Persisting

For many of us, who believe in the free movement of people, goods, capital, and ideas, who thus despair of political developments in 2016, and who thus worry about 2017 as, inter alia, the Trump Presidency begins, this writer recommends a read of the leading, year-end essay in The Economist's Holiday Double Issue, "The year of living dangerously". It's an antidote for despair. Moreover, it's an incentive to persist with liberal thought.

Here are some highlights of the essay:

- 2016 was a year of setbacks, not just regarding Brexit and the election of Donald Trump, but also regarding the implosion of Syria, left to its suffering, and regarding globalization, as it became a slur, replaced with nationalism and authoritarianism;

- It's no time to write the epitaph for liberalism; indeed, its claim to be the best way to offer dignity and continue to bring about prosperity and equity, as it did in the 19th century when relentless technological change threatened, and as it has since especially in the developing world, needs emphasis;

- illiberalism is popular; one hears it in calls to "take back control", from the mouths of autocrats promising to hold back and even reverse the cosmopolitan tide;

-rather than ruling via warfare, strife and bullying, governments should go on pursuing trade and treaties;

-today, more than ever, liberalism must offer an answer for the pessimists who believe wealth does not spread itself, new technologies only serve to destroy jobs, and other cultures are menacing. Liberals must advance new policies within the framework that technology and social needs will open up.

- Brexit and the Trump presidency will prove costly and harmful. But there is an undeniable demand for change, which is precisely what liberals, with their capacity exhibited over two centuries for reinvention through innovation, are poised to harness.

The Economics of Worry

The potential for an Italian banking crisis is front and center, again. One stat tells all: Italian banks' non-performing loans total 360 billion euros, equivalent to about one-third of the euro zone total of bad loans. It is a "brink-of-bankruptcy" story, unfolding against the backdrop of the multi-year stagnation of the Italian economy.

Mitigating the crisis hinges on the debate between those who insist private investors in Italian bank debt and shares should bear the bulk of losses (the view of the European Commission in Brussels, reiterated this week by Valdis Dombrovskis, the new European Commissioner for financial services), and others, like the Italian government, who want a Brussels bail-out utilizing taxpayer funds. Italian Prime Minister Renzi, who faced mass protests after his government imposed losses last year on bondholders of four small Italian banks, knows that a "bail-in" process (by which private investors bear the losses) this time around would surely cost him his political career. This is Greece again, but writ much larger.

If, over the next few months, Brussels faces both the beginning of Brexit (i.e., the invoking by the UK of Clause 50 of the Lisbon Treaty), and the collapse of the Italian banking system, it would not be unreasonable to suggest that such developments were signalling the start of an unravelling of the EU. This is a principal reason why global sovereign bond yields are not just increasingly low, but, extraordinarily, in many cases negative, as worried investors rush to safety (quick primer: bond yields drop as bond demand and hence their prices rise), even if they need to pay a bit for such safety.

Sub Zero

Last month, the Japanese central bank (which sets monetary policy in the world's third-largest economy) followed what other central banks in Switzerland, Sweden, Denmark and the euro area had already done - establishing a negative interest rate. Just under a quarter of the world's GDP now originates in countries with negative interest rates - seems the lower boundary for rates is no longer, as has been assumed, zero.

Technically, this means that the Bank of Japan levied a 0.1% charge on a portion of the reserves that commercial banks deposit with it - a remarkable move given that such reserves in all countries have normally earned a positive rate of return. The idea - in Japan and elsewhere -  is to spur banks to lend (growth in bank credit in the rich word has been dismal), rather than hold reserves,  thereby boosting aggregate demand and inflation. Despite years of low - and falling - interest rates, economic recoveries are at best weak everywhere, and inflation is so persistently low as to raise the specter of deflation. Bond markets reflect such concern: in Germany, government-bond yields are now negative for terms of up to eight years, and up to ten years in Switzerland; in America, the 10-year government-bond yield dropped below 2% - despite the Federal Reserve raising its federal-funds rate in mid-December, for the first time in seven years.

Negative interest rates are not good for banks. In any financial environment, deposit rates cannot be lowered as far or as fast as lending rates; especially in an already low-rate environment,  the fear is that at some point savers decide to switch to cash.  Negative interest rates signal that indeed they should (though deposits in Europe, where rates have been slightly negative for over a year, have so far been stable). This margin squeeze impairs banks' profits and balance sheets - evident now particularly in Europe, where commercial bank solvency is once again in question, and in America, where bank shares have been under pressure since the beginning of this year.

A negative-rate world is extraordinary. To grasp the concept, think of an economy in which, for example, manufacturers pay their suppliers well before they have sold their finished products, and ask their own customers to pay slowly; where the IRS asks citizens to hold off paying their taxes; where a penalty is charged by credit card companies to card-holders paying on-time; or where buying a car for cash is more expensive than financing it.  All of this is possible, if negative interest rates persist and spread.

Prioritizing Goals

In their annual letter at the beginning of this year, Bill and Melinda Gates wrote that, “The lives of people in poor countries will improve faster in the next 15 years than at any other time in history. And their lives will improve more than anyone else’s". They went on, citing expectations regarding infant mortality rates (dropping by half), polio and some other deadly diseases (being eradicated), agriculture (Africa achieving food self-sufficiency), individual financial security (spurred by the use of mobile devices to open first-time bank accounts), and a jump in educational opportunities for boys and especially girls (accessing inexpensive on-line courses, again with mobile devices).

