AFGHANISTAN: China and Russia look for gains, but terrorism a rising worry
China and Russia will build on the disorderly US withdrawal from Afghanistan to strike their own relationship with the new regime, protect their respective regional interests, and undermine US global influence. The return of the Taliban to power is a boost to terrorist gro… Become a member to read the rest of this article […]
Governments must help manage the risks of fintech
The writer’s next book is ‘The Future of Money: How the Digital Revolution is Transforming Currencies and Finance’Financial innovation sometimes brings great rewards. It can make the financial system more accessible to underserved segments of the population and improve lives. But some innovations can lead to disaster, which usually hurts the poor more than others. Governments must find the right balance between promoting innovation and managing risks. As the world economy recovers from the Covid recession, which has exacerbated inequalities, the stakes could hardly be higher. The pace of innovations, including some truly groundbreaking ones, has picked up, heightening the urgency of addressing this question. In the early 2000s, financial innovations took the form of new products that ostensibly made it easier for consumers to get credit and for investors to generate higher returns and better manage risk. The hubristic notions that financial engineering could itself create value, and that the private sector could adequately manage risks on its own, culminated in a spectacular collapse. The latest wave of innovation is underpinned by new technologies that are encapsulated by the term “fintech”. Fintech is putting banking and other services literally in the hands of consumers. We can now make payments, do basic banking and even trade stocks with apps on our mobile phones. The fintech revolution has the potential to democratise finance. Digital banks, robo-advisers and online platforms that directly connect savers and borrowers are transforming financial intermediation. They have made saving and credit products easily available even to low-income households as well as those in rural and remote areas, while encouraging entrepreneurial activity. Digital payments that are cheap, quick and efficient are proving a boon for consumers and businesses. Disruptive change is coming to international payments, which have long been expensive and time-consuming. For economic migrants sending remittances to their home countries and many low-income countries that rely heavily on such flows, this is a blessing. Better payment systems will benefit domestic and international commerce. Technology is not an unqualified blessing, however. Computer algorithms that dispassionately render verdicts on creditworthiness and loan qualifications in principle reduce overt racial and other forms of bias. But algorithms built by humans and benchmarked against historical data can end up reinforcing existing biases. Digital access and financial literacy are still unevenly distributed. As the Gamestop saga showed, naive retail investors are often the last to join the party when speculative frenzies erupt, and they are left nursing losses when the frenzies end. Governments must still work to protect investors and ensure basic financial literacy, so that investors understand the products on offer and risks involved. Moreover, even the relatively low cost of entry into digital markets does not ensure an easy path for new entrants and fair competition. Network effects that benefit incumbents can lead to even greater concentration in the digital realm. China’s government gave Alipay and WeChat Pay free rein, which they used to create innovations that expanded financial access to the masses and helped in the fight against poverty. But these two platforms now dominate the payments landscape, acquiring so much power that the Chinese authorities recently cracked down on them. India’s Unified Payments Interface provides a model for how a government can foster private sector innovation and competition in financial services, without directly intruding in this sector. The Indian government created a public digital infrastructure with open access that provides easy entry for payment providers, ensuring a level playing field for established operators and new entrants.Aadhaar, a biometric identification scheme, makes it easy for even illiterate and poor individuals to establish their identity, facilitating access to the financial system. The government has proposed regulations to give consumers control over use of their data.Fintech regulatory “sandboxes” that allow new products and services to be tested in a controlled environment and in a limited scope can also help balance regulators’ concerns with the inherent riskiness of innovations. Fintech can play a powerful role in democratising finance in advanced and developing economies, but its perils must not be discounted. While the private sector should be left mostly unshackled to do the heavy lifting, governments have an indispensable role in securing the benefits and managing the risks.
EUROPE: Managing the pandemic – what we are watching
This updated weekly piece provides snapshots of how selected European governments are dealing with the ongoing Covid-19 pandemic. Please do not hesitate to contact us if you want to discuss any of the countries mentioned in more detail. Graph of the week Spain – Covid-19 cas… Become a member to read the rest of […]
ZAMBIA: Opposition landslide, daunting legacy
Opposition leader Hakainde Hichilema has won the 12 August presidential election by a landslide, trouncing incumbent President Edgar Lungu by close to 1mn votes. Despite three days of tensions and suggestions that Lungu’s side might refuse to accept the results, a relative… Become a member to read the rest of this article
LATAM PULSE
This week, Argentina’s President Alberto Fernandez has been hit by a scandal under four weeks from the crucial mid-term primaries. In Peru, the political chaos and confusion that has marked Pedro Castillo’s first 19 days in office is set to continue this week. Brazil’s Congress m… Become a member to read the rest of […]
MACRO: Policy responses to Covid-19
Below is our weekly summary table on the health and economic policies that selected governments around the world are implementing to counter the fallout from Covid-19. The updated table includes information about each country’s vaccination strategy. Please do not hesitate to cont… Become a member to read the rest of this article
CHINA: This time is different? Signs of progress on long-awaited property tax
Political obstacles have stalled progress on a property tax for over a decade, despite a broad consensus among technocrats and official promises by the Communist Party leadership. But recent policy signals, combined with a more favorable political and economic context, sug… Become a member to read the rest of this article
TURKEY: Afghan crisis leaves Erdogan empty handed
The Taliban’s seizure of Afghanistan’s capital has effectively killed Ankara’s plans to use Turkish forces to operate Kabul international airport after the withdrawal of NATO allies. The “airport mission” was Erdogan’s (weak) card to try to mend ties with the US and show t… Become a member to read the rest of this article
Where are the Biden financial regulators?
