The Economist - USA (2020-11-13)

(Antfer) #1

14 Leaders The EconomistNovember 14th 2020


2 most long-standing philosophies is under siege, too.
Value investors might argue that they are the victims of a
stockmarket bubble and that they will thus be proved right even-
tually. The last time value strategies did badly was in 1998-2000,
before the dotcom crash. Today stockmarkets do indeed look ex-
pensive. But alongside this are two deeper changes to the econ-
omy that the value framework is still struggling to grapple with.
The first is the rise of intangible assets, which now account
for over a third of all American business investment—think of
data, or research. Firms treat these costs as an expense, rather
than an investment that creates an asset. Some sophisticated in-
stitutional investors try to adjust for this but it is still easy to mis-
calculate how much firms are reinvesting—and firms’ ability to
reinvest heavily at high rates of return is crucial for their long run
performance. On a traditional definition, America’s top ten list-
ed firms have invested $700bn since 2010. On a broad one, the

figure is $1.5trn or more. Intangible firms can also often scale up
quickly and exploit network effects to sustain high profits.
The second change is the rising importance of externalities,
costs that firms are responsible for but avoid paying. Today the
value doctrine suggests you should load up on car firms and oil
producers. But these firms’ prospects depend on the potential li-
ability from their carbon footprint, the cost of which may rise as
emissions rules tighten and carbon taxes spread.
Value investing’s rigour and scepticism are as relevant as
ever—especially given how frothy markets look. But many inves-
tors are still only just beginning to get their heads round how to
assess firms’ intangible assets and externalities. It is a laborious
task, but getting it right could give asset management a new
lease of life and help ensure that capital is allocated efficiently.
In the 1930s and 1940s Graham described how the old investing
framework had become obsolete. Time for another upgrade. 7

A

decade ago, as the rich world was struggling with the after-
math of the global financial crisis, much of Africa was surf-
ing a wave of optimism. At the front was Zambia, which in the
early 1990s was among the first African countries to ditch one-
party rule and socialism. In 2012, after a decade of stunning eco-
nomic growth, it joined the small club of African countries bor-
rowing on international bond markets. Demand for its debt was
so strong that it was able to borrow more cheaply than Spain.
Now Zambia finds itself at the front of another, less admirable
pack. On November 13th it was poised to become the first African
country to default since the imf’s “heavily indebted poor coun-
tries” scheme in 2005 wiped clean the debts of 30 of the conti-
nent’s poorest countries.
Zambia is not the only indebted African state that is strug-
gling. Because of covid-19, sub-Saharan Africa’s
economy is expected to shrink by 3% this year,
equivalent to 5.3% per person. The imfreckons
that six African countries are struggling to pay
back loans and another 11 are thought to be at
“high risk of debt distress”.
However, Zambia’s economic problems owe
more to the disastrous presidency of Edgar
Lungu than to the pandemic. When he took of-
fice in 2015 after the death of his predecessor, publicdebtstoodat
32% of gdp. After five years of profligacy and theft by the ruling
elite, debt has ballooned to 120%. Economic growth has tum-
bled—to 1.4% in 2019 owing in no small part to his government’s
habit of scaring off investors by seizing mines and detaining
mining bosses. A central-bank governor who resisted Mr Lungu’s
hints that he print more money was fired in August.
Mr Lungu may be economically incompetent, but he is politi-
cally shrewd. Before a presidential election in 2016, his regime
arrested opposition leaders and shut down the main independ-
ent newspaper. He won by the slenderest of margins; eked out by
last-minute ballot-stuffing, according to the opposition. When
it asked the constitutional court for a recount, the judges (many
appointed by Mr Lungu) set a date for a hearing two weeks later.

In the hearing they threw out the case, citing a constitutional
provision that election petitions must be heard within 14 days.
Mr Lungu is taking few chances ahead of the next presidential
poll in August 2021, which he would probably lose if it were free
and fair (see Middle East & Africa section). He has arrested and
harassed Hakainde Hichilema, the main opposition leader, as
well as journalists, musicians and other critics. The electoral
commission is scrapping its voters’ roll and requiring all voters
to register again in just 30 days. And if it turns out to be harder to
register during the rainy season in the opposition’s rural strong-
holds than the ruling party’s urban ones, tough luck.
Many Zambians worry that their country is sliding into auto-
cracy and economic ruin, like next-door Zimbabwe. To stop that
slide, the region and the wider world need to start paying atten-
tion now, rather than just sending election ob-
servers a few weeks before the poll. South Afri-
ca, which has the most clout, needs to speak up.
So does sadc, the regional bloc. And Zambia’s
creditors should insist on cleaner and more
democratic governance before agreeing to a
bail-out. They wield a big stick. Zambia’s mas-
sive fiscal deficit of 12% of gdpmeans that it has
to win their agreement if it is to keep borrowing
inordertopay the salaries of soldiers, teachers and policemen.
Lenders—a disparate group that includes both Chinese con-
struction firms and private bondholders—may object that it is
not their job to safeguard democracy. Their main interest, quite
reasonably, is to be repaid; or, in the case of the imf, to help Zam-
bia’s public finances get back on a sound footing. They do not
want to be involved in politics. Yet Zambia’s economic crisis is
caused mainly by its authoritarian and dysfunctional politics,
not the pandemic or the slump in commodity prices. Its debt
problem cannot be fixed without facing up to its political pro-
blem. Zambia’s next government will have to raise taxes and re-
strain spending to balance its books and repay creditors any
more than a token amount. Only a government which Zambians
see as legitimate can do this without sparking unrest. 7

Zambia’s descent


There is still time to stop a slide to autocracy and economic collapse

Democracy in Africa

Zambia
General government grossdebt,%ofGDP
120
90
60
30
0
14122010 16 2018

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