The Economist - USA (2019-08-03)

8 Leaders The EconomistAugust 3rd 2019

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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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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