The Economist - Can anyone stop Narendra Modi? Part 8

Frontier markets are generally small, illiquid and risky, so it is a surprise that recent tremors in emerging markets have not shaken them more. Exotix, a broker, calculates an average interest-rate spread of Eurobonds from 50 frontier markets (compared with Treasuries). The spread on its index has narrowed to 395 basis points. The gap between the Exotix measure and J.P. Morgan's benchmark Emerging-Market Bond Index (EMBI) reached an all-time low of 68 basis points this week (see chart 1). Nor has investors' interest been confined to bonds. The MSCI frontier equity index lagged behind its emerging-market cousin after the global financial crisis but recently has been catching up (see chart 2).

Frontier markets might once have been dismissed as a side bet for emerging-market funds looking to pep up returns. They are now seen as an a.s.set cla.s.s in their own right, says Andrew Brudenell, who runs $700m of frontier equity funds at HSBC. Pension-fund trustees and consultants now ask how much money they should allocate to the frontier. The rising interest is in part because GDP growth in China, Brazil and India has diminished. The things that made emerging markets exciting in the 1990s are now found in frontier markets, says Charlie Robertson of Renaissance Capital, an investment bank.

There is much debate about where the frontier starts and ends. If the definition is a market that is neither developed nor emerging, then 23 of the 25 fastest-growing economies over the past decade are in the frontier category. But many of these frontier economies do not have stockmarkets and only Qatar is in the MSCI frontier-market index, an industry benchmark. To qualify, a stockmarket must have at least two stocks that meet specific thresholds for size and liquidity. It must also be "accessible": this is harder to quantify but what matters is openness to foreign ownership, the ease with which capital can flow across borders and the stockmarket's functioning. Only 24 markets across eastern Europe, the Middle East, Africa and Asia make the cut. Their combined market capitalisation is $146 billion or so. By comparison the 21 stock markets in MSCI's emerging-market index are worth $4 trillion.

A familiar grumble about these sorts of indices, which are weighted by the market value of stocks, is that they have a skew that is unfavourable to bargain-hunters. Investors in index trackers spend more on stocks that have gone up in price. It is an acute problem for frontier markets. More than half of the MSCI index is accounted for by stocks from three oil-rich Gulf states: Qatar, the United Arab Emirates and Kuwait (though the first two will soon graduate to emerging-market status).

The purist sort of frontiersman sees the job as investing in poorer countries with the greatest potential. Purists give more room in their portfolios to stocks from poor, populous and fast-growing markets, such as Nigeria or Pakistan. As countries like these become richer, their middle cla.s.ses will grow and spending on infrastructure will increase. The so-called BBC stocks (banks, brewers and cement companies) are one way to play these investment themes. Zenith Bank, Nigerian Breweries and Dangote Cement are popular stocks. Nestle has a subsidiary that is listed in Lagos. In Pakistan there is Bank Alfalah and DG Khan, a cement company.

Specialist funds wanting to spread their bets may look at markets and stocks that are not in the main index. Saudi Arabia is a liquid market but tricky for foreigners to invest in. Its stockmarket sports SADAFCO, a dairy producer. Cambodia is another off-index bet. It has Nagacorp, a casino. Often the only way to buy exposure is through bonds. Angola is Africa's third-biggest economy, after South Africa and Nigeria. It has no stockmarket but it does have a Eurobond. Mozambique's Eurobond was ostensibly for a state-backed fishing venture. Investors bought it anyway, with one eye on the country's fast-growing economy and the other on its offsh.o.r.e gas reserves.

Greater demand should spur the supply of stocks, through sales of private stakes or privatisations. Deeper equity markets would be welcome. Access to debt markets is more of a mixed blessing for some. Ghana issued its first Eurobond in 2007. Within a few years its budget deficit blew out to 12% of GDP after a large public-sector pay rise. Mozambique shows worrying signs of similar trouble.

Zambia meant to use its proceeds wisely. The money was to go on targeted projects. New roads in the copperbelt make sense since so much cargo is sent by truck. But easy money leads to lax discipline (see article). The state's wage bill has become bloated. The budget deficit may be as high as 8% of GDP this year. To help fill the gap, Zambia is said to be plotting another Eurobond.

b.u.t.tonwood Now you see them Central banks will be financing governments on a permanent basis Apr 5th 2014 | From the print edition EVERYBODY would like a rich uncle to help them when times are hard. And that is the role central banks have been playing in recent years, easing monetary policy at a time when economic output is below trend and the scope for fiscal stimulus has been reduced.

The most controversial aspect of this support has been "quant.i.tative easing" (QE), the creation of money to buy a.s.sets, mostly government bonds. Central banks resorted to this expedient in the depths of the crisis as interest rates approached zero. The role of QE was to provide liquidity to the system and to ensure that long-term rates did not rise too far.

The policy had the useful side-effect, as far as governments were concerned, of providing a willing buyer for their bonds at a low interest rate. To be fair, central banks did not buy in the primary market: that is, when the bonds were issued. But the fact that they were buying in the secondary market gave an incentive for private-sector buyers to stump up.

