The great reversal

Covid-19 is undoing years of progress in curbing global poverty

The number of very poor people was steadily falling; now it is rising fast

Jane kabahuma has been eating one meal a day since the end of March, when the lockdown began. She used to work in a hotel, but it had to close, along with most businesses in Uganda. She thinks “it will take time” before the work comes back. In five months she is expecting a baby; it may arrive before a job does.

Her standard of living has plummeted. She used to pay to fill her jerrycans from a clean tap, but these days fetches water from a dirty well, because it is free. She gets by, more or less, with help from friends and family. But for how long?

In normal times, people in poor countries have many ways to cope with shocks. If one member of a family falls sick, the others can work longer hours to make up for the lost income. Or they can ask cousins or neighbours for help. Or, if a whole village is impoverished by a bad harvest, they can ask a nephew working in a big city or a foreign country to send some extra cash. All these “coping mechanisms”, as development experts call them, depend on calamity not striking everywhere at once. Alas, covid-19 has done just that.

In many places, workers cannot make up for lost income by working harder because demand for their labour has collapsed. Empty restaurants need no waiters; shuttered malls need no mopping; and few motorists are rolling down their windows to buy fruit from street hawkers.

The newly impoverished cannot easily get help from friends or relatives because, no matter where in the world they are, they are all experiencing a simultaneous and massive economic shock. The World Bank predicts that remittances from migrant workers will drop by 20% this year. Male Nepali migrants who are still overseas are now sending back only a quarter of what they were in January. Many send back nothing at all, having returned home.

Most countries in the developing world still require their citizens to stay at home, except to duck out for essentials. But few of the world’s poorest can work from home. And without work, many cannot eat. Thus, covid-19 imperils one of the greatest achievements of recent decades—the stunning reduction in global poverty.

From 1990 until last year the number of extremely poor people—those who subsist on less than $1.90 per day—fell from 2bn, or 36% of the world’s population, to around 630m, or just 8%. Now, for the first time since 1998, that number is rising—very fast. The big questions are: how many millions will slip back into penury? And will they quickly escape again when the pandemic is past, or will its effects be long-lasting, or even permanent?

The answers to those questions are maddeningly hard to pin down. The World Bank estimates that national lockdowns and the global economic collapse will push at least 49m people into extreme poverty, eliminating nearly all the gains made since 2017. That seems implausibly rosy—the bank’s estimate was based on data published in April. More recent numbers are far gloomier. For example, on May 17th Goldman Sachs estimated that India’s economy is shrinking at an annualised rate of 45%.

Andy Sumner of King’s College London estimates that if global income per head falls by 20%, which it may for several months at least, the number of extremely poor people could increase by 420m—as much as the entire population of South America. That would wipe out a decade of gains in the fight against poverty.

Many poor countries have copied the kind of lockdowns that have been imposed in rich countries. But the circumstances are utterly different. The well-off are much more likely to have jobs that can be done from home. And workers in rich countries who cannot do their jobs, such as hotel receptionists or waiters, are typically wellsupported by taxpayers.

By contrast, when India imposed a strict and dramatic lockdown on March 24th, the 140m people who are estimated to have lost their jobs were suddenly in big trouble. Tens of millions of migrants who had moved from villages to cities suddenly had no income, no way to pay the rent and no trains to take them home, since those were also cancelled. Millions trudged hundreds of kilometres back to their home villages, where their families at least would take them in. The lockdown has been extended to May 31st, with only small adjustments.

Similar tales of woe are coming from other poor places. Over 80% of Kenyans and Senegalese reported a loss of income in early April. In a study for the University of Manchester, 60 Bangladeshi families have been writing “money diaries”. Before March, about $1,000 a month passed through each household (not all of it income). In April that fell to $300 or so.

In middle-income countries, too, lockdowns have been excruciating. Colombia’s was so tough that it sparked protests in working-class barrios. In Altavista, a neighbourhood near San Salvador, the capital of El Salvador, people have taken to hanging white flags from their windows to show that they have run out of food.

“Almost overnight people go from having income to having no income,” says Carolina Sánchez-Páramo of the World Bank. Less income often means less food. The World Food Programme (wfp) predicts a doubling of acute hunger by the end of 2020. David Beasely, its boss, worries that the world could see “multiple famines of biblical proportions” within a few months.

Health-care systems have been disrupted not only by the virus itself but also by lockdowns, which make it harder for people to seek treatment for other illnesses. A team at Johns Hopkins University calculates that across 118 poor and middle-income countries, disruption to health systems and hunger could kill 1.2m more children and 57,000 mothers over six months.

The Stop tb Partnership, an international research group, reckons that in India alone interruptions of diagnosis and treatment from a three-month lockdown, followed by a 10-month recovery period, could cause 500,000 excess deaths from tuberculosis.

Some kinds of lockdown could cost more lives than they save. A report by the London School of Hygiene and Tropical Medicine estimates that if restrictions prevent vaccinations, in Africa 140 will die for every covid-19 death prevented.

Even moderate lockdowns can be harmful in very poor countries. The Malawian National Planning Commission and two think-tanks did a cost-benefit analysis of continuing Malawi’s restrictions, which include closing schools, curbing travel and stopping health outreach work. They estimated that the lockdown, if maintained for nine months, would avert 12,000 deaths from covid-19.

However, it would also cause more people to go hungry, making them vulnerable to tb and malaria, so the net number of deaths avoided would be roughly half that. And because the victims of coronavirus would be largely old people, whereas the victims of malaria would often be infants, the lockdown would actually cause a net loss of 26,000 years of life.

The lockdown would also leave Malawi $12bn worse off, by stopping people from working and interrupting children’s education, thus dooming them to earn less in the future. That is equivalent to nearly two years’ gdp—an astounding sum. Overall, they estimated that the costs of the lockdown outweighed the benefits by 25 to 1.

Such calculations are subject to a wide margin of error. Nonetheless, they explain why many experts think that rich-country style lockdowns are unsustainable in many poor countries.

No work, no pay, no food

People who lack savings or a functioning safety net cannot simply stop working. Yet millions are being forced to do so. Before the crisis Jonathan Solmayor drove a tuk-tuk in Davao City in the Philippines. “I am feeding four mouths,” he says, but “my only source of living was stopped.”

