices are up. The French have snapped up the iPad and 20m, or nearly a third of the population, are on Facebook. The French may moan about their country, their bureaucrats and their politicians, but they seem happy with their individual situation. Though only 17% of young people told one recent poll that their country’s future was promising, a massive 83% said that they were satisfied with their own lives.
• Thanks to a decent diet and health system, the French, in particular French women, live longer than many others in Europe. Most strikingly, the French birth rate has risen to just over two babies per woman. By some estimates, France’s population will overtake Germany’s by 2037. The French, it seems, are persuaded by the ambient gloom that their country is doomed—yet even their own behaviour suggests that they think it may have a future.
• At a converted 19th-century warehouse on the Paris fringes a few months ago, French revolutionaries gathered to plot the future. They met, however, not to take to the streets but to take on the virtual world, at one of Europe’s biggest tech events. The shirts were tieless, the iPads abundant and the language a blend of French and West Coast. There were Facebook workshops, and talks on such themes as “Teen Entrepreneurs can Change the World”. Glass jars filled with lime-green and crimson jelly bears were perched on the buffet tables and talent contests for start-up entrepreneurs took place on the stage. “France isn’t just about strikes,” argues Loïc Le Meur, the event’s organiser. “There is a whole network of entrepreneurs who are French, but also plugged into the rest of the world.”
• France’s start-up scene may be relatively new, but a fresh generation of faces has begun to graduate into the big league. They include such figures as Pierre Kosciusko-Morizet of Priceminister, Marc Simoncini of Meetic, and Xavier Niel of Iliad, who launched Free, a telecoms firm, from nothing to take on the established giants. Three entrepreneurs now plan to launch an internet business school in France this autumn. Among them is Jacques-Antoine Granjon, the founder of vente-privée.com, a private online shopping club. His firm employs over 1,300 staff, and turnover in 2010 jumped 15% to a handy €969m ($1.3m), mostly from sales in France.
• “We are only at the beginning of the revolution,” declares Mr Granjon, rolling off his plans to expand across Europe. He runs the firm from a converted printing works on the outer northern edge of the Paris périphérique, where staff are offered yoga classes, and the open industrial spaces drip with avant-garde art installations. “The French are very entrepreneurial, very creative,” argues Mr Granjon. “What we are doing gives a signal to young people that everything is possible.”
• In recent years, the government has cut red-tape for new businesses, and boosted the tax credit for investment in research and innovation. Just setting up a company in France used to involve a battle of wills with bureaucracy. Now the time it takes to register a new business has fallen from 41 days in 2004, according to the OECD, to just seven in 2010—lower than it is in Britain or Germany. Thanks to a simplified procedure, a record 622,000 entrepreneurs started new businesses in France last year, twice as many as in 2007. A recent advertisement for Rouen Business School, in Normandy, captures the innovative mood: “The ten most sought-after jobs in 2010 did not exist in 2004.”
• By 2015, according to a study by McKinsey, a consultancy, France’s digital economy could nearly double in value and create 450,000 new jobs. The appeal of the technology scene seems to be spreading. When a poll asked French teenagers which company they would most like to work for, the top three responses were not, as in the past, French state enterprises, but Apple, Microsoft and Google.
• This is a world that has little time for the preoccupations that blocked French roads and dried up petrol pumps. “I’m not against what they were doing, it’s just not relevant to me,” says Olivier Desmoulin, the 28-year-old founder of SuperMarmite, a start-up based on sharing home-cooked meals. It is the mindset of a different generation. Stéphane Distinguin, another entrepreneur, founded a start-up, faberNovel; both his parents were civil servants.“The politicians don’t make it easy”, he says, “but I don’t subscribe to the view that you can’t do anything in France.”
• Plainly, not every Frenchman is a budding internet entrepreneur. There is plenty of rigid conservatism, within France’s big private firms—and certainly among those early-rising artisans. The French still express particular hostility to capitalism. But the outlook of this conservative crowd chimes with broader French public opinion in surprising ways. In a recent study on lifestyles by the Foundation for Political Innovation, a think-tank, 64% said they had no confidence in unions, and 53% regarded international trade as a good thing for France. Fully 52% defined themselves as middle class, with aspirational values to match. Of the top four values ranked by respondents, three were “freedom”, “responsibility” and “effort”.