The unanswered question was how the central banks would ever unwind these positions. The Federal Reserve owns some $2.3 trillion of Treasury bonds; the Bank of England has 375 billion ($624 billion) of gilts. Any sign that central banks were selling their holdings, or not reinvesting when bonds mature, might cause the bond market to panic. When the Fed hinted at tapering last year-merely reducing the amount of bond purchases-yields rose by more than a percentage point.

Sir Mervyn King, when head of the Bank of England, displayed a certain insouciance on this question. In February 2012 he told the press: "I have absolutely no doubt that when the time comes to reduce the size of the balance-sheet that we'll find that a whole lot easier than we did when expanding it." Whether he pa.s.sed his cunning plan on to his successor, Mark Carney, is not known. But Mr Carney recently revealed that the Bank did not expect to unwind all its gilt holdings; post-crisis, central banks will have to have a much bigger balance-sheet to cope with the liquidity needs of the banks.

This is a perfectly respectable argument and seems likely to be replicated elsewhere. In a paper for the Peterson Inst.i.tute, Joseph Gagnon and Brian Sack argue that "the Fed should not shrink its balance-sheet all the way back to a size that would have been considered normal prior to the global financial crisis but should instead leave a larger amount of liquidity in the financial system on a permanent basis."

Nevertheless, it is worth reflecting on the road that has been travelled, paved all the way with good intentions. When QE was first announced, it was the equivalent of emergency surgery. Then, further rounds were needed to help the economic patient recover. The third step was for the Bank of England to hand back to the Treasury the interest it earned on government bonds, in the name of good accounting. And now what was originally a temporary arrangement has been turned into something more permanent.

All along, the authorities have denied that this process represents "monetisation" (the monetary financing of government debt), which is something of a taboo in central banking. But the c.u.mulative impact is similar. The British government has in effect ended up with an interest-free loan from its central bank, financed by money creation. The debt has not been formally cancelled, but it might as well have been.

The obvious response is: where is the harm? Previous instances of ma.s.sive monetisation-in Zimbabwe, say, or Weimar Germany-had led to hyperinflation. This time round inflation is low and falling. If the authorities had not used QE, the alternative might well have been a deeper recession, higher unemployment and a lower standard of living. Set in that context, worries about the theoretical risks of QE seem like a luxury we cannot afford.

But another reason why monetisation has always been frowned upon is that it is an easy option. Why should governments finance spending with unpopular taxes or borrow from suspicious bond investors when they can get the money from a friendly central bank? The process makes democratic leaders less accountable; by boosting a.s.set prices, which are mostly owned by the rich, it may well have led to a rise in inequality, without the sanction of any vote. Perhaps in ten or 20 years' time, recent events will be seen as the moment the world crossed a line.

Economist.com/blogs/b.u.t.tonwood j.a.pan's economy Out of the zone Shinzo Abe's fancy economic areas are big enough but not bold enough Apr 5th 2014 | TOKYO | From the print edition Transformation-ready FOR Izumi Yoshimura, an estate agent in Tokyo's Ginza shopping district, the increase in the consumption tax on April 1st from 5% to 8% is a triple blow. It lifts her cost of living; she will need to rejig her firm's computer systems at great expense; and her commissions are likely to fall along with sales of apartments. Adding to the downbeat mood this week, the Tankan survey from the Bank of j.a.pan showed that many firms are concerned about the dampening effect of the tax hike. Retailers were particularly gloomy.

Consumption is expected to crater in the weeks following the rise. The country's GDP could shrink by as much as 4.1% (annualised) in the second quarter, say economists. It was mainly the central bank's radical loosening of monetary policy, which began a year ago, combined with a big dollop of fiscal spending, that has lifted j.a.pan's growth up to now. Further easing by the central bank is likely to follow the tax rise, but the expected economic dip will also heap more pressure on Mr Abe to press ahead with other growth-boosting measures. Thus far his government has largely failed to deliver on its promise of structural reforms.

For those who fear that he may continue to shirk the task, the announcement of the locations of six special economic zones on March 28th came as welcome news. The idea is that in the tokku, as the zones are known in j.a.pan, firms will be able to take steps that are too controversial for the country as a whole, such as hiring and firing workers more easily. The rules are later to be extended nationwide. The brand-new tokku cover a vast swathe of ground. Greater Tokyo is included, as are the region of Kansai, Narita City in Chiba prefecture and f.u.kuoka. In total, an area producing nearly two-fifths of j.a.pan's GDP will fall inside the zones.

Some of the zones will carry out particularly ambitious deregulation. In Yabu, a small town in the mountains of Hyogo prefecture, and in Niigata, a slightly larger city, the ability of local agricultural committees to block large companies entering the protected area of farming will be sharply reined in. If extended nationwide, that could help transform j.a.panese agriculture. In f.u.kuoka, where local officials are similarly ambitious, labour practices are to be reformed so that firms can far more easily adapt the size of their workforces.

