The Economist: Finance and economics articles summarised

Vietnam’s growth model
Vietnam is in the midst of its worst virus outbreak and large parts of its manufacturing are impacted by its strictest lockdowns yet. Their GDP rose 2.9% in 2020 and this year could see even faster growth despite the lockdown. The World Bank forecasts growth of 4.8% for 2021. Its openness to trade and investment has powered the economy and it has been one of the fastest growing economies in the world over the last 30 years, see chart below. It has been compared to China but its goods trade exceeds 200% and its deep connection to global supply chains and high levels of investment make it more like Singapore. It has become overwhelmingly dependent on investment and exports by foreign firms; domestic firms have underperformed. They have in part been dragged down by state-owned firms, who benefit from preferential treatment from banks. As they borrow cheaply, banks make up for this by charging other domestic firms higher rates. It has been estimated their productivity gains would have been 40% higher since 2007 without state-owned firms. The government wants something akin to South Korea’s chaebol to help the private sector grow, but this will be difficult if the economy is still open to investment. Due to their membership of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and other trade deals they must extend support to foreign firms as well as domestic. Vietnam is also helped by their vast diaspora either investing or returning home. To keep this growth going the domestic sector will need to be reformed.

Labour shortages
House building in America has stalled due to shortages in material and labour. Although shortages in materials may ease, employing skilled labour will still be difficult. This happened at a time when demand for housing boomed given low interest rates and demand for bigger homes. House prices have shot up, chart below. These labour shortages are the same all over the rich world. Fear of the virus and benefits have kept workers away. Travel restrictions due to the pandemic have also hit the construction industry as have changes to immigration laws implemented under President Trump. America’s workforce is also aging, causing skilled workers to retire. Infrastructure spending may suck out more workers.

Bitcoin as legal tender
San Salvador will make Bitcoin legal tender on September 7th, alongside the dollar, yet two-thirds of Salvadoreans surveyed by Disruptiva are unwilling to be paid with Bitcoin. Despite this, El Salvador’s law goes further than making it just legal tender, it will include the ability to settle debts and businesses will be required to accept it as payment for goods or services. Some are sceptical of the President’s plans as just a stunt for the president’s brothers who are crypto-enthusiasts. He has said it will help foreign investment and reduce the cost of remittances. This may be totally wrong. The bitcoin cash machine used by The Economist charged a 5% fee.

Climate risk
Regulators around the world have warned of climate change effects on the financial system. There are three ways this can happen; “transition risks” when governments follow strict climate policies and capital moves away from polluters; insurance risks as losses have trebled due to rising temperatures and weather related catastrophes; and asset price volatility as climate change causes wider economic damage. Initial stress tests by central banks suggest the final risk is manageable but some claim the models used are out of date. A possible concern is if governments hesitate then introduce too much change too quickly.

Buttonwood
Sustainable investing, there is pushback on how it’s done and measured. The SEC wants to clampdown on “greenwashing”, where companies and investors make claims about ESG friendly investments but they don’t always hold up. DWS is being investigated by the SEC and its European counterpart after the firm’s former head of sustainability questioned claims by the asset manager. A former sustainable investing expert at BlackRock said the investment industry is self-interested and the new initiative is just a way to charge more fees. Even if the approach does tweak firms’ cost of capital, it just gives the false impression that the industry can lead the change.

Free exchange
Jackson Hole, how and when to tighten policy with inflation and unemployment in mind. Research from Veronica Guerrieri et al said inflation helped workers shift from one job to another, a shift that is necessary as the economic recovery is so uneven. This works by allowing nominal wages in lagging industries to fall as it’s not easy to cut wages, but it is easier to raise wages in the other industries. As regards unemployment, Bart Hobijn and Aysegul Sahin found that lowering unemployment increases the participation rate. In this present recovery, the participation rate has not recovered while the employment rate has.

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