New-Model Development Finance

Anne-Marie Slaughter

MAY 22, 2015

Development financing

WASHINGTON, DC – China’s success in establishing the Asian Infrastructure Investment Bank has been widely regarded as a diplomatic fiasco for the United States. After discouraging all US allies from joining the AIIB, President Barack Obama’s administration watched as Great Britain led a raft of Western European countries, followed by Australia and South Korea, into doing just that.
Worse, the Obama administration found itself in the position of trying to block Chinese efforts to create a regional financial institution after the US itself was unable to deliver on promises to give China and other major emerging economies a greater say in the governance of the International Monetary Fund. The administration had pushed European countries to accept less representation on the IMF Board and increase China’s voting share from 3.65% to 6.07%, only to prove unable to win the support of the US Congress. Once again, Obama found himself stymied abroad because of political paralysis at home.
From a geopolitical perspective, China’s AIIB initiative is a bold and successful gambit in what Ely Ratner, a senior fellow at the Center for a New American Security, describes as “an institutional competition for global governance that has now officially begun.” China will control half of the voting shares in the AIIB, initially capitalized at $1 billion. Unless the Western victors of World War II can update the rules and institutions that underpinned the post-war international order, they will find themselves in a world with multiple competing regional orders and even dueling multilateral institutions.
From the point of view of developing countries in need of capital, competing banks probably look like a good thing. Developing-country governments will be only too pleased to borrow without the pesky conditions that the World Bank and existing regional development banks typically attach to their loans. And, as a region, East Asia will now get more of the roughly $8 trillion that the Asian Development Bank has estimated that the region will need to keep growing through 2020.
But what about the impact on actual development, the likelihood that individual citizens of poor countries will live richer, healthier, more educated lives? World Bank conditionality often includes provisions on human rights and environmental protections that make it more difficult for governments bent on growth at any cost to run roughshod over their people. Competition is good, but unregulated competition typically ends up in a race to the bottom.
China’s establishment of the AIIB is the latest sign of a broader move away from the view that aid to developing countries is best provided in the form of massive government-to-government transfers. Power and wealth are not only diffusing across the international system, but also within states, such that corporations, foundations, wealthy individuals, private investment funds, civil-society groups, and most recently, municipal governments all have a role to play in development.
Consider the second Quadrennial Diplomacy and Development Review, released last month by the State Department and the US Agency for International Development. The QDDR emphasizes a “new model of development,” one based on the recognition “that the United States is one of many actors, and that countries require investments from multiple sources to achieve sustained and inclusive economic growth.” Initiatives such as Feed the Future, the US Global Development Lab, and Power Africa combine “local ownership, private investment, innovation, multi-stakeholder partnerships, and mutual accountability.”
This new model moves beyond the mantra of “public-private partnership.” It genuinely leverages multiple sources of money and expertise in broad coalitions pursuing the same big goal.
Power Africa, for example, includes six US government agencies: the Overseas Private Investment Corporation, the US Export-Import Bank, the US Trade and Development Corporation, the Millennium Challenge Corporation, and the US African Development Foundation. Together, they will commit more than $7 billion over five years in financing, trade credits, insurance, small business grants, and direct government support to the energy sector in six partner countries. Those investments will leverage billions in private-sector commitments, starting with more than $9 billion from a range of companies, including General Electric.
Power Africa takes a “transaction-centered approach,” creating teams to align incentives among “host governments, the private sector, and donors.” Unlike big government-to-government transfers, which can often end up in the pockets of officials, the point is to ensure that deals actually get done and investments flow to their intended destination.
This pragmatic focus on results is equally evident in the QDDR’s emphasis on working with mayors around the world on issues like climate change. Targeting government officials with the incentives and ability to make a difference in regulating emissions on the ground yields results much more quickly than negotiations on an international treaty.
Skeptics will say that the US is simply making a virtue of necessity. The federal government no longer has billions of dollars to dole out to foreign governments, while China is far more centralized and less beholden to its taxpayers. China and its partners in the AIIB can thus build the big things – roads, bridges, dams, railroads and ports – that unquestionably power an economy and that citizens notice, but that the US, and for that matter the World Bank, no longer funds. The days of the Marshall Plan are long gone.
That criticism contains some truth. But, over the longer term, the new US model of development is actually far more resilient and sustainable than the old government-to-government model.

Only societies with thriving sectors free of government control can participate in these broad coalitions of public, private, and civic actors. Corporations, foundations, and civil-society groups, in turn, are much more likely to forge lasting ties with their counterparts in local communities in the host countries – relationships that will survive changes of government and fiscal turbulence.
Overall, the AIIB is a positive development. More money aimed at helping poor countries become middle-income countries and at middle-income countries to help them provide transport, energy, and communication for their people is a good thing. But the Asian way is not the only way.


Financial crime

Justice, interrupted

More wrongdoing at banks, more swingeing fines, no prosecutions

May 23rd 2015

THE scene was familiar: regulators meting out vast penalties to banks, scathing statements about gross misconduct, yet no individuals charged with any crimes and some confusion as to what exactly the banks were admitting to and what effect that would have. On May 20th a consortium of American and British government agencies announced settlements with six international banks regarding claims that they had manipulated currency markets. The six—Bank of America, Barclays, Citigroup, JPMorgan Chase, Royal Bank of Scotland (RBS), and UBS—agreed to pay $5.6 billion in penalties. All but UBS also admitted criminal behaviour, although the significance of that is unclear.

The settlement was the culmination of a long investigation into the actions of perhaps 20 employees of the six banks, who referred to themselves as the “cartel”. Between 2007 and 2013 they used coded communication in an online chat room to help one another make money, especially by rigging the two daily “fixes” of the exchange rate between the dollar and the euro, violating rules on market manipulation and collusion. As one of them wrote in a chat session, “If you aint [sic] cheating, you aint trying.”

UBS was spared an admission of guilt because it was the first bank to report the suspicious conduct to the authorities. But this is its second “non-prosecution agreement”: three years ago it paid $1.2 billion to American authorities looking into claims that it had manipulated LIBOR, a benchmark interest rate. That deal was dependent on UBS not doing anything else wrong. Its conduct in the currency case has prompted the DoJ to tear up the LIBOR deal. The main consequence is yet another fine, of $203m, small beer compared to the $87 billion in similar penalties big banks paid last year (see chart). UBS is also admitting to fraud tied to LIBOR, but that is apparently meaningless: it said the deal “will have no financial impact” on its results.

