Economist
From The Economist Global Agenda
Financial exchanges are booming, but this is no time for complacency
TWO hundred and thirteen years ago, a group of brokers and merchants signed an agreement under a buttonwood tree in lower Manhattan. They thereby created a securities-trading system that was the forerunner of the New York Stock Exchange (NYSE). Until recently, the NYSE was a bastion of tradition, sticking to member-ownership and floor-based, face-to-face trading. Now it recognises that technology and speed rule the day. On Tuesday December 6th the exchange’s seatholders—who are also its owners—took a vote that will thrust it into the modern trading era, by merging it with Archipelago, a quoted electronic exchange, and turning it into a listed company.
The transformation of the NYSE is just part of the change sweeping through financial exchanges on both sides of the Atlantic. Technology is making trading faster and more automated. It is opening up new opportunities for some, but making competition more intense for all. Demutualisation has allowed some exchanges to raise pots of cash, but has also exposed their managers to sometimes unwelcome pressure from shareholders. And regulation is forcing many exchanges to reconsider long-established ways of doing business.
One upshot of all this is consolidation. The NASDAQ stockmarket, also in New York, plans to acquire Instinet, another electronic exchange. There is courting, if not yet consummation, in Europe too. Rumours have swirled for months: the potential combinations involve the London Stock Exchange (LSE), Germany’s Deutsche Börse, the pan-European Euronext and OMX, a Nordic exchange operator. Meanwhile, Australia’s Macquarie Bank has been looking for a partner to join it in a possible offer for the LSE. Britain’s competition authority has given the Australians until December 15th to bid or back off.
“The whole exchange space in Europe and the US is in play at the moment,” says Octavio Marenzi, chief executive of Celent, a technology research and consulting firm. That space is for the time being remarkably exciting and profitable. Volumes are booming, especially on derivatives exchanges. Profits are strong. Fox-Pitt, Kelton, an investment bank, expects that this year Deutsche Börse and the LSE will make returns on equity of more than 20%, with Euronext making a respectable 11%. Exchanges’ share prices have been soaring.
Yet amid the bounty, the changes swirling around the industry are also bringing challenges. Mr Marenzi predicts that an increasingly networked world will diminish exchanges’ centralising role of bringing buyers and sellers together. He thinks it could even disappear in 15 or 20 years, as more buyers and sellers trade directly on screen. Thanks to demutualisation, technological change and regulation, exchanges also face more immediate threats. Although the details vary between Europe and America, exchanges in both face strain on revenues and costs. The future may not be as lucrative as the recent past. Investors may even be sensing this. Those scorching share prices have cooled a bit in recent days.
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On the revenue side, Ruben Lee, managing director of Oxford Finance Group, a consultancy, notes that many sources are already under threat. Membership fees have vanished as exchanges have gone public. Trading fees, a primary source of revenue, have fallen on a per-trade basis, although the effect of this has been offset by higher volumes. One result, says Mr Lee, is that more exchanges are subsidising transactions or are paying marketmakers to direct orders to them.
Meanwhile, in Europe there are questions about future competition in clearing and settlement, which is especially awkward for Deutsche Börse: 40% of its revenue comes from post-trade services. The European Commission has made noises about new regulation in this area.
Also in question are revenues from publishing prices and quotes. In Europe, views differ on how great the effect will be of a big, looming regulation, the Markets in Financial Instruments Directive (MiFID), which demands more transparency and competition in pre- and post-trade data.
Some—notably technology companies selling software—foresee an explosion of market-data services that will take the exchanges’ business. Mr Marenzi believes the LSE, which is active in this area, could suffer more than others. The LSE, which charges up to £2.75 ($4.75) per trade for its post-trade information, admits that margins are likely to be cut when MiFID kicks in in 2007, but says it is well placed to increase its market share. Mr Lee notes that few alternative systems have displaced primary exchanges in the past as providers of price and quote data.
More broadly, big exchanges say that MiFID ought to bring them more business, through the extension of “single passport” rules that will allow more investment firms to operate on a pan-European basis. The LSE and Deutsche Börse say that they do not expect to have to change their methods much to comply with the directive. Its effects could be more troublesome farther south, because France, Spain and Italy now have rules that drive all trades through exchanges. The directive in essence says that this should cease.
While revenues are under threat, technology costs have soared. The rise of electronic trading has entailed costly investments. That said, some exchanges, such as Euronext and OMX, have sold technology and software to others, which provides offsetting revenues.
Technology has in turn spawned internalisation of trades by big investment banks off-exchange, alternative trading systems, and automated block trading. The last—the lumping together of lots of small trades—has put pressure on fees by cutting the marginal cost of a trade, in effect to zero. Liquidnet, a fast-growing firm that anonymously joins buyers and sellers to negotiate trades without intermediaries, says that its average order size for large-cap stocks in the third quarter was 62,000 shares. With so many alternatives, the NYSE has seen its share of the trading in its own listed stocks fall below 75%, the lowest level in 29 years.
Fears about regulation extend beyond the Europeans and MiFID. In America, regulators are also forcing the more old-fashioned stock exchanges to modernise or die. Earlier this year the Securities and Exchange Commission approved a regulation known as Reg NMS, which emphasises the need for markets to be speedy. Some think it helps explain the NYSE’s eagerness to merge with an electronic exchange. Whether the American Stock Exchange’s plans for a part-open-outcry, part-electronic model will satisfy the rule remains to be seen. Reg NMS does not cover commodity exchanges, which allows the member-owned, floor-trading New York Mercantile Exchange to sustain its old ways—although competition from the all-electronic IntercontinentalExchange could also force it to change.
Meanwhile, the managers of public exchanges have outspoken shareholders to put up with. Activists have already driven out Werner Seifert, chief executive of Deutsche Börse, for being too keen to buy the LSE. Euronext’s Jean-François Théodore, has also faced demands that he explore other options, including a tie-up with Deutsche Börse, before making a formal offer for the London exchange. Shareholder pressure is pushing exchanges to look for new sources of revenue, in new asset classes or in foreign markets. So far, the first has been easier than the second.
