Friday, January 31, 2014

Growth, investment at risk from emerging markets rate hikes

A growth-crushing downward spiral looks imminent for emerging markets, threatening to turn back the tide of foreign investment that flooded into developing countries on the premise of fast economic expansion.
Countries in Asia, Latin America and emerging Europe are being forced to raise interest rates sharply to stave off currency collapses and a wholesale exodus of foreign investors. Turkey, India and South Africa jacked up rates this week, heaping pressure on others to follow suit.
Whether these steps will steady the currencies is unclear, but one thing is sure - economic growth, developing countries' main trump card over their richer peers, will take a hit.
Analysts reckon Turkey's dramatic 425 basis point rate hike could almost halve this year's growth rate, to 1.7-1.9 percent, for example, while the South African Reserve Bank, which raised by half a point, cut its estimates for 2014 and 2015 growth.
Indonesia's economy last year probably grew at its slowest pace in four years, below its long-term average of above 6 percent, after 175 bps in policy tightening since June.
Even before the latest increases in borrowing costs, developing country growth rates were under the cosh.
Not only was the developing world's 4.7 percent growth last year almost a full percentage point under International Monetary Fund forecasts, its premium over growth rates in advanced countries has shrunk to its lowest in a decade.
In Brazil and Russia, growth is running below the levels forecast for Britain and the United States in 2014.
That is very bad news for the investment outlook, going by the findings of a recent IMF study that examined capital flows for 150 countries between 1980 and 2011.
Net capital flows to emerging economies, estimated at as much as $7 trillion since 2005, have tended to be highest during periods when their growth differential over developed economies is high, the paper found.
And investment flow is also "mildly pro-cyclical" with domestic growth rates, the paper said, meaning that as developing economies expand, they draw more investment.
"Investors are getting what they asked central banks for - higher interest rates. But there is no denying that there is a massive headwind to capital flows into emerging markets," said David Hauner, head of EEMEA fixed income strategy and economics at Bank of America Merrill Lynch.
"Historically the two main drivers of capital flows to EM (are) the difference between EM-DM growth... (and) real U.S. interest rates which are starting to go up."
Higher interest rates raise borrowing costs for the corporate sector and curb credit growth and consumer demand, thus hurting companies' profits. They also make fixed income assets less attractive.
Clearly then, bad news for bond and equity investors who, Thomson Reuters service Lipper says, have pumped almost half a trillion dollars into emerging assets in the past decade.
Add to that bank loans, merger and acquisition deals and direct investments by foreign companies into manufacturing and services, and the figure just since 2005 could be as large as $7 trillion, Institute of International Finance data show.
Like Hauner, Morgan Stanley analysts see the central bank moves as broadly positive, in that they raise inflation-adjusted, or real interest rates. That ultimately makes economies more competitive by slowing wage growth.
In the meantime though, emerging markets are exposed to the risk of a sudden stop in capital flows, highlighting potential ructions on credit markets, asset prices, economic growth and also politics as a result of the rate rises.
"Will we see an orderly slowdown, or a more disorderly unwind?" Morgan Stanley said in a note. "An orderly deceleration in growth will also be important in keeping political uncertainty at bay with elections ahead of us in many double-deficit countries."
India, Brazil, Turkey, Indonesia and South Africa are among key developing countries facing elections in 2014 and which are seen as vulnerable to the withdrawal of the Fed's cheap cash because of their budget or current account deficits.
Equity investors found out the hard way in China that fast economic growth doesn't equate with investment returns, enduring miserable stock market performance for two decades even as the economy grew at turbo-charged rates.
Slowing growth is at least partly driving heavy outflows from emerging markets, where funds tracked by EPFR Global shed over $50 billion in 2013 and over $8 billion so far this year.
But the growth allure is yet to completely fade, with many investors focusing on long-term positives such as demographics or low ownership of goods such as mobile phones or cars.
The question is when will asset prices reflect the inevitable growth-inflation hit these developing countries will take, says Steve O'Hanlon, a fund manager at ACPI Investments.
"Markets are pricing a pretty dire situation in emerging markets (but) is EM cheaper given potential future output? I wouldn't say so but it's getting there," O'Hanlon said.
"When currencies stop selling off, if (governments) produce real reforms, I will be investing in those markets. If you don't see any reforms, the rate hikes will just destroy growth, discourage investors and make the situation far worse."
(Source: Reuters)