In western Nepal men have seen the hours they can work for wages fall by about 75%, according to the Yale Research Initiative on Innovation and Scale. In Uzbekistan the number of households where at least one person works has dropped by over 40%.

As the number of breadwinners falls, the price of food is rising. In India the price of potatoes has jumped by over 15%. In Uganda the prices of most key foods have gone up by over 15% since mid-March.

The global food supply is holding up, but local disruptions are severe. In the province of Quezon in the Philippines an “extreme” quarantine has seen squash, beans, and watermelons wither in the fields.

In India vegetables that were harvested have been left to rot as they cannot be transported to market. In East Africa covid-19 is not the only plague to strike this year: trillions of locusts are once again devouring crops.

Some hope that the rural poor may escape the worst. The virus has taken longer to reach remote villages, where social distancing is easier than it is in slums. Subsistence farmers might be able to feed themselves. But even the poorest rural households in Africa buy almost half their food. Many would normally top up their income with paid work, but no longer can.

Those who were already miserable have become more so. In Uganda the wfp has cut rations for refugees by 30%, and funding is drying up. In Bangladesh more than 70% of Rohingya refugees say they are now unable to buy food.

The most concentrated suffering will be in big cities such as Kolkata and Kinshasa, says Ms Sánchez-Páramo. Even before the pandemic about 130m city-dwellers were extremely poor. Many kept their heads above the poverty line by pedalling rickshaws or hawking vegetables. Lockdowns have stopped that. In India 84% of poor urban self-employed have lost their work.

Even where lockdowns are less strict, the urban poor are struggling. In Mexico City, where staying at home is more of a suggestion than a requirement, Romaldo San Juan Garcia normally spends his days polishing shoes. But these days the kind of people who can afford shoe-shines no longer wear leather shoes, since they are staying away from the office.

In a long day on the street Mr Garcia polished only two pairs. Just to pay his monthly rent, he needs to shine about 100. In tough times his children would usually pick up extra shifts waiting tables. But because of the virus, the restaurants are shut.

With so few other options, many of the newly destitute are doing things that will make it harder for them to escape poverty even if the economy recovers. They are eating less, selling productive assets and even pulling children out of school.

“When I eat supper it means I will sacrifice lunch,” explains Nathan Tumuhimbise, a flower worker in Uganda who was sent home on unpaid leave. He has no idea whether he will be able to pay for his daughter’s next instalment of school fees. In desperation he has called his father in the village to sell some of the family goats. “I’m overwhelmed,” he says. Other workers he knows are even selling off their land. Why? “Survival, life and death,” he says.

Assets such as land, livestock and motorbike taxis can be sold only once. When so many people try to sell them at the same time, prices collapse. And people who sell their productive assets today will have no source of income tomorrow.

Cutting back on food is risky, too, especially for children. Malnutrition stops brains and bodies from growing properly. Stunting results in lower iqs, greater risk of chronic illness and lower lifetime earnings. In towns in Sierra Leone almost 60% of people said they had eaten fewer times than normal in the past week, according to the Yale Research Initiative. Fully 14% have gone a whole day without eating.

Pulling kids out of school has awful long-term consequences. One World Bank paper found that if schools remain closed for just four months, the reduction in their lifetime earnings will be equivalent to 15% of a year’s global gdp.

We’re here to help

Governments can help. Fully 181 countries have announced extra efforts to protect the poor, about 60% of which involve cash or food aid. For millions, these have proven a lifeline. Ganesh, an auto-rickshaw driver in Delhi, says he was lucky to spot an advert about a state government scheme to pay idle auto drivers a one-off 5,000 rupees (about $70).

He texted in his id and soon got the money. However, the vast majority of the cash in all these new welfare schemes is in rich countries. In the poorest ones, extra social spending announced so far amounts to just $1 per head—in total, not per day. Other drivers applied for help too, says Ganesh, but they have not received anything.

Existing safety nets have long focused on rural folk, which used to make sense because they were the poorest. However, many of the newly poor are in cities. Systems need to adapt, but many are badly managed. India’s federal programme of cash and food handouts is scattershot and misses many of the neediest. In Uganda the government’s own spokesperson described its efforts to get aid to the right people as “inadequate, incompetent, disorganised.” Egypt has managed to get payments only to 2m of its 100m people.

In countries such as Kenya and Bangladesh mobile money is being used to distribute aid more quickly. But the poorest are often hard to reach. Governments often do not know who they are.

And welfare systems were not designed with pandemics in mind. In South Africa delays have led people to form queues (not always socially distanced ones) outside post offices to sign up for benefits. In many countries corruption limits the effectiveness of welfare. In Zimbabwe aid has been steered to supporters of the ruling party. In Uganda mps initially put themselves in charge of distributing $2.6m of relief cash in their constituencies (a court ruled they should pay it back).

The biggest problem, though, is simply that governments in the poorest countries do not have much money. And they are getting poorer. The World Bank says that African government revenues will drop between 12% and 16% this year. In Nigeria, home to more extremely poor people than any other country, the collapse of the oil price has shredded government spending plans. During the global financial crisis many poor countries slashed spending on education; they may do so again.

He needs protection, too

All this has prompted calls to ease lockdowns. That will not save poor countries from being battered by the global economic crisis. Nor will all businesses reopen if people are still scared of being infected. But at least the poor would be able to try to work and children would be able to get vaccinations.

Nigeria has already loosened lockdowns in some big cities, even as cases rise. Bangladesh and Pakistan have eased up, too. India will open up somewhat next month. This is not always popular—after two weeks shut in, 82% of Indians supported the first extension there. Ghana, one of the first in Africa to remove some restrictions, shows the risks. In one fish factory, 533 workers were recently infected.

Lock down smarter

However, the choice is not binary: total lockdown or no precautions at all. Governments and citizens can do a lot to prevent infections without freezing the whole economy. They can protect the elderly while letting most adults go to work and children go to school. They can keep nightclubs closed but allow markets, bus stations and factories to open—with compulsory masks, hand-washing and social distancing.

They can do a better job of spotting outbreaks and quarantining the infected. They can teach people the facts about the disease, so they can protect themselves. Community health workers did this well during the Ebola crisis.