• Even during the pension-reform strikes, when polls seemed to show wholehearted support for the protesters, attitudes were mixed. Pascal Perrineau, a political scientist at Sciences-Po university, makes the point that the French almost always back strikes, particularly at the start. A majority supported those against pension reform in 1995, which crippled the country and forced the rigid government of the day to back down. An even bigger majority was initially behind the 2010 pension protests. Yet, as the weeks went by, such support proved thin. Between September and November, it dropped from 70% to 47%.
• The French seem simultaneously to hold two conflicting views. When asked if they backed the strikes, a majority said yes. When asked in the same poll whether raising the retirement age was “responsible towards future generations”, 70% also said yes. In other words, the French temperamentally liked the idea of protest, not least as a way of snubbing Mr Sarkozy. But, at the same time, they knew that raising the retirement age to 62, when the Greeks were being told to stay at their desks till 65, was the reasonable thing to do. “Public opinion”, comments Ms Lagarde, “is much more mature than people think.
• How much further could France go in modernising its social rules, so as to preserve what works best, while neither busting the state nor cramping growth? This is a pre-election year, and although Mr Sarkozy said that he would press on with reform, he is deeply unpopular and his prospects of re-election are in the balance. Already, he has abandoned one bold idea, of abolishing the anachronistic wealth tax, preferring merely to raise the minimum asset base at which the yearly tax kicks in, from €790,000 to €1.3m. The government will have to keep trimming spending, in order to get its deficit down to 3% by 2013, and to keep bond markets at bay. But it looks increasingly unlikely that Mr Sarkozy will launch any controversial economic reform ahead of the 2012 election.
• The trouble is that France cannot afford to be complacent. Despite its failure to balance the government budget since the 1970s, it is not Greece or Ireland or Portugal. But nor is it Germany. For years, the French have comforted themselves with the illusion that their economy was more or less doing as well as, if not better than, their neighbour’s across the Rhine. During the recession, thanks to a strong state and welfare system, its economy was indeed less battered than Germany’s. But the recovery has exposed France’s competitiveness problem. Over the past ten years, Germany’s share of exports within the euro-zone has grown, while France’s has shrunk. In 2000 French labour costs were lower than those in Germany; now they are 10% higher.
• A big part of the gap can be blamed on France’s heavy payroll taxes. These make employers’ total wage costs 41% higher in France than in Germany, according to Medef, the French bosses’ federation. They are one reason why French firms hesitate to grow, let alone to seek to export, and are reluctant to hire staff on permanent contracts. The average French firm employs just 14 people, according to COE Rexecode, a French research group, compared with 35 in Germany. The upshot is high structural unemployment in France, an over-reliance on temporary work, and a two-tier labour market that over-protects insiders and under-protects the rest. The young, who have become serial collectors of short-term contracts, pay the price by lacking the security that the insiders enjoy.
• Such concerns ought to be at the heart of any debate today about French economic reform, and yet they are not. No politician dares to contemplate the spending cuts that would be needed in order to bring French social charges down to competitive levels. Nor does anybody seem ready to take on other blockages, such as the lobbies of taxi-drivers, pharmacies or notaries that keep such professions organised in their favour, rather than that of the consumer. Mr Sarkozy has achieved some useful reforms during his term, including pensions, the decentralisation of universities and some loosening of the 35-hour working week. But these are only a start.
• With pension reform, Mr Sarkozy showed that it is possible to lean on the silent majority in order to defy conservatism and stir up France. At his best, he is one of the few politicians bold enough to argue the case for reforming the social model in order to safeguard it. But even he no longer seems ready to talk of France in a way that portrays its people, not as victims of outside forces, but as a source of entrepreneurial energy who could contribute to the creation of the wealth needed to sustain France’s social model. This France exists, and wants the government to do little more than get off its back.
• Over 30 years ago, in “Le Mal Français”, Alain Peyrefitte, a Gaullist minister and thinker, wrote that “the French are as attached to the status quo as they are discontented with it.” He put this tension down to an over-bureaucratic system that crushes initiative and encourages passivity, and called for a shift in mentalities. A third of a century later, it is above all French politicians who have yet to change their outlook. French morosité and the politics of victimisation are overdone. France is a stronger, more resourceful place than its people seem to think. It is certainly not in as dire a condition as the euro-zone periphery. But it would be a sad reflection of shrivelled ambitions if that were the only standard it set for itself.