A Holiday Surprise: Amazon Growth Slows

If anything seemed reliable in today’s topsy-turvy retail climate, it’s that (AMZN) would continue to put up shocking rates of revenue growth, lapping rivals in traditional and online commerce.
Today, Amazon surprised its investors by demonstrating growth that was more anemic than usual, thanks in part to a slow holiday season overseas. Sales for the holiday quarter were $25.59 billion, a 20 percent jump from a year ago but missing analyst estimates of $26.08 billion. That 20 percent is the lowest growth rate in several years.
The company also reintroduced to its balance sheet a strange phenomenon that accountants generally describe as net income, but which more conventionally is referred to as “profit.” After losing money in four of the last five quarters, Amazon reported net income of $239 million, or 51¢ per share, below analyst estimates of 69¢ a share.
The weaker-than-expected sales performance appears to be partly the result of soft international growth and a shift to purchases of cheaper digital items from purchases of their physical counterparts. Overseas sales grew 13 percent in the fourth quarter, compared to 21 percent a year ago, while sales grew 26 percent in the U.S. during the holidays.
Amazon is also spending more: some $2.9 billion on fulfillment during the fourth quarter, vs. $2.3 billion in the same period last year, and $1.8 billion on technology and content, vs. $1.3 billion last year.
The stock was down more than 8 percent in after-hours trading.
Amazon Chief Financial Officer Tom Szkutak was asked on a conference call with journalists whether Amazon needs to do a better job guiding Wall Street analysts. Speaking with his typical charisma, suggestive of a revivalist preacher, Szkutak said, “We certainly do our best to communicate the results.” Then he noted that Amazon had delivered toward the upper range of its previous quarterly guidance.
This year’s holiday season left plenty of carnage. Best Buy (BBY), Target (TGT), and J.C. Penney (JCP) all disappointed investors with fourth quarter earnings reports. Last week, EBay (EBAY) surged on the growth of its PayPal business and the sudden interest of activist investor Carl Icahn, but it notched a further decline in its troubled marketplace.
Amazon’s revenues for all of 2013 were $74.45 billion, a jump of 22 percent from $61.09 billion in 2012. Amazon is likely to approach or exceed $100 billion in sales this year, which make it the fastest retailer in history to reach that benchmark.
Amazon is still growing faster than its rivals. Retail overall is growing at 4 percent, according to the U.S. Census Bureau, while online retail is growing by about 11 percent. That means Amazon continues to take market share from both offline and online competitors. The company also made a profit of $274 million for the year, compared with a loss of $39 million last year.
Over the last three months, Amazon has been busy. In addition to meeting holiday demand and almost breaking the supply chains of logistics partners such as UPS (UPS), it introduced Sunday delivery in partnership with the U.S. Postal Service, announced some far-fetched drone dreams on 60 Minutes, and started selling new models of its Kindle Fire tablet.
Jeff Bezos does not typically participate in Amazon’s quarterly earnings ritual, but he does contribute a quotation that speaks more to customers than Amazon shareholders. Here it is: “It’s a good time to be an Amazon customer. You can now read your Kindle gate-to-gate, get instant on-device tech support via our revolutionary Mayday button, and have packages delivered to your door even on Sundays,” said Bezos in the note. “In just the last weeks, Forrester, YouGov, and ForeSee have all ranked Amazon #1—and we believe we’re just scratching the surface of what world-class customer service can be.”
(Source: Business Week)