Admitting to criminal behaviour in America was once a guarantee of bankruptcy. That, at any rate, was the fate of big names such as Drexel Burnham Lambert, an investment bank, and Arthur Andersen, an accountancy firm, which had to shut up shop after losing both operating licences and clients that were restricted from doing business with felons. Yet the Department of Justice and other regulators seem to have magicked this consequence away.

Credit Suisse, another multinational bank, admitted to criminal charges related to its clients’ tax evasion last year, but received waivers from the SEC, among others, that allowed it to stay in business. Loretta Lynch, the attorney general, claimed it was up to other regulators to decide whether to do the same this time. “It is thought that the required waivers have been obtained but this is not certain,” wrote Richard Bove of Rafferty Capital, an investment bank, reflecting the confusion.

Private lawsuits will follow. The foreign-exchange market is vast, with $500 billion traded daily in the dollar-euro market. The manipulation may have been transient, but the number of people affected is huge. A group of investors has already announced a $394m deal with Citigroup. And so the backroom deals continue.

Review & Outlook

Poseidon Over the China Sea

The U.S. is right to resist China’s new territorial claims.

May 22, 2015 6:23 p.m. ET

A handout provided by the U.S. Navy shows a crewman aboard a P-8A Poseidon surveillance aircraft pointing at Chinese construction on one of the disputed Spratly Islands.                                       

A handout provided by the U.S. Navy shows a crewman aboard a P-8A Poseidon surveillance aircraft pointing at Chinese construction on one of the disputed Spratly Islands. Photo: REUTERS/U.S. Navy

The U.S. Navy flew a P-8 Poseidon surveillance plane this week over the South China Sea’s Spratly Islands, where Beijing is building military bases atop reefs and rocks claimed by several of its neighbors. A CNN team invited along for the mission reported that China’s military repeatedly tried to order the U.S. plane away. “This is the Chinese navy,” it radioed in English. “Please go away . . . to avoid misunderstanding.” The U.S. crew responded each time that it was flying through international airspace.

American Enterprise Institute Scholar Michael Auslin on the Secretary of State’s latest diplomatic efforts. Plus, feminists call for a unified Korea. Photo credit: Associated Press.

By flying over the Spratlys, the U.S. provided its most forceful rejection to date of Beijing’s claim to sovereignty over an area that lies more than 600 miles from China’s coast. It also signaled that Washington would defend the freedom of the seas and the maritime rights of its partners.

And not a moment too soon. In recent years Beijing has expelled Philippine boats from certain fisheries, cut the cables of Vietnamese oil-exploration ships, and intercepted U.S. military vessels.

Chinese dredgers have nearly doubled the total landmass of the Spratlys—creating more than 2,000 new acres, or some 1,500 football fields—in an attempt to extend Chinese military reach and its political claims.

For years diplomats got nowhere politely asking Beijing to stop. In 2012 the Obama Administration did not send naval forces to stop Chinese civilian and coast guard ships from banishing Filipinos from Scarborough Shoal, a rich fishing area north of the Spratlys and inside the Philippines’ 200-mile exclusive economic zone. The episode was barely noticed in the U.S. but raised alarms throughout Asia.

To its credit, the Administration has since toughened its response. After China declared an air-defense identification zone over Japan’s Senkaku Islands, a pair of B-52 bombers soon overflew the area. But U.S. officials claimed that was a previously scheduled mission unrelated to China’s gambit.

This week’s overflight, by contrast, was an explicit response to China’s island-building, with the military releasing once-classified surveillance footage and bringing the media along for the ride.

In March a bipartisan group of Senate leaders demanded briefings on “specific actions the United States can take to slow down or stop China’s reclamation activities,” including possible military measures, changes in U.S.-China relations and expanded cooperation with Asian allies and partners.

U.S. officials also say they are considering sending naval patrols past China’s artificial islands to reinforce that the waters around the Spratlys aren’t China’s to control.

That would be the right move. The longer the U.S. fails to contest Beijing’s South China Sea claims, the more aggressive China will become in asserting those claims—and perhaps the more willing it will be to fight for them. The time to resist Beijing’s maritime pretensions is now.

A World of Underinvestment

Michael Spence

MAY 20, 2015


MILAN – When World War II ended 70 years ago, much of the world – including industrialized Europe, Japan, and other countries that had been occupied – was left geopolitically riven and burdened by heavy sovereign debt, with many major economies in ruins. One might have expected a long period of limited international cooperation, slow growth, high unemployment, and extreme privation, owing to countries’ limited capacity to finance their huge investment needs. But that is not what happened.
Instead, world leaders adopted a long-term perspective. They recognized that their countries’ debt-reduction prospects depended on nominal economic growth, and that their economic-growth prospects – not to mention continued peace – depended on a worldwide recovery. So they used – and even stretched – their balance sheets for investment, while opening themselves up to international trade, thereby helping to restore demand. The United States – which faced considerable public debt, but had lost little in the way of physical assets – naturally assumed a leadership role in this process.
Two features of the post-war economic recovery are striking. First, countries did not view their sovereign debt as a binding constraint, and instead pursued investment and potential growth.

Second, they cooperated with one another on multiple fronts, and the countries with the strongest balance sheets bolstered investment elsewhere, crowding in private investment. The onset of the Cold War may have encouraged this approach. In any case, it was not every country for itself.
Today’s global economy bears striking similarities to the immediate post-war period: high unemployment, high and rising debt levels, and a global shortage of aggregate demand are constraining growth and generating deflationary pressures. And now, as then, the level and quality of investment have been consistently inadequate, with public spending on tangible and intangible capital – a critical factor in long-term growth – well below optimal levels for some time.
Of course, there are also new challenges. The dynamics of income distribution have shifted adversely in recent decades, impeding consensus on economic policy. And aging populations – a result of rising longevity and declining fertility – are putting pressure on public finances.
Nonetheless, the ingredients of an effective strategy to spur economic growth and employment are similar: available balance sheets (sovereign and private) should be used to generate additional demand and boost public investment, even if it results in greater leverage. Recent IMF research suggests that, given excess capacity, governments would probably benefit from substantial short-run multipliers. More important, the focus on investment would improve prospects for long-term sustainable growth, which would enable governments and households to pursue responsible deleveraging.
Likewise, international cooperation is just as critical to success today as it was 70 years ago.

