The EconomistFebruary 10th 2018 Finance and economics 67South-to-South investmentDeveloping ties
A
T A meeting in Namibia last month
Zimbabwe’s finance minister, Patrick
Chinamasa, made a pitch to lure African
investors to an economy ruined by Rob-
ert Mugabe. That he did so first in Wind-
hoek, not London or New York, is telling.
Although flows through tax havens
muddy the data, 28% of new foreign
direct investment (FDI)globally in 2016
was from firms in emerging markets—up
from just8% in 2000.
Chinese FDI, a big chunk of this,
shrank in 2017 as Beijing restricted out-
flows and America and Europe screened
acquisitions by foreigners more closely.
But the trend of outbound investment is
widespread. Almost all developing coun-
tries have companies with overseas
affiliates. Mostof their investment goes to
the West. But in two-fifths of developing
countries they make up at least half of
incomingFDI. In 2015-16 the ten leading
foreign investors in Africa, by number of
new projects, included China, India,
Kenya and South Africa.
A World Bank survey of more than
750 firms with FDI in developing coun-
tries found that those from developing
countries themselves were more willing
to set up shop in smaller and higher-risk
countries. And they were just as likely as
rich-country firms to reinvest profits in
their foreign affiliates. Peter Kusek from
the bank says that globally ambitious
firms often start affiliatesin neighbouringcountries first, to cut their teeth in a rela-
tively familiar foreign market.
The trend toward South-to-South
investment is particularly beneficial for
the world’s poorest countries, and would
be even bigger if governments got out of
the way. According to the World Bank,
60% of poor countries curb outward FDI,
through cumbersome reporting require-
ments, foreign-exchange controls or
ceilings for specific destinations or in-
dustries. Restrictions on inward FDIare
also common. Foreign banks in the Phil-
ippines can open no more than six local
branches. In Ethiopia foreigners cannot
own bakeries, hair salons, travel agen-
cies, sawmills or much else. In 2013 Gha-
na more than tripled its capital require-
ments for foreign-owned trading
companies, bowing to local retailers
irked by a proliferation of Nigerian shops.
Still, there are reasons for optimism.
Kevin Ibeh of Birkbeck University in
London says that the rise of African
multinationals is a sign of the maturing
of private enterprise in the region. Some
employ hundreds of thousands of work-
ers. So they have clout in lobbying for
better regulation and infrastructure, or
for their governments to intervene when
another country mulls protectionist
rules. All of this, says Mr Ibeh, may even
usher in better implementation of va-
rious regional free-trade agreements,
which so far exist largely on paper.Poorer countries’ firms are branching out abroad, often next doorO
N HER way out, Janet Yellen, who
stood down as the Federal Reserve’s
chair on February 2nd, paused to add yet
another sanction to those already imposed
on Wells Fargo for foisting unwanted insur-
ance and banking products on clients. The
latest punishment is a highly unusual one.
Wells will be blocked from adding assets to
the $2trn held on its balance-sheet at the
end of 2017. Two other regulators had al-
ready imposed fines and penalties soon
after the shenanigans began emerging in- The bank has gone through a big reor-
ganisation. The Fed’sbelated response pre-
sumably took into account not only the er-
rant conduct but also the political fallout.
The government, as well as the bank, had
been embarrassed.
At first glance, Wells is an odd target for
such treatment. During the financial crisis
it proved itself the best of the big banks,
with relatively high underwriting stan-
dards and manageable losses. The scandal
was huge—millions of clients were pushed
into unwanted products. But the financial
costs were small and the bank’s contrition
(and readiness to pay compensation) high.
On the other hand, its malfeasance was
blatant, which is rare in finance. Also, it
was able to bear tough sanctions. And the
Fed needed to make a statement about the
sharpness of its regulatory steel. In doing
so, it has made Wells, not long ago the
model of a well-run bank, a model for ex-
perimental punishment.
One aspect of the bank’s punishment
(although the bankplausiblydenies this
formed part of the agreement with the Fed)
involves managerial change. The Fed’s an-
nouncement noted that four Wells direc-
tors will leave by the end of 2018.
A purge of directors had long been
urged by the bank’s critics, such as Senator
Elizabeth Warren. The board hasalready
seen heavy turnover and nearly 6,000 em-
ployees have been laid off, including a for-
mer chief executive, John Stumpf, and the
head of the division where most of the
transgressions took place. Other depar-
tures continue quietly; the long-serving
head of riskannounced his resignation last
month. The Fed is keen to avoid the im-
pression given by past efforts to punish
banks—such as levying fines—that the per-
petrators of misdeeds had been spared
and that shareholders had borne the cost.
Wells’s travails are sending a blunt warn-
ing to directors at other banks.
The explicit component of the sanc-
tions, the cap on growth, will continue for
at least 60 days, while a new risk plan is
drawn up for the Fed. After that it will stay
in place for an open-ended period, subject
to reviews. Unable to expand its balance-
sheet, Wellswill be unable to take advan-
tage of a growing economy that seems like-
ly to crave credit and investment. Instead,to maintain returns, it may well be forced
into gruelling cost cuts.
Wells reckons that its profits in 2018 will
drop by less than $400m—just a blip com-
pared with the $22bn it made in 2017. But
the market seemed to differ. The Fed’s an-
nouncement came just before the week-
end. When trading reopened on February
5th, Wells’s share price dropped by 9%,
slashing $30bn from its valuation, a bad re-
sult even on a terrible day for the stock-
market more broadly.
This suggests that the largest constraints
on Wells’s future activities may be behav-
ioural. The bank says it can continue to
serve itscustomers and maintain returns.
But its priorities will surely lie in not getting
into any more trouble. The only area in
which it is likely to embark on a hiring
spree will be in regulatory compliance,
where it has already added more than
2,000 people in the past two years. Since
the crisis, banks have not needed an ex-
cuse to be bureaucratic or timid. In Wells’s
case, it may find it has little choice. 7Wells FargoIf the cap fits
NEW YORK
A banking giant keeps taking punches
for a scandal in 2016FargoneSource: Thomson ReutersShare prices, July 1st 2016=1002016 17 1850100150200250Wells FargoCitigroup
JPMorgan
ChaseBank of
America