Economy

The hinterland is in revolt. This has been a theme of much of the political commentary on the election of Donald Trump and the vote for Brexit in 2016. In the UK, the idea has been further cemented by the success of the Tories in winning seats long loyal to Labour in the 2019 general election — turning the “red wall” blue. Quite suddenly, what economic geographer Andrés Rodríguez-Pose calls the “places that don’t matter” do: they have been at the forefront of these populist rebellions.
The UK government has promised a “levelling up” of these places, as a way to entrench the shift in political loyalties. The question, however, is whether the country has a well-defined problem, with clear solutions. The answer, alas, is no. It has neither. It might prove far easier to level the economy down, by destroying London. The indifference to the fate of London’s service industries in the Brexit deal suggests the government might even like to do so, though the deal’s impact on EU-destined exports of manufactures is likely to offset this.

The starting point has to be with an attempt to understand the problem. This turns out to be complex, on at least two dimensions: place versus people; and productivity versus consumption. On the former dyad, the question is whether one should care more about places or the people who currently live there? On the latter, the question is whether we should care more about what people do or how they live?

The distinction between productivity and income is critical. A paper published by the National Institute of Economic and Social Research last year argued that the “UK today is one of the most geographically unbalanced countries in the industrialised world”. Regional inequality in output per head is exceptionally large in the UK, with London far above the rest. This reflects the benefits of agglomeration and the costs of deindustrialisation, reinforced by over-centralised governance.

Yet, perhaps surprisingly, as the Resolution Foundation and others have pointed out, the distribution of real household disposable incomes, earnings and employment is far less regionally unequal than that of output per head. Moreover, while regional inequality in output per head and per worker has tended to rise since 2000, that in earnings and employment fell, at least pre-Covid-19.
This is due, in part, to the combination of higher minimum wages with higher employment — a real success. Moreover, housing costs are very regionally unequal. Thus, according to the Resolution Foundation, the regional variation in real median household disposable incomes, after housing costs, was at its lowest since the 1970s, pre-pandemic. The UK also has fairly average regional inequality in household incomes among OECD members.
Suppose, quite reasonably, we care more about people than places and consumption than output. We would conclude there is no big problem of regional inequality as such. The problem is poverty, which is an important issue everywhere, including London, with its high cost of housing and low real incomes for those dependent on minimum wages or state benefits.
The solution to poverty is for the government to provide resources needed for good education, health services, local government services and welfare support, everywhere. It was a mistake to slash money for local authorities, especially in poorer areas, and to cut spending on investment and welfare, in the austerity programmes imposed by the government after the financial crisis.

Yet this does not mean regional inequality in productivity should be ignored, for three reasons. First, redistributing money from wealthy regions to poorer ones, in order to equalise consumption, is a burden on the former and one that the post-Brexit UK may be less able to afford. Second, the concentration of highly educated people in a relatively small part of the country divides it culturally, in a very unfortunate way.

Finally, and most importantly, as the Niesr paper persuasively argues, a large economy cannot fly fast on just one regional engine. The paper’s most important finding is that the UK has just one big high-productivity city and many low-productivity ones. Despite their size, these cities are no more productive than the regions around them.
Policy must therefore focus on developing what the late urbanist Jane Jacobs called “city-regions”. These must be granted the autonomy and resources needed to create their own development paths. The aim must be to help the UK’s city-regions develop themselves, but London must be allowed to develop, too. The country will need all its growth engines in the years ahead.
martin.wolf@ft.com
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Zambia’s attempts to stabilise its finances in the wake of Africa’s first pandemic-era bond default have been jeopardised by a pre-election push to take control of its copper mines and take on new debt.
After a November default and with further payments due in the coming months, Africa’s second-biggest copper producer had hoped to strike a deal with the IMF and creditors to restructure $12bn of external debt before August’s presidential election.
But despite pressure by the fund and bondholders on the government to stop accumulating new debts, a state mining company took on $1.5bn of loans last week to take over Glencore’s Mopani Copper Mines operation. This follows a pledge by President Edgar Lungu in December to acquire “strategic” stakes in the country’s mineral wealth. Lusaka also plans to boost domestic borrowing to keep the economy ticking over and fund election spending.