Whatever the approach, poor countries will need help from developed ones. Rich countries have spent a stunning $8trn on supporting their own citizens during the pandemic, notes Homi Kharas of the Brookings Institution, a think-tank. It is in their interest to help poor countries grapple with the disease—otherwise they will become a coronavirus reservoir that can reinfect the rich.

Yet the international response has been “very go slow”, says Matthew Spencer of Oxfam, an ngo. So far the imf and World Bank have lent about $20bn and $6bn respectively. Talks about debt relief are moving lethargically.

In the past, crises have sometimes fostered solidarity with the poor, notes Amartya Sen of Harvard University. In Britain during the 1940s life expectancy shot up by seven years, thanks to a wartime rationing system that ensured everyone had nourishing (if dull) food. According to a forthcoming un Development Programme study between 2013 and 2016, despite an Ebola epidemic, living standards in Sierra Leone improved faster than in any of 70 poor countries.

The huge effort to fight Ebola had spillover effects, as aid-workers and public servants also helped improve nutrition and child mortality. It would be wonderful if covid-19 could inspire similar efforts. But for now, the rich world is too distracted by its own problems to pay much heed to the poor.

Global Banks

As China goes global, its banks are coming out, too

European banks are losing their influence

AMERICAN BANKERS make for bold bosses. From his roomy office in Manhattan, in early February, the boss of one of the country’s biggest suggested he has few serious rivals—and all are just a few blocks away. “US banks continue to gain share from European banks.” Asia barely gets a mention.

“Chinese institutions have generally proven incapable of expanding globally. When they buy sports cars and flashy hotels, it just doesn’t feel solid.” Days later Morgan Stanley, America’s sixth-largest bank, announced its $13bn acquisition of E-Trade, a broker—the biggest by a Wall Street bank since 2008.

Within weeks China had exported a different threat. As coronavirus-induced investor fever took hold, the Dow Jones index of top American lenders, which had soared by a third over 2019, crashed by 50%. The market rout did not wipe them out.

But it is the sort of event that could lead incumbents to self-isolate—accelerating the discreet spread of Chinese banks in emerging markets. And the country is opening up its own market, hoping to learn tips from new entrants along the way.

Chinese banks are already huge. Their total assets now surpass those of American and European banks. They are also providing more cross-border credit, the bread and butter of international banks.

The sum they lend overseas has grown by 11% a year since 2016. More surprising to outsiders, they are gaining clout in the sophisticated universe of capital markets, too. Last year Chinese banks earned three times more investment-banking fees than all Asian rivals combined (excluding Japan).

Their share of the total has jumped from 1% in 2000 to 14%.

Balance-sheet of power

On the eve of the collapse of Lehman Brothers in 2008, European banks were the kings of cross-border lending. They accounted for 71% of total flows, which had grown from $10trn in 2000 to $35trn in 2008. But the subprime meltdown, followed by the eurozone crisis, forced them to retreat.

As regulators required global banks to hold more rainy-day equity, other lenders chose to issue capital or to retain earnings. But conditions in Europe meant its banks had little choice but to trim their balance-sheets. Banks shed assets overseas. Far-flung subsidiaries were sold or shut.

Today Europe (including Britain and Switzerland) provides 47% of the world’s $31trn in cross-border flows.

Cyclical events are likely to stymie them further. It is hard for banks to grow faster than their home economy. Europe has had anaemic growth throughout the 2010s.

The virus crisis is turning 2020 into an even sicklier year. Interest rates, negative across the region for many quarters, are plumbing new depths.

European banks’ return on tangible equity (ROTE) sank to 6.6% last year (investors reckon 10% is par). America’s top banks, buoyed by positive rates and a sprightly economy, posted double-digit ROTEs in 2019.

Europe will be hindered by structural factors, too. American lenders draw strength from their vast and unified home market. They can also reduce risk by repackaging loans and flogging them onto the country’s deep capital markets.

The EU lacks both those things. Squabbles among members are hampering plans to complete a banking union. Cross-border mergers would give its top banks more scale, but are politically tricky, says Irene Finel-Honigman of Columbia University. And efforts to fuse capital markets remain unfinished (and diminished by Brexit, which separates the EU from its main financial centre).

The biggest issue lies with where European banks sit within the financial system. For all their cross-border heft, they are mostly middlemen, ferrying greenbacks from New York to other corners of the planet. Outside Europe much of their lending is done in dollars. Some is locked in long-term loans that cannot be called back.

Yet they have no natural source of dollars, so many fund themselves by borrowing from short-term money-market funds. That makes them hostage to unsympathetic parties. Many reeled in 2012 when American funds, spooked that some European countries might default on their debt, struck European clients off their registers, says a top executive at a Swiss lender.

Asian rivals are filling part of the gap. With Japan stagnant, the country’s “megabanks” have been hunting for yield. They now extend 16% of global cross-border lending, twice their pre-2008 share. But their onslaught looks brash: they have piled into risky American securities.

The rise of South-East Asia’s “super-regionals” seems more robust. They avoided follies during the 2000s, so suffered no hangover, says Edmund Lin of Bain, a consultancy. They have upgraded their tech. Perky economies give them oomph. Their total assets in the region have grown fivefold since 2002, when those of international banks doubled.

Many think China is missing out. A distant third in 2008, its banking system, at $40trn in assets, now surpasses both the euro area’s and America’s. A list of 30 “global systemically important banks” by the Financial Stability Board, a grouping of watchdogs, now includes all China’s “Big Four”—Bank of China, Industrial and Commercial Bank of China (ICBC), China Construction Bank and Agricultural Bank of China. Only one featured in 2012. But sceptics say they sit on dud loans at home and are being reined in by the state, which owns them. Their management is deemed “paternalistic”; their systems “unsophisticated”.

Chinese banks have indeed long been absorbed by their home market, where they have a 98% share. And their first attempts at internationalising did fail. Many hoped to garner tips on how to climb global leagues in the 2000s after luring American stars, like Goldman Sachs and Bank of America, as “strategic shareholders” through IPOs in Hong Kong.

But those stakes were quickly liquidated after the subprime crisis. Chinese banks also realised they could earn higher profits at home. So plans were scaled back.