With shareholders so jumpy and exchanges in need of profits, users naturally have wondered how they stand to gain from all the upheaval. In Europe, particularly, many have complained about exchange fees. Sensing the mood, Macquarie Bank has reportedly asked to meet investment banks as it ponders a bid for the LSE. In America, big investment banks recently took big stakes in the Philadelphia Stock Exchange, and are investing in a new, all-electronic Boston exchange in the hope of countering the NYSE’s power. Neither is much of a threat—at least not yet.
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Economist
From The Economist print edition
Did Steven Levitt, author of “Freakonomics”, get his most notorious paper wrong?
ABORTION cuts crime. That claim—first demonstrated by John Donohue, of Yale Law School, and Steven Levitt, of the University of Chicago, in an academic article in 2001* —is the kind of provocative and surprising conclusion that has made Mr Levitt's book, “Freakonomics”, such a runaway success this year. Unwanted children, the story goes, are more likely to become criminals in later life. Abortion, legalised throughout the United States by the Supreme Court's Roe v Wade ruling in 1973, prevents unwanted pregnancies from becoming unwanted children. Higher abortion rates from the 1970s onwards thus help to explain why crime rates fell in America about two decades later.
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That's the theory. But a paper published last week† by Christopher Foote and Christopher Goetz, two economists at the Federal Reserve Bank of Boston, finds an embarrassing hole in the evidence. Messrs Donohue and Levitt subjected the data to a battery of tests, some suggestive, others more systematic, in an effort to prove the links in the chain. The challenge is to distinguish the role of abortion from other potential influences on crime, many of which cannot be observed directly. Some of these rival factors vary year by year; others state by state. Messrs Foote and Goetz concentrate their fire on those that do both. They offer the crack epidemic, which rose and receded at different times in different places, as an example.
Messrs Donohue and Levitt claim to control for such effects in the final test of their paper. That exercise is meant to facilitate comparisons such as: did arrests of 20-year-olds in New York in 1992 diverge from those of 18-year olds in the same state and year? This automatically takes account of anything going on in the Empire state that year (such as a crack epidemic) that would have affected 18-year-olds and 20-year-olds alike. The principal difference between the two age groups is that one was born after the Supreme Court legalised abortion and the other before.
It was a good test to attempt. But Messrs Foote and Goetz have inspected the authors' computer code and found the controls missing. In other words, Messrs Donohue and Levitt did not run the test they thought they had—an “inadvertent but serious computer programming error”, according to Messrs Foote and Goetz
Fixing that error reduces the effect of abortion on arrests by about half, using the original data, and two-thirds using updated numbers. But there is more. In their flawed test, Messrs Donohue and Levitt seek to explain arrest totals (eg, the 465 Alabamans of 18 years of age arrested for violent crime in 1989), not arrest rates per head (ie, 6.6 arrests per 100,000). This is unsatisfactory, because a smaller cohort will obviously commit fewer crimes in total. Messrs Foote and Goetz, by contrast, look at arrest rates, using passable population estimates based on data from the Census Bureau, and discover that the impact of abortion on arrest rates disappears entirely. “I am simply not convinced that there is a link between abortion and crime,” Mr Foote says.
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Messrs Donohue and Levitt did not run the test they thought they had |
It may be asking too much of the numbers to convince everybody. “The debate over abortion and crime will not be resolved within the parameters of our paper,” says Mr Donohue. He thinks the arrest figures are “muddy” and the state population data “sloppy”. Combining the two generates so much noise, it is hard for the statistical tests to hear anything. Ted Joyce, a professor at Baruch College (part of the City University of New York), who has had his own methodological disagreements with Messrs Donohue and Levitt, also thinks the debate is stretching the data too far. He points out that if you add controls for 50 states and 12 years—as Messrs Foote and Goetz do, and as Messrs Donohue and Levitt meant to do—you are, in effect, holding another 600 things constant. This robs the data of most of their variety, and of much of their ability to explain anything.
To say, as Mr Levitt does in “Freakonomics”, that “abortion was one of the greatest crime-lowering factors in American history” may be a bit strong. But the underlying thesis, however unpalatable to some, is not likely to be dispelled by a stroke of Mr Foote's computer key. Mr Levitt says his case is based on a “collage of evidence”, of which the flawed test is one small piece. He is, in particular, sceptical that crack undermines his thesis: it varied more by age group than by state, he says, hitting 17-year-olds in all states harder than 25-year-olds in any state. He is instead trying to improve his measures of abortion, to take account of the fact that people born under one state's abortion regime might later move elsewhere to commit their crimes.
For those interested in the consequences of abortion, rather than the causes of American crime per se, the dispute might next move to Romania. In 1966 Nicolae Ceausescu, the country's dictator, banned abortion. A kind of Roe v Wade in reverse, this decision had a much bigger effect on childbearing in Romania, where women had relied heavily on termination as a form of family planning. The birth rate rose from 1.9 to 3.7 children per woman in the space of a year. A forthcoming study by Cristian Pop-Eleches, of Columbia University in New York, explores how these extra 1.8 children fared in later life. Mr Pop-Eleches offers “some suggestive evidence” that children of a given background born after the ban may have grown up to commit more crimes than those born just before—although again this may have as much to do with the changing times in which they lived.
Of course, lots of people have always thought Mr Levitt was in the wrong. Even if abortion cuts crime, it is still immoral, they fulminate. But this is largely beside the point: Mr Levitt's research does not take a position on abortion's social virtues, but aims merely to uncover its societal effects. Besides, for someone of Mr Levitt's iconoclasm and ingenuity, technical ineptitude is a much graver charge than moral turpitude. To be politically incorrect is one thing; to be simply incorrect quite another.
* “The Impact of Legalised Abortion on Crime”. Quarterly Journal of Economics, May 2001.
