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发布时间:2013-09-28 09:02:26  

THE rupee’s tumble continues to grip India. On August 29th Duvvuri Subbarao, the departing boss of the central bank, told an audience in Mumbai of the widespread “dismay about the ferocity of the depreciation”. Today, on August 30th, I spoke to the boss of a big hotel in the city who says he is preparing to dollarise his business. The rupee is too flaky to operate in, he said. “It’s just like Russia and Indonesia in the 1990s.” Shortly after this, Manmohan Singh, the prime minister, addressed parliament on the matter. While part of the currency slump is a “natural” correction to reflect high inflation, he said, “foreign exchange markets have a notorious history of overshooting. Unfortunately this is what is happening”.

That statement looks correct on a three-day time horizon. The rupee almost breached 69 per dollar earlier this week. On August 30th it bounced back to 65.7, making it the best-performing big currency worldwide that day, though still leaving it down 16% year-to-date. The vote by Britain’s parliament against military action in Syria has helped push down oil prices. That is helpful for India, a big energy importer. And some of the Reserve Bank of India’s tweaks have calmed nerves. On August 28th the central bank said it would provide dollars directly to India’s big oil-importing firms. That will stop them having to sell rupees in the spot market. It is an indirect way for the RBI to use its reserves to support the exchange rate.

Whether India’s currency has stabilised is another matter. There is plenty to worry about. The prospect of the Federal Reserve ending its purchases of bonds draws ever closer, especially with good news from the American economy this week. That means the “Great Exit” of money from emerging markets may continue. Both Indonesia and Brazil raised interest rates this week to protect their currencies, making India relatively less attractive. A foreign investor in town told me at he would not invest in India until it raised its rates. He had arrived in India expecting to allocate more funds to it now prices have fallen, but after several days he felt more pessimistic and reckoned that the slump had further to go.

As if to confirm that view, GDP figures were released on August 30th for the quarter to June. Growth slowed to 4.4%, from 4.8% in the preceding quarter. Manufacturing contracted. These figures do not yet reflect the credit crunch that has taken place over the last two months, so it seems likely that GDP growth will slow even further. A good monsoon may boost farming, but the formal, industrial bit of the economy is in dire condition. On August 27th Palaniappan Chidambaram, the finance minister, said that the government had fast-tracked $27 billion of power and other projects stuck in red tape. But I have yet to find a full account of these proposals. In the past such announcements have contained far more hype than substance, as we explained in an article in June.


That credit crunch is still pronounced, even if the rupee has recovered a little. Most measures of stress in the financial system are still flashing red, reflecting Indian banks’ bad debt problem. Credit default swaps on State Bank of India, which measure its risk, have soared. Short-term market interest rates have not come down. The government has yet to show much desire to clean up banks’ dud loans and is instead putting more pressure on them to “extend and pretend”.

Even as mayhem stalks the currency market, the election campaign is ramping up. India’s legislators may be lousy at making decisions about economic reform, but they are remarkably decisive at passing more populist measures. Early this week a new programme to increase food subsidies was agreed. Moody’s, a credit rating agency, warned that this will put more pressure on the public finances. Then the lower house of parliament approved a new law on land reform. It replaces a decrepit act that is over a century old. But businesses say the new rules will make it even harder to buy land to set up factories, with long delays becoming the norm.

If the rupee still looks vulnerable, India has three options, none very palatable. One is to let the currency fall further. In most countries a cheaper currency would boost exports and help close the current-account deficit. But India’s manufacturing industry is too small and too bound in red tape to ramp up quickly. So a turn-around in the balance of payments may take time during which investors could panic. Meanwhile the weaker currency may destabilise the domestic economy by adding to inflation and increasing the government’s subsidies on fuel and thus its borrowing.

The second option is to do the opposite and increase interest rates to attract more foreign money in, following the path of Indonesia and Brazil. But this would further hammer Indian industry, which is already in poor shape, and probably increase bad debts at banks too. If the economy slowed further as a result, equity investors might begin to worry about corporate earnings declining and pull out their roughly $200 billion of investments in listed shares. Inducing a credit crunch in India might make things even worse.

The last option is to lower government borrowing. It is running at 7% of GDP (including India’s states) and has stoked excess demand in the last few years, widening the current-account deficit. The populist political mood doesn’t make big spending cuts easy, though, and while it is often accused of epic profligacy, India’s central government has pretty low expenditure relative to GDP—about 15%. There is simply no way it can cut its way to a balanced budget. What India really needs is more tax revenues. But with a narrow tax base—only 3% of Indians pay income tax—this might mean concentrating tax rises on the formal economy, which is already reeling.


For now my sense is that the authorities’ plan is to let the rupee trade freely but hold out the threat of an interest rate rise or direct intervention in the currency market to try to scare off speculators. At the same time they will squeeze borrowing as much as is possible during an election and use administrative measures, such as higher duties, to try to cap imports. It is a bet that the economy will pick up soon and that growth will make India’s problems fade away. The trouble is that the economy is still decelerating.