Rajan Warns of Policy Breakdown as Emerging Markets Fall

India central bank Governor Raghuram Rajan warned of a breakdown in global policy coordination after the Federal Reserve further cut stimulus, weakening emerging-market currencies from the rupee to the Turkish lira.
Rajan, a former chief economist at the International Monetary Fund, called for greater cooperation among policy makers weeks before finance chiefs from the world’s top developed and emerging markets gather in Sydney. The Fed’s Jan. 29 statement made no mention of developing economies.
“International monetary cooperation has broken down,” Rajan, 50, said yesterday in an interview in Mumbai with Bloomberg TV India, noting how emerging markets helped pull the global economy out of crisis starting in late 2008. “Industrial countries have to play a part in restoring that, and they can’t at this point wash their hands off and say we’ll do what we need to and you do the adjustment.”
Rajan raised interest rates this week along with central bankers from Turkey to South Africa as the Fed pressed on with a reduction in monthly bond purchases put in place to speed a recovery from the worst recession since the Great Depression. Emerging-market stocks have had the worst start to a year since 2008 as currencies from Argentina to Russia tumbled. 
 “Fortunately the IMF has stopped giving this as its mantra, but you hear from the industrial countries: We’ll do what we have to do, the markets will adjust and you can decide what you want to do,” Rajan said. “We need better cooperation and unfortunately that’s not been forthcoming so far.”

Left Twisting

The rupee, down about 15 percent against the dollar in the past year, gained 0.3 percent to 62.4150 at 9:15 a.m. in Mumbai.
The Fed said it will cut monthly bond purchases by $10 billion to $65 billion, citing improved labor-market indicators and accelerating economic growth. The move left emerging markets to “twist in the wind,” Steven Englander, the head of currency trading for major industrialized nations at Citigroup Inc., the world’s second-biggest currency trader, said in a note.
Fed spokesman David Skidmore declined to comment.
Fed officials including Chairman Ben S. Bernanke have said their congressional mandate is to promote price stability and full employment in the U.S., goals that will ultimately benefit other developing economies.
“What we’re trying to do with our monetary policy here -- as I think my colleagues in the emerging markets recognize -- is trying to create a stronger U.S. economy,” Bernanke said in a Sept. 18 press conference. “And a stronger U.S. economy is one of the most important things that could happen to help the economies of emerging markets.”   
Fed Governor Jerome Powell said in a Nov. 4 speech that policy makers in developed economies should “communicate as clearly as possible about their policy aims and intentions in order to limit the odds of policy surprises and a consequent sharp adjustment in financial markets.”
“My colleagues on the FOMC and I are committed to just such an approach,” Powell said, referring to the Federal Open Market Committee.
The Fed shouldn’t be blamed for turmoil in emerging markets, former Fed Governor Randall Kroszner, a professor at the University of Chicago where Rajan once lectured, said on Bloomberg Radio’s “The Hays Advantage.”
“Countries that are being hit tend to be ones that have high current-account deficits, high fiscal deficits and relatively high inflation, and the challenge is brought on by their own domestic policies,” Kroszner said. “It’s unfair to say it’s all the Fed’s fault.”

‘Unsynchronized’ Exit

The exit from monetary stimulus is “unsynchronized this time around,” Brazil central bank President Alexandre Tombini told a panel at the World Economic Forum meetings in Davos on Jan. 24. Tudor Investment Corp., the $13.7 billion macro hedge-fund firm run by Paul Tudor Jones, said earlier this month that global central bank policies will diverge this year for the first time since 2010.
In 2011, Rajan co-authored a report that called for the creation of an International Monetary Policy Committee composed of representatives from major central banks that would regularly report on the aggregate consequences of individual central bank policies. Central banks from bigger countries should be encouraged to internalize the spillover effects of their policies, it said.