Zambia was already struggling with ballooning debt before the Covid-19 crisis and its attempts to restructure were seen as a crucial test case for poorer nations trying to find debt relief during the pandemic.
While last week’s deal is “a dream deal for Glencore” for Zambia’s other creditors and the IMF, “it does send a pretty clear signal that the government’s fiscal priorities are a function of what will get it elected”, said Connor Vasey, an analyst for Eurasia Group.
Bailout talks with the IMF will resume next month, according to Zambia’s finance ministry. But investors have doubted there will be a breakthrough before the August election, given political reluctance to commit to difficult reforms. Without IMF oversight in place bondholders are unlikely to agree to a restructuring.
Mr Lungu is “filling the economy with more debt, expensive debt” with deals such as the Mopani takeover, Hakainde Hichilema, Zambia’s main opposition leader said.
The Glencore deal in itself will not impact bondholder discussions or an IMF deal “though it will result in an increase in public sector debt, something the fund will flag”, said Kevin Daly, a fund manager at Aberdeen Standard Investments and who is on a committee of Zambian bond investors.
Last year deals were struck with major Chinese creditors to delay debt payments, but analysts say that Zambia will need to seek further deferrals this year before the election. Deferred interest on borrowings from the China Development Bank is due in April. The government is also still having to service debt attached to priority projects.

Analysts say that Mr Lungu’s government is likely to lean further on local banks to borrow in its own currency — including the Bank of Zambia, which has raised holdings of government bonds in the last year.
“There will always be someone to play ball with,” if Zambia needed to turn to external loans in the midst of default, but it would have to pay up for them because of the risk of further default, Mr Vasey said.
Last year, Mr Lungu abruptly fired a technocrat as central bank governor and replaced him with a former deputy finance minister, prompting a warning from the IMF about the importance of central bank independence.
The government’s budget for this year allowed for an almost fivefold increase in domestic borrowings to just under 15 per cent of the budget — a rate of increase that might have to be backstopped by the central bank’s purchases of government bonds, Mr Vasey said. “They have options.”
Zambia’s President Edgar Lungu, left, and China’s President Xi Jinping during a welcoming ceremony in Beijing © Jason Lee/Reuters
Zambia’s copper belt mining heartland will be a major battleground for a re-election battle by Mr Lungu who has portrayed himself as defending thousands of mining jobs. “The Zambian government justifies the takeover of Mopani because mining jobs were under threat,” said Situmbeko Musokotwane, an opposition politician and former finance minister. But “mining jobs are under greater threat under government ownership” because of the burden of repaying the debt, he said. More

Joe Biden’s inauguration as US president offers a crucial opportunity for America — and other western allies — to reset policy on the defining geopolitical issue of today, and perhaps of the 21st century: how to deal with the rise of China as a great power.
The starting point should be a clear-eyed assessment of China’s behaviour. In the past year, China has crushed freedoms in Hong Kong, intensified its persecution in Xinjiang, skirmished with Indian troops on its border, placed sanctions on Australia and threatened Taiwan. It is hard to argue that Beijing represents anything less than an unambiguous challenge to western influence and democratic values.
Strategically, it displays an ambition to control the South China Sea and project military power across the Indo-Pacific. The increasingly sophisticated People’s Liberation Army is charged with being able to win global wars by 2049. Civilian technology companies are officially required to hand over any knowhow that the PLA demands.

Nonetheless, China is alluring. It contributes the largest share of global growth and remains the biggest trading nation. Its co-operation is also crucial to the future of the global commons, especially when climate change threatens the livelihood of all humanity.
Seeking to isolate China or sever its commercial links with the west is hence a non-starter. But so is “constructive engagement”, a policy that predates China’s accession into the World Trade Organization in 2001, but proved naive. It raised false hopes that exposure to commerce with the west would somehow inculcate liberalism into Chinese politics and society. More realism needs to be injected into the relationship.
Mr Biden should recognise that, for all its chaos, the administration of Donald Trump understood the utility of a hard edge towards Beijing. But he should also be clear that Mr Trump’s inability to bring western allies alongside was a fatal flaw. The EU’s investment treaty with China, agreed at the end of 2020 in spite of appeals by Mr Biden’s team to slow down, was in part a reflection of how much US influence has waned during the Trump years.
To be effective at countering China, the west needs priorities, and unity. Beijing has long been adept at sniffing out western inconsistency, for example in criticising the country’s human rights record without any plan to follow up with concrete penalties. China has also found it far too easy to undermine western attempts at a united front, typically by offering commercial lures to weakest-link countries.
The west therefore requires a mechanism to back its bark with real bite. Mr Biden should work with allies to create groupings that not only enable multilateral responses to Chinese misdemeanours but penalise their own members if they violate the unified front. Old engagement-era forums, such as the WTO, have become too sluggish and too fractious.
The strategy of the US and its European and Asian partners should reflect an uncomfortable reality. Trying to change China’s domestic nature by nudging it towards a more liberal path has failed. The focus should be on combating Beijing’s efforts to project its vision and power abroad through its influence campaigns and increasingly assertive military posture.