World poltics

\A UN report confirmed that sarin had been used in the attack on a Damascus suburb on August 21st that killed almost 1,500 people. Although the report did not say who was responsible, the sarin had been deployed with an artillery rocket similar to a type used by the Syrian army. Ban Ki-moon, the UN secretary-general, called it a war crime. Meanwhile, the diplomacy moved swiftly to back Russia’s plan for the Security Council to oversee the dismantling of Syria’s chemical weapons by mid-2014. America agreed, but said a missile strike on the Assad regime was still an option if it did not co-operate. See article

A former navy reservist shot dead 12 people at a naval facility in Washington, DC , before he was killed by police. In a depressingly familiar tragedy, Aaron Alexis had sought psychiatric treatment for mental illness. See article

European politics

A judge in New Orleans overturned the convictions of five former police officers for the Danziger Bridge shootings that took place in the aftermath of Hurricane Katrina, because of misconduct by prosecutors. The five had been convicted in 2011 for shooting six people, killing two, and for covering it up. But the prosecuting lawyers had prejudiced the case by posting comments about the five on the biggest news website in New Orleans, the judge decided this week.

A new trial is to be held. See article

A showdown loomed between the White House and congressional Republicans over authorising spending to keep the government running until December. The Republicans’ condition for passing a spending bill is to “defund” Obamacare, which is a vivid red line for the president.

When to listen

Dilma Rousseff, Brazil’s president, called off a state visit to Washington due next month, following revelations that the United States National Security Agency (NSA) had monitored her e-mails and phone calls and spied on Petrobras, the national oil company. She failed to obtain from Barack Obama the apology and assurances she sought that the NSA would not continue to spy on her government. See article


Mexico was battered by simultaneous tropical storms on both its coasts, killing at least 80 people and destroying 35,000 homes. Acapulco, a resort that has waned in popularity because of violent crime, was badly hit, stranding thousands of tourists there. See article

Brazil’s supreme court voted six to five to hear appeals against their sentences by senior figures in the ruling Workers’ Party convicted of corruption. The appeal could mean they will not face jail.

Colombia’s former president, álvaro Uribe, announced that he would run for the Senate in an election in March. Mr Uribe, who is barred from running again for the presidency, has become a bitter opponent of President Juan Manuel Santos’s effort to strike a peace deal with the FARC guerrillas.

Little indicators

Iran’s new president, Hassan Rohani, freed 11 prominent political prisoners and briefly unblocked access to Western social media. In a rare interview with American television Mr Rohani said Iran would never “seek weapons of mass destruction, including nuclear weapons” and that he had “full power and complete authority” to strike a nuclear deal. He is due to speak at the UN General Assembly in New York on September 24th. See article

Bahrain’s main opposition withdrew from talks with the government, following the arrest of a prominent dissident leader, Khalil Marzook, on terrorism charges.

The ruling party in Rwanda received three-quarters of the votes in parliamentary elections, giving it a majority big enough to change presidential term limits. That would allow Paul Kagame to extend his long rule. See article

A bit more exciting

In the week before Germany’s general election on September 22nd the centre-right and opposition centre-left parties were both polling around 44%. The leaders of the centre-right CDU and the centre-left SPD were said to be discreetly preparing for a “grand coalition” to form a government. See article Unions in Poland staged the country’s largest protests in years, increasing the pressure on Donald Tusk, the prime minister, whose party was recently shaken by a bout of infighting and resignations that has left his coalition with a wafer-thin majority of just two in parliament. See article

A sympathiser of Golden Dawn, the Greek far-right party, was suspected of stabbing and killing Pavlos Fyssas, a hip-hop artist. While police raided Golden Dawn offices the party’s spokesman denied in parliament that Golden Dawn had anything to do with the killing. Lawmakers booed in derision and protesters took to the streets. See article


In a televised address, Silvio Berlusconi, the former Italian prime minister, vowed to stay at the centre of politics, despite his expected expulsion from parliament. But the media tycoon made no mention of previous threats to bring down the coalition government of Enrico Letta.

Religious hatred

A court in India ordered the arrest of 16 local politicians for inciting religious violence in the northern state of Uttar Pradesh. Over 40 people died in clashes between Hindus and Muslims around the town of Muzaffarnagar. See article Abdul Quader Mollah, a senior member of Bangladesh’s largest Islamist party, was sentenced to death for war crimes committed during the 1971 war of independence. He had previously been sentenced to life in prison. See article Australia’s new prime minister, Tony Abbott, brought his policy on those seeking asylum into force: those arriving in Australia by boat will now be towed to Indonesia. He has also promised to scrap a tax on carbon emissions introduced by the previous government.

The most senior woman police officer in Afghanistan’ssouthern province of Helmand was shot dead by unidentified gunmen. A campaign of violence is being waged against female officials.

North Korea and South Korea reopened a joint factory complex at Kaesong, that the North closed amid tensions earlier this year. The warming in relations comes, however, as columns of steam were observed rising from North Korea’s decrepit nuclear complex at Yongbyon, causing speculation that the reactor there had been restarted. See article From the print edition: The world this week

The American Dream, RIP?