Brazil’s economy

• Inflation  is at 6.3% and is poised to break through the ceiling of the Central Bank’s target of 2.5-6.5% for the first time since it was adopted in 2006. That is despite the currency surging to 1.58 reais to the dollar, close to its peak since it was allowed to float in 1999—and much stronger than either the government or industry would like. All this means that monetary policy in Brazil is attempting to tame two wild horses at the same time. The Central Bank has already raised its benchmark rate by three percentage points over the past year, to 11.75%, with another 0.25-0.50 points expected from its monetary-policy committee on April 20th . But as the bank admitted in its latest quarterly inflation report, it does not now expect to bring inflation back to its central 4.5% target by the end of 2011. The economic cost, it said, would be “too high”.
• The difficulty for the Central Bank is that each rise in interest rates—already the highest of any big economy—makes Brazil more attractive to footloose foreign capital. In the first three months of 2011 it saw net inflows of $35 billion, more than in the whole of 2010. That pushes up the currency, which is not directly the monetary-policy committee’s concern, and throws fuel on an overheated economy, which is.
• To try to curb inflation without boosting the real further, the bank is resorting to what central bankers call “macroprudential measures”, such as higher bank reserve-requirements. The finance ministry has chipped in by raising taxes on consumer credit, foreign bond issues, and on overseas loans and derivatives’ margins. Without such measures, says the finance minister, Guido Mantega, the real would be at 1.4 to the dollar.
• Some think the government should welcome the inflows, let the real rise where it will and cut public spending to eliminate the expansionary fiscal deficit. All that would bear down on inflation and in turn allow the bank to cut rates, thereby stemming inflows and eventually allowing the currency to fall. But the government is afraid this would lead to a destabilising outflow once rich countries start tightening monetary policy—and that manufacturers would be unable to survive a stronger real, even temporarily. FIESP, an industrialists’ trade body in São Paulo, says its members are already struggling: in 2010 the share of imported industrial goods in total consumption was at an all-time high. It wants the government to restrain speculative inflows by imposing far higher initial margin requirements on currency futures.
• Dilma Rousseff, the president, has promised to do whatever it takes to control inflation. A big test involves the minimum wage, due to rise next year by 7.5% above inflation, unless the government amends the formula used to calculate it. That would push up state pensions, which are linked to minimum pay, as well as wages across the board, as many salaries are expressed in multiples of the minimum. The danger in trying to steer the exchange rate and inflation simultaneously is the risk of losing control of both of them.

a backlash against Chinese investors in poor countries

• China has a competitive advantage that is rare among economic powers investing in faraway developing countries: a lack of ancient hostility. In the past decade Chinese investors have been welcomed with open arms in places where Western colonial powers once misbehaved and their descendants sometimes still arouse suspicion.
• Hundreds of thousands of Chinese have comfortably set up shop in Africa, bringing with them economic growth and useful technical skills. Their government, eager to loosen constraints on resources and industrial expansion at home, supports them with abundant loans. Africa now supplies 35% of China’s oil. Two-way trade grew by 39% last year.
• China deserves credit for engaging a continent that desperately needs investment. Millions of Africans are using roads, schools and hospitals built by Chinese companies or financed with fees from resources they extracted. Not surprisingly, many African leaders have embraced the Chinese, especially when offered vast loans for infrastructure projects. By contrast, the leaders say, Western governments these days offer little more than lectures on good governance.
• But the honeymoon is coming to an end. Growing numbers of Africans are turning against the saviours from the East. They complain that Chinese companies destroy national parks in their hunt for resources and that they routinely disobey even rudimentary safety rules. Workers are killed in almost daily accidents. Some are shot by managers. Where China offers its companies preferential loans, African businesses struggle to compete. Roads and hospitals built by the Chinese are often faulty, not least because they bribe local officials and inspectors. Although corruption has long been a problem in Africa, people complain China is making it worse.
• This antipathy should worry the Chinese government. Granted, it is unlikely to lose access to resources controlled by friendly dictators who have benefited personally from China’s arrival. But its ambitions stretch far beyond securing resources. Chinese companies, private as well as publicly owned, are investing in farming, manufacturing and retailing. Many depend on co-operation with a wide array of increasingly unhappy locals. In Dar es Salaam, Tanzania’s commercial capital, Chinese are banned from selling in markets. In South Africa their factories face closure at the hands of enraged trade unions.