The Gateses have stepped forward with their considerable personal resources to help bring such predictions to fruition. And in a broader context this past September, world leaders agreed to a United Nations' initiative establishing a set of seventeen "Sustainable Development Goals" (SDGs) for 2030 (replacing their previous eight Millennium Development Goals), covering everything from climate change, to clean water and sanitation, to inequality. 

Ban Ki-Moon, the UN secretary-general, is a big fan of the sweeping proposals, including all of the 169 sub-targets associated with the 17 SDGs. Others, no less committed, nonetheless feel that focus is required if further progress is to be made over the next 15 years. Notable among the latter is Bjorn Lomborg, a Danish economist, who a decade ago established the Copenhagen Consensus. According to Lomborg, "having 169 targets is like having no targets at all". Now assessing the best (cheapest) ways to utilize the $2.5 trillion in international development assistance expected over the years to 2030, his Post-2015 Consensus has assembled no less than 60 teams of economists, plus representatives from the UN, NGOs and the private sector, to evaluate the UN SDGs, so as to produce a short list of targets with the biggest bang for the buck. Here's an example: to lower deaths from air pollution, which kills an estimated 7 million people a year, shifting 1.4 billion people from traditional cooking methods to stoves with outdoor vents  could save half a million lives each year, an economic benefit to the world of $10 for every $1 spent. Using entirely smoke-free stoves would lead to an even larger drop in deaths, but at a much higher cost, generating a benefit of only $2 per dollar spent.

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To this writer (who has advocated the benefits of free international trade ever since studying Ricardo, Smith, and Mill at the University of Strathclyde), perhaps the most interesting finding from Lomborg's group is that lowering barriers to trade would achieve, by far, the highest per dollar benefit ($2,011) of all the UN goals (see chart). Accordingly, Lomborg argues for new emphasis on completing the treaty currently being negotiated at the World Trade Organization, as well as the the free-trade deal involving China, Japan, South Korea and the ASEAN countries. Next, and well down, on the biggest-benefit list is providing contraception and other reproductive-health services, costing some $3.6 billion yet producing a benefit worth $432 billion annually, or $120 per dollar spent. Stopping tax evasion (which costs 20 sub-Saharan governments about 10% of GDP annually) would also be effective, at $49 per dollar spent. On the other hand, for example, the UN's call for "data for development" as part of the SDG process would be very expensive, at some $1.5 billion per SDG target, that is, $253 billion for all 169 targets, over 10% of total international aid. And so goes the prioritizing....

The year 2015 is regarded as a milestone, as it marks, on the one hand, the end of the 15-year time frame during which the world has been guided by the eight Millennium Development Goals, and on the other hand, the beginning of a new development agenda known as the sustainable development goals (SDGs). In launching these new goals, Ban Ki-Moon noted the world is presented with a "once-in-a-generation opportunity to advance prosperity, secure the planet's sustainability for future generations, and unlock resources for investments in education, health, equitable growth and sustainable production and consumption".  The trick will be to turn such aspirations into practical steps and strategies. Commitment - and focus - will be required.

A Light Still Shining

There is a light shining in the Arab world, in tiny Tunisia, somewhat more brightly after elections this past week, though still at risk of flickering, or being extinguished.

Tunisians went to the polls this past Sunday to elect members of their national parliament - the second such vote since January 2011, when they brought down the 23-year rule of their autocratic leader, Zine el-Abidine Ben Ali, and sparked the uprisings across much of the Arab World known as the Arab Spring. Unlike in virtually every other every other Arab state today, however - and in particular contrast to its turbulent neighbors, Egypt and Libya - this election suggests that "Spring" may still be an appropriate description of Tunisian society, and its politics.

Some 100 political parties were vying for the 217 seats in the National Assembly. Two parties did well, but swapped places: the Ennahda party, the first Arab Spring Islamist movement to secure power in a free election, and the ruling party in the coalition government since winning nearly 40% of the vote three years ago, won 68 seats; it has conceded defeat to its main secular rival, the Nidaa Tounes party, which won 83 seats. Neither count, of course, constitutes an outright win, so another coalition government is certain. But before a new government is installed, parties must wait for a president to be chosen from 27 candidates in November's first- round and December final elections.

What is remarkable here is that the next ruling coalition government in Tunisia could be stable and effective. Tunisians have a relatively strong civil society, with a long tradition of liberal education and women's and minorities' rights A new Constitution, which allowed for this parliamentary election, is already in place. Significantly, the Ennahda party, is a disciplined but moderate Islamist group, and is not even advancing a presidential candidate, mitigating fears of secular Tunisians. Underlining its moderation, the party has learned a clear lesson from the downfall of former Egyptian President Morsi and his far more ideological Muslim Brotherhood backers. The Nidaa Tounes party counts among its members former Ben Ali-era figures who are described as honest and competent technocrats, capable of running the country, and focused on what most Tunisians now describe as their most pressing concerns, economic development, unemployment, and the high cost of living.

Much, however, could still go wrong as Tunisia continues its transition to democracy. Tunisians remain uneasy, and especially in regions away from their Mediterranean coast, struggle to get by. Among university graduates, nearly half are unemployed; an estimated 3,000 young Tunisians have joined jihadists in Iraq and Syria. Fiscal austerity measures are urgently required, including the reform of the subsidy system requested by the IMF. There is a risk that old-line secularists may still agitate to eliminate the Islamists altogether from politics. And the think-tank, International Crisis Group, warns there is a danger of criminal and radical jihad networks merging between the thinly-populated borders with Libya and Algeria. Western governments, evidently confounded by events across the Middle East, have a clear opportunity to ensure that the region's one bright light - Tunisia's emerging democracy - does not fade and implode.