2019-08-03_The_Economist

(C. Jardin) #1

8 Leaders The EconomistAugust 3rd 2019


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A


merica’s economyiscaughtintwostalemates.Thefirstin-
volvesitscentralbank.OnJuly31 theFederalReservecutin-
terestratesbya quarterofa percentagepoint,thefirstreduction
since2008.TheFedisdeterminednottolettheeconomysuc-
cumbtoa recession.Butnorwilltheeconomywarmupenough
tolettheFedraiseratestonormallevels.Theotherstalemateis
withChina.TalksthisweekinShanghaiconfirmedthatthetrade
warisunlikelyeithertoendsoonorescalatesoon.
Allthesignalspointtocontinuing sluggishexpansionin
Americawhich,after121 months,isalreadythelongestonrecord
(seeFinancesection).Lesswellappreciatedisthatsuchtepid
conditionshavea potentialsilverliningforthebillionsofpeople
livinginfinanciallyexposedemergingeconomies.AnAmerican
slumpwouldhurtthem,butsomighta boomif
it ledtheFedtoraiserates,suckingcapitaloutof
thedevelopingworld.TheFed’s0.25-percent-
age-pointcutgivesemergingeconomieswel-
comebreathingspacetoeasetheirowninterest
ratesandgetbackona pathtohighergrowth.
Theyneeda break.Emergingmarketshave
hada difficultfewyears.InJulytheimfcutits
growth forecast for developing countries to
4.1%,theslowestrateofexpansionsince2009.Indiaislosing
steam.TurkeyandArgentinahavesufferedcurrencycrises.In-
vestorshavealsohada roughride.Sincethestartof 2013 Ameri-
ca’ss&p 500 indexofleadingfirmshasmorethandoubled.
Emerging-marketequitieshavedroppedbyalmost2%.
It wasnotmeanttobethisway.Intheearly2000sBrazil,Rus-
sia,IndiaandChina,theso-calledbrics,grewatmiraculous
rates.Itwaseasytothinkpoorereconomieswouldnaturally
catchupwithrichones,becauseimitationiseasierthaninnova-
tion,especiallywheninnovativefirmsbuildplantsinimitative
countries.Manyalsobelievedthatemergingeconomieshadbe-
comeresilient,withwell-runcentralbanks,higherdollarre-
servesandmoreflexiblecurrencies.

Sadlythepaceofconvergencebetweenpoorcountriesand
richhasslowedanditsscopehasnarrowed(seeFreeexchange).
Itappearsthosebarnstorminggrowthratesreliedheavilyon
China’stransformationintotheworkshopoftheworld,a feat
thatwillnotberepeated.Meanwhiletherehavebeenseveral
boutsofmarketjitters:thetapertantrumin2013,thecommod-
ity-pricecollapsein2014,China’sdevaluationin2015,theFed’s
interest-raterisesin2018,financialcarnageinTurkeyandAr-
gentina,andtheuncertaintiesofthetradewarthisyear.
Thatiswheremonetarypolicycomesin.InAmericathecen-
tralbankcaneasepolicytooffsetthreatstogrowth.Butmany
emergingeconomiesfeltunabletocutinterestrateslastyear,be-
causetheFedwasdoingtheopposite.TighterAmericanmone-
tarypolicytendstospoilinvestors’appetitefor
riskyemerging-marketassets.Tostabilisetheir
currencies,policymakersinmanyplacesfound
themselvestighteningintoa slowdown.Indo-
nesia’scentralbank,forexample,raisedratesby
1.75percentagepointsin2018,eventhoughin-
flationremainedbelow3.5%.Centralbanksin
RussiaandIndiaalsoturnedhawkish,andBra-
zilhadtostopitseasingcycle.
TheFed’sdoveishturnhaschangedthat.Emergingecono-
miesnowfeelabletoease,too.SouthKoreahasjustloweredits
benchmarkrateforthefirsttimeinthreeyears.Brazilcutratesto
recordlowsthisweek.SouthAfricaandIndonesiahaveloos-
ened.Mexicoisexpectedtoeasesoon.Easiermoneywillhelpre-
vivegrowth.Buttosustainitmuchmoreisrequired.Emerging
economiesmustusebenigntimestoprepareforbadonesby,for
instance,reducingshort-term,foreign-currencydebt.Andtoex-
ploitcatch-upgrowth,theymustmakethemselveshospitableto
globalmanufacturing,emulatingChinaratherthanridingonits
coat-tails.Theeuphoriaofthebrics eramayneverreturn.But
theFed’scutcreatesa momentofopportunity.Emergingmar-
ketsshoulduseit. 7

An opportunity


USFederalfundstargetrate,%

1917151311092007

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4
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0

The Fed has cut interest rates. That may help emerging markets more than anyone

The Federal Reserve and emerging markets

D


onald trump likes to grab the news with a barrage of tweets.
Just weeks after insulting four Democratic congresswomen,
all from minority backgrounds, the president has found another
target. On July 27th it was Elijah Cummings, a black Democratic
congressman from Maryland’s seventh district, home to much of
the city of Baltimore, who attracted the president’s wrath. Mr
Cummings, who as chairman of the House Oversight Committee
has been investigating Mr Trump, comes from “the worst run
and most dangerous” district in America, the president jeered.
Much of the city, he said, is a “disgusting, rat and rodent infested
mess”, in which “no human being would want to live”.

Mr Trump’s invective smacks of bigotry: congressmen from
poor white districts do not receive insults in the same vein. And
Baltimoreans are naturally seething at the contempt that their
president seems to have for them.
Yet while the president is hitting out at his foes and cranking
up the politics of outrage, Baltimore’s problems are all too real. It
is one of America’s great cities: Johns Hopkins University, the
Victorian splendour of Fell’s Point, and an important port are as-
sets most American mayors would dream of. But it is also deeply
troubled. Since the spring of 2015, when Freddie Gray, a 25-year-
old black man, died in police custody, sparking rioting that set

Saving Charm City


Democrats need to take responsibility for Baltimore’s problems

Baltimore
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