• Moreover, China’s investments spread far beyond Africa. Stains on China’s reputation are harming its commercial plans elsewhere—and governments in other continents will be keener than African politicians have been to find reasons to put obstacles in China’s way. A Chinese construction firm had an ear-bashing when bidding for a Polish motorway contract, in part because an Angolan hospital the company had built fell apart within months of opening its doors.
• China’s government says it can do little about bad eggs among its expatriates. In fact it can do plenty. It might start by enforcing the many sensible international rules it has signed up for, such as the UN Convention Against Corruption. Some Chinese officials and businessmen are punished for bribery at home; the same should apply abroad. Treating financial dealings with African governments as a state secret, as China does, aids embezzlers and fuels suspicion.
• Expecting much more than this, you might say, is hopelessly naive. For a start, the Chinese government has a foreign-policy doctrine of not interfering in the internal affairs of other countries. Even such an apparently modest step as training African officials in enforcing business rules could fall foul of this. When China so often seems indifferent to the rape of its own countryside or to working conditions in factories and mines at home, there may be no reason to expect it to foster better conditions abroad. And it dislikes lectures from Westerners whose own history in Africa lays them open to charges of hypocrisy.
• Yet China’s rulers may find that it is increasingly in their own country’s interest to demand better behaviour from its companies. As an economic giant with global ambitions it may have little choice—as America learnt a century ago. It is in the interest of a big trading power to ensure that markets function well, and that its businesses are welcomed, not feared and distrusted—especially when they have often done good.

how to restructure Greece’s debts

• At first  sight, Greece’s debt crisis has taken another turn for the worse. Yields on its government bonds have soared, rising above 20% on two-year paper on April 18th. But what seems to be bad news may in fact be good.
• Greek bond yields are spiking because European policymakers now seem to be acknowledging what this newspaper has long argued was inevitable: Greece’s debt will need to be restructured. Even Wolfgang Schäuble, Germany’s finance minister, appears to be open to the idea. The official line, admittedly, remains that restructuring is not an option; and the European Central Bank still has its head firmly in the sand. But the debate in Europe is finally shifting from how to avoid a Greek restructuring to how to do it.
• This is to be welcomed—but with a reservation: even as Europe’s leaders start to consider restructuring, there are worrying signs that they will shrink from doing it boldly enough. That is because the continent’s politicians are not chiefly motivated by the desire to cut Greece’s debt burden to a sustainable level. The Germans, in particular, have two concerns closer to home. The first is to minimise Greece’s need for more cash from German taxpayers: the current plan is for Greece to return to the markets next year, which is plainly implausible. The second is to protect German banks, many of which hold Greek bonds, which makes them reluctant to accept any debt write-down. These two concerns point to a modest “reprofiling”, which temporarily defers Greece’s debt payments but does not come close to restoring its solvency. Realisation would merely be postponed.
• The debate about Greece now has a Latin American dimension. Those who favour deferral point to Uruguay. In 2003 the small Latin American country convinced its creditors to swap their bonds for new ones with the same principal, same interest rates and five years’ longer maturity. That reduced the effective burden of the South American country’s debt by around 15% at little cost: soon afterwards it was borrowing again in international markets. Greece, goes the hope in Berlin, could do the same. Putting off bond repayments for a few years would mean that the official rescue funds would last longer. You could lean on financial regulators to allow Europe’s banks to continue valuing their bonds at par.
• The trouble is that Greece in 2011 is not Uruguay in 2003. Greece’s debt stock, set to reach 160% of GDP in 2012, is almost twice as high as Uruguay’s was. Greece is unlikely to enjoy a fortunate run of strong economic growth, as Uruguay has, clocking up a rate of 6.1% a year thanks to the global commodity boom. Modest reprofiling will not, therefore, put Greece’s public finances onto a sustainable footing. At best it will buy time. A deeper reduction, not deferral, is needed.
• A more accurate and worrying Latin American parallel is the debt crises of the 1980s. Greece is bust, just as Mexico (followed by several others) was in 1982. The exposure of America’s big banks to Latin America was enormous; formal write-downs of debt would have left many of them insolvent. A plan named after James Baker, then America’s treasury secretary, offered the Latin Americans a temporary rescheduling (similar in spirit to the sort of scheme being discussed for the Greeks today). It gave the American banks more time to recover, but Latin America’s economies buckled under the burden of debts that could not be repaid. In 1989 another plan, named after another treasury secretary, Nicholas Brady, provided the necessary debt reduction. But Latin America lost a decade. In 1992 income per person was still lower than ten years before.