Stem Inflation

Rajan said yesterday developed countries might not like adjustments emerging markets take to cope with the outflows, without elaborating on specific measures. His surprise Jan. 28 move to raise the benchmark repurchase rate by a quarter point - - adding to increases of 50 basis points since he took over the Reserve Bank of India in September -- was to stem consumer-price inflation running at close to 10 percent, he said.
“In an environment when there is external turmoil, we have to get our house in order and we can’t postpone that,” Rajan said. “So a collateral benefit of getting inflation down is that you also strengthen the belief in the value of the rupee.”
Rajan said the rupee has become “a little more stable,” and he’s intent on preventing “extreme volatility.” The rupee has strengthened 9.6 percent against the dollar from a record-low reached Aug. 28, the world’s best performer in that time, according to data compiled by Bloomberg.
“We may see some outflows, but I’m not overly worried at this point that it would be problematic,” Rajan said.
The RBI estimates consumer-price inflation will exceed 9 percent in the three months ending March 31, and range between 7.5 percent and 8.5 percent in the same period next year. A central bank committee led by Deputy Governor Urjit Patel last week suggested reducing CPI to 8 percent within one year and 6 percent by 2016, at which point it would adopt a 4 percent target with a band of plus or minus two percentage points.

Inflation Target

“Ultimately if we go towards some kind of a medium-term inflation target, like the Urjit Patel committee report has suggested, it would be good for that target to have the support of the parliament, support of the government,” Rajan said. “Since our mandate is bringing down inflation, the fact that we pick a number is not in any way inconsistent with our mandate.”
Finance Minister Palaniappan Chidambaram challenged the central bank’s proposal of prioritizing inflation over growth in an interview last week and called the inflation target “ambitious.” Rajan said the government will follow through on promises of fiscal tightening.
“When there is huge outside turmoil, even today post the Federal Reserve withdrawing stimulus further, it is extremely important that we both be seen on the same page,” Rajan said. “There is a huge degree of understanding and communication between the government and the central bank.”

‘Complete Nonsense’

India’s current-account deficit will narrow to below $50 billion in the financial year ending March 31 from a record $88 billion in the previous 12 months, Chidambaram said in a statement yesterday. The fiscal deficit will contract to below 4.8 percent of gross domestic product in that time, a six-year low, Economic Affairs Secretary Arvind Mayaram told reporters yesterday.
“I don’t think there should be major impact on us,” Mayaram told reporters in New Delhi when asked about the impact of the Fed’s decision. “There should not be undue worry.”
Asia’s third-biggest economy can grow between 5 percent and 6 percent in the next fiscal year ending March 2015 if inflation slows, the RBI said this week. GDP will expand “a little below” 5 percent in the year through March 31, it said.
Rajan disputed criticism that lower interest rates would lead to higher growth because banks are fixing interest rates based on inflation.
“This notion somehow that the RBI is standing in the way of growth is complete nonsense,” Rajan said. “Today what is standing in the way of growth is inflation. Unless we bring inflation down, growth with lower interest rates has no hope.”
(Source: Bloomberg)