Yet the efforts of bureaucrats in recent months to resist and water down deregulation in the tokku are also visible. Foreign doctors will be allowed to practise, but only on foreign patients, not on j.a.panese ones as at first planned. No measures are included on important areas such as immigration, or immediately lowering corporate taxes. And the city of Tokyo, economically the weightiest of all, is holding back. It wants the new labour practices to apply only at foreign firms, not at j.a.panese ones. The city's new governor, Yoichi Masuzoe, who was elected in February, received strong support during the campaign from labour unions, which are wary of such changes.

All is not lost. Four members of Mr Abe's council on the special economic zones denounced Tokyo's measures as "wholly inadequate", and the council has demanded that Mr Masuzoe rewrite the city's proposal. Mr Abe promised on March 28th that over the next two years, all protectionist "bedrock" regulations will be subject to change in the tokku. For now, says Eiji Hara, a former bureaucrat who sits on Mr Abe's working group on the zones, the two real special economic zones are Yabu and f.u.kuoka, for these relative minnows are far bolder than the rest of the tokku put together.

Banks and fraud Hacking back Bankers go undercover to catch bad guys Apr 5th 2014 | NEW YORK | From the print edition Funny, you don't look like a banker FIVE years ago MI5, Britain's security service, sent a doc.u.ment to British firms, giving warning that Chinese spies could be seeking to "exploit vulnerabilities such as s.e.xual relationships" among Western businesspeople. Moneymen are obvious targets for honey traps, but they can set them too-as they are increasingly doing to catch cyber-fraudsters.

A midsized American bank has taken a leaf out of Ian Fleming's book with a project, known internally as "Honey Banker", to smoke out fraudulent payments. It has created a coterie of non-existent bankers, with fake e-mail addresses and biographies, whose details appear on bogus web pages not linked to the rest of the bank's website. If a transfer request comes in to one of these aliases, it is likely to be from a fraudster. The bank blocks the sender's internet address, pending further investigation. (The Economist is withholding the bank's name so as not to blow its cover.) Though not yet widespread, this sort of counter-intelligence tactic is becoming more common as banks look for creative ways to ensnare the online scammers, says Aaron Glover, a fraud expert at SunTrust, another American bank. Some banks have hired professional spies, as HSBC did when it employed a former head of MI5.

The amount a fraudster can steal depends on the number of "mule" accounts-set up by paid or cajoled accomplices-that he has to divert funds into. This number is constrained by account-opening restrictions, including requirements that accounts have to be opened in person. East European crime rings will pay mules to fly to America, where they can set up accounts as non-resident aliens (using stolen ident.i.ties). Other fraudsters will persuade gullible Americans to open accounts in their own name and hand over the details, after convincing them that they have been picked as "secret shoppers" to rate bank service. Even so, "scammers have a finite supply of mule accounts," says Mr Glover. "The more of them that can be identified and shut off using undercover operations, the less room [criminals] have to operate."

Banks are also using similar strategies to infiltrate the dark recesses of the internet in which criminals buy and sell stolen financial data. A fraud investigator at a large American bank says that since the ma.s.sive theft of credit-card data last year from Target, a retailer, his bank has become a more active partic.i.p.ant in "carder forums", where card numbers are hawked for between $20 and $100 apiece, often in batches of 1m or more. Two recent sales were dubbed "Tortuga" and "Eagle Claw".

Some banks scour the forums in the hope of gathering intelligence on which of their cards have been compromised, so they can cancel them before they are sold on-as opposed to waiting for suspect transactions to appear on statements. A few banks are even believed to have bid in black-market bazaars to buy the details of cards they suspected they issued themselves, but could not identify for certain because details were concealed until purchase, in order to learn more about where and when data breaches occurred.

This subterfuge partly reflects the need to be more proactive in the face of rampant cyber-fraud. But there is a regulatory motive, too. America's Financial Crimes Enforcement Network, the arm of the Treasury tasked with fighting illicit finance, has been broadening its definition of money laundering, bankers say. This raises the prospect of large fines for inadequate anti-money-laundering controls for banks that aren't deemed to be doing enough to combat these scourges. Some bankers may feel they have as much to fear from the agencies that regulate them as from the criminals who infiltrate them.

Cash and crime Less coin to purloin A cashless economy leads to a safer society Apr 5th 2014 | ATLANTA | From the print edition "CASH", wrote Marcus Felson, an eminent American criminologist, "is the mother's milk of crime." Its appeal to criminals is clear. Unlike cars or paintings, it can be concealed immediately after being pinched. It has no security features to prevent its being easily and anonymously spent on legal or illegal goods. Unlike nearly any other object that can be stolen, it needs no fence.

Criminals' need for cash motivates much predatory street crime. A new paper from the National Bureau of Economic Research asks whether this might work in reverse: if cash motivates crime, could the absence of cash reduce crime? The answer seems to be yes.