• Greece needs a Brady plan, not a Baker one. Such a restructuring would hurt some European banks, especially Greek ones, which would need extra official help. Overall the hit to Europe’s banks is manageable, and it is far better to push them to boost their capital than to pretend unpayable debt is whole. None of this will be easy to sell to voters (Finnish ones vented their anger this week . But the longer that politicians lie to them about reality, the angrier they will get.
• The reality is that Greece’s debt burden needs to fall by at least half. European officials could offer a menu of ways to achieve that: reducing the principal owed, cutting interest rates or radically lengthening maturities. They could sweeten the terms with guarantees, as the Brady bonds did, and offer investors a share in any Greek recovery with warrants related to the country’s future economic growth. The interest rates on new official loans might also be made contingent on growth rates. There are creative ways to make default less painful; trying to pretend it will not happen is not one of them.

growth Vs GDP per head

• Growth tends to slow when GDP per head reaches a certain threshold. China is getting close.The economic crisis may have been debilitating for the rich world but for emerging markets it has been closer to a triumph. In 2010 China overtook a limping Japan as the world’s second-largest economy. It looks sets to catch America within a decade or two. India and Brazil are growing rapidly. The past few years have reinforced the suspicion of many that the story of the century will be the inexorable rise of emerging economies. If projections of future growth look rosy for emerging markets, however, history counsels caution. The post-war period is rich in examples of blistering catch-up growth. But at some point growth starts to disappoint. Gaining ground on the leaders is far easier than overtaking them.
• Rapid growth is initially easy because the leader has already trodden a clear path. Developing countries can borrow existing technologies from countries that have already become rich. Advanced economies may be stuck with obsolete infrastructure; laggards can skip right to the shiniest and best. Labour productivity soars as poor economies shift workers from agriculture to a growing manufacturing sector. And rapid income growth among young workers boosts savings and fuels investment.
• But the more an emerging economy resembles the leaders, the harder it is to sustain the pace. As the stock of borrowable ideas runs low, the developing economy must begin innovating for itself. The supply of cheap agricultural labour dries up and a rising number of workers take jobs in the service sector, where productivity improvements are more difficult to achieve. The moment of convergence with the leaders, which once seemed within easy reach, retreats into the future. Growth rates may slow, as they did in the case of western Europe and the Asian tigers, or they may falter, as in Latin America in the 1990s.
• The world’s reliance on emerging markets as engines of growth lends urgency to the question of just when this “middle-income trap” is sprung. In a new paper* Barry Eichengreen of the University of California, Berkeley, Donghyun Park of the Asian Development Bank and Kwanho Shin of Korea University examine the economic record since 1957 in an attempt to identify potential warning-signs. The authors focus on countries whose GDP per head on a purchasing-power-parity (PPP) basis grew by more than 3.5% a year for seven years, and then suffered a sharp slowdown in which growth dipped by two percentage points or more. They ignore slowdowns that occur when GDP per head is still below $10,000 on a PPP basis, limiting the sample to countries enjoying sustained catch-up growth. What emerges is an estimate of a critical threshold: on average, growth slowdowns occur when per-head GDP reaches around $16,740 at PPP. The average growth rate then drops from 5.6% a year to 2.1%.
• This estimate passes the smell test of history. In the 1970s growth rates in western Europe and Japan cooled off at approximately the $16,740 threshold. Singapore’s early-1980s slowdown matches the model, as does the experience of South Korea and Taiwan in the late 1990s. As these examples indicate, a deceleration need not precipitate disaster. Growth often continues and may accelerate again; the authors identify a number of cases in which a slowdown proceeds in steps. Japan’s initial boom lost steam in the early 1970s, but its economy continued to grow faster than other rich nations until its 1990s blow-up.
• In the right circumstances the good times may be prolonged, allowing an economy to reach a higher income level before the inevitable slowdown. When America passed the threshold it was the world leader and was able to keep growing rapidly so long as its own innovative prowess allowed. Britain’s experience indicates economic liberalisation or a fortunate turn of the business cycle may also prevent the threshold from binding at once.