Mr Biden takes the helm with US dominance in decline and western democratic systems under attack. The west must find a way to trade profitably with China and co-operate in meeting common threats such as climate change, while restraining the spread of Beijing’s authoritarian creed. The future of the free world depends on it. More

What impact will Biden stimulus plans have on Fed policy?
Federal Reserve officials convene this week for their first gathering of 2021 against a backdrop of surging coronavirus cases and further evidence that the economic recovery has fizzled.
Investors, however, have largely looked past these growth headwinds, instead focusing their attention on the potential injection of $1.9tn of additional stimulus should president Joe Biden’s plan pass through Congress.
The prospect of substantial fiscal aid has prompted economists to revise higher their forecasts for growth. Goldman Sachs now expects US gross domestic product to expand 6.6 per cent this year, with the unemployment rate ticking down to 4.5 per cent by the end of the year from 6.7 per cent in December.

Investors will watch Wednesday’s press conference closely for any signals from Fed chairman Jay Powell about the US central bank’s commitment to keeping its ultra-accommodative monetary policy in place should inflation also return at a faster pace than previously expected. 
Recent comments from a handful of regional Fed presidents about the possibility of the central bank beginning to taper its enormous asset purchase programme as early as this year rattled market participants, who largely assumed the Fed would not start scaling back until 2022. 
Mr Powell has sought to alleviate any fears of a repeat of the 2013 “taper tantrum” episode that saw financial conditions tighten dramatically. Investors believe he is likely to affirm that message once again.
“Any disorderly rise of interest rates could create unstable conditions for the markets which the Fed tries to avoid, especially at a time when parts of the economy are still very depressed,” said Solita Marcelli, chief investment officer of the Americas at UBS Global Wealth Management. Colby Smith
Will the UK’s new EU trade relationship buffet the pound?
Sterling has had an upbeat start to 2021, reaching close to a three-year high against the dollar last week and also ticking up against the euro.
Positive news about the progress of vaccinations has bolstered hopes of a robust economic recovery as many analysts look beyond the gloomy figures trickling out of an economy constrained by lockdowns, including disappointing purchasing managers’ index data for January on Friday.

But analysts are wondering if the buoyant tone will last, questioning whether the longer-term impact of the UK’s new trade relationship with the EU will be a headwind for the currency.
Derek Halpenny, head of research at MUFG Bank, noted that recent surveys suggested long delays at the UK border for goods coming from the EU, even as the volume of traffic stands at only 70 per cent of normal averages due to coronavirus-related restrictions.
However, Dean Turner, an economist at UBS Wealth Management, said that while January’s activity indicators would weigh on sterling in the short term, these wrinkles should iron out over time and allow sterling to trade above $1.40 later this year. On Friday, it was trading just under $1.37.
“We should be mindful that although services in the UK and Europe are feeling the pinch, things aren’t as bad as they were last spring, and firms remain optimistic on the outlook,” Mr Turner said, adding that the outlook for the pound was brightened by a weakening US dollar. Eva Szalay
Will European equities continue to rise?
European equities have reached their highest level since shortly before the market tumult last March. The Stoxx 600, the region’s benchmark, is up 2 per cent since the start of the year, with Britain’s FTSE 100 increasing nearly 4 per cent.
The recovery in the region’s equities bourses has been supported by vast stimulus programmes from governments and central banks such as the European Central Bank and Bank of England. The rollout of coronavirus vaccines has provided a further boost that has helped relieve the sting of renewed social restrictions.
Tui, the Germany-based travel and tourism company, has risen 24 per cent this year in London trading. Other big gainers include Switzerland’s Zur Rose Group, Europe’s largest ecommerce pharmacy, which is up 51 per cent, and the UK’s Royal Mail, up 22 per cent.
“In our central scenario, European equities will continue to rise,” said Juliette Cohen, strategist at CPR Asset Management, who forecasts a 10 per cent rise this year for the Stoxx 50 index of blue-chip eurozone groups.
According to Ms Cohen, European equity markets will be supported by a strong rebound in profits as companies recover from the pandemic and the prospect of an attractive dividend in a period of low interest rates.
Tancredi Cordero, chief executive officer at Kuros Associates, pointed to luxury goods as a sector that would benefit from the buying spree that would come as lockdowns ease and “new bags and expensive apparel can be flaunted socially, especially if we consider that people have been saving a lot in 2020”.
Travel-related stocks, such as aeroplane maker Airbus and airport retailer Dufry, may also attract interest from investors in coming months, analysts said. Leke Oso Alabi More