Emerging Market Rout May Signal ‘Sudden Stop’: Cutting Research

Brazil, South Africa, Turkey and Ukraine are the emerging markets most at risk of a “sudden stop,” in the view of Morgan Stanley.
That’s defined as a halt or even a reversal in capital flows into a country, slashing access to international financial markets for an extended period and weakening the economy. The term is often linked to 1995 work by Rudi Dornbusch, the late international economics professor at the Massachusetts Institute of Technology in Cambridge.
Mexico, Indonesia, India and Thailand are also in some jeopardy of such a phenomenon as investors turn sour on emerging markets, London-based economists Manoj Pradhan and Patryk Drozdzik said in two reports to clients over the past week. They wrote as central banks in India, Turkey and South Africa raised interest rates to shore up confidence in their currencies.
The Morgan Stanley authors evaluated the risk by looking at factors such as the reliance on capital inflows and credit, the size of the current account deficit, the legroom for policy and exposure to China. In the case of Brazil, for example, capital inflows account for almost half the money entering the country, total external debt is more than the size of foreign exchange reserves, the current account shortfall is almost 4 percent of gross domestic product, inflation is around 6 percent and government debt is about 70 percent of GDP.
The countries most in danger now face questions over how they will fund their budget and trade gaps and whether they can pivot to new sources of expansion, the economists said. Investors should monitor the processes of reducing debt and political splits. Ukraine, Turkey and Thailand have all witnessed social unrest.
“While the risk of a sudden stop is higher in some economies and lower in others, EM economies remain exposed to the risk,” Pradhan and Drozdzik said in a Jan. 27 report. “If policy makers don’t enforce the change and reforms that are needed to generate a new model of growth, asset prices will adjust by as much as is necessary to generate that change.”
In a Jan. 29 report after the rate increases in Turkey and South Africa, Pradhan and Drozdzik wrote: “this new policy awareness is by itself a positive and a step in the right direction.”
* * *
The euro area is the major economy most at risk from the recent outbreak of emerging-market anxiety.
The region last year exported the equivalent of 3.1 percent of gross domestic product to Brazil, India, Indonesia, Russia, South Africa and Turkey, the countries most attacked by investors lately, according to Julian Callow, chief international economist at Barclays Plc in London. That compares with 2.4 percent for Japan and 1.3 percent for the U.S.
By contrast, the euro area’s exposure to the so-far non-stressed emerging markets was 4.7 percent. The U.S.’s was 3.3 percent and Japan’s 6.6 percent.
“It suggests that if there were to be a more serious decline in imports by China then this would carry much more significant implications for GDP in the advanced economies,” Callow said.
In a separate report, Dominic Wilson, chief market economist at Goldman Sachs Group Inc., concluded that a greater risk to rich nations may lie through financial channels. It nevertheless remains manageable, he said.
Citing data from the Bank for International Settlements, New York-based Wilson said on Jan. 29 that the developed-market banking system has $5 trillion tied to emerging markets, 20 percent of its total external position. The exposure to the economies in tumult is just $1.14 trillion, he said.
* * *
Inflation is increasingly driven by global rather than local factors, meaning central banks in industrial economies may be running overly easy monetary policy.
So say Stephen L. Jen and Fatih Yilmaz of London-based hedge fund SLJ Macro Partners LLP.
In a Jan. 22 report they outlined how forces of globalization -- such as international labor arbitrage, free trade and rise of multinational corporations -- have driven up correlations between the inflation rates of different countries, especially since the 1990s. The link is less strong for output.
The results mean that central banks targeting for inflation alone could be destabilizing because it fails to account for whether price pressures are located at home or abroad.
The Fed, for example, may have eased monetary policy too much in the mid-2000s because it under-appreciated the disinflationary effects of globalization, said Jen and Yilmaz. It may be running over-loose policies now, they said.
* * *
Immigration can have a positive effect on the average wages of lower-skilled workers, according to a new study that challenges the conventional wisdom of governments.
The paper, to be published in the Economic Journal, found that during the 1990s, immigration usually boosted the average pay of workers lacking skills in countries from the 34-member Organization for Economic Cooperation and Development.
That’s because the immigrants are typically more educated than the non-migrant natives and so create jobs, fanning hiring of those further down the job ladder, according to authors Frederic Docquier, Caglar Ozden and Giovanni Peri. They work at the National Fund for Economic Research in Brussels, the World Bank in Washington and the University of California Davis respectively.
Less educated workers enjoyed particularly large gains in countries where immigration favors educated foreigners, such as Australia and Canada, their study said. In Ireland, the U.K. and Switzerland, the wage increase was still as much as 5 percent.
* * *
Traders hit the sell button on stocks as their national teams are eliminated from the World Cup, according to researchers at the Bank of Canada -- a nation that has only been to the men’s tournament once and never scored a goal.
Ahead of this year’s World Cup in Brazil, the researchers tracked minute-by-minute trading of STMicroelectronics NV (STM) on the Milan and Paris stock exchanges during the 2010 tournament matches where Italy and France were being knocked out. Share prices that should have been equal in each city were as much as 7 basis points lower in the country whose team was being defeated, the central-bank economists said.
“A major shift in investors’ emotions, caused by a national team’s imminent elimination from a major sporting event, can almost instantaneously affect stock prices,” Ottawa-based Michael Ehrmann and David-Jan Jansen wrote in a Jan. 28 paper. The finding “contributes to the continuing debate on the efficiency of financial markets and the rationality of market participants.”
STMicroelectronics of Geneva is Europe’s largest semiconductor maker, and its shares trade at a median rate of 5,500 per minute in Milan and 4,300 in Paris. The average price difference in a trading sample taken outside a match day was 0.02 percentage points.
(Source: Bloomberg)