In recent years, however, they have been on a stealthy prowl. Banks have followed their corporate clients, themselves inclined to grow beyond their saturated home market. They finance trade, take local deposits from local subsidiaries and serve their mundane needs, like cash management or foreign exchange.

They also fund Chinese-built infrastructure in emerging markets. Thanks to huge balance-sheets and inside knowledge of contractors’ history, they often outcompete foreign peers, says John Ott of Bain.

The Chinese octopus

Their tentacles are spreading. The Big Four now have a total of 618 branches outside the mainland—a conservative proxy, since commercial banks need few shops. Since 2015 their share of global cross-border lending has risen from 5% to 7%. Foreign assets account for 9% of their book.

Their footprint differs from that of Western peers: Chinese banks supply two-thirds of all cross-border lending within emerging markets. Hasnen Varawalla of Absa, a South African bank, says their presence in Africa keeps growing.

President Xi Jinping’s Belt and Road Initiative (BRI) is a big catalyst. Chinese banks have lent nearly $600bn to 820 official BRI projects since 2013, reckons RWR, a consultancy. Unofficial sums are probably bigger.

Bank of China alone says it lent more than $140bn to 600 projects between 2013 and mid-2019 (others do not disclose figures). Chinese lenders are expanding along the trail: they now have 76 branches in BRI countries, many created since 2018.

Commercial banks share the labour with “policy” banks, like China Development Bank or the Export-Import Bank. Those tend to fund low-yielding projects like ports and railways, while the Big Four often back the “bankable” amenities around them, such as shopping centres or property development.

Significant lending also appears to be done by non-bank subsidiaries of Chinese banks (no one knows how much). Many state agencies also disburse “hidden” credit. A paper in 2019 by German economists argues international bodies miss as much as 50% of China’s “public” lending.

The medium-term fallout from covid-19 may draw China’s Big Four further out. China’s global firms—which make up 24% of the Fortune 500 ranking, second only to America’s—may focus on Asia, where they have a natural edge.

The banks will also want to diversify away from their domestic market, where non-performing loans are increasing. And unlike Japanese banks in the 1980s, which bought expensive property, they “have a strategic reason to win,” says Jamie Dimon of JPMorgan Chase.

They may be fighting the wrong fight. Since the financial crisis a growing share of people and firms are financing themselves by issuing securities on capital markets, shunning traditional lenders for “shadow” banks like pension funds and insurance firms. These have been amassing assets twice as fast as banks since 2008.

They now account for nearly half the world’s financial system—about $184trn. Issuers of securities still rely on banks, but the shift favours those earning a living through fees (advising on issuances or underwriting them) rather than interest on loans from their balance-sheets.

American banks have a huge advantage, says James Gorman, Morgan Stanley’s boss. They make 60% of their revenue at home, which hosts the world’s biggest and most profitable capital market (it now represents 45% of global investment-banking revenue, up from 36% in 2009).

The world’s top-five earning banks are all American. Some European banks, notably BNP Paribas, have snapped up clients and businesses from ailing peers, says Jean Lemierre, its chairman. Yet even in their backyard the top slots belong to transatlantic rivals.

Gaining an edge in investment banking requires a global network of investors and companies Chinese banks do not yet have. Many also lack independence. In 2015 the state leaned on securities firms to rescue the stockmarket.

Last year it told them to lend to struggling small firms. Attempts at tie-ups with foreigners have foundered, too. The rigid hierarchy of China’s state-owned firms does not mix well with Wall Street’s freewheeling ethos, bankers say. Many staff have left CSLA, a respected Hong Kong outfit, since CITIC, a Chinese broker, bought it in 2013.

But Chinese banks are making unnoticed leaps. Eager to diversify funding and amass firepower for acquisitions overseas, home-grown companies have been rapidly raising dollar debt. Issuance reached $310bn last year, from $71bn in 2016. Chinese banks are underwriting these as lead or even sole arrangers, allowing tighter links with domestic titans while building contacts with foreign investors.

Some also outsource services they do not yet master, like sales or electronic trading, to Western banks, which they then resell under their own brand. That enables them to grab a growing slice of clients’ “banking wallet”.

They are also progressing in the prestigious equity business. In 2019 CITIC beat Goldman Sachs to become the first local bank to top league tables in Asia. Chinese firms are propelled by their home market: local companies raised half a trillion dollars through IPOs in the past decade, says Refinitiv, a data firm.

They are climbing the ranks in Hong Kong, which became the world’s largest listing hub in 2019. Chinese venues may not replace New York peers soon, says Ivy Wong of Baker McKenzie, a law firm. But they do provide leverage. Chinese issuers facing resistance in America can court global investors from Hong Kong, with no political fracas. Stock Connect, a scheme launched in June 2019 allowing Shanghai-listed firms to raise equity in London, may help.

Elsewhere in Asia China’s progress has been muted. But that need not matter much. Last year protests in Hong Kong prompted talk of a drain to Singapore, the rival regional centre. Yet, loth to anger Chinese officials, few firms dared move staff, says an executive at an American bank in Hong Kong. The Middle Kingdom is cementing its status as the centre of gravity for the region: investment-banking revenue in China has grown to $12bn, up from $550m in 2000.

Those juicy prospects are attracting outsiders—and Beijing is opening the door. Last year regulators cleared the way for full foreign takeovers of local banks. They then allowed outsiders to control wealth-management firms, pension-fund managers and brokers. In April foreign-ownership caps were also removed on securities firms.

The world’s A-team of money managers is teaming up with locals or seeding subsidiaries in the hope of grabbing a slice of China’s $45trn financial-services market. “Every week we get a knock on the door by one of these top 15 players,” says Greg Gibb of Lufax, a Chinese wealth manager.

Breaking ground will be hard. Incumbents have a 25-year head start at building networks of branches and contacts throughout China’s huge landmass. Often they use investment banking to cross-sell other services to local companies, so can undercut outsiders on fees. Past episodes of liberalisation are not encouraging: in 2007, when Beijing first allowed foreign banks in, it hindered competition by forcing them to operate in bizarre locations. Today they have a 1.5% market share.

New entrants say it would be mad not to try. But many fear they will be crushed before they get big enough to make money. “We do not have expectations of short-term commercial success,” says the man in charge at an American firm. Another money manager in a tie-up with a local company says the flow of information seems to be going only in one direction.