† “Testing Economic Hypotheses with State-Level Data: A comment on Donohue and Levitt (2001)”. Federal Reserve Bank of Boston working paper. November 2005. Available at www.bos.frb.org/economic/wp/wp2005/wp0515.pdf
Economist
Under the thumb
From The Economist print edition
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In dampening resentment, nothing succeeds like success
TO CHINESE cadres, the town of Yining is an advertisement for their country's six-year-old policy of boosting development in lagging western regions. Executive centres and multi-storey shopping malls sprout along the pavements. Fleets of luxury cars, and trucks bearing coal, weave their way along the roads. By day, traders from across a stunning spectrum of ethnicities—Han Chinese, Uighurs, Kazakhs, Russians, Tajiks—gather in the markets to swap goods and gossip about their travels in Central Asia; by night they socialise over a game of pool or hit the parks for a spot of outdoor dancing.
Situated in Xinjiang, China's largest, westernmost province, this once sleepy backwater is becoming increasingly known for its prosperity and cosmopolitanism. The visitor has to journey to Yining's more secluded rural outskirts to hear murmurs of the town's dark past. Twice in 1997, Uighur and Kazakh Muslims launched separatist riots here, provoking a merciless response from the Chinese government. Several people were killed and many more injured. “I'm still afraid sometimes,” confides one Kazakh. But for most of Yining's residents, the memory of those days has faded, paling into insignificance before the promise of quick riches and peaceful stability.
China's goal is not just to replicate the boom of its coastal areas. It wants to tame Xinjiang, its wild western frontier. Since January 2000, when China launched the “great development of the west” (often referred to as the “Go west” policy), it has been clear that there is more to this than simply boosting growth in China's economic backwaters. It is shorthand for a policy of tightening central control over remote, far-flung territories and assimilating them into China proper. Xinjiang (literally meaning “New Frontier”) was the most recalcitrant region of the lot.
A chasm of language, culture and religion lies between the Han Chinese, who make up more than 90% of China's population, and Xinjiang's Uighurs, Kazakhs and Tajiks. The region's brand of Islam, heavily influenced by Sufi mysticism, sits uncomfortably with the atheism espoused by the Chinese Communist Party. Xinjiang is periodically roiled by local uprisings set off by supporters of independence for the region—“East Turkestan” as the separatists call it, rejecting the Chinese name for their territory.
In 1945, a rebellion led to the creation of a short-lived independent republic in the Yining region close to the Soviet Union. But in 1949, this was abolished after the Russians told the Uighurs to co-operate with Mao. An earlier East Turkestan, in 1933, had lasted only a few months. Since 1949, Chinese rule has never been seriously challenged, although the authorities say there were more than 200 “terrorist incidents” between 1990 and 2001, causing the deaths of 162 people. The most recent unrest of any significance occurred in 1997, with the Yining riots. Three bus bombings in Urumqi and an explosion in Beijing that year were also blamed on Xinjiang separatists.
Calls for independence are still heard among members of the Uighur diaspora. Rebiya Kadeer, a Uighur businesswoman and former political prisoner who was sent into exile in America by China in March, has become a prominent cheerleader for the cause. She has been labelled a “terrorist” by the Chinese government and her family members in Xinjiang have been harassed by the police. Amnesty International says the government's accusations “have not been backed up with any evidence” and appear to be aimed at discrediting Ms Kadeer and her associates as part of a broader political crackdown in Xinjiang.
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But at the beginning of October, official celebrations of the 50th anniversary of the founding of what China calls the Xinjiang Uighur Autonomous Region passed without disruption. Tight security for the events reflected the authorities' continuing fear that, though subdued, separatists could still pose a security risk. Yet China plainly does not worry that Xinjiang might descend into a Chechnya-style conflict. And for all its warnings of terrorist dangers, it appears convinced that, just as rapid economic growth has bought respite from radical political demands in other parts of China, the same formula could well work in Xinjiang.
Xinjiang is a prize worth keeping for more than just reasons of national pride. As China searches for fuel to power its economic development, its gaze has inevitably turned westwards to the province's rich endowments of coal, oil and natural gas. Driving along the edge of the vast Taklamakan desert, the vista is of endless tracts of wells and drills. Official hyperbole makes it hard to tell how much oil and gas Xinjiang really has. But the province is a focal point of exploration by China's largest oil and gas producer, the China National Petroleum Corporation (CNPC).
The discovery of Xinjiang's Kela II natural-gas field laid the foundation for a 4,000km (2,500-mile) pipeline that began pumping gas from Xinjiang to China's east coast last year. Three years ago, the oilfields of the Junggar basin, in northern Xinjiang, broke the annual output record for Chinese oilfields by crossing the ten million tonne mark. In 2004, the Tarim basin oilfields chipped in with five million tonnes.
With its borders with Kazakhstan, Kirgizstan, Tajikistan and Pakistan, among others, Xinjiang is also China's principal gateway to the energy reserves of Central Asia. Chinese oil experts are frequent visitors to Almaty and Tashkent, where they hammer out some of the biggest deals in the global energy market today. The first phase of an oil pipeline stretching from Kazakhstan to the border town of Alashankou, in Xinjiang, is soon to be completed. The two countries are also exploring the feasibility of a natural-gas pipeline.
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To protect these interests, China has no qualms about threatening and using force to keep militant Muslims under control. Religious schools have been banned altogether, and residents report that the prohibition has been completely effective. China has won support for its efforts from fellow members of the Shanghai Co-operation Organisation, a security and commercial forum which also includes Russia, Kazakhstan, Kirgizstan, Uzbekistan and Tajikistan. “The government has such a chokehold over us today,” mourns one local imam, “that we can't even think about making war.”
China has also encouraged the migration of ethnic Han Chinese into Xinjiang. Although there is no irrefutable evidence of a deliberate attempt to dilute Xinjiang's potentially restive Muslim population with this influx, this is precisely what has happened in many urban areas. Once forming the vast majority of the region's population, Xinjiang's minorities had slipped to a rough parity with the Han even before the “Go west” policy began.