Thursday, January 30, 2014

Record Cash Leaves Emerging Market ETFs on Lira Drop

Investors are pulling money from exchange-traded funds that track emerging markets at the fastest rate on record, as China’s slowing growth and cuts to central-bank stimulus sink currencies from Turkey to Brazil.
More than $7 billion flowed from ETFs investing in developing-nation assets in January, the most since the securities were created, data compiled by Bloomberg show. The iShares MSCI Emerging Markets ETF (EEM) has seen its assets shrink by 11 percent, while the Vanguard FTSE Emerging Markets ETF is poised for the biggest monthly redemption since the fund was started in 2005. The WisdomTree Emerging Markets Local Debt Fund (ELD) is on track for an eighth straight month of withdrawals.
Investors accelerated redemptions after data showed Chinese manufacturing contracted and Argentina’s unexpected devaluation of its peso dented confidence in Latin America. Surprise rate increases by central banks in Turkey and South Africa failed to boost their currencies, while the U.S. Federal Reserve opted to press on with reductions to its monetary stimulus.
“A lot of speculative money has been circulating in the emerging markets and the party seems to be over, at least for now,” said Howard Ward, the chief investment officer for growth equity at Rye, New York-based Gamco Investors (GBL) Inc., which oversees about $40 billion. “There is a growing lack of confidence in the economic policies of many emerging markets at a time when growth is slowing and inflation is a real problem.”

Cheap Money

Emerging economies have benefited from cheap money as three rounds of Fed bond buying pushed capital into their borders in search of higher returns. The central bank began paring the purchases by $10 billion to $75 billion this month and announced yesterday plans to reduce the amount by another $10 billion.
The MSCI Emerging Markets Index of equities is off to the worst start to a year since 2008, with almost $500 billion erased from stocks this year. Turkey and South Africa followed counterparts from Brazil to India in tightening monetary policy as exchange rates for the lira and the ruble tumbled to records.
Withdrawals from the iShares fund and the Vanguard ETF (VWO), the largest such products by assets for emerging markets, totaled $1.9 billion on Jan. 27, the biggest one-day redemption since 2005, data compiled by Bloomberg show. About $58 million has been withdrawn from the WisdomTree debt fund this month, bringing the total redemption since June to $752 million.

Crisis ’Shock’

“Obviously that is a shock, and people are panicking much more than we thought,” Julian Rimmer, a broker at London-based CF Global Trading U.K., said in an interview. “And then you realize, maybe this is a crisis.”
The selloff in developing-nation ETFs picked up after a Jan. 23 report from HSBC Holdings Plc and Markit Economics Ltd. said Chinese manufacturing may contract in January, raising concern about the growth outlook for a country that buys everything from Chile’s copper to Brazil’s iron ore.
Hours later, Argentina’s peso started sliding as the central bank pared dollar sales to preserve international reserves that have fallen to a seven-year low. The central bank said the next day it would ease currency controls, capping a 15 percent weekly loss.
A Bloomberg customized gauge tracking 20 emerging-market currencies fell to 89.50 at 7:41 a.m. New York time, the lowest level on a closing-market basis since April 2009. The index has tumbled 10 percent over the past 12 months, bigger than any annual decline since it slid 15 percent in 2008.