• Openness to trade appears to be a potent stimulant: the authors attribute the outperformance of Hong Kong and Singapore to this effect. Lifting consumption to just over 60% of GDP is useful, as is a low and stable rate of inflation. Neither financial openness nor changes of political regime seem to matter much, but a large ratio of workers to dependents reduces the odds of a slowdown. An undervalued exchange rate, on the other hand, appears to contribute to a higher probability of a slowdown. The reason for this is not clear but the authors suggest that undervaluation could lead countries to neglect their innovative capacity, or may contribute to imbalances that choke off a boom.
• The authors are careful to say that there is no iron law of slowdowns. Even so, their analysis is unlikely to cheer the leadership in Beijing. China’s torrid growth puts it on course to hit the $16,740 GDP-per-head threshold by 2015, well ahead of the likes of Brazil and India. Given the Chinese economy’s long list of risk factors—including an older population, low levels of consumption and a substantially undervalued currency—the authors suggest that the odds of a slowdown are over 70%.
• It is hazardous to extend any analysis to a country as unique as China. The authors acknowledge that rapid development could shift inland, where millions of workers have yet to move into manufacturing, while the coastal cities nurture an ability to innovate. The IMF forecasts real GDP growth rates above 9% through to 2016; a slowdown to 7-8% does not sound that scary. But past experience indicates that slowdowns are frequently accompanied by crises. In East Asia in the late 1990s it became clear that investments which made sense at growth rates of 7%, say, did not at expansion rates of 5%. Political systems may prove similarly vulnerable: it has been many years since China has to deal with an annual growth rate below 7%. Structural reforms can help to cushion the effects of a slowdown. It would be wise for China to pursue such reforms during fat years rather than the leaner ones that will, eventually, come.

indian shares provisionally closed 1.9 percent higher today

• The 30-share BSE index provisionally ended up 1.86 percent or 355.75 points at 19,477.58, with 28 components gaining. Auto, IT and metal remained the prime gainers and banks also registered good gains.
• India’s exports surged to record high growth in fiscal year 2010/11, but uncertainty over the global economy and a ballooning import bill mean concerns persist over the trade deficit of one of the world’s fastest-growing economies.
• Stock index futures pointed to a stronger open on Wall Street on Wednesday, with futures for the S&P 500 up 0.8 percent, Dow Jones futures up 0.5 percent and Nasdaq 100 futures up 0.8 percent at 0847 GMT.
• Upbeat earnings from companies including chip maker Intel lifted stocks and boosted appetite for riskier assets on Wednesday, driving commodities higher and the Australian dollar to a 29-year high versus the dollar.
• Brent crude rose above $122 a barrel on Wednesday, helped by a rebound in equities and a weaker dollar.
• Tokyo stocks snapped a three-day losing streak on Wednesday after Intel’s earnings guidance sparked short-covering in chip-related stocks, but trade is expected to stay thin ahead of forecasts from Japanese firms.
• Spot gold prices breached $1,500 for the first time and silver hit a 31-year high on Wednesday, supported by a weak dollar and concerns over a sovereign debt crisis in the euro zone.
• The euro and commodity currencies surged higher in thin trading conditions on Wednesday, as upbeat corporate earnings in the U.S. prompted investors to buy riskier assets amid rising growth expectations.
• U.S. oil rose on Tuesday in volatile trade as a weaker dollar and stronger equities lifted prices and offset concerns over sovereign debt and uncertain demand prospects.
• General Motors Co has a better grasp of how to handle disruptions in its global network of suppliers, said GM’s chief executive, who also reiterated the automaker’s outlook for vehicle sales this year.
• Yes Bank on Wednesday reported a 45 percent jump in January-March net profit to 2.03 billion rupees as compared to a net profit of 1.4 billion rupees over the same period last year.
• Global miner Rio Tinto said it has control over 72 percent of takeover target Riversdale after Brazil’s CSN accepted its offer.
• India should allow exports of wheat and rice as the country has huge grain stocks and global prices are favourable, Farm Minister Sharad Pawar said on Wednesday.
• A top executive at Beijing Automotive Industry Holding Co (BAIC) said on Wednesday the Chinese state auto group was not currently in talks to invest in ailing Swedish car brand Saab, with which it shares some vehicle technology.
• Shares in DB Realty, Unitech and Reliance Communications fell on Wednesday, after a CBI court rejected bail applications of executives involved in the telecoms graft trial.
• Online travel firm Yatra Online Private Ltd said on Wednesday it received 2 billion rupees in funds from investors including Valiant Capital Management, Norwest Venture Partners and Intel Capital.