Critics of China's western development strategy argued that it would simply encourage a further influx of Han, who would collar all the best jobs and dominate local markets completely, to the detriment of the local peoples. There would be growth, certainly, but its fruits would belong to the enterprising new immigrants, while the province's original residents would remain impoverished. But this has not been the case. True, the Han have come in and enriched themselves. But one of the main reasons many local Muslims are loth to disrupt the new order is that significant numbers of their ranks too have grown fat on the spoils.
As formerly obscure towns experience a boom powered by trade, mining and a rocketing tourist industry, Xinjiang's Muslims are better off, in material terms, than they have been in a long time. Wealthy Uighurs own a fair share of the sleek Landcruisers plying the streets of Urumqi. In the rural areas of northern Xinjiang, such as Buerjin, the Kazakhs still tend to their cattle and sheep. But outside the yurts, there now stand gleaming new motorcycles and even cars. A crucial factor behind Xinjiang's avoidance of large-scale strife is that life as a Chinese subject, particularly compared with many other parts of Central Asia, seems to some at least to have its advantages.
Development is by no means a cure-all. Although it helps create a relatively content middle class, as it has elsewhere in China, it also exacerbates social divisions that could store up problems for the future, should growth falter. The divide between urban and rural communities is one looming challenge. Energy and tourism aside, industrial growth is slow enough to leave many of the province's natives by the wayside. Much of Xinjiang is still rural and even the most impressive cities have a tendency to give way suddenly to pastures and mud-houses, where six-person families live cramped in a single room (ethnic minorities in Xinjiang are subject to less stringent family planning regulations than families in Han areas of China).
This growing gap between rich and poor in Xinjiang could provide new fuel for religious and ethnic hatred. While a number of Xinjiang's Muslims have benefited from the Great Leap West, virtually all the losers are Muslim. In spite of stricter border control, access to weapons and even military training from madrassas in neighbouring Pakistan remains an option; in August, several Muslims were indicted for smuggling firearms from Pakistan into China through Xinjiang. With so many non-Han Muslims feeling disenfranchised, to say nothing of the fear amongst neighbouring Central Asians of being reduced to the near-abroad satellites of an expanding giant once again, there is always a chance that the development of China's west might yet be accompanied by a return to 1997-style violence, with bombs going off in Beijing.
All of which, if history is any guide, will probably do very little to deter a state beginning to flex its muscles. Like the development of America's west, the development of China's has seen native peoples who dared to resist crushed or driven into exile. But however brutal the pacification of Xinjiang, China has so far managed to prevent it from degenerating into a security nightmare.
Economist
From The Economist print edition
Even at $500, it's still a barbarous relic
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NOTHING swells the breast so much as the thought that you have been proved right at last. After riding high at the start of the 1980s, gold bugs had a miserable couple of decades. The price declined relentlessly, mocking their credo that the security of the financial system ultimately depends upon the yellow metal. Lately, though, the faithful have enjoyed their reward. In the past five years the price of gold has doubled. This week in Asian trading it briefly surpassed $500 a troy ounce—a level last breached in 1987. You can almost feel the bugs' excitement as the message sinks in: gold is back.
This being gold, the resurgence has brought forth all manner of alarming prophecies. The price is an omen of rampant inflation; bonds are doomed; the dollar is about to fall prey to the United States' reckless deficits; the euro will shortly be revealed as a worthless creation of bureaucrats.
The world is an unpredictable place. But, with the possible exception of a fall in the dollar, not much of the above catalogue of doom looks likely; and none of it has much to do with gold's good run. The dull truth is much less bullish for gold. Investors have put money into a wide range of metals, and precious metals' prices, including gold's, have risen with the base. Meanwhile, gold remains fundamentally unattractive. It yields nothing and central banks are sitting on vaultfuls of the stuff that they want eventually to sell. Gold bugs hope that $500 is the threshold at which mainstream investors will start once again to take an interest in the metal. Caveat emptor.
The fascination of gold lies in its being not only a commodity but also a store of value and means of exchange. The glamour and the mystique lie in the latter, monetary part. This is what draws gold bugs, but their story doesn't quite add up. The unbalanced world economy still faces risks. But the most recent rises in the gold price have come against a strong dollar, which is normally a sign of weaker gold and continues to confound warnings of a collapse in the greenback. Oil prices are plainly far higher than they were, but they have come off their peaks. Moreover, there have been few signs so far that oil prices are feeding through to a 1970s-style stagflation. Nothing in either bond or stockmarkets suggests that investors see much danger of such a thing happening.
Gold's renewed shine is best explained by thinking of the metal not as money but as a commodity dug out of the ground. In the past few years the price has climbed because mining companies stopped locking in prices by selling gold in advance—in effect, withdrawing a huge source of supply. Even then, gold has captured only 40% of the gains of other metals in The Economist's metals index, which has almost doubled since the start of 2003 thanks partly to fundamental demand from emerging markets and partly to investors in search of better returns than those from other assets. Gold would have done better had Chinese demand risen as fast as some expected; in fact, figures from GFMS, a consultancy, suggest it has been flat, even falling, over the past 20 years. Chinese investors now have other places to put their money.
Gold is still cheap compared with its peak of $850 in 1980. Today, adjusting for changes in American consumer prices, it is worth only a quarter as much. Gold bugs might see that as a chance to buy; others as a reminder of gold's enduring capacity to disappoint.
Economist
The climate has changed since we first published, in 1986. How will it change over the next 20 years?
“How can you predict what the climate will be like in 20 years’ time when you can’t even get tomorrow’s forecast right?” That is the usual response from the layman to the climatologist expounding the latest theory on climate change.
Put it this way: forecasting tomorrow’s weather is a bit like estimating how much loose change you will have in your pocket or purse in 24 hours’ time. It is the result of many small transactions, often inter-related, most of them entirely predictable at such short range: a visit to the cashpoint, buying groceries, pocket-money for the kids, and so on. Foreshadowing changes in the climate over a long period is more akin to calculating the household budget over a year or more: the daily transactions hardly matter, whereas much more important are out-side influences, many of which are predictable but some of which may be quite unexpected.
Climatologists believe they understand most but not all of these “forcing factors” and are therefore able to make broad-brush, qualified assessments of where the world’s climate may go in coming decades.