Currency Declines

Russia’s ruble weakened the most among 24 emerging-market currencies since the rout began, tumbling 3.1 percent against the dollar since Jan. 23 and sinking to a record versus a euro-dollar basket monitored by the central bank. Bank Rossii reiterated in a statement on its website today its policy of taking unlimited action in currency markets if the ruble slips beyond its target corridor.
South Africa’s rand touched a five-year low today and Hungary’s forint, the day’s worst performer, weakened 2.7 percent since Jan. 23.
The Turkish lira touched a record-low of 2.39 per dollar on Jan. 27 before recovering after policy makers called an emergency meeting and raised benchmark lending rates.
The flight from emerging markets started last May when Fed Chairman Ben S. Bernanke first suggested the central bank may scale back its stimulus before the end of the year. Almost $9 billion was pulled out of ETFs that track developing markets in 2013, the first annual outflow since the securities were created. The funds attracted more than $110 billion in the previous decade as a booming Chinese economy and low interest rates in the U.S. spurred demand for risky assets.

Flowing Back

Mark Mobius, the chairman of Templeton Emerging Markets Group, said inflows into developing nations will resume later this year.
“People are enjoying what they see as a bull market in the U.S.,” he said in an interview in Johannesburg yesterday. “As we go forward, we’re going to see a lot of overweight positions in the U.S. So, given the fact that emerging markets are still growing fast, given that they have low debt-to-gross domestic product ratios, given that they have high foreign-exchange reserves, we believe that money will be flowing back in again to emerging markets.”
John-Paul Smith, a global emerging-market equity strategist at Deutsche Bank AG, disagrees. Withdrawals may accelerate among retail investors and pension funds, at least until growth in China stabilizes, he said.

Credit Boom

“They haven’t started reducing yet, compared with how much money has come in over the last 10 years,” Smith said in a phone interview from London. Deutsche Bank is the world’s biggest currency trader. “I suspect retail investors are in the process of selling now and it will increase through the year.”
The Fed’s asset purchases had helped fuel a credit boom in developing nations from Turkey to Brazil. Accumulated capital inflows to developing-country’s debt markets since 2008 reached $1.1 trillion, or $470 billion more than their long-term trend, according to a study by the International Monetary Fund in October.
The inflows encouraged borrowing, pushing Turkey’s current-account deficits to more than 7 percent of its gross domestic product and making the nation more reliant on foreign capital. The lending growth also fueled inflation, with Brazil’s consumer prices staying above the central bank’s target since August 2010, eroding the competitiveness of the economy.
“It’s quite a challenging outlook,” David Simmonds, the head of currency and emerging-markets strategy at Royal Bank of Scotland Group Plc, said in a phone interview from London. “Turkey and a number of other countries during the years of global liquidity injection have over-consumed and over-imported. We are only in the early stage of the adjustment.”
(Source: Bloomberg)