Seven months into the Biden administration and despite rising attention to a host of diverse issues in financial regulation and monetary policy—notably concerns about inflation, central bank digital currencies, retail investing, stablecoins—the president has shown little appetite for filling pending vacancies in the financial regulatory agencies beyond the occasional (and often inconsistent) trial balloon.
This is an old problem: Joe Biden didn’t invent vacancies in new administrations, nor the preference to hobble along with people in acting positions while nominations await them.
The age of the problem is cold comfort, however. The Biden administration is exacerbating it and should change course, immediately.
Appointments in financial regulatory positions fill three vital functions. First, and most obviously, they permit the president to make policy. The issues pending before financial regulators in 2021 are staggering. The policy priorities of the president are clear—on racial diversity, inequality, climate change, full employment, even competition in banking—but announcing a bold policy agenda is just the beginning of accomplishing the work of policymaking. Without filling these key vacancies, the policy work of the administration will suffer from a lack of clarity on what should be accomplished, when, and by whom.
Second, policymakers appointed by the president to run financial regulation must govern. The poetry of bold policy agendas will always give way to the prose of practical governance. This is true in the Oval Office and is even truer for the corridors of the Federal Reserve System, the Federal Deposit Insurance Corp (FDIC), the Comptroller of the Currency—all of which have key vacancies—as well as other arenas of financial regulation.
Take the Federal Reserve System for example. The task of managing the Federal Reserve System is enormous and has only increased in its complexity. The Board members must be central bankers, voting on the course of monetary policy; they must be bank supervisors, working with banks and other financial institutions to manage financial risk throughout the system; they must be bank regulators, writing rules for that same system; they operate a financial system as participants in payment rails that allow money to flow through the global economy; and they must be managers, supervising the employment of the quasi-private Federal Reserve Banks and the 20,000 people who work within the Federal Reserve System.
Each vacancy—and, at this rate, we risk having at least three simultaneously, a low-water mark that was never crossed before the Obama administration and has become something of a new normal in Fed vacancies—adds to the work of governance and risks muddying the work of all those who depend on the Fed’s managerial competence in all of its many areas of responsibility.
Finally, and perhaps most importantly, these appointments are the principal—in some ways, the only—mechanism for democratic governance to organize, respond to, and participate in the technical affairs of financial regulation. The logic of representative democracy is that elections inspire political organization before they occur and have policy consequences long afterward. But few people make financial regulation the sole basis for their vote in a presidential election, even in the rare instances when politicians pay close attention to financial regulation on the stump. The ballot box just isn’t the time or place where the American public engages forcefully with essential questions about monetary policy, bank supervision, or whether (and if so, how) the Fed should create its own digital currency.
The better time is when a nomination is made and the U.S. Senate engages in providing its advice and consent on the appointment. In those moments, it is astonishing how high the quality of engagement becomes across the partisan divide in debating finer points about the causes of inflation, the consequences of the Fed’s management of the public-private partnerships that characterize our financial system, or the implications of banking merger policy.
At present, however, the administration has deprived the public of these focused conversations. Failing to nominate anyone for the first one-eighth of Biden’s elected term deprives the administration of its ability to make policy and society of the ability to engage in debate on these issues. Floating and then popping trial balloons is not enough to sustain this discussion: we need presidential nominations and hearings in the Senate.
President Biden can quickly change this unfortunate state of affairs. The benches of qualified candidates who can fill them are deep, from across the coalition of Democrats (and some Republicans) who support the president’s views on financial regulation and monetary policy. Some factions within the party may resent appointments made to representatives of other factions, but this must never become a barrier to making timely nominations of qualified candidates. That very intraparty debate is itself enormously beneficial for the nation as it seeks to understand what a candidate for, say, Comptroller of the Currency promoted by the left wing of the party believes about issues of importance to the party’s center.
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There is another risk to these vacancies beyond the top line of the administration. Most (but not all) of the vacancies pending are not the top officials—the Secretary of the Treasury or Chair of the Federal Reserve—but are deeper within the organizations, including the Vice Chair for the FDIC, the Comptroller of the Currency, members of the Fed’s Board of Governors, and others. They just don’t capture the same imagination as those top jobs, and so presidents of both parties may be unwilling to wage the partisan fights that nomination and appointment might invite.
This is folly. The consequence of this “only at the top” focus is to make those top appointments even higher stakes, creating strange hydraulic pressure on a single nomination to satisfy the accountability demands that should be satisfied through the other vacancies. So it is, for example, that Fed Chair Jay Powell’s presumed views on financial regulation threaten his reappointment as the nation’s chief monetary policymaker despite the fact that his record through the Obama and Trump administrations suggests that he will defer on regulatory matters to the administration. The debate about the Fed Chairmanship—a vacancy that the administration is sure not to let occur—has become a debate about financial regulation because the other nominations with arguably more influence on those policies are still pending. The result is an inferior public discourse about both financial regulation and monetary policy alike.
Let us end this abysmal record in financial regulation. Let the president fill the large and soon-to-be growing list of vacancies in the financial regulatory agencies. The policy, governance, and accountability of the system demand it.
Private equity buyouts and firm exports: evidence from UK firms
This paper examines the impact of private equity buyouts on the export activity of target firms. We exploit data on UK firms over the 2004-2017 period, and use difference-in-differences estimations on matched target versus non-target firms.