We can get a feel for the direction the climate is taking by looking back 20 years. During that period the mean temperature of the lowest layer of the atmosphere, where human beings live, has increased by 0.4°C. The warming has not been even: the northern hemisphere has warmed more than the southern hemisphere, the continents more than the oceans, the polar fringes more than the core of the Arctic and Antarctic, and Europe more than North America. In Europe (excluding the Mediterranean basin) there were twice as many heat-related deaths in two weeks in August 2003 than there had been in the 20 previous years put together. In September 2005 both the geographical extent and the mean thickness of Arctic Ocean ice reached record low levels.
The warming seems to be accelerating. Computer models indicate a rise in temperature, averaged globally, of 0.5-1.0°C between 2006 and 2026. We can expect the hemispheric and continent/ocean differentials to continue, though not necessarily the transatlantic one, so substantial further warming is likely over both Europe and North America.
In the Arctic basin sea-ice may vanish altogether in the summer by the 2020s; this will probably generate a dynamic of its own. For the time being energy in the form of latent heat is absorbed throughout the summer by the melting process in the Arctic, maintaining cold conditions there and preventing the ocean temperature from climbing more than a degree or so above zero. If all the ice were routinely to disappear by late July, that energy absorption would halt, the Arctic Ocean would warm by several degrees, delaying the onset of ice formation in the autumn. The change in temperature distribution in the Arctic would also affect ocean currents in the Atlantic, which would in turn influence the atmospheric circulation in the region.
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These knock-on effects are very difficult to model on the computer because we have no detailed measurements from previous such occurrences. However, one could postulate a poleward shift in the Atlantic depression track, and that would leave much of Europe—Scotland, Iceland and Norway excepted—with less rain in all seasons and much more prone to water shortages.
Tropical revolving storms (variously known as hurricanes, typhoons and cyclones) have been regarded as particularly sensitive to a changing global climate. These storms can develop only where the sea-surface temperature exceeds 26°C. Although their frequency has increased sharply, especially in the Atlantic/Caribbean, this may be part of a natural 60-year cycle: there were previous peaks in the 1880s and 1940s. Still, a warming climate will probably result in storms which are both longer-lasting and more intense, and which may develop in areas hitherto largely immune—offshore Brazil, for instance. And although their frequency may decrease between now and 2026 in line with the natural cycle, this may be partly offset by an extension of the season. Remember, too, that the coastal fringes threatened by these storms, from Texas to Taiwan, Florida to the Philippines, are increasingly urbanised and susceptible to huge human and economic losses.
Climate, it was once said, is average weather. That is not so. The climate of a given place is described by the extremes as well as the averages. Even if the world’s climate were static there would be dozens of natural disasters every year. With a rapidly changing climate, the next 20 years will be a white-knuckle ride: droughts, floods, heatwaves and hurricanes will probably occur more frequently (affecting regions that were previously untouched) and be longer-lasting. Even the mundane will change: in 2026 the ordinary day-to-day weather where you live will be different—almost certainly warmer, possibly drier but in other places possibly wetter—than it is today.
Philip Eden: contributor to the Daily Telegraph; author of “The Daily Telegraph Book of the Weather” (Continuum)
ＥｃｎｏｍｉｓｔのThe world in 2006から小泉退陣について
Junichiro Koizumi will leave Japan’s economy on the mend and its politics invigorated
The land of the rising sun has been swathed in so much cloud during the past decade that even the optimists are nervous of speaking out. That is despite the fact that 2005 was a good year for Japan’s economy, a fine one for its stockmarket and excellent for its politics, and 2006 promises to be even better. Soon the Japan bulls will regain their voice. For at long last Japan is poised to surprise on the upside, not the downside.
As the year begins the economy will be pulling clear of the deflation that has bedevilled it. Falling prices might seem a boon in what was long considered a high-cost economy, but instead the result has been that consumers have deferred spending, wages have fallen and companies have held back on investment. All that is now changing. Since early 2005 wages have been rising again and since mid-2005 so has the sort of regular, full-time employment that is so important to consumer confidence. The growth of part-time and temporary contract work, which at 30% of the labour force has been vital in boosting profits but debilitating for demand, has come to an end. Gently but steadily, Japan’s excess labour has been absorbed and household incomes are growing again. Encouraged by that, corporate investment will rise and even productivity could start to jump. There is a lot of catching-up to do, after all.
That brings with it a worry, that the Bank of Japan might respond to inflation’s return by abandoning its zero interest rates and massive monetary expansion, and might thus choke the recovery. But as long as the Bank waits until mid-year, to be sure that economic growth really is being sustained and deflation really is over, then that fear is unlikely to be borne out. Rather, a modest return to positive interest rates will begin an important new phase of Japan’s recovery: the restoration of the price mechanism for allocating capital.
The prime minister, Junichiro Koizumi, was in September 2005 returned to power with a landslide election victory, so you might expect him to be carrying out a vigorous programme of reforms to stimulate the economy. If so, you would be wrong. Mr Koizumi’s main task in 2006 will be to stay out of the way of the economic recovery, resisting pressure from the Ministry of Finance or some colleagues in the Liberal Democratic Party to raise taxes or cut public spending, in order to reduce the budget deficit, now 6.4% of GDP. That will be necessary, as the gross public debt has reached 170% of GDP and even the net debt (ie, taking account of the public pension scheme’s holdings of government bonds) is over 80% of GDP, the fourth-highest in the OECD. But it will be best not to rush it as that too could risk choking consumer spending.
Rather, the reforms presented to the Diet (parliament) by Mr Koizumi and his economics minister, Heizo Takenaka, will be directed at the much longer term. Like the postal-savings privatisation that he used as his election-winning issue, the reforms of 2006 will be aimed at establishing a long-term squeeze on the state’s role in the economy. The postal privatisation will not take full effect until 2017. With the two-thirds majority in the lower house of the Diet that he enjoys with the LDP’s small coalition partner, New Komeito, Mr Koizumi will be able to implement other reforms a bit faster than that, but caution will remain the watchword. Next in line for the Takenaka treatment are eight state lending institutions.