Because the balance sheets (public, quasi-public, and private) with the capacity to invest are not uniformly distributed around the world, a determined global effort – which includes an important role for multilateral financial institutions – is needed to clear clogged intermediation channels.
There is plenty of incentive for countries to collaborate, rather than using trade, finance, monetary policy, public-sector purchasing, tax policy, or other levers to undermine one another. After all, given the connectedness that characterizes today’s globalized financial and economic systems, a full recovery anywhere is virtually impossible without a broad-based recovery nearly everywhere.
Yet, for the most part, limited cooperation has been the world’s chosen course in recent years, with countries believing not only that they must fend for themselves, but also that their debt levels impose a hard constraint on growth-generating investment. The resulting underinvestment and depreciation of the global economy’s asset base are suppressing productivity growth and thus undermining sustainable recoveries.
In the absence of a vigorous international re-investment program, monetary policy is being used to prop up growth. But monetary policy typically focuses on domestic recovery. And, though unconventional measures have reduced financial instability, their effectiveness in countering widespread deflationary pressures or restoring growth remains dubious.
Meanwhile, savers are being repressed, asset prices distorted, and incentives to maintain or even increase leverage enhanced. Competitive devaluations, even if they are not policymakers’ stated objectives, are becoming increasingly tempting – though they will not solve the aggregate-demand problem.
This is not to say that sudden “normalization” of monetary policy is a good idea. But, if large-scale investment and reform programs were initiated as complements to unconventional monetary-policy measures, the economy could move onto a more resilient growth path.
Despite its obvious benefits, such a coordinated international approach remains elusive.

Though trade and investment agreements are being negotiated, they are increasingly regional in scope. Meanwhile, the multilateral trade system is fragmenting, along with the consensus that created it.
Given the level of interconnectedness and interdependence that characterizes today’s global economy, the reluctance to cooperate is difficult to comprehend. One problem seems to be conditionality, with countries unwilling to commit to complementary fiscal and structural reforms.
This is especially evident in Europe, where it is argued, with some justification, that, without such reforms, growth will remain anemic, sustaining or even exacerbating fiscal constraints.
But if conditionality is so important, why didn’t it prevent cooperation 70 years ago? Perhaps the idea that severely damaged economies, with limited prospects for independent recoveries, would pass up the opportunity that international cooperation presented was implausible.

Maybe it still is. If so, creating a similar opportunity today could change the incentives, trigger the required complementary reforms, and put the global economy on course to a stronger long-term recovery.

Barron's Cover

Robo Advisors Take On Wall Street

Technology is transforming the insular world of financial advice. That’s good news for investors.

By Alexander Eule 

May 23, 2015

Financial advisors have always enjoyed the fanciest of digs; but their plush offices and high-end art are being upended by software engineers sitting at Ikea desks. Silicon Valley swagger is testing Wall Street arrogance in an attempt to transform the insular world of financial advice.
Software can’t replicate a relationship, but it’s a good alternative for many investors. Illustration: Mark Fredrickson for Barron's
It’s a welcome change—though not without its problems. These so-called robo advisors use Websites backed by sophisticated software to put investors into asset allocation plans that meet their various financial goals.
Granted, the best financial advisors don’t just manage investments: They build relationships and help their clients negotiate all of life’s financial and emotional challenges. But the best advisors also don’t typically take on clients with less than $1 million in investible assets—and often require far more. The robos are bringing advice to the masses, for a fraction of what traditional advisors charge.
The change is being driven by technology, but it’s cultural in its roots. The advisory business is still relatively young; it’s grown rapidly, like so many other industries, on the backs of the baby boomers.