The paper looks at county-level crime data in Missouri from 1990 to 2011, a period when crime dropped markedly all over the rich world. During this time Missouri, like the rest of America, changed the way it delivered its welfare and food-stamp benefits. Instead of paper cheques states now use a debit-card system known as Electronic Benefit Transfer (EBT). Missouri introduced EBT cards in eight phases over 12 months. This gradual shift allowed the authors to a.n.a.lyse not just differences in crime rates before and after the introduction of EBT, but also how those differences compared with changes during the same period in counties that had not implemented it.

They found that electronic payments led to a drop of 9.8% in the overall crime rate and caused the rates of burglary, a.s.sault and larceny to fall by 7.9%, 12.5% and 9.6%, respectively. The introduction of EBT was also a.s.sociated with a lower number of arrests, an indication that the crime rate's decline did not stem from more aggressive policing. EBT's effects on non-property-related crimes such as drug offences, rape and prost.i.tution were statistically insignificant. The findings suggest, according to Volkan Topalli, one of the authors, that "for people in densely populated urban neighbourhoods, the less cash they have and the more their transactions are digitised, the less attractive criminal targets they make."

It points to something broader, too. The sharp decline in crime since the 1990s has led to a rash of theories to explain it: ageing populations, higher incarceration and immigration rates, less exposure to lead paint, better police tactics as well as vastly improved security of both products (such as improved circuitry in cars that impedes hot-wiring) and places (security cameras and bulletproof part.i.tions once protected only banks, but today they are standard in American corner liquor stores). Mr Topalli's paper suggests that the shift from cash to cards-since 1990 debit-card transactions have risen 27-fold, whereas cash volume has grown by just 4% a year-may also have contributed to the decline in crime. It's hard to rip and run, after all, without something to rip.

Reforming the audit profession The cost of cosiness Europe's auditors get ready to rotate Apr 5th 2014 | From the print edition AMONG the many scapegoats blamed for the financial crisis, auditors got off lightly. A central component of their reports is an a.s.sessment of whether a firm is a "going concern", meaning it is likely to survive for at least a year. Yet in late 2008 one financial inst.i.tution after another collapsed, having recently had their sustainability vouched for by auditors. After nearly four years of debate and negotiation the European Parliament seemed set (as The Economist went to press) to approve reforms aimed at enhancing confidence in their audits.

The biggest proposed changes focus on safeguarding auditors' independence. To prevent them from getting too cosy with their clients, companies will be required to put the job out for tender once a decade, and pick a new auditor at least every 20 years. (Some have not switched in a century or more.) They will be banned from buying a wide range of other services from the firm that audits them, including advice on tax. And from 2016 the value of the non-audit services that are still allowed will be capped at 70% of the audit fee over a three-year period.

The rules represent a compromise between reformers who believe the beancounters are hopelessly in bed with their clients and sceptics who warn that the regulations could do more harm than good. They have been watered down from previous proposals that included suggestions that a third party, such as a regulator, appoint auditors.

The sharpest criticism of the reform is that it is barking up the wrong tree by focusing on independence instead of rea.s.sessing what audits are for. Even an unimpeachably unbiased auditor would probably have certified many financial firms as going concerns in 2008, simply because they were no better able to predict the future than were credit-rating agencies or investors. As a British Parliament report said in 2009: "The fact that some banks failed soon after receiving unqualified audits does not necessarily mean that these audits were deficient. But the fact that the audit process failed to highlight developing problems in the banking sector does cause us to question exactly how useful audit currently is." With or without new rules, the main worry for auditors may be that people wonder whether their reports are worth a bean.

The euro-zone economy Frost in spring The recovery may be warming but inflation is cooling Apr 5th 2014 | From the print edition VIEWED from one perspective, the euro area is a minor miracle. Instead of collapsing in a heap, as seemed possible two years ago, the currency club is not just intact but has a new member, Latvia, which joined in January. An economic recovery has been under way since last spring and appears to be strengthening. But seen from another standpoint the euro zone is an accident waiting to happen. As inflation slips ever lower, a slide into j.a.panese-style deflation looks increasingly likely. That would raise an already onerous debt burden in real terms and pull down growth.

The actions of the European Central Bank (ECB) will be crucial if such an outcome is to be averted. The ECB's mission is to achieve price stability, and since 2003 it has interpreted this to mean an inflation rate over the medium term of "below but close to" 2%. Yet despite a fall in annual inflation to just 0.5% in March, the central bank was expected to hold its fire when its council met on April 3rd (after The Economist had gone to press). Previously, it had lowered the main policy rate to 0.25% in November.

One reason for the ECB to wait was that underlying inflation, excluding more volatile elements such as energy and food, has been broadly stable over the past six months, at around 0.8% (see chart). The council also sees grounds for being patient and allowing its very low interest rates to take effect. It thinks that the recovery, which started in the second quarter of 2013 after a double-dip recession lasting a year and a half, should eventually bring inflation back towards the target.