Incumbents can hope for more efficient markets and some knowledge transfers. Many have started joint ventures with several foreign firms to cover all bases. “China is opening up because it is confident,” says a former Bank of China executive.

He compares the country’s financial industry to its automotive sector, on which China also lifted ownership caps last year. One such tie-up suggests possible dangers ahead for foreign companies.

In 2007 Geely, an obscure Chinese firm, partnered with LTI, the maker of London’s black cabs. By 2013 it had bought the business. It is now filling Britain with e-taxis that can out-green Uber.


Looking back on Peru’s Shining Path

The battle against murderous Maoist guerrillas changed Peru, for better and worse

FORTY YEARS ago this week, on the eve of a presidential election that ended a military dictatorship, five masked intruders set fire to the ballot box in Chuschi, a village in the Ayacucho region of the Peruvian Andes. Their action kicked off modern Latin America’s strangest and most brutal guerrilla insurgency, the 12-year terrorist war of Sendero Luminoso (Shining Path), a fundamentalist Maoist outfit akin to Pol Pot’s Khmer Rouge in Cambodia.

Today, although unexpected death has returned in the form of covid-19, Peru is a vastly better place. But the terror unleashed by Sendero (as Peruvians called the group), often matched by the state’s response, exposed social fractures and left scars.

A Truth and Reconciliation Commission later reckoned that 69,000 people were killed or “disappeared”, and around 500,000 were driven from their homes. It blamed Sendero for nearly half of the dead, government forces for around a third and village militias for most of the rest.

Sendero was the creation of Abimael Guzmán, a philosophy professor who gained control of the university in the colonial city of Huamanga, Ayacucho’s capital, in the 1970s, recruiting students and teachers, especially women. His insurgency’s centre was Ayacucho’s rural hinterland of rutted dirt roads, bleak mountains and lonely villages of Quechua-speaking subsistence farmers.

Sendero would come to be abhorred by most Peruvians. But its lynchings of abusive officials and traders in a neglected region of an unjust country initially garnered it some popular support.

Bello made half-a-dozen reporting trips to Ayacucho in those years and recalls the atmosphere of menace and grief in a faceless war, often conducted at night. Villagers soon tired of Sendero. Both it and the army committed massacres.

Only when the army recognised villagers as allies, organising them in militias, was Sendero defeated in its heartland. By then it had taken its terror and bombings to Lima. It contributed to and fed on an economic collapse.

Mr Guzmán created a bombastic personality cult, calling himself “President Gonzalo” and bracketing himself with Marx, Lenin and Mao as the “fourth sword of Marxism-Leninism”. He acted with absolute moral dissonance.

He directed the slaughter from the comfort of rented houses in posh districts of Lima. When old-fashioned detective work tracked him down in 1992, he meekly surrendered. Now aged 85, he has spent decades in jail. A few thousand of his supporters lurk in Lima’s shantytowns.

Alberto Fujimori, who presided over Sendero’s defeat and the economy’s revival, used its threat to erect a dictatorship. Hailed by many as a saviour, and hated by many others as a corrupt authoritarian, Mr Fujimori continues to divide. In different ways, both he and Sendero weakened institutions.
Max Hernández, a psychoanalyst, argues that despite the Truth Commission, the country “never carried out the job of grieving, of trauma relief”. He says that the war revealed that, after five centuries of racial mixing, Peru had yet to bridge the divide between its indigenous population and the rest. Three-quarters of the victims of the war were Quechua-speaking rural people, treated with contempt by Mr Guzmán and with indifference by the state.

In this century a flood of books about the Sendero years has appeared. In 2015 a museum of memory opened in Lima. Based on the work of the Truth Commission, it is moving and even-handed, telling the stories of victims on all sides. It has few visitors. Many Peruvians who lived through their country’s darkest recent chapter want to forget.

As for Ayacucho, “terrorism destroyed everything,” says Carlos Añanyos, whose family set up a soft-drinks business in Huamanga in 1988 that is now a multinational headquartered in Madrid. The region’s income per person is still only two-thirds of the national average. Mr Añanyos has set up a foundation that, pre-pandemic, was promoting tourism in Ayacucho, as well as the region’s products, such as speciality potatoes, natural colourings and handicrafts.

There are other grounds for hope. Out of the wreckage of the 1980s Peru created a successful market economy that slashed poverty.

The racial divide has blurred, especially among the young. Economic growth has reached people in the Andes, thanks to better communications.

Ayacucho means “corner of the dead” in Quechua. Covid-19 aside, at least that is no longer true.

A New Era for Beijing

China Is Happy to Fill the Leadership Vacuum Left by the U.S.

In the global jostling amid the coronavirus crisis, Beijing is extending its influence while U.S. President Donald Trump continues to squander America's leadership role. The pandemic could mark the beginning of a new Chinese era.

By Matthias Gebauer, Ralf Neukirch, René Pfister und Bernhard Zand

Graffiti showing the Chinese and American presidents, Xi Jinping and Donald Trump
Graffiti showing the Chinese and American presidents, Xi Jinping and Donald Trump

The leadership in Beijing has done everything in its power to ensure that the People's Congress can take place this year. Around 3,000 delegates will meet in the Chinese capital in late May, with many having traveled all the way from Shanghai and Sichuan, Tibet and Inner Mongolia.

They will walk across Tiananmen Square, past the red flag and soldiers of the People's Liberation Army, before taking a seat in the Great Hall of the People, which was built at the behest of the founder of the modern Chinese state, Mao Zedong.

For more than 20 years, China's Communist Party has held the National People's Congress in early March. It is a ritual of self-affirmation, and this has been especially true since the rise to power of Xi Jinping, who leads the country with an iron fist. Delegates don't debate much at the congress. Instead, they clap.

The congress is meant to give people in China and around the world an impression of how satisfied provincial Party functionaries are with the leadership in the capital. And that makes it all the more important that the meeting takes place this year, despite the coronavirus.

The fact that Xi has announced a specific date for the congress, namely May 22, sends a specific message: The corona crisis is over. For weeks, strict entry regulations have been in place in Beijing to prevent the political spectacle from being jeopardized by a last-minute flare-up of the epidemic.