The boomers, the first generation for whom pensions weren’t a sure thing, embraced financial advisors. They wanted credentialed professionals who inspired confidence, which often came packaged with concierge-type services, and fees set at 1% of assets. Their kids, today’s millennials, have grown up understanding the importance of financial advice. But instead of human advisors, young investors are turning to software that provides the simplicity and speed they value.
THE INSURGENCY BEGAN in 2010, when Jon Stein, a 30-year-old entrepreneur launched Betterment at TechCrunch Disrupt, the prominent technology confab. “We were the voice in the wilderness,” says Stein, who remains Betterment’s CEO. It took New York–based Betterment a year to collect its first $10 million in assets; it now manages $2.2 billion for 85,000 clients. Its biggest rival emerged in late 2011 when Wealthfront launched. The Palo Alto, Calif., rival set its sights squarely on young Silicon Valley professionals and has since amassed $2.3 billion in 27,000 accounts.
Wealthfront and Betterment aim to keep it simple; both Websites ask users just a handful of questions about their goals, risk tolerance, and investment horizon. From there, algorithms calculate a recommended asset allocation. After funding the account with an online transfer, a client’s assets are automatically split between several exchange-traded funds. (See the graphic.) The process takes less than 10 minutes and can be done with zero human interaction. Asset allocations are regularly rebalanced and both firms promise tax-loss harvesting, until now the domain of higher-end accounts.
“In general there’s been a lack of imagination about how far technology can go in helping investors,” says Wealthfront CEO Adam Nash. “In the next 10 years, everyone will be using some form of automated investment service. This is like e-commerce in the ’90s.”
Betterment and Wealthfront have sliding fee scales, but they essentially charge one-quarter of a percent for the service. That amounts to $19 a month for a $100,000 account, or “less than a night at the movies,” Wealthfront advertises. Wealthfront will manage the first $10,000 for free but has a $5,000 minimum. Betterment has no minimum but charges 0.35% for the first $10,000 invested.
Betterment says its assets are growing 400% a year, with each month stronger than the last. “We just keep accelerating, and I don’t see any reason that’s going to slow down,” Stein says.
The low fees mean revenues are also low—at least, for now. Neither of the start-ups disclose financial information, but based on an advisory fee of 0.25%, neither firm generated much more than $5 million in revenue over the last 12 months. Venture capitalists are nonetheless eager to invest in the businesses. Wealthfront and Betterment have raised $130 million and $105 million, respectively.
THERE’S BEEN a lot of Sturm und Drang around the notion of these firms encroaching on established advisors’ territory. That’s not likely. With their all-ETF portfolios, bare-bones advice, and low fees and account minimums, Betterment and Wealthfront are aimed at the smaller investor new to the world of financial advice. Investors with more money or complicated financial lives will still seek out traditional advisors. While Wealthfront and Betterment have $5 billion in assets combined, 55 of the top 100 advisors in Barron’s latest ranking each have $5 billion or more under management.
Perhaps that’s why the nation’s largest wealth managers, Morgan Stanley and Merrill Lynch, seem nonplussed when asked about the influence of robo advisors. Not only did the two firms decline to speak about the robo phenomenon, neither could even muster a comment on how the advisory business might look different in 10 years.
So we’ll tell you: Morgan Stanley, Merrill Lynch, UBS, and their ilk will still cater to the uber-wealthy, where most of their profits already exist. But every advisor—from the powerhouse firms to the small independents—will be forced to justify their fees, which typically run 1% of assets under management. “We used to get paid to be toll keepers on a highway that consumers couldn’t navigate,” says Steve Lockshin, who founded Convergent Wealth Advisors, an independent advisory, in 1994. He’s now an investor in Betterment and a founder of AdvicePeriod, a full-service financial planning firm. “Now highways have been open for very little cost or free but advisors still want to charge a toll.”
The differentiator, advisors say, is financial planning, the kind of customized advice that computers struggle to provide.
“If you’re with a robo advisor, are you going to put in there that you have a special-needs child?” asks Marvin McIntyre, a longtime Washington, D.C., advisor, now with Morgan Stanley, who has been ranked on Barron’s list of Top 100 Advisors since it began in 2004. “Are you going to put in there that you need to protect these assets because your daughter married someone you’re not comfortable with?”
Ron Vinder is a UBS advisor who has also frequently been included in Barron’s annual ranking. For years, he has been building client portfolios using just ETFs. In that sense, his portfolios look like the ones built by robo advisors. But Vinder says security selection and asset allocation are a small part of his job. “I’m talking about asset allocation for maybe five minutes of my meeting,” Vinder says. “Most of the meeting with clients is talking about estate plans, education plans, whether to buy or sell a company, how to give more money to the kids.”
Fund giant Vanguard has researched what it calls “advisor’s alpha” for 14 years, and has found that the standard 1% of assets that many advisors charge is low compared with the potential benefits that arise from a human advisor., which can add 3% to a client’s annual return. Half of the overall effect comes from what Vanguard calls “behavioral coaching”—basically, stopping clients from making bad decisions.
TECHNOLOGY IS TURNING asset allocation models into a commodity service, which could allow many firms—not just Betterment and Wealthfront—to profitably serve the masses.
In promoting his company, Nash has frequently referred to Wealthfront as a new kind of Charles Schwab (ticker: SCHW). Forty years ago, it was Schwab that disrupted the financial services world, bringing discount brokerage services to young baby boomers. Nash sees his firm doing something similar for the new wave of millennial investors, though Schwab is not yet willing to cede the innovation mantle.
This spring, Charles Schwab launched its own automated platform, called Intelligent Portfolios.
Schwab’s established presence gives it a leg up: It amassed $1.5 billion in the first six weeks, primarily from existing customers. That’s already two-thirds of what Betterment and Wealthfront each have under management.
Schwab’s massive scale allows it to offer the robo service without a management fee; investors pay only for the cost of ETFs, many of which are Schwab funds. “This is an evolution, not a revolution for us,” says Naureen Hassan, Schwab’s executive vice president for investor services segments and platforms.
There’s no free lunch, of course. Schwab’s portfolios are costly in other ways. The firm mandates that all portfolios have at least 6% in cash at all times, its most conservative portfolios can have as much as 30%—an unusual construction for an investment portfolio. Schwab claims that cash is a necessary ballast. Fair enough. But the parent company also profits by depositing the cash at its banking subsidiary.
Wealthfront and Betterment are flattered by the imitation, but the start-ups contend that the legacy players are hampered by outdated technology and old-fashioned thinking. “We’ve built from the ground up,” says Betterment’s Stein, adding that Schwab’s product is “bolted together.”
It certainly seems that way. Schwab’s robo product feels like it was created for the Web of a decade ago. It lacks the polish and modern design of Betterment and Wealthfront, and its attempts at simplicity feel more like limitations. “I don’t envy them,” Stein says of Schwab’s attempts to remake its consumer-facing Websites. “Legacy code is incredibly expensive to deal with.” Stein notes that Betterment has worked hard to surface only important details, but the site allows impressive customization under the hood.
The technology the robos boast about isn’t just about a slick Website and asset-allocation modeling. Both Betterment and Wealthfront say they can automatically sell securities after a selloff to capture a loss, while buying a similar ETF, so asset allocation stays unchanged. Wealthfront says that its tax-loss harvesting can improve returns by one percentage point annually, even more if clients allow Wealthfront to directly buy all the stocks in the S&P 500, instead of using an index.
But Vanguard senior investment strategist Francis Kinniry says the robos are “trying too hard to validate” even their low fees. He’s complimentary of the robos’ efforts and says he would recommend an automated service to his 18-year-old son. But: “I haven’t found anyone in the financial community who agrees with their tax-loss harvesting and self-indexing.”
VANGUARD IS STRIKING its own middle ground. Earlier this month, the firm officially launched its own new retail service that’s part robo and part traditional advisor. The hybrid service, called Personal Advisor Services, carries a fee of 0.3% and a minimum initial investment of $50,000—a tenth of the firm’s prior threshold for personal advice. Thanks to a lengthy pilot program and the shifting of some existing advisory client assets, Vanguard has more than $17 billion in its new product, $7 billion of which is new money.
The service features a robo-type Web interface, but an advisor controls all activity. It’s a role the firm likens to an “emotional circuit breaker,” forcing investors to stick to preset goals and asset allocations. “This is more akin to a traditional advisor relationship with a heavy tech element,” says Karin Risi, who heads Vanguard’s retail investor division.
Vanguard is clearly thinking about how their customers will react in the next stock market correction—an environment the robos haven’t faced yet. “It’s a lot easier to renege on a machine than someone you’ve made a personal bond with,” Kinniry says. He likens the situation to scheduling a workout with a friend. “It causes me great pain to cancel on my running partner,” he says. “It’s a lot easier to turn the Fitbit off.”
THE ADVISORY BUSINESS is still a young one, and this disruption is even younger. Betterment and Wealthfront don’t have much of a track record—Barron’s requires advisors have at least seven years to even be a contender for our rankings.
Wealthfront and Betterment hope to make up for their inexperience by relying on some of the best academic work to create their portfolios. Wealthfront CEO Nash spends a lot of time talking about the “efficient frontier,” for instance. That’s the concept introduced by Nobel Prize-winning economist Harry Markowitz that refers to structuring a portfolio’s asset mix to maximize return with the least amount of risk. For an aggressive 30-something investor with $100,000 in investible assets, that leads to a six-ETF allocation at Wealthfront, with 95% stocks and 5% in bonds. Betterment and Schwab’s algorithms lead to more products in the portfolios, 10 and 15 funds, respectively.
In the past, those complex portfolios would have drawn criticisms because of the transaction costs. That’s no longer a concern with the robos, which offer unlimited trades. “Transaction costs have gone to zero, so you think about investing in a different way,” Betterment CEO Stein says. For instance, “We’ll take a $100 deposit and divide that across 12 ETFs. You wouldn’t do that in a world where you have transaction cost in each of those trades.”
But there’s still a question of efficacy. There’s significant overlap in terms of the stocks held in the various ETFs in the Betterment and Schwab portfolios. Spreading the money around too much doesn’t help, either. While the efficient frontier makes theoretical sense, it’s hard to see how a 2% allocation to anything will move the needle, or why a $10,000 portfolio needs such fine parsing.
That’s why Vanguard—no stranger to rigorous academic research—puts the same young, aggressive investor in just two funds, a total-market U.S. stock fund and its international counterpart. Vanguard, of course, isn’t a start-up trying to promote a groundbreaking service. No matter what they say about the need for diversity or the value of the efficient frontier, Betterment and Wealthfront simply couldn’t launch a firm that offered a two-fund solution.
THE DEMOCRATIZATION OF ADVICE is a noble one, and the appeal of an easy-to-open account with a full investment plan will no doubt succeed despite its obstacles. Silicon Valley is leading the way, but it’s still Wall Street that holds the cards. “We can do this in a far more scalable way that delivers value to investors,” Schwab’s Hassan says. “It’s all backed by a company with 40 years of stability and proven experience.”
Nash argues that Schwab’s experience has become a liability not an asset. “I think that frankly most investors in their 20s and 30s are not happy with the status quo,” Nash says. “They’re not happy with pricing gimmicks. A lot of the traditional brands are increasingly damaged. Most of our clients choose Wealthfront because they’re looking for something different.”