Indeed, the once-sickly euro zone is losing some of its pallor. The recovery, though feeble, has nonetheless been sustained. Output rose by 0.3% (an annualised rate of 1.3%) in the second quarter of 2013, and although growth slowed to 0.1% in the third, it picked up to 0.2% in the fourth. More important, there are signs that the pace may be accelerating this year.

Despite the crisis in Ukraine, euro-zone surveys of confidence and activity in the first three months of 2014 have been encouraging. The European Commission's economic-sentiment indicator, based on what both businesses and consumers are reporting, rose in March to 102.4, the highest since July 2011 and a little above the long-term average of 100 since 1990; at the worst of the recession in late 2012 it had fallen to 85.8. The indicator tends to track growth, which suggests that it is picking up. That chimes with surveys of manufacturing, compiled by Markit, a data provider, which show the sector in the first quarter at its healthiest since the spring of 2011.

A rea.s.suring feature of the recovery is that it is spreading to the once-afflicted countries of southern Europe. Germany, which remains the main engine of growth in the euro zone, is likely to have expanded strongly in the first quarter of 2014, according to the Bundesbank. But the recovery is also being boosted by a return to growth, albeit sluggish, on the part of both Italy and Spain, the third- and fourth-biggest economies in the euro zone.

The peripheral economies are benefiting from falling long-term interest rates. Ten-year government-bond yields in Italy, Spain and Portugal are now lower than they were four years ago, shortly before the Greek crisis flared up and led to the first bail-out (see chart). Remarkably, yields in Ireland, which exited its rescue programme only last December, have fallen to their lowest since the euro started 15 years ago. Peripheral yields have been dragged down both by the fall in German yields and the narrowing of their spreads over German bonds since the height of the crisis. Although the spreads are still wider than before the crisis, their tightening reflects a broader rea.s.sessment of risk: investors no longer shun peripheral Europe on fears of a euro-zone break-up, whereas they fret about emerging markets.

Despite these promising developments, there is still a concern that the recovery may have come too late and be too weak to avert the onset of deflation. Consumer prices are falling in several peripheral countries, notably Cyprus and Greece, but also now in Spain, where in March they declined by 0.2% on a year earlier.

The advent of deflation in the euro-zone periphery can be seen as part of a one-off adjustment as the crisis countries claw back lost compet.i.tiveness. But balefully high unemployment across the euro area will continue to bear down on wages, which in turn will keep prices weak. The jobless rate in February remained at 11.9%, only marginally down from its peak of 12% for much of 2013. Though unemployment has fallen over the past year from already low levels in Germany and has declined in Spain, it has risen sharply in Italy.

Making matters worse, the strength of the euro, which has appreciated by 7% against the dollar in the past year, is an endors.e.m.e.nt the still vulnerable euro-zone economy could do without. For the time being the ECB is choosing to fight disinflationary pressures through words and threats rather than deeds. But, as Christine Lagarde, the head of the IMF, said on April 2nd, a long period of "lowflation" can be bad for growth and jobs. If inflation weakens any further, the ECB will have to act.

Free exchange Financial indulgence Cheap credit is tempting emerging markets towards risky borrowing Apr 5th 2014 | From the print edition "ORIGINAL sin" in the economic scriptures differs slightly from its theological counterpart. It is the observation, made in the aftermath of the emerging-market crises of the 1990s, that most countries are unable to borrow from foreigners in their own currency. Foreign-currency borrowing d.a.m.ns them, in times of trouble, to a vicious downward spiral: a loss of faith in a country's currency makes its debts harder to repay. That in turn further reinforces doubts about its currency.

Of late this doctrine has begun to look a bit old-fashioned. Financial globalisation has freed many developing economies from the need to go cap in hand to foreign financial markets. With investors willing to lend in local markets (and often in the local currency), they have sharply reduced their overseas borrowing over the past decade. Yet some economists worry that their salvation remains incomplete. Old vulnerabilities are creeping back.

The 1990s crises were a Damascene moment for emerging markets, prompting broad changes in policy. Many developing countries managed to introduce serious fiscal and monetary reform. This cut overall borrowing needs and also rea.s.sured adventurous rich-world investors who were considering a plunge into emerging economies' domestic bond markets. Most abandoned hard-currency pegs, smoothing their adjustment to shifting capital flows, and many acc.u.mulated large stocks of foreign-exchange reserves. Above all emerging markets sought to escape original sin.

Financial integration has helped. The International Monetary Fund's latest Global Financial Stability Report points out that gross capital flows to emerging markets roughly quintupled from 2000 to 2010. From 2002 to 2010 the share of emerging-market debt issued in foreign markets dropped from 27% to 12% (see chart, left panel). This, in turn, helped governments reduce their vulnerability to sudden swings in exchange rates. In 1998 nearly a third of Turkey's marketable government debt and more than half of that in Mexico was denominated in a foreign currency. By 2010 the share in both economies was below 20%.