The biggest challenge, though, lies in finding ways to cut the costs of the state health-care and pension schemes. Mr Koizumi’s election manifesto promised reforms, but was short on details. High principles governed his campaign for postal privatisation; hard graft will be needed for health and pensions, and he is not noted for that. This task will be left to his successor.
That succession could come remarkably quickly—remarkably, at least, given the election landslide. The LDP’s rules say that he must stand down as leader in September 2006. There will be plenty of pressure for the rules to be waived, to give him a further one or two years, both because of his 2005 success and because an upper-house election looms in 2007. Mr Koizumi is such a loner that no one can feel sure whether or not he will want to retire, as he claims. Human nature says he will stay on. But retirement currently looks like the better bet. He has achieved his long-held ambition of postal privatisation, has changed his party, as he said he would, and is not known to have any further agenda.
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Human nature says he will stay on. But retirement currently looks like the better bet |
If Mr Koizumi does decide to retire, the two likeliest successors are Shinzo Abe, a young, right-wing former LDP secretary-general, cut from the Koizumi mould, or Yasuo Fukuda, a less populist and very steady former cabinet secretary. Mr Koizumi’s cabinet reshuffle in October 2005 gave Mr Abe’s chances a boost by returning him to the public eye as cabinet secretary and government spokesman. In that case reformists will be pleased, but China will be unhappy. Mr Abe insists he will continue Mr Koizumi’s habit of visiting the controversial Yasukuni shrine for the war-dead that so irks the Chinese.
Bill Emmott: editor-in-chief, The Economist
EconomistのThe world in 2006から2006年の通貨危機
立ち読みした。
2006年の通貨危機は、ついにドル暴落がおきる可能性が最も高いという。
ここに貼り付けたのは、最初の部分だけだが。
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The currency crisis of 2006
From The World in 2006 print edition
Ask economists about global risks at the moment and they are likely to talk about energy prices or trade protectionism. The more adventurous might even discuss bird flu or Iran’s nuclear programme. Few will dwell on currency risk, because over the past four years too many economists have cried wolf over exchange rates.…
Economist記事から：ピーター･ドラッカーへの弔辞
From The Economist Global Executive
A look at noteworthy articles from business journals
After Peter Drucker died on November 11th—eight days before what would have been his 96th birthday—tributes began appearing all over the Web. Some were content to acknowledge Drucker’s contributions to management theory—others pointed to his Renaissance spirit. Yoram (Jerry) Wind, a professor at Wharton, noted that Drucker was also the author of a book on Japanese painting and two novels. (Wharton professors’ appreciations of Drucker were collected by Knowledge@Wharton in yet another example of that particular online outlet’s gift for timeliness.)
Both the Harvard Business Review and McKinsey Quarterly have assembled collections of Drucker’s work over the years. Several publications have reprinted interviews: one of the more entertaining is a 1996 discussion with Wired in which Drucker opens by saying testily: “Will you people at Wired please accept the fact that the computer industry, as an industry, hasn't made a dime?”
Other tributes were more personal. Geoffrey Colvin, writing for Fortune , remembered how Drucker commanded that they be on first-name terms, and how he remained funny and sharp throughout their acquaintance: “I don’t know how you get to be ninety-something without growing world-weary, but he did it.” Mickey Kaus, a political columnist for Slate , remembered: “Of all the experts and wonks I called when I was writing a magazine column, he's the only one who had the honesty to politely say (roughly) ‘I'm sorry, but why should I give my ideas to you?’ . . . I’ve respected him ever since.” Tom Peters , writing on his personal blog, sounded slightly more rueful: “Doubtless Mr Drucker would have been appalled to be described as a ‘populariser’—after all, that was one of his abiding and biting criticisms of me.”
A new report from the Aspen Institute Italia, produced in corporation with the Economist Intelligence Unit (EIU), highlights the extraordinary lack of diversity in Europe’s boardrooms. The report suggests that European companies’ failure to promote women and members of ethnic minorities “could prove detrimental to their prospects and those of the European economy.”
The study examined the 75 “most important public and private organisations” in France, Germany, Italy, Scandinavia, Spain and the UK. The least diverse boards were those of France and Italy. In Italy only 3% of the 50 largest companies’ board directors are women (and many of them, in a country dominated by family firms, are there by birth rather than by merit). In France, 44% of board directors (96% of whom are men) went to only two schools (the Ecole Polytechnique and the Ecole des Hautes Etudes Commerciales) compared with the mere 12% in the UK who went to either Oxford or Cambridge.
The report sounds a note of false optimism. “There are signs of change,” it says, “in Scandinavia and the UK, where significant numbers of women now sit on company boards, which suggests that before long they will succeed in breaking through the final glass ceiling.” Significant? In Scandinavia the numbers are boosted by the legal requirement in Norway that 20% of company directors be women, and the UK has yet to see a British woman at the head of a FTSE100 company. The only female boss of a top UK company — Marjorie Scardino at Pearson — is American.
For the last year or so, American pundits have been batting around the idea that consumers are suffering from “too much” choice—that the sheer number of varieties of jam or jeans leaves the buyer irritated and unhappy, less content rather than more. In the latest issue of Harvard Business Review, two partners at Bain & Company turn the question around and ask from the producer’s point of view: is it beneficial for companies to provide all those choices? Not necessarily, they conclude: too many options can raise costs and make it harder to provide good customer service. It is possible, they argue, to cut back on the variety of products offered while still satisfying customer demand, by paying attention to an “innovation fulcrum”: seven different options might create just enough bang for the buck, but eight may be too pricey.
Dipak Jain, the dean of Kellogg School of Management at Northwestern University in Illinois, and Michaela Draganska, a professor of marketing at Stanford University, took a more specific look at product lines and too much choice in research published in the Journal of Economics and Management Strategy earlier this year. They looked specifically at “horizontal” extensions, when firms keep adding new varieties at the same price point (ie, Classic Coke, Diet Coke, Coke with lime, and the soon-to-be-withdrawn Vanilla Coke). By examining competition between yoghurt brands, they conclude that after a certain number too many varieties have a negative impact on market share, while driving up costs—another warning that for the producers, at least, there may truly be such a thing as too much choice.