May 22, 2015, 10:53 AM ET

Inequality Hurts Growth, But How?

By Greg Ip..

Students study math at the Ridings Federation Winterbourne International Academy in South Gloucestershire, England, in February.
It’s an age-old tradeoff in economics: Should a country narrow the gap between rich and poor if it also hurts investment and growth?

A major new study by the Organization for Economic Cooperation and Development raises the tantalizing prospect that no such tradeoff is necessary: Growing inequality may actually hurt growth.

If so, then policies that close the income gap may actually help rather than hurt the broader economy.

It’s an intriguing finding, but one with a caveat. The study is better at showing that inequality hurts growth than at explaining why. That means policy makers who want to use taxes and social spending to close the income gap cannot assume they’ll help the economy in the process.

In theory, inequality has an ambiguous relationship with overall economic prosperity. The allure of getting rich is an important spur to innovation, educational attainment and hard work. So some inequality is necessary for economic growth. But under some circumstances, it may do the opposite: It can leave the poor incapable of investing in their own skills and health, encourage them to borrow too much, which brings on financial crises, and lead to social unrest and support for laws and regulations that undermine capitalism.

In trying to figure out which effects predominate, economists have come up with conflicting answers. In 2000, Robert Barro of Harvard University found  that more inequality led to lower growth in poor countries, but higher growth in rich countries.

The OECD disagrees. It sifts through 30 years of data from its predominantly rich member countries and finds that when the “Gini coefficient,” a popular measure of inequality (a Gini of 0 means everyone has exactly the same income; a Gini of 1 means one person gets all the income) goes up, growth declines.

Is that because inequality hurts growth, or vice versa? The OECD uses a statistical test to conclude it’s the former. Refining the relationship, the study finds that higher inequality has a significant impact on relative educational attainment among different income classes. As inequality goes up, the poorest 40% of the population get fewer skills and lower quality education. For example, numeracy among lower-income families declines as inequality increases; no such relationship exists for middle- and upper-income families.

Then they estimate how much more education the poor may have had if inequality had not increased, and plug that into a growth model that includes components such as human capital. From this, they conclude cumulative economic growth was 4.7 percentage points lower for the average OECD country between 1990 and 2010 (that’s about $2,500 for the average American).

The question is, why? Here’s where it gets complicated. It’s no surprise that poor people have less time and money to spend on college, tutoring and the like. But why should this depend on how much richer everyone else is? Is it really inequality holding the poor back, or poverty, which is a different problem in need of different remedies?

The OECD’s tests indicate that inequality has an impact on the human capital of the poor independent of poverty. Put another way, if the rich were less rich, the poor would be better off.

The study, however, doesn’t explain why. In interviews, OECD researchers suggest the cost of education is driven by things like teacher salaries, which in turn are linked to overall economic growth. If the incomes of the poor lag the overall economy, education will be increasingly out of reach. In the U.S., for example, upper-income families’ demand for college tuition and homes in neighborhoods with good schools might put both out of reach of the poor.

But this is just a hypothesis.

The study notes it would be interesting to explore “whether the link between inequality and educational attainment varies with countries’ institutional characteristics or policy settings,” but “preliminary attempts to explore these issues proved inconclusive.”

So what should policy makers do? Raise taxes on the rich to dampen the cost of tuition and thereby make it more accessible to the poor? This seems an awfully blunt instrument.

In fact, there are two different policy challenges: how to help the poor, and how to finance that help.

There are good and bad ways to do both. Passive support such as unemployment and welfare benefits do less to raise education and incomes than direct training assistance, work subsidies and child care.

The education system might directly tackle inequality by sending the best teachers to the toughest schools, as Korea does.

As for paying for this: The OECD prefers raising taxes on the rich and multinational companies, for example by limiting tax breaks or the ability of companies to shift their taxable activities to low-tax jurisdictions. Their research finds that such redistribution need not hurt economic growth. But nor is it a given that this is the only approach. If the key to reversing inequality is raising the resources the poor have for education, this can also be done through sales, property or payroll taxes, much as is already done in the U.S. and in many European countries.

Did Someone Forget To Tell The Machines The US Is Shut Today?

by Tyler Durden

05/25/2015 11:20 -0400

"Unrigged"... European weakness - on the heels of increasing event risk and slowing ECB purchases - provided downward impetus to global risk assets this morning... but the machines rigging running US equity futures appears to have forgotten that the US markets are shut and sparked the ubiquitous rampathon back to unchanged for S&P futures (on less than 10% of daily average pro-rata volume).

Charts: Bloomberg

What You Know for Certain: Huge Demand for Gold And Silver

By: Michael Noonan

Saturday, May 23, 2015

If there is any certainty in the world, [and there is very little], it is that the demand for gold and silver is at its highest and has been running at a fevered pitch for several years. From John Keats "Ode On A Grecian Urn," "...that is all ye know on earth, and all ye need to know."

Anything else stems from subjective conclusions drawn from lying politicians, no matter the source or government. They all lie under the aegis of political diplomacy. For Obama and his entire administration there is very little diplomacy, so mostly just lies.