That discipline has, however, begun to erode. In the aftermath of the global financial crisis, rich-world central banks unleashed a flood of liquidity to support their own sickly economies. As the deluge depressed interest rates investors went hunting abroad for better returns. Governments in emerging markets have mostly remained disciplined through this onslaught; the share of emerging-market government debt issued in foreign markets has continued to drop, from 12% in 2008 to 8% last year. Private firms, however, have been more likely to succ.u.mb to temptation.

Emerging-market companies have begun issuing foreign-currency-denominated debt with gusto: $1.3 trillion of it was outstanding in 2013, up from $597 billion in 2009, according to Nomura, a j.a.panese bank. As a result, foreign borrowing as a share of all emerging-economy borrowing has been climbing. Banks are leading the way. Since late 2008 the share of debt issued by financial firms abroad has risen steeply, from 15% to 22%, the IMF says.

Moreover, official figures on external borrowing may not capture the entire picture because of "hidden debt" being acc.u.mulated by emerging-market firms. Conventional measures typically include debt securities issued domestically and official cross-border bank lending-but not bonds issued in foreign markets by emerging-market multinationals. In a 2013 paper Hyun Song Shin, of Princeton University, and Laura Yi Zhao, of the Asian Development Bank, warned that nonfinancial firms may be borrowing cheaply abroad to make loans at home.

If bonds issued abroad by the foreign subsidiaries of Indian and Chinese firms are included in their national statistics, then the foreign-currency debt of non-financial firms looks twice as large as under the usual measure. Foreign issuance by Brazilian firms more than doubles its stock of private-sector external debt, according to a new Inter-American Development Bank report. Growth in this hidden debt has soared since 2008.

Whether these excesses amount to mortal sin is not easy to judge. New debt estimates a.s.sembled by Nomura take account of countries' foreign-currency exposure via "hidden" offsh.o.r.e bonds. Such borrowing makes some economies look shakier, it reckons, but not much. Hidden debt in Brazil and Russia amounts to 5% or more of GDP. But overall foreign-currency exposure is generally below the average of the past two decades (see chart, right panel). Nomura's adjustment raises China's foreign-currency debt from 9.2% of GDP to 9.3%: hardly the stuff of doom.

Living on a prayer If there is little sign of imminent disaster, there is good reason to be vigilant. The flood of money from America and Britain may soon dry up, but the euro zone and j.a.pan seem likely to keep providing yield-hungry investors, eager to lend on tempting terms. The trend towards foreign borrowing bears watching.

What is more, having only a small foreign-currency exposure may no longer be enough to protect emerging economies from swings in global sentiment-and monetary conditions. The financial maturation that allowed emerging economies to do more of their borrowing locally has necessarily raised foreign partic.i.p.ation in local-government bond markets. In some economies, the share of local-market government debt owned by foreigners has more than doubled since 2009.

Investors continue to do a poor job discriminating between developing markets based on the underlying health of their economy. And stampeding capital can still apply uncomfortable financial pressure, as the market wobbles of the past year revealed. Falling currencies may hurt exposed firms' balance-sheets, thereby weakening investment and the outlook for growth. An abrupt growth slowdown looks preferable to the crises of the late 1990s. But it is no Eden.

Economist.com/blogs/freeexchange.

Science and technology.

Climate change: In the balance Psychology: Sweet little lies.

Beer and barbecues: A marriage made in heaven Climate change In the balance A new report from the IPCC implies that "climate exceptionalism", the notion that global warming is a problem like no other, is coming to an end Apr 5th 2014 | YOKOHAMA | From the print edition IN SCIENCE, more information is supposed to lead to better conclusions and greater consensus. The Intergovernmental Panel on Climate Change (IPCC), which published its latest report on March 31st, certainly has more information. The new study synthesises 73,000 published works (a quarter of them in Chinese). This represents a 100-fold increase in about 30 years. But consensus remains elusive. Richard Tol of Suss.e.x University, in Britain, disparagingly appraised the report's conclusions as "the four hors.e.m.e.n of the apocalypse". The final version appears to have been fought over paragraph and comma between those (such as Dr Tol) who want to describe dispa.s.sionately what they think is happening and those who want to scare the world into taking action.

Every six or so years, the IPCC produces a three-part encyclopedia of the climate. This report is the second tranche of its latest effort. The first, on the science of climate change, came out last September. It argued that the process is accelerating even though the world's surface temperatures are currently flatlining (a phenomenon most climate scientists regard as merely a pause in an upward trend). This, second, volume asks how the climate is affecting ecosystems, the economy and people's livelihoods.

Profoundly, is the headline answer. It argues that climate change is having an impact on every ecosystem from the equator to the poles. It suggests that although there are some benefits to a warmer climate, most effects are negative and will get worse. It talks of "extreme weather events leading to breakdown of...critical services such as electricity, water supply and health and emergency services" and it sounds the alarm about "the breakdown of food systems, linked to warming".