The writer is a specialist regulatory adviser and former head of The Office of Fair Trading (now the Competition and Markets Authority)
Last November, a significant piece of legislation was introduced in the UK parliament that in more normal times would have provoked far greater coverage and concern.
Although it has been overshadowed by Covid and Brexit, the new National Security and Investment Bill threatens to change the investment environment in Britain radically — though few companies yet realise the extent of its impact. Peter Mandelson, a former UK business secretary, has described the bill as “a powerful deterrent to foreign direct investment”.

The bill introduces a new regime for monitoring inward investment on national security grounds. It requires any investment in a company in one of 17 industrial sectors that amounts to more than 15 per cent of the company’s value to be notified to a new government body: the Investment and Security Unit. For other sectors, notification is voluntary. The bill gives the government power to block a transaction if the ISU has concerns.
Such legislation captures the zeitgeist of the times. Other advanced economies have also recently introduced or extended laws to protect sensitive industries from foreign takeover. But this is far more than the UK playing catch-up in a worldwide outbreak of protectionism. It goes way beyond what has been introduced elsewhere — in two ways.
First, the scope is incredibly wide. It covers all sectors of the economy, and the investment threshold for mandatory notification is incredibly low. The UK government will even be able to intervene in cases involving businesses that have no UK assets, because the law will cover foreign companies that are active, or sell goods and services, in Britain.
Second, the powers of intervention are draconian and can be applied retrospectively. The government can “call in” deals up to five years after they have been completed, and it then has the power to declare them to be null and void. This applies to any investments made after the bill was introduced.
The threat of such drastic action means investors will want to play safe — especially as there is no definition in the bill of what actually constitutes “national security”. Before going ahead with any deal, participants will be keen to seek full clearance from the ISU — an organisation that does not yet exist. When it does, the body will be expected to handle hundreds of times more deals than are currently investigated for national security. That may lead to long waiting times and, perhaps, some investors seeking other homes for their money.
Ironically, two days before the bill was introduced to parliament, the prime minister launched a new “Office for Investment”, set up specifically to improve the UK’s ability to attract foreign investors. That is sensible, as there is clear evidence that foreign direct investment increases productivity. But the security bill ensures this new office will start with at least one hand tied behind its back. 

The most worrying aspect of the bill, however, is that it will encourage any vested interest that does not like the look of a deal to lobby politicians to call it in for investigation on national security grounds. Regulatory delays or uncertainty can kill deals. Foreign investment into wind-farm projects could be stymied by a complaint from competing energy firms. A takeover could be held up by workers objecting to job relocation. At present, ministers can say they lack the ability to intervene, but the bill will change all that. It will be a charter for economically wasteful lobbying amid Kafkaesque bureaucracy.
At a broader level, the legislation is simply misdirected. It buys into conspiracy theories about malevolent foreigners itching to buy up corporations in order to steal hard-won secrets. When introducing the bill, the former business secretary Alok Sharma said that “hostile actors should be in no doubt that there is no back door to the UK”. How can direct investment in a company be described as a secret “back door”?
In most of the 17 mandatory sectors identified by the bill, national security risks lie more with people and knowhow than with capital. Why would malevolent foreigners buy expensively into companies when they can simply try to hire a few key employees who carry valuable intellectual property in their heads? Or when they can recruit leading academics from university research departments?
In the US, the FBI is well aware of this latter possibility and recently sharpened its focus on America’s key universities, asking a number of them specifically to monitor the information that their Chinese research students can access. The interests of national security are better served by steps that target the risk directly than by threatening to staunch the economic lifeblood of foreign direct investment.
With a new secretary of state for business, Kwasi Kwarteng, now in post, it is time for a radical rethink. More

Opportunities for investors seen despite economic and technological rivalry More