Visitors from abroad are unwelcome. Even the 163 embassies in Beijing are not allowed to receive guests until mid-May. There are also rules in place requiring visitors to Beijing from the countryside to self-isolate for three weeks.

For a while, it looked as though the coronavirus outbreak would set China back years. But now, it's U.S. President Donald Trump who is reeling as his country fails to get the disease under control. As of Tuesday, almost 1.2 million people in the U.S. had been infected with SARS-CoV-2, the virus that causes the respiratory disease COVID-19.

In China, the country in which the pandemic originated, there were only 83,966 infected people as of last Thursday, according to statistics from Johns Hopkins University.

A Reignited Quarrel

Are we witnessing a shift in global power relations?

Beijing is seizing the moment to increase its influence, particularly in the South China Sea, where China -- to the annoyance of the U.S. and many neighboring countries -- is becoming increasingly bold and cementing its territorial claims.

A confidential situation report from the German Defense Ministry states: "The U.S. Navy assumes the Chinese navy will make use of the, albeit temporary, COVID-19-related absence of all U.S. aircraft carriers in the Pacific to deliberately increase military pressure on countries in the entire region." The report is apparently referring to the USS Theodore Roosevelt, which has experienced an outbreak of the coronavirus infecting nearly 1,000 crew members.

The fact that China is finally managing to become a superpower -- not just economically, but also geopolitically -- during the tenure of U.S. President Donald Trump is not without irony. After all, it was Trump who promised during the election campaign that he would put China in its place.

Upon entering office, Trump tapped the economist Peter Navarro to be one of his consultants on trade. Navarro once wrote a book titled, "Death by China," in which he warned that the world's most populous country would soon also have the strongest economy, at which point it would become "an effective killer."

This marked a radical change of tone. Ever since Richard Nixon's famous trip to Beijing in February 1972, every U.S. president has sought to establish a fruitful relationship with China. Trump, though, has favored confrontation. He called on American companies to withdraw from China and slapped the country with punitive tariffs. The fear of a stock market crash finally persuaded him to end his brinkmanship with Beijing. That, plus his admiration for the authoritarian Xi, who managed to make himself China's de facto head of state for life.

Now, the virus has reignited the quarrel between the two countries. Republicans in Washington are particularly keen to find a scapegoat. In February, back when there were only a few confirmed cases of COVID-19 in the U.S., Republican Senator Tom Cotton posited the theory that the coronavirus may have been concocted in a lab in Wuhan, a claim that was immediately taken up by Trump's favorite TV station, Fox News, and that is now being investigated by U.S. intelligence agencies, according to the New York Times.

As the pandemic spread in the U.S., Trump began referring to the "Chinese virus." At the end of March, Secretary of State Mike Pompeo tried in vain to get the words "Wuhan virus" to appear in the closing statement of the G-7 summit. Last Monday, Trump said he was demanding "substantial" compensation from China because the virus "could have been stopped at the source."

Different Approaches

Indeed, there is evidence that the world could have been spared a catastrophe had the Chinese regime not silenced doctors who warned of the new disease early on. "The lack of openness is disturbing and has contributed to depriving the rest of the world of the opportunity to respond to the virus," says Nicholas Burns, a foreign policy adviser to Democratic presidential candidate Joe Biden.

But unlike the U.S., the Chinese were consistent in their campaign against the virus. On Jan. 23, Beijing imposed a strict blockade of Wuhan and the surrounding province. When the measures were at their strictest, almost 800 million Chinese were subject to travel restrictions.

Those who displayed symptoms of the disease were transferred to hastily built hospitals in order to protect their family members from infection. Even if the official government figures are inaccurate, there is little doubt that China has contained the epidemic, while in the U.S., the number of deaths due to the coronavirus is still rising by the day.

A meat saleswoman in Beijing on April 24
A meat saleswoman in Beijing on April 24 / KEVIN FRAYER / GETTY IMAGES

Nowhere is the haphazard approach more apparent than in Georgia, where last week -- at the behest of the state's governor, Brian Kemp, and against President Trump's express wishes -- many stores were allowed to reopen. "The Barber Pole," a small barbershop in downtown Savannah, was well attended last Monday.

Two customers were getting their hair cut while a third was having his shoes shined. Four more men waited outside. Not everyone was wearing a mask. At the local deli, guests sat close to one another at tables.

Van R. Johnson, the mayor of Savannah, makes no secret of his desperation. "If the governor and the president and the mayor are all saying different things, it is extremely confusing and scary for our citizens," he says. Johnson pleaded with local businessmen not to open their stores. But why should his authority be respected more than the governor's, when even the president's words fall on deaf ears?

A Unique Opportunity

The discrepancy with China could not be greater. In Wuhan, the lockdown was lifted on April 8, after close to 11 weeks of strict quarantining. And even now, many shop owners in the city center aren't allowing customers into their stores but are serving them at the front door.

Fashion boutiques measure people's temperature before they allow them inside. And everyone wears a mask and has a coronavirus app on their smartphone.

The regime in Beijing was quick to recognize the opportunity the pandemic presented. The deeper the U.S. sunk into its crisis, the more China could prove its superiority. In March and April, Beijing dispatched teams of doctors to 16 countries.

At the same time, it provided more than 125 countries and four international organizations with relief supplies. While Italy was begging Europe for help at the beginning of the crisis, the Chinese billionaire Jack Ma was supplying the EU with 2 million protective masks.

But the regime isn't only limiting itself to charitable actions. Lu Shaye, China's top diplomat in Paris, was summoned to the French Foreign Ministry a few days ago after a text appeared on his embassy's website stating that French geriatric nurses were letting people "die of hunger and disease."

In March, a spokesman for China's Ministry of Foreign Affairs claimed that American soldiers had brought the coronavirus to China. The regime then more or less ignored the furious protests coming from Washington.

Protesters in Miami on April 25: The discrepancy between the U.S. and China could hardly be greater.
Protesters in Miami on April 25: The discrepancy between the U.S. and China could hardly be greater. / ADAM DELGIUDICE / AFP

The reality is that there's little Trump can do to oppose China. The government in Washington isn't just paralyzed by its mismanaged response to the coronavirus. China's rise is also the result of imperial hubris on the part of the U.S., which thought itself invincible after the collapse of the Soviet Union and waged wars that proved as expensive as they were fruitless.