Behind such scares, though, lies a subtler story, in which the effects of global warming vary a lot, climate change is just one risk among many, and the damage it causes-and the possibility of reducing that damage-depend as much on other factors, such as health systems and rural development, as they do on global warming itself.

Bad, but how bad?

The report describes three different sorts of problem. The first are those in which climate is the dominant influence, so that no human action other than stopping it changing will have an effect. The second are those in which the climate's influence is modest and where the news is not entirely bad. The third are the ways a changing climate alters which species (both natural and agricultural) thrive where-which from a human perspective can be both good and bad.

Rising sea levels are an example of the first sort of problem. Thermal expansion of the water in the oceans means that, at current rates, the average sea level could go up half a metre (20 inches) by the end of the century. That would be pure bad news for people living in coastal cities. They now number 271m, a figure which may increase to 345m by 2050, according to the report.

Another example of a problem of the first sort is ocean acidification. This is caused by the absorption of carbon dioxide into seawater. The report calls this "a fundamental challenge to marine organisms and ecosystems".

The second sort of problem, in which the climate's influence is more modest and manageable, includes its effects on health. In a warmer world some diseases, such as malaria, are expected to spread. And heat itself can kill. More summer heatwaves will mean more premature deaths. But cold is also a killer, and the number of cold-related deaths will fall. By and large, the report says, the bad impacts will outweigh the good, but in neither case is climate the dominant influence on mortality or morbidity. Public health and nutrition matter more. Malaria cannot spread if it has been exterminated.

The third category, the way a changing climate alters species' ranges, is in some ways the most intriguing. To the surprise of a lot of conservationists, for example, global warming does not seem to have caused many extinctions. The only ones laid at its door so far are of frogs in Central America.

That does not mean change is not happening. In the oceans both animals and plants are migrating from the tropics to temperate lat.i.tudes in pursuit of cooler waters. Benthic algae-seaweeds, to the layman-are shifting their ranges polewards at 10km (6 miles) a decade. Their single-celled planktonic cousins are moving much faster: 400km a decade.

Since algae are the beginning of marine food chains, everything else changes with them. The result, says the report, is that by 2055 fish yields in temperate lat.i.tudes could be 30-70% higher than they were in 2005 (see map). Tropical yields, by contrast, could fall by 40-60%. The yields in question are potential ones, and a.s.sume that overfishing has not denuded the oceans by then, but that matter is beyond the IPCC's remit.

From the human point of view, though biological changes in the ocean are important, the most crucial such changes will be on land, and will concern where particular crops can be grown. A warmer climate lengthens growing seasons and more carbon dioxide in the atmosphere should stimulate photosynthesis. The previous IPCC a.s.sessment, in 2007, therefore said that yields of the world's main crops-wheat, rice, maize and soyabeans-would improve in temperate and cold climates, offsetting declines elsewhere. Some argued, on this basis, that a modest amount of warming might be good for people.

The new report pours cold water on that idea. It confirms that tropical yields will decline if the temperature rises by 2C (which is all but inevitable) but finds that the offsetting benefits in temperate zones will be smaller than once thought. Rain-fed crops (as opposed to those watered by irrigation), which are often grown in the tropics, do respond to higher levels of carbon dioxide, but the effect is counteracted by rising temperatures. Plants like long growing seasons but many (especially maize) hate temperature spikes: even one day above 35C at the wrong time of their life cycles can damage them. And rates of photosynthesis in maize, sorghum and sugarcane (called C4 cereals, because of the details of their photosynthetic pathways) do not respond to changes in CO2 concentrations in the way that C3 cereals, such as wheat and rice, do, so the effect of more carbon dioxide on crops is patchy.

At the moment, the report concludes, wheat yields are being pushed down by 2% a decade compared with what would have happened without climate change; maize is down by 1% a decade; rice and soyabeans are unaffected. Over time, this could worsen. Roughly half of studies of likely cereal yields over the next ten years forecast an increase, whereas the other half forecast a decline. Forecasts for the 2030s are even more sobering: twice as many predict a fall as a rise.

Dividing up the effects of climate change in this fashion leads to different ideas about how to respond. Defending low-lying cities against a rising sea level is difficult and expensive, and it is impossible to adapt to ocean acidification. These problems would best be dealt with (if at all) by attacking the cause: ie, by cutting carbon-dioxide emissions.

Problems in the second category, however, can be approached in other ways. As the report itself says, "the most effective vulnerability reduction measures for health...are programmes that implement and improve basic public health [like] the provision of clean water." Such measures would be beneficial even if there were no climate change.

The third category lies somewhere in between. It requires measures that should be undertaken anyway, but need to be tweaked because of the climate. Farmers are always trying out new crop varieties, but increasingly those varieties will have to be drought-resistant. That may mean choosing between different aims, for there is often a trade-off between drought resistance and yield.