If the leading economic powerhouses, China and Russia, have been accumulating as much gold and silver as is available, and keeping every ounce each of those nations produce, with nothing being exported, cut through all of the rhetoric and do as they do, and do not listen to any Western country/central bank/bought-and-paid-for-media that says gold has no value. Buy each or either metal [the gold/silver ratio favors accumulating silver more so than gold, but that is an opinion], and obtain physical possession yourself.

There is ample record evidence that banks are totally unreliable if it is known that any gold or silver is being held, either by consent for a fee or in a safe deposit box. If you have any PMs in a bank, guess who really owns it? Word is that even allocated gold owned by wealthy clients, in the hundreds of millions of dollars, is missing. Who cares? That is their problem, not yours. 

The point to be made is we all live in a world where it is a matter of self-survival.

Everything, at least in the Western world, is breaking down: society, laws, governments, all are being ignored by the upper echelons. There is no punishment for bankers, none for lying politicians/bureaucrats. All politicians are unresponsive to those they purport to represent.

Laws only apply to the working masses. In the United States, local police forces have increasingly become militarized, more heavily armed than actual soldiers engaged in war, as the corporate federal government prepares the population for martial law. Operation Jade Helm 15 is no simple military exercise to acclimate soldiers to war-like conditions. No country is more engaged in war around the world than the United States where soldiers get on-hands experience. Jade Helm is just another ruse.

It is always the same or a variation of the same ruse: problem-reaction-solution, [See Elite's Game Of Jenga In Place, Your Move, 8th paragraph]. In the US, it is the constant threat of "terrorism" as a "problem," even though none exists. It is designed to elicit a fear "reaction" in order for the government to offer a "solution" of safety but at the expense of further loss of rights, the sole purpose of the government forces. Governments are the original arsonists that pose as ultimate firefighters to the rescue. This has all been carefully orchestrated by the elites over the last century, in this country.

All we can do is maintain a focus when it comes to buying and owning physical silver and gold. Forget about price. It is purposefully being manipulated by Western elite's central bankers, complicit with China as it acquires as much as possible at these suppressed levels. China has the US under a financial gun, and the US is compliant, quietly selling off assets to the Chinese to assuage them for all of the dirty deals the corporate federal government pulled over the past few decades. Payback is a bitch, and for the US, tres expensive.

Nothing can be done about the low prices until all of this underhanded, behind the scenes payback is fulfilled. The scarier aspect of all this has less to do with price manipulation as the US has become more and more cornered and has been fighting its ultimate fate of elite imposed destruction of the entire country. To stave off the demise of its fiat "dollar," the US is doing what it can to start a war to provide cover and an excuse to blame its failure anywhere else other than where it belongs.

The primary farce known as the European Union, and its degenerate debt-laden offspring, Greece being the current example: Exit? Not exit. Pay back debts? Default? The elites will not allow Greece to fail. If Greece sets an example, Spain, Italy, France, and a host of other domino-effect countries are waiting in the deficit wings to follow suit. The self- implosion of the EU gets postponed, simply to die at a later date. All that is going on is nothing more than illusions being passed off as reality.

Sadly, too many of the masses are compliant, ignorant, or simply too concerned about when the next government doled-out benefit [always at a bare-subsistence level] will arrive.

Nobody got it right in 2013, maybe a few were closer to recognizing nothing would happen in 2014, and so far, there is little to expect some kind of upside breakout to occur in 2015. We are not saying no breakout can or will occur, for we are of the mind that anything can happen. As we look at the charts, there is no indication whatsoever that the current trends are about to change. The imaginary worth of the US dollar, when compared to the imaginary worth of the other fiats, is still holding. There appeared to be buyers entering at the low-end of the most recent decline, as was noted the prior week, and last week that observation was confirmed.

In every market, one move is validated by a subsequent confirming price change, and until there is confirmation, what is being observed remains as potential. While the increased volume and small range at the sell-off low gave the appearance of buying activity, it still needed to be confirmed. The confirmation came during last week's rally.

If the high of the fiat "dollar" is the March 101 area, this current rally will show signs of weakening by decreasing volume, smaller ranges on rally bars, and poor close locations. If the opposite occurs, price can make new recent highs or move sideways to marginally higher, as the S&P has been doing.

For as long as the fiat "dollar" can maintain itself, the price of silver and gold are unlikely to stage any kind of meaningful rally.

US Dollar Daily Chart
Larger Image

When looking at the weekly chart, from left to right, the trend is obviously down, and any expectations for a sustained rally to the upside is an unreasonable one. The destructive ways of the United States-dominated [but fast becoming unraveled] Western world has not yet been exhausted, however much the people are.

There can be a few signs that are positive for buyers, of late, but it would be more like having a few warm days in Chicago at the beginning of March. Everyone knows there are many more cold days and snow, yet to come, before Spring finally arrives, meteorological March 21st, but realistically not felt until into April.

The weekly chart has not signaled the end of the down cycle.

Silver Weekly Chart
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The daily is showing the potential for a small trend to develop on the upside, but it is in the context of a down market environment, and as price has been developing, the move has not been strong. There was a small upside breakout on the D/S [Demand over Supply] bar noted when resistance was broken, and that broken resistance may now become support, if it holds.

We keep saying it is important to watch how price reacts at obvious support or resistance, and resistance was briefly breached to the upside, last week. Price came back under the 17.45 area resistance [darker horizontal line], but did not extend the decline after sellers had an apparent strong down day, last Tuesday, 4th bar from end.

We see the how of the failure to continue lower and move sideways, instead, as a message that buyers are making their presence known. Still, the effort is small relative to the larger picture, as seen on the weekly chart.

Silver Daily Chart
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Similar to silver, gold remains at the lower reaches of a protracted decline from the 2011 highs, and it is currently trading in the middle of a TR [Trading Range], where the level of knowledge is least reliable.

Gold Weekly Chart
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The spike in volume for the D/S rally bar gave the gold rally a small burst just over the 1200+ level of resistance, but the overarching down trend kept it short-lived as price returned under defined resistance. If the D/S bar can hold the current reaction lower, gold stands a chance to rally above the 1230 area. As we keep saying, there needs to be signs of confirmation all along the way.

Gold Daily Chart
Larger Image

miércoles, mayo 27, 2015


Synthetic biology

Only connect

Home-brewed heroin may soon be in the Works

May 23rd 2015

SHORTENING an industry’s supply chain is bound to affect the activities of its suppliers. That is as true of the recreational-drugs business as it is of any other. Some street pharmaceuticals, such as methamphetamine and cannabis, are already produced near their main consumer markets—whether cooked up in laboratories or grown under cover. But others, particularly cocaine and heroin, still have to be imported from far-flung places where the plants which produce them flourish in the open (think of poppies in Afghanistan).