Could the lack of women in higher management positions be attributable in part to their greater distaste for the competition necessary to win the job? Muriel Niederle, a Stanford economist, thinks the answer might be yes, based on research she recently presented at Wharton. Ms Niederle set up a series of events based on her test subjects, 20 men and 20 women, doing simple addition problems; they were then given the opportunity to win money if they entered tournaments against each other, based on how many answers they got right. The female subjects, Ms Niederle found, consistently underrated their own performances and declined the tournament opportunity, while the male subjects were overconfident: “High-performing women enter[ed] the tournament too rarely, and low-performing men enter[ed] the tournament too often.” But when no competition was involved, there was little difference in performance between the sexes.
Ms Niederle speculated that even high-performing women may simply dislike competition, or not feel confident enough to compete. Her paper summarising the research, co-written with Lise Vesterlund, an economist at the University of Pittsburgh, is also downloadable (click here ).
Rare is the business journal article that has as its authors a marketing professor and a sitting state governor. Mike Huckabee, governor of Arkansas, made reducing obesity in his state a goal ever since he himself shed 110 pounds while in office; this article, co-written with Brian Wansink of Cornell University’s Food and Brand Lab, looks at what food companies can do to discourage consumers’ from gorging themselves into poor health.
Thankfully, the article doesn’t thunder on about government regulation or the evil of McDonald’s. Instead, it explores potential marketing opportunities—such as packaging smaller portions; designing packages so that consumers find it less convenient to gorge; or creating foods of the same size but with a lower calorie content. The authors point out that consumers expect low-fat items, such as McDonald’s failed McLean sandwich, to taste bad. But they will keep on eating a favourite snack that has merely had a few “stealth modifications.”
“Most organisations are inherently unhealthy,” begins a new report from Booz Allen Hamilton (BAH). The report is based on an analysis of almost 50,000 responses to a questionnaire that the consulting firm posted on a website, www.orgdna.com , and handed out to its clients. BAH defines organisational health as being demonstrated by “the ability to execute”. Healthy companies “get things done”. Unhealthy organisations are those described by their employees as being inherently ineffectual.
The analysis throws up a number of intriguing findings:
• Some industrial sectors are healthier than others. Top of the list comes real-estate, followed by “commercial services and supplies”. Bottom of the list (perhaps not entirely surprisingly) comes utilities.
• The health of companies differs by geography. Switzerland has the healthiest companies of all; Japan the least healthy. The credibility of this finding is slightly dented by the fact that Italy comes in second place, and China third—way ahead of Canada, the UK and the US. Italian companies are not perhaps highly regarded for getting things done.
• Smaller organisations are healthier than big ones. “Larger organisations are more likely to manifest dysfunctional traits and behaviours, and report unhealthy profiles,” say the report’s authors.
• The methodology of the survey is novel. Employees’ answers to questions about whether information flows freely across their organisation’s boundaries or whether decisions, once made, are “second-guessed”, will be influenced by the culture of both their corporation and their country. While Britons and Americans have a questioning sceptical attitude to their employers, the Swiss, Italians and Chinese may be less critical of their company’s failings.
Companies search for information on “ordinary” people all the time, says the author, a consultant at Oxford Business Intelligence—to pitch better-tailored marketing efforts at them, say, or to find out whether they are being strictly honest when applying for a job. Mr Gordon-Till reviews the sources of information available to (ethical) information professionals in Britain, where access to personal data has been limited in recent years. Companies can still get access to the Electoral Roll, which is required to be published on a monthly basis, but it is easier to access an edited version than the “full register”, which cannot be copied. Third-party providers will package Electoral Roll data, but, the author warns, they do not all use the most up-to-date information.
Other methods of finding information include reverse searching (looking up information on a person for whom one has only the telephone number), tracing services, and, yes, even hiring private investigators. Of such a practise Mr Gordon-Till is highly sceptical: detectives do not, on average, have greater access to legal information, and their “relatively scant regard for ethics” makes relying on them difficult, if not impossible, for an ethical professional.
Economist記事から；当面は金利据え置き
Holding operation
From The Economist print edition
The Bank is in no hurry to raise the price of money
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INFLATION, long quiescent, has staged a comeback over the past year. The consumer-prices index (CPI) rose by 2.5% in the 12 months to September, up from 1.1% a year earlier. The upsurge, spurred by rising oil prices, raised fears that the inflationary genie was out of the bottle again.
But the inflation scare looks overdone, going by this week's official figures. Helped by a fall in petrol prices, CPI inflation slackened in October, to 2.3%. Further down the supply chain, a decline in crude-oil prices has also eased the cost pressures on manufacturing. Factories' input prices for fuels and materials rose by 7.7% in the year to October, down from 14.2% in July.
The nightmare for the Bank of England—charged with meeting the government's CPI-inflation target of 2%—would be if the oil-price shock generated a price-pay spiral. But the latest figures show that these “second-round effects”, so damaging in the 1970s and early 1980s, have this time been conspicuous by their absence. Average-earnings growth has slowed from 4.2% a year to 4.1%, comfortably below the 4.5% rate broadly consistent with keeping inflation at 2%.
The economy has stayed weak since August, when the Bank's monetary-policy committee (MPC) lowered the base rate from 4.75% to 4.5%. GDP grew at a below-trend rate of 0.4% in the third quarter, and was only 1.6% higher than in the same period a year before.
Troubled businesses and retailers might have expected that the encouraging news on inflation would open the door to another interest-rate cut. But on November 16th, the Bank quashed such hopes. In its quarterly Inflation Report it signalled that the door remains under lock and key. Based on market expectations of broadly unchanged rates, the MPC's central projection is that inflation will be close to the 2% target in two years' time (see chart). Since that is the period it takes for interest-rate changes to work their way fully through to inflation, the forecast implies that the Bank will keep rates at 4.5%.
