The Economist UK - 03.08.2019

8 Leaders The EconomistAugust 3rd 2019

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merica’s economyis caught in two stalemates. The first in-

volves its central bank. On July 31 the Federal Reserve cut in-

terest rates by a quarter of a percentage point, the first reduction

since 2008. The Fed is determined not to let the economy suc-

cumb to a recession. But nor will the economy warm up enough

to let the Fed raise rates to normal levels. The other stalemate is

with China. Talks this week in Shanghai confirmed that the trade

war is unlikely either to end soon or escalate soon.

All the signals point to continuing sluggish expansion in

America which, after 121 months, is already the longest on record

(see Finance section). Less well appreciated is that such tepid

conditions have a potential silver lining for the billions of people

living in financially exposed emerging economies. An American

slump would hurt them, but so might a boom if

it led the Fed to raise rates, sucking capital out of

the developing world. The Fed’s 0.25-percent-

age-point cut gives emerging economies wel-

come breathing space to ease their own interest

rates and get back on a path to higher growth.

They need a break. Emerging markets have

had a difficult few years. In July theimfcut its

growth forecast for developing countries to

4.1%, the slowest rate of expansion since 2009. India is losing

steam. Turkey and Argentina have suffered currency crises. In-

vestors have also had a rough ride. Since the start of 2013 Ameri-

ca’ss&p500 index of leading firms has more than doubled.

Emerging-market equities have dropped by almost 2%.

It was not meant to be this way. In the early 2000s Brazil, Rus-

sia, India and China, the so-calledbrics, grew at miraculous

rates. It was easy to think poorer economies would naturally

catch up with rich ones, because imitation is easier than innova-

tion, especially when innovative firms build plants in imitative

countries. Many also believed that emerging economies had be-

come resilient, with well-run central banks, higher dollar re-

serves and more flexible currencies.

Sadly the pace of convergence between poor countries and

rich has slowed and its scope has narrowed (see Free exchange).

It appears those barnstorming growth rates relied heavily on

China’s transformation into the workshop of the world, a feat

that will not be repeated. Meanwhile there have been several

bouts of market jitters: the taper tantrum in 2013, the commod-

ity-price collapse in 2014, China’s devaluation in 2015, the Fed’s

interest-rate rises in 2018, financial carnage in Turkey and Ar-

gentina, and the uncertainties of the trade war this year.

That is where monetary policy comes in. In America the cen-

tral bank can ease policy to offset threats to growth. But many

emerging economies felt unable to cut interest rates last year, be-

cause the Fed was doing the opposite. Tighter American mone-

tary policy tends to spoil investors’ appetite for

risky emerging-market assets. To stabilise their

currencies, policymakers in many places found

themselves tightening into a slowdown. Indo-

nesia’s central bank, for example, raised rates by

1.75 percentage points in 2018, even though in-

flation remained below 3.5%. Central banks in

Russia and India also turned hawkish, and Bra-

zil had to stop its easing cycle.

The Fed’s doveish turn has changed that. Emerging econo-

mies now feel able to ease, too. South Korea has just lowered its

benchmark rate for the first time in three years. Brazil cut rates to

record lows this week. South Africa and Indonesia have loos-

ened. Mexico is expected to ease soon. Easier money will help re-

vive growth. But to sustain it much more is required. Emerging

economies must use benign times to prepare for bad ones by, for

instance, reducing short-term, foreign-currency debt. And to ex-

ploit catch-up growth, they must make themselves hospitable to

global manufacturing, emulating China rather than riding on its

coat-tails. The euphoria of thebrics era may never return. But

the Fed’s cut creates a moment of opportunity. Emerging mar-

kets should use it. 7

An opportunity

US Federal funds target rate, %

1917151311092007

6

4

2

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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