If these internationally traded commodities could be produced locally, the cartels that now smuggle them might find themselves out of business. Astute drug barons will therefore be reading their copies of Nature Chemical Biology with particular interest—for the current edition of the journal contains a paper describing a technology that could completely disrupt their business.

It may, to be fair, also change the businesses of legitimate drug firms, because the authors of this paper, John Dueber of the University of California, Berkeley and his colleagues, have found the last pieces of a jigsaw puzzle that will permit opiates to be made from glucose through the agency of yeast. They have still to fit them with the other pieces, to form a single picture. But when they do so, which is likely to be soon, instead of fermenting sugar into alcohol, you will be able to ferment it into morphine—and into many other pharmacologically active molecules as well.

The path from glucose, biochemistry’s common currency, to morphine is a long one. The poppies that produce the stuff naturally go to the trouble because it confuses the nervous systems of potential pests. The synthesis has 15 steps, each requiring a particular enzyme.

Several groups of researchers have replicated its later stages in yeast, by borrowing appropriate enzymes (or, rather, the genetic material that encodes them) from poppies, and also from bacteria. These investigators have not, however, been able to backtrack in yeast beyond a molecule called S-reticuline, which is the hub of the process, in that it can act as the precursor for many morphine-like substances. They have managed to do this backtracking in E. coli—but that is a bacterium and thus works very differently from yeast, which is a fungus.

Strange brew
Dr Dueber and his team found the missing part of the puzzle in the genome of sugar beet. The crucial step leading to S-reticuline that previous workers had been unable to engineer into yeast is the transformation of a molecule called tyrosine into one called L-DOPA (itself a useful drug for the treatment of Parkinson’s disease). They needed a way to follow this reaction, in order to see if candidate enzymes they were testing actually worked. They found the answer in a substance that turns L-DOPA into a fluorescent yellow molecule. With this marker to hand, they were able to stick candidate enzyme after candidate enzyme into yeast DNA until they found one which made L-DOPA in reasonable quantities.

Having identified their target, the researchers set about improving it by a process of mutation and selection that mimics natural evolution. The upshot is a strain of yeast which makes S-reticuline from tyrosine, to go with the existing one that makes S-reticuline into morphine—and, since tyrosine is one of the 20 amino acids used to make proteins, yeast cells turn it out naturally from glucose. Once the two halves of the pathway, from tyrosine to S-reticuline, and from S-reticuline to morphine, are connected together in an appropriately engineered yeast cell, that cell will be able to make morphine from sugar.

Whether this will be better, from the point of view of legitimate drug companies, than extracting it from poppy sap, remains to be seen. But it looks promising. Moreover, it should be easy to attach the S-reticuline pathway to others than that leading to morphine, to make codeine, hydrocodone, hydromorphone and oxycodone, all of which are valuable painkillers; sanguinarine and berberine, which are antibiotics; and tubocurarine and papaverine, which are muscle relaxants.

Drug-smuggling syndicates, though, should be quaking in their boots. If strains of yeast that can turn out opiates are liberated from laboratories and pass into general circulation, brewing morphine-containing liquor for recreational use will be easy. It will be illegal, of course. And the authorities will, no doubt, try to crack down on it. But those who smuggle the stuff from places like Afghanistan may find themselves driven out of business by home-brew opium clubs based in garajes.

Why FIFA Can’t Get Out of Its Own Way

Soccer’s world-wide governing body has an ultra-democratic election system—a setup that also stifles change

By Joshua Robinson in London and Jonathan Clegg in New York

Updated May 21, 2015 5:39 p.m. ET 

 Mesut Özil of Germany and Lionel Messi of Argentina during the World Cup final in Brazil last year. Photo: Robert Cianflone/Getty Images 

In the world of international soccer, Germany and Anguilla are as far apart as two teams can get.
Germany’s team is ranked No. 1 world-wide and is a four-time World Cup champion. Anguilla, a British overseas territory in the Caribbean, has won four games in its entire history.

FIFA delegates will soon meet to a elect a new president. But what looks like a democratic process isn't without criticism. WSJ's Jonathan Clegg reports. Photo: Getty
On the field, these two teams are so hopelessly mismatched that they are barely playing the same sport. But for all those differences, there is one arena where they are equals: world soccer’s presidential elections.

On May 29, delegates from across the world will convene in Zurich to elect a president to lead FIFA, the sport’s global governing body, for the next four years. Under election protocol, each of FIFA’s 209 members receives a vote and, no matter how big or small, each one is worth the same. Which means Germany’s vote counts the same as Anguilla’s. Brazil’s is no different than Bhutan’s.

There is no doubt that this is the most democratic arrangement. But as one of the most embattled figures in sports stands poised to be elected for a fifth consecutive term, the consequences of the system have become clear. In recent years, the FIFA system has helped preserve the status quo atop the world’s most popular sport despite gaffes, controversy and allegations of corruption among its leaders.

On Thursday, two of the three challengers in the election dropped out of the race, with one, decorated former midfielder Luis Figo, calling FIFA “a dictatorship.”

The likely winner of next week’s vote is incumbent Joseph “Sepp” Blatter, a 79-year-old former watch company executive. He has presided over FIFA, the nonprofit custodian and organizer of the World Cup, since 1998. The sole other candidate is Prince Ali bin Al Hussein, a FIFA executive committee member who has called for change.

FIFA declined to answer specific questions about any candidate, and declined to make Blatter available for comment.

“I have tried to think of another system but I can’t find it,” said Harold Mayne-Nicholls, a former president of the Chilean soccer federation and FIFA official who wasn’t in the running.

“If you go to the number of people that live in the country, it will not be fair. If you go on the number of football players, [it is] the same. I can understand that people get frustrated, but on the other hand, I don’t see any solution.”

During his tenure, Blatter has overseen the World Cup’s growth into a quadrennial cash cow for Swiss-based FIFA through the shrewd sale of television and marketing rights. As of 2014, its cash reserves stood at $1.52 billion. During the 2011-14 cycle, it generated $5.72 billion of revenue, according to FIFA’s most recently published financial results, the most in its history.

But Blatter’s 17-year reign also has been marked by controversy. There have been allegations of bribery surrounding the 2022 World Cup in Qatar, a high-profile lawsuit by MasterCard MA -0.23 % in New York federal court and the ousting of at least eight members of FIFA’s executive committee, along with public-relations faux pas on topics from fan racism to women’s soccer uniforms.                                                        
In 2004, a U.S. District Judge ruled that FIFA had breached a contract agreement by dropping MasterCard as a sponsor in favor of rival Visa V 0.36 % and sharply criticized the organization’s business tactics. MasterCard and FIFA reached a $90 million settlement. Blatter also has attracted criticism for his suggestion in 2011 that instances of on-field racism could be solved with a handshake and for his remarks in 2004 that female players could wear tighter shorts to help market women’s soccer.