According to one study, U.S. deployments in the Middle East and Asia alone have devoured an estimated $6.4 trillion (5.9 trillion euros) and cost the lives of 7,000 American soldiers since 2001. China, on the other hand, was busy concentrating on raising the standard of living for hundreds of millions of people.

While the annual, price-adjusted per capita income was a mere $430 in 1980, today's it's $10,000. Never before in the history of mankind has such a large country recorded such a dramatic increase in prosperity in such a short amount of time. In the U.S., per capita income rose from $33,400 to $65,100 in the same period.

Filling the Vacuum

At the same time, the U.S. is withdrawing from the system of international cooperation that it created in the first place. After the Second World War, it was Washington's efforts that led to the establishment of the United Nations, NATO and the International Monetary Fund.

That engagement cost America a lot of money, but it also secured its superpower status.

Trump, on the other hand, withdrew from the Paris Climate Accord, tore up the nuclear deal with Iran and, most recently, stopped payments to the World Health Organization.

China is skillfully maneuvering itself into the gaps the U.S. is leaving behind in international organizations, observes Germany's ambassador to the UN, Christoph Heusgen. Take Liu Zhenmin, the head of the UN Department of Economic and Social Affairs in New York, for example: When Western diplomats introduce themselves, his response is: "I am here on behalf of China and President Xi."

On Jan. 17, 2017, just a few weeks after Trump's election as president, the Chinese head of state traveled to the World Economic Forum in Davos, Switzerland, where he made a passionate plea for globalization. Three days later, Trump said in his inaugural address in Washington: "From this day forward, a new vision will govern our land. From this moment on, it's going to be America First." The contrast could hardly have been greater.

China wants to once again secure a place for itself on the world stage. The Chinese Empire lasted more than 2,000 years and for several centuries, it was one of the world's largest economic powers, alongside India.

That empire didn't begin to falter until the 19th century, when it was struck by multiple natural disasters and when the British forcibly opened up the country to the opium trade, causing many Chinese people to develop drug addictions.

In 1911, the nearly 300-year-old Qing Dynasty came to and end. What followed were decades of chaos and decline. The country was first invaded by the Japanese and then, after Mao came to power, sank into the turmoil of the Cultural Revolution.

It wasn't until the opening of China under Deng Xiaoping in the late '70s that the stage was set for an unprecedented resurgence.

A New Cold War?

Militarily speaking, China is still inferior to the U.S. The U.S. Navy has 10 aircraft carriers, while the People's Liberation Army only has two. But Beijing is becoming increasingly adept at combining military and economic pressure.

In early April, a Chinese patrol boat rammed a Vietnamese fishing vessel, whereupon Western diplomats encouraged the government in Hanoi to place the issue on the agenda of the UN Security Council. But the Vietnamese government, which has strong economic ties with China, preferred to leave the matter alone. Is the world facing a new systemic duel? A new cold war?

That's certainly how the hawks around Trump see it. "If you don’t want your grandchildren speaking Chinese and obeying Beijing, then this is a topic we better have a national dialogue about," the influential Republican Newt Gingrich said recently. Gingrich has close ties with the president and Trump even appointed his wife, Callista Gingrich, as the U.S. ambassador to the Vatican.

But does history simply repeat itself? There can be no doubt that China wants to regain its old place in the hierarchy of nations, writes Kishore Mahbubani, one of Asia's leading political intellectuals, in his book "Has China Won?" But it would be a big mistake, he goes on, for the West to believe the country has imperial aspirations similar to those of the former Soviet Union.

"It's no coincidence that China hasn't fought a major war in 40 years and hasn't fired a bullet outside its borders in 30 years." This is evidence, he argues, of the strong civilizing impulse of Chinese society.

In light of the artificial islands that China is developing into military fortresses in the South China Sea, this comes off as slightly gullible. "I don't believe that Beijing wants to spread the gospel of Communist Party rule around the world," says Susan Shirk, who served in the U.S. State Department under President Bill Clinton.

Instead, she believes, Beijing is driven by the fear that one day, the middle class will want to have its say -- which is why it is doing everything it can to keep the idea of democracy at bay.

From that point of view, America can only hurt itself, namely by betraying the ideals for which the country has long stood. The U.S. became a superpower not only with atomic bombs and the power of the dollar, but also through its "soft power," i.e. the promise of freedom, the brilliance of American universities and, frequently, the character and charisma of the man in the White House.

Right now, that man is Donald Trump.

But unlike China, the U.S. will soon have the choice whether to keep or replace him.

How to escape the trap of excessive debt

The rich will benefit if we create sustainable demand with less household borrowing

Martin Wolf

Golden calf for !%
© James Ferguson

“It is utterly impossible . . . for the rich to save as much as they have been trying to save, and save anything that is worth saving.”

Marriner Eccles, Congressional testimony 1933.

Debt creates fragility. The question is how to escape from the trap. To answer it, we need to analyse why today’s global economy has become so debt-dependent. That did not happen because of the idle whims of central bankers, as many suppose. It happened because of an excessive desire to save relative to investment opportunities.

This has suppressed real interest rates and made demand far too reliant on debt.

Two recent papers illuminate both the forces driving this rise in leverage and its consequences. One, directly related to the views of Eccles, who chaired the US Federal Reserve from 1934 to 1948, is on “The Saving Glut of the Rich and the Rise in Household Debt”.

The other, on “Indebted Demand”, explains how debt overhangs weaken demand and lower interest rates, in a feedback loop. The authors of both include Princeton’s Atif Mian and Chicago’s Amir Sufi, well known for their fine past work on debt.

As Eccles said so clearly, beyond a point, inequality weakens an economy by driving policymakers into a ruinous choice between high unemployment or ever-rising debt. The paper on the savings glut makes two points.

First, rising inequality in the US has resulted in a large increase in the savings of the top 1 per cent of the income distribution, not matched by a rise in investment. Instead, the investment rate has been falling, despite declining real interest rates.

The rising savings surplus of the rich has been matched by the rising dissaving, or consumption above income, of the bottom 90 per cent of the income distribution.

Line chart of Total debt as a % of GDP, weighted average of 14 advanced economies*  showing The ever-rising global debt mountain

The savings of the rich might have led to a current account surplus, as in late-19th-century UK.