An economist asks provocative questions about the future of social mobility

COULD America survive the end of the American Dream? The idea is unthinkable, say political leaders of right and left. Yet it is predicted in “Average is Over”, a bracing new book by Tyler Cowen, an economist. Mr Cowen is no stranger to controversy. In 2011 he galvanised Washington with “The Great Stagnation”, in which he argued that America has used up the low-hanging fruit of free land, abundant labour and new technologies. His new book suggests that the disruptive effects of automation and ever-cheaper computer power have only just begun to be felt.

It describes a future largely stripped of middling jobs and broad prosperity. An elite 10-15% of Americans will have the brains and self-discipline to master tomorrow’s technology and extract profit from it, he speculates. They will enjoy great wealth and stimulating lives. Others will endure stagnant or even falling wages, as employers 5

measure their output with “oppressive precision”. Some will thrive as service-providers to the rich. A few will claw their way into the elite (cheap online education will be a great leveller), bolstering the idea of a “hyper-meritocracy” at work: this “will make it easier to ignore those left behind”.

Mr Cowen’s vision is neither warm nor fuzzy. In his future, mistakes and even mediocrity will be hard to hide: eg, an ever-expanding array of ratings will expose so-so doctors and also patients who do not take their medicines or otherwise spell trouble. Young men will struggle in a labour market that rewards conscientiousness over muscle. With incomes squeezed, many Americans will head to the sort of cheap, sun-baked sprawling exurbs that give the farmers’-market-and-bike-lanes set heartburn. Many will accept rotten public services in exchange for low taxes. This may sound a bit grim, but it reflects real-world trends: 60% of employers already check the credit ratings of job candidates; young male unemployment is high and migrants have been flooding to low-tax, low-service Texas for years.

The left is sure that inequality is a recipe for riots. Mr Cowen doubts it. The have-nots will be too engrossed in video games to light real petrol bombs. An ageing population will be rather conservative, he thinks. There will be lots of Tea-Party sorts among the economically left-behind. Aid for the poor will be slashed but benefits for the old preserved. He does not fear protectionism, as most jobs that can be sent overseas have already gone. He notes that the late 1960s, when society was in turmoil, was a golden age of income equality, while some highly unequal moments in history, including in medieval times, were rather stable.

Even if only a fraction of Mr Cowen’s vision comes to pass, he is too sanguine about the politics of polarisation. Inter-generational tensions fuelled 1960s unrest and would be back with a vengeance, this time in the form of economic competition for scarce resources. The Middle Ages were stable partly because peasants could not vote; an unhappy modern electorate, by contrast, would be prey to demagogues peddling simple solutions, from xenophobia to soak-the-rich taxes, or harsh, self-defeating crime policies. Yet Mr Cowen’s main point is plausible: gigantic shifts are under way, and they may be unstoppable.

Politicians are skittish about admitting this. Barack Obama calls America’s wealth gap “our great unfinished business”, describing a crisis of inequality decades in the making. Think of technology, he tells audiences, and how it has thinned the ranks of travel agents, bank clerks and other middle-class gateway jobs. At the same time, global competition has reduced workers’ bargaining power. People have “lost trust in the capacity of government to help them”, he sorrows. But then Mr Obama implies that political villainy is the real culprit. He accuses entrenched interests of working for years to spread a “great untruth”: that government intervention is either harmful or a plot to grab tax dollars from the squeezed middle and shower them on the undeserving poor. Politics risks becoming a “zero-sum game where a few do very well while struggling families of every race fight over a shrinking economic pie.”


Republicans are just as partisan. Senator Marco Rubio of Florida, a son of Cuban immigrants, likes to say that had he not been born in post-war America in an era of high social mobility, he would probably be a very opinionated bartender. At a “Defending the American Dream Summit” on August 30th he accused Mr Obama of smothering economic opportunity with a big-government nightmare of debts, “class-warfare” taxes, innovation-smothering regulation and over-generous welfare. While most are working harder than ever and barely keeping up, Mr Rubio growls, “some people” shun work because they can make almost as much from government benefits. In short, both sides never tire of explaining how the other is destroying the American Dream. Alas, neither can explain, convincingly, how to revive it.

What, Tyler, no revolt?

Asked about the limits of his power, Mr Obama mutters about “pushing back against the trends” squeezing middle America, rather than resolving them entirely. That, he argues, is better than the Republican right, who “want to accelerate” such trends.

For their part Republican leaders offer long-cherished shrink-the-government schemes, rebranded as plans to save the American Dream. They say that tax cuts and deregulation would trigger a private-sector investment boom. In truth, the links between investment and government policy are rarely so neat, and even such a boom might do little for middle-class wage stagnation.

Many voters remember a time when hard work was reliably rewarded with economic security. This was not really true in the 1950s and 60s if you were black or female, but the question still remains: what if Mr Cowen is right? What if the bottom 85% today are mostly doomed to stay there? In a country founded on hope, that would require something like a new social contract. Politicians cannot duck Mr Cowen’s conundrum for ever.


From the print edition: United States


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