One reason for the MPC's reluctance to bring down rates again is that it is sceptical about the scale of the economic slowdown revealed in the national accounts. Estimates based on business surveys have consistently pointed to stronger service-sector growth over the past year or so than the official figures.
The MPC is also expecting a healthy recovery in GDP growth. It thinks that the squeeze on the consumer, caused by rising taxes and debt-servicing charges, is abating. This should pave the way to a pick-up in consumer-spending growth. The economy should also be bolstered by rising business investment and an improvement in Britain's trading performance.
The MPC's growth forecast looks rather optimistic. But even if it is too bullish, there is another reason why the Bank is reluctant to lower rates. It is concerned about the impact of the oil-price shock on the supply side of the economy. The risk is that higher oil prices will reduce capacity growth, for example by making some capital equipment unprofitable to use. Most important, the Bank wants to avoid any increase in inflationary expectations. The best way to achieve this is to stick to a tough line on interest rates
Economist記事から：欧米の中央銀行総裁が金融政策変更示唆
From The Economist Global Agenda
The past week has brought signals of a shift in monetary policy from both the European and American central banks, sending the euro up against the dollar as traders anticipate higher rates in the euro area and a levelling-off across the Atlantic. The rich world’s monetary guardians are struggling to read the outlook for inflation. But things could be worse
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THE day before Thanksgiving is generally a dull time in American offices, as workers lackadaisically shove papers around their desks until it is time to knock off early for the holiday. But on Wednesday November 23rd, currency traders were kept busy trying to predict which way interest rates were going to go. A flurry of news out this week about the plans of central bankers in America, Britain and the euro area brought about a swift change in expectations that had seemed set in stone for the past year.
The euro area’s monetary guardian, the European Central Bank, which has kept interest rates at 2% since June 2003, is finally preparing to raise them as Europe’s economies begin moving out of the doldrums. Last Friday, Jean-Claude Trichet, the ECB’s president, signalled that the bank would start tightening at its next meeting, on December 1st. And this week, the minutes of the most recent meeting of the Federal Reserve’s governors suggested that American monetary policy might be heading in an unexpectedly mellow direction. Foreign-exchange markets reacted immediately, sending the dollar lower against the euro.
But as more information surfaced, the market calmed down a bit. The Fed may be preparing to end its “measured” monetary tightening—12 quarter-point increases since June 2004—in the not-too-distant future. But most people still expect that its benchmark rate, currently 4%, will reach at least 4.5% before the increases stop. This is thanks in part to Jeffrey Lacker, the president of the Richmond Federal Reserve, who will be a voting member of the Fed’s rate-setting body next year. After the minutes were released on Tuesday, he said it was clear that the Fed was not done tightening. In Europe, Mr Trichet has also rushed to calm fears of change, assuring markets on Monday that the ECB’s proposed tightening does not necessarily constitute a trend. So the interest-rate spread between America and the euro area may remain roughly the same for a while yet.
Meanwhile, Britain’s central bank has signalled that it is in no hurry to move rates in either direction. On Wednesday, the Bank of England released the minutes from its November meeting, revealing that its decision to leave rates at 4.5% was unanimous. Though inflation slackened in October, to 2.3%, it is still above the Bank’s target of 2%. But after more than ten years of robust economic growth, even when America and the rest of Europe were decidedly anaemic, Britain’s economy has faltered over the past year. This prompted the Bank’s monetary policy committee to lower rates in August. Since then, however, it has sought to dampen market expectations of further cuts. It wants to be sure that the rise in consumer prices does not trigger a rise in wage inflation.
All of the central bankers may soon find themselves confronting a growing problem: what to do when core consumer-price inflation (excluding volatile energy and food prices) diverges from the all-inclusive headline figure. In all three monetary areas, core inflation is relatively low. But high energy prices, driven by roaring Chinese demand, security concerns in the Middle East and hurricane damage in the Gulf of Mexico, are putting substantial upward pressure on the headline figure. In September, it hit 4.7% on an annualised basis in America, the highest level since 1991—though it dipped to 4.3% in October. This raises the spectre of Alan Greenspan’s leaving office with a higher rate of inflation than when he entered it.
Central banks usually focus on core inflation, because energy and food prices, which tend to swing more than the cost of other goods, can distort the picture. What central bankers want to know, above all, is whether the supply of money is big enough to meet the demand for money, without exceeding it (which is what leads to inflation). If the prices of a few commodities rise while other prices stay low, this indicates that short supply of those commodities, rather than excessively loose monetary policy, is the culprit. This has certainly been the case in America, where September’s soaring inflation was due largely to high petrol prices at the pump.
Over time, however, things get more complicated. Because energy is such a crucial part of the economy, if prices stay high for a prolonged period, they will both raise the inflation rate and lower the rate of economic growth. In extreme situations, this can result in the “stagflation” that afflicted the rich world during the 1970s, in which growth stagnated while inflation soared into double digits in many countries.
Once inflation has started to race away, it is hard to stop. After inflationary expectations take hold, they get built into contracts for labour, goods and services, perpetuating a vicious cycle. As Fed chairman in the early 1980s, Paul Volcker had to raise rates to nearly 20% in order to convince markets that he was serious about fighting inflation. The gambit worked, but it plunged America into its worst recession since the second world war.
That is why the ECB is determined to raise rates, even though the recovery in several of its largest economies is still fragile. Once credibility as an inflation hawk has been lost, it is devastatingly expensive to regain, and the euro area’s central bank wants to make sure that in its first years of life it develops a reputation for being tough.
Thankfully, although high oil prices are undoubtedly having an effect on economic growth in rich countries, it has so far been limited—thanks, many think, to the energy-saving policies implemented in the 1970s, particularly in Europe. In America, where petrol usage is more profligate, the pain may be felt more keenly. But so far growth remains strong, giving the Fed leeway to resume tightening if the situation calls for it. Central bankers face some difficult choices in the months ahead. But for now, they still have much to give thanks for.