But the rich of the rest of the world have sought to accumulate US assets, and so generated a persistent US current account deficit. Except when the pre-financial crisis housing bubble drove up private ­investment, this has also remained too weak. The chief users of excess foreign and domestic savings have been less well-off households and the government.

There is a clear link between the saving of the rich and dissaving of the less rich, and the accumulation of credit and debt. Since 1982, the decline in net indebtedness of the rich has been matched by the rise in indebtedness of the bottom 90 per cent. This is why the argument that low interest rates hurt the less well off is absurd. The less well off are not large net creditors.

The rich hold claims on the less rich, not only directly, via bank deposits, but via equity holdings in businesses that also hold such claims. This phenomenon of rising household debt and rising inequality is not unique to the US. It is widespread.

Line chart of Per cent showing The progressive fall in real interest rates

Why does the rising debt matter? One answer, as David Levy argues in Bubble or Nothing, is that the economy becomes increasingly driven by finance and fragile, as borrowers become ever more overburdened.

Another is the idea of “indebted demand” — a close relative of the idea of “balance-sheet recessions” propounded by the Japanese economist, Richard Koo.

As debt soars, people are ever more unwilling to borrow still larger amounts. So interest rates have to fall, to balance supply with demand and avoid a deep slump. In these ways, we have ended up where we were even before Covid-19, with real interest rates at zero.

This is one mechanism driving what Lawrence Summers has called “secular stagnation”.

Line chart of Shares of US national income (1982=100) showing The domestic rich and foreigners are equally big savers for the US

We must focus on the US first, because that is where global demand and supply tend to balance. But similar phenomena of rising inequality and soaring savings are to be seen in other big economies, notably China and Germany. The former used to export its excess savings to the
US, but now absorbs it in wasteful investment at home.

The latter has driven trading partners into rising debt in the eurozone and beyond. So, how are we to escape from the debt trap? One step is to diminish the incentive to finance businesses with debt, rather than equity.

The obvious way to do so is to eliminate the preference of the former over the latter in almost all tax systems. It is also possible, as Profs Mian and Sufi argued in an earlier book, to shift from debt to equity financing of housing.

In addition, we have a huge opportunity now to replace government lending to companies in the Covid-19 crisis with equity purchases. Indeed, at current ultra-low interest rates, governments could create instantaneous sovereign wealth funds very cheaply.

Line chart of Changes in net household debt as a share of national income relative to 1982, across the US income distribution (% points) showing The US rich have become much bigger creditors, while the rest have become much bigger net debtors.

Yet none of this would fix the ongoing dependence of macroeconomic stability on ever more debt. There are two apparent solutions.

The first is for governments to keep on borrowing. But, in the very long term, this is likely to lead to some sort of default. The well-off, who are the principal creditors of government, are bound to bear much of the costs, in one way or the other.

The alternative is to shift the distribution of income, in order to create more sustainable demand and so stronger investment, without soaring household debt. In 1933, Eccles also told Congress, “It is for the interests of the well to do . . . that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit.”

That happened, partly by accident and partly deliberately, after the second world war. Ever-rising household and government debt will not stabilise the world economy ­forever. Nor should asset-price bubbles remain so central to our economy.

We will have to adopt more radical alternatives.

A crisis is a superb a time to change course. Let us start right now.

G0949_20X Line chart showing Household and government debt against Income share of top 1% in the distribution

Coronavirus Crisis Has Made Even Global Banks Local

Lenders are flying their national colors during the Covid-19 shutdowns, making cross-border deals in Europe less likely than ever

By Rochelle Toplensky

European banking has become decidedly more local during the Covid-19 crisis. One consequence is that the dream of cross-border mergers seems more far-fetched than ever.

Locally-run banks have proved very useful to leaders in Paris, Berlin and other European capitals during the economic shutdowns aimed at arresting the spread of the new coronavirus. Recent first-quarter results showcased the role national lenders are playing in supporting their home economies.

In times of trouble, banks tend to focus on top clients—usually big multinational businesses with which they share national roots. That has happened in this downturn too. Many global companies drew on pre-existing credit lines as debt markets seized up early in the crisis, often only to deposit the cash back with the same local lender as a rainy-day fund.

As the Covid-19 lockdowns hit, politicians also worked closely with their country’s biggest banks to extend easy credit to citizens and small and medium-size businesses. Loan balances grew in the first quarter. Although a lot of the new lending was to big clients, state programs also encouraged banks to lend more widely despite the greater macroeconomic uncertainty and risk. Expected credit losses are also up, partly offset by government loan guarantees.

Europe’s banking sector is more fragmented and less profitable than its U.S. counterpart. Some policy makers, investors and bank executives have long called for cross-border deals to help revive profits and build the scale necessary to take on Wall Street rivals. The last big flurry of rumors in mid-2018 centered on Italian group UniCreditand France’s Société Générale.

The current turmoil could create opportunities for big banks to buy up struggling domestic rivals, as happened in 2008. But the pandemic response has also underlined the entrenched localism of European politics, making cross-border deals less likely than ever.

To make them work, politicians would need to overhaul European banking rules. Negotiations have been stalled for years. Breakthroughs were achieved in the heat of the eurozone crisis, when national leaders overcame their entrenched positions to agree to new rules on stability funding. The current crisis might just usher in a new compact, but early signs aren’t promising.

Home bias was also evident in investment banking when European debt markets revived late in the first quarter and companies rushed to issue new debt. BNP Paribasand Deutsche Bankseem to have won business in their domestic markets as rivals from London and New York retreated to focus on their own core clients.

Big U.S. banks had been competing fiercely in Europe, particularly in investment banking.

Faced with this stiff competition, as well as slow growth and ultralow interest rates, many European lenders have scaled back their global investment-banking ambitions over the past five years and refocused on their home markets. The latest crisis only seems likely to reinforce this long-term trend.

For country leaders, it has been helpful to lean on local banking executives in a crisis. A pan-European behemoth—with divided loyalties and multiple political masters—would likely face opposition at the national level, even if regulators in Brussels and Frankfurt might welcome it.

While the conditions might soon be ripe for banking consolidation in Europe, domestic tie-ups are still the best investors can hope for.