This way of looking at the climate is new for both scientists and policymakers. Until now, many of them have thought of the climate as a problem like no other: its severity determined by meteorological factors, such as the interaction between clouds, winds and oceans; not much influenced by "lesser" problems, like rural development; and best dealt with by trying to stop it (by reducing greenhouse-gas emissions). The new report breaks with this approach. It sees the climate as one problem among many, the severity of which is often determined by its interaction with those other problems. And the right policies frequently try to lessen the burden-to adapt to change, rather than attempting to stop it. In that respect, then, this report marks the end of climate exceptionalism and the beginning of realism.

Psychology Sweet little lies Hormone treatment can stimulate deception for the benefit of friends Apr 5th 2014 | From the print edition IT IRKED Hamlet that "one may smile, and smile, and be a villain." Little is known about the biological foundations of morality. Wrong can be done for the right reasons and dishonesty can protect others. Deception itself is driven by complex chemical processes-not all of them maliciously motivated, according to a new study published in the Proceedings of the National Academy of Sciences on the effects of oxytocin, a signalling molecule in the brain that is sometimes referred to as the "love hormone".

Falling in love releases oxytocin from the hypothalamus, encouraging coupling between doe-eyed romantics. It also triggers contractions during childbirth and bonding during breastfeeding. The latest study of its actions, though, suggests it has darker effects too. Shaul Shalvi, from Ben-Gurion University of the Negev, in Israel, and Carsten De Dreu, from the University of Amsterdam, in the Netherlands, have discovered that it encourages people to lie-not for themselves, but for the good of the group they are part of.

Such altruism emerged from an experiment in which Dr Shalvi and Dr De Dreu randomly a.s.signed 120 male volunteers (women were excluded in case any were unknowingly pregnant) to one of two groups. Members of one were to receive a dose of oxytocin from a nasal spray; members of the other to sniff a placebo. Half the volunteers were then further divided into clans of three.

Thirty minutes after taking six puffs from the spray, each partic.i.p.ant played a coin-tossing game on a computer. He had to watch a virtual coin being tossed 30 times, predict the outcome, remember the actual outcome and report on the accuracy of his forecast. For ten of the tosses (volunteers knew which ten) reporting a correct prediction won a clan member 30 cents, to be split three ways with the rest of the clan, while non-members of clans won ten cents. For another ten tosses a correct prediction lost the same amounts. For the remaining tosses no money was at stake. And throughout the process incorrect predictions had no effect.

As might be expected, people tended to lie when it was to their advantage to do so-over-reporting correct guesses when they would result in profit, underreporting them when a loss would result and telling the truth (more or less) when it made no difference. There was, though, one intriguing anomaly. Clan members, and only clan members, lied a lot more under the influence of oxytocin when they reported their results for the profit-related tosses.

This effect was huge. Oxytocin-affected clan members were twice as likely as anyone else to fib to extreme levels, by claiming nine or ten correct predictions (in reality, such runs of good luck would happen to only one person in 100). That helped them, of course, but since no similar effect was seen in non-members, Dr Shalvi and Dr De Dreu think the help to fellow members of a clan is the significant point. Weirdly, though, they saw nothing equivalent when accurate reporting of a toss resulted in a loss to the clan. Oxytocin did not encourage people to lie about this. Perhaps the hormone stimulates lying about positive things but not negative ones.

Beer and barbecues A marriage made in heaven To reduce the health risk of barbecuing meat, just add beer Apr 5th 2014 | From the print edition GRILLING meat gives it great flavour. This taste, though, comes at a price, since the process creates molecules called polycyclic aromatic hydrocarbons (PAHs) which damage DNA and thus increase the eater's chances of developing colon cancer. For those who think barbecues one of summer's great delights, that is a shame. But a group of researchers led by Isabel Ferreira of the University of Porto, in Portugal, think they have found a way around the problem. When barbecuing meat, they suggest, you should add beer.

This welcome advice was the result of some serious experiments, as Dr Ferreira explains in a paper in the Journal of Agricultural and Food Chemistry. The PAHs created by grilling form from molecules called free radicals which, in turn, form from fat and protein in the intense heat of this type of cooking. One way of stopping PAH-formation, then, might be to apply chemicals called antioxidants that mop up free radicals. And beer is rich in these, in the shape of melanoidins, which form when barley is roasted. So Dr Ferreira and her colleagues prepared some beer marinades, bought some steaks and headed for the griddle.

One of their marinades was based on Pilsner, a pale lager. A second was based on a black beer (type unstated). Since black beers have more melanoidins than light beers-as the name suggests, they give it colour-Dr Ferreira's hypothesis was that steaks steeped in the black-beer marinade would form fewer PAHs than those steeped in the light-beer marinade, which would, in turn, form fewer than control steaks left unmarinated.

And so it proved. When cooked, unmarinated steaks had an average of 21 nanograms (billionths of a gram) of PAHs per gram of grilled meat. Those marinated in Pilsner averaged 18 nanograms. Those marinated in black beer averaged only 10 nanograms. Tasty and healthy too, then. Just what the doctor ordered.

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