FIFA has denied wrongdoing in relation to the MasterCard case and Blatter later apologized for the comments on racism and women’s soccer.

When the votes are cast next week, Blatter is almost certain to be swept back into office on a surge of political support from FIFA members across Africa, Oceania, Central and South America and large swaths of Asia, who have publicly declared their support.

“To us, he is still the man of the moment,” African Football Confederation president Issa Hayatou said at its congress this spring. “Dear Sepp: Africa is comfortable having you.”

To some soccer fans, another re-election might seem inconceivable, considering the negative attention FIFA has drawn since December 2010, when it chose Qatar to host the 2022 World Cup.

The furor over the bidding grew so loud that FIFA appointed Michael J. Garcia, a former U.S. Attorney, to investigate. His report led to the opening of ethics proceedings against three sitting members of the executive committee. (At least one has been closed, clearing Michel d’Hooghe, while FIFA declined to comment on the details of the other cases. All three members denied the ethics charges against them.) There were no allegations of impropriety against Blatter in the report. FIFA’s ethics committee said the report cleared Qatar of wrongdoing, without discussing specifics of the investigation. Garcia resigned from his role as investigator in December to protest the organization’s handling of his report.

The full report was never published, though a person familiar with it said that it heavily criticized a “culture of entitlement” among FIFA’s upper management. The executive committee announced in December that it would be released, in some form, this year. There is no sign of it coming before the election. FIFA said Thursday that it wouldn’t be published while cases remained open.
Africa’s support of Blatter has been echoed by federation presidents across the planet. Oceania committed its 11 votes to Blatter in January; South America followed suit with its 10 votes in March.

Concacaf, the confederation of North America, Central America and the Caribbean, expressed its support for the incumbent along with tributes in which Blatter was compared with Jesus Christ, Nelson Mandela, Winston Churchill and Martin Luther King Jr.

Not every region has been so complimentary. In Europe, home to the game’s richest and most televised professional leagues, his tenure has been regularly and loudly denounced. Michel Platini, the head of European soccer’s governing body, has led the calls for “fresh air” at the top and accused Blatter of ruining FIFA’s image.

Before last summer’s World Cup in Brazil, a series of speakers at the UEFA Congress called on Blatter to make his current term his last. UEFA didn’t respond to requests for comment; FIFA declined to address his candidacy.

What Blatter’s imminent re-election makes clear is that the path to the FIFA presidency no longer runs through the game’s traditional heartland. Over the past four decades, FIFA has redrawn the soccer map by enfranchising smaller federations across the developing world.

Since 1975, when Blatter was named FIFA’s technical director under then-president João Havelange of Brazil, the first non-European in that role, FIFA membership has jumped from 141 nations to 209, an increase of more than 48%. In the process, it overtook the membership of the United Nations, which stands at 193. Countries that aren’t, strictly speaking, independent countries, such as the U.S. Virgin Islands and New Caledonia, will be represented at the FIFA Congress, the organization’s annual meeting. 

The regions that experienced the most growth during this period were Concacaf, which has increased from 22 to 35 members, and Oceania, which has nearly tripled its membership, from four countries to 11 currently.

The upshot has been a radical reconfiguration of soccer’s power structure.

Before Blatter joined FIFA, the sport’s traditional base of Europe and South America accounted for 35% of total votes in FIFA’s Congress and their 49 combined votes were just 22 short of a majority.

Today, their combined share of 63 votes comprises just 30% and they require an additional 42 votes to form a majority. In other words, it is now possible for a candidate to collect the requisite two-thirds of all votes necessary to be elected president on the first ballot without receiving a single vote from soccer’s hotbeds.

“Some Europeans do not understand that the world has changed,” said Jérôme Champagne, a former FIFA executive from France who worked alongside Blatter for 11 years. FIFA said that the expansion of its membership “reflects the evolution of our sport and the evolution of the world. Over the last decades, new members have joined in all confederations.”

Blatter understands soccer’s new world order better than most. In interviews with FIFA executives and federation officials around the world, a pattern emerges of Blatter specifically enfranchising and providing financial assistance to smaller nations, particularly in the developing world.

FIFA says that its “Goal” projects, which allocate funds to be spent on soccer-related infrastructure, are disproportionately awarded to developing nations because one of the purposes of the program is to “reduce the gap between member associations.”

“The payment of development funds to member associations reflects FIFA’s statutory objective to promote football globally,” a FIFA spokesperson said in an email. “This is FIFA’s main goal: Share the benefits from the FIFA World Cup to develop football all around the world.”

Blatter implemented the Goal Programme, in which national federations can apply for up to $500,000 at a time for specific soccer-related projects. (That figure is rising to $600,000 this year.) Through all of its development programs, FIFA now distributes some $180 million a year for soccer development programs around the world, excluding any extraordinary payments, according to its records.

“He’s more of a humanitarian than administrator,” Mokhosi Mohapi, the general secretary of the Lesotho soccer federation, said of Blatter. “That makes him want to hear the plight of all the countries.”

Since 1998, 205 of the 209 associations have had Goal projects accepted, with $36.6 million approved last year alone. They have covered everything from video production of national youth-team games in Italy to the purchase of association headquarters in Andorra, though figures from FIFA show that much of this funding has been directed at some of soccer’s smallest nations. Since 1999, the 11 countries that make up the Oceania confederation have each received an average of 4.6 Goal payments. By contrast, European nations have received an average of 2.6.

Critics have accused FIFA of using the program as pork to secure support come election day, an allegation FIFA firmly denies.

“People in Western Europe complain, ‘ Mr. Blatter is re-elected because of development programs buying votes,’ ” said Champagne, who intended to run for president but failed to collect enough nominations. “But this is really an analysis, a point of view, coming from people where the fields have green grass.”

Blatter’s would-be opponents in the election realized the weight that development programs carry in this system. The other candidates all made increasing financial aid a key plank of their campaigns before the field was whittled down. In his manifesto, Dutch federation president Michael van Praag pledged to boost assistance payments from $250,000 to $1 million a year.

Figo went for $2 million. Bin al Hussein also pledged to boost funding.

Van Praag and Figo both pulled out of the running on Thursday, throwing their support behind bin Al Hussein.

Blatter has declined to speak directly about the election and hasn’t published a manifesto. “I am 40 years in FIFA,” he said in Zurich in March. “I am 17 years the president of FIFA. This is my manifesto.”