Saturday, January 25, 2014

The Big Mac Index: Grease-proof taper

LAST summer mere talk from the Federal Reserve about “tapering” (ie, phasing out) its monetary stimulus through asset purchases was enough to fry emerging-market currencies. The exchange rates of the “fragile five”—Brazil, India, Indonesia, South Africa and Turkey—fell sharply. Now that tapering has, belatedly, commenced this month, which currencies look susceptible to further grilling?
The Big Mac index, The Economist’s gauge of exchange rates, offers some food for thought. The index is based on the theory of purchasing-power parity (PPP), which holds that currencies should in the long run adjust to rates that would make a basket of goods and services cost the same wherever they were bought. Our basket contains just one item, a Big Mac, since its ingredients are the same the world over, except in India, where the Maharaja Mac is made of chicken. Because buying a Big Mac in Norway, for instance, costs $7.80 at market exchange rates compared with $4.62 in America, our index suggests that the Norwegian krone is almost 70% overvalued.
Of the fragile five, Brazil looks the most vulnerable, because a Big Mac there costs $5.25, implying that the real is overheated by 13%. The other four all have undervalued currencies, to varying degrees. The Indonesian rupiah, the South African rand and the Indian rupee are undercooked by 50% or more.
In the short term, however, it is financial and economic factors, together with confidence or lack of it, that hold sway in currency markets. Brazil is running a current-account deficit of 3% of GDP, but it has a healthy stockpile of foreign-exchange reserves to call upon if necessary. Though the credibility of the Brazilian government has been eroded, the central bank has clawed back some respect by pushing through interest-rate rises.
In contrast, both Turkey and South Africa are running current-account deficits (as shares of their GDP) that are twice as large as Brazil’s. Their foreign-exchange reserves are much smaller than Brazil’s when gauged against their external-financing requirements. The Turkish lira, which has been plummeting in recent days, has also been affected by the central bank’s stubborn refusal to raise interest rates, along with a more general loss of confidence in the Turkish government. The lira has been among the worst performers of the currencies in our index over the past year; as a result, it has swung from 9% overvalued to 19% undervalued.
Although new forecasts from the International Monetary Fund (IMF) this week envisage an increase in global growth from 3% in 2013 to 3.7% in 2014, the demand for commodities is likely to remain restrained. That has already been affecting the currencies of economies that are rich in resources, such as Australia and Canada. Declines in the Australian dollar since it peaked in 2011 mean that it is now undervalued, by 3% according to our index. By contrast the Canadian dollar, which has been dropping sharply in recent weeks, remains overvalued, by 8%.
The IMF is predicting growth for the euro area of just 1% this year. That forecast chimes with the message from the Big Mac index, which finds that the single currency is overvalued, by 7%. The strength of the euro is unwelcome for exporters and casts a shadow over a recovery in the 18-country zone that is already proving to be feeble and faltering. By contrast the British pound is at the right level, according to the index, which should help the much sturdier growth the IMF now expects in Britain this year, of 2.4%.
Our Big Mac index will soon be beefed up with the addition of the Vietnamese dong as McDonald’s is soon to open its first branch in Vietnam, the first new country to welcome the golden arches in 15 years. Ketchup on this new entry to our index online next month.

The future of jobs: The onrushing wave

IN 1930, when the world was “suffering…from a bad attack of economic pessimism”, John Maynard Keynes wrote a broadly optimistic essay, “Economic Possibilities for our Grandchildren”. It imagined a middle way between revolution and stagnation that would leave the said grandchildren a great deal richer than their grandparents. But the path was not without dangers.
One of the worries Keynes admitted was a “new disease”: “technological unemployment…due to our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour.” His readers might not have heard of the problem, he suggested—but they were certain to hear a lot more about it in the years to come.
For the most part, they did not. Nowadays, the majority of economists confidently wave such worries away. By raising productivity, they argue, any automation which economises on the use of labour will increase incomes. That will generate demand for new products and services, which will in turn create new jobs for displaced workers. To think otherwise has meant being tarred a Luddite—the name taken by 19th-century textile workers who smashed the machines taking their jobs.
For much of the 20th century, those arguing that technology brought ever more jobs and prosperity looked to have the better of the debate. Real incomes in Britain scarcely doubled between the beginning of the common era and 1570. They then tripled from 1570 to 1875. And they more than tripled from 1875 to 1975. Industrialisation did not end up eliminating the need for human workers. On the contrary, it created employment opportunities sufficient to soak up the 20th century’s exploding population. Keynes’s vision of everyone in the 2030s being a lot richer is largely achieved. His belief they would work just 15 hours or so a week has not come to pass.
When the sleeper wakes
Yet some now fear that a new era of automation enabled by ever more powerful and capable computers could work out differently. They start from the observation that, across the rich world, all is far from well in the world of work. The essence of what they see as a work crisis is that in rich countries the wages of the typical worker, adjusted for cost of living, are stagnant. In America the real wage has hardly budged over the past four decades. Even in places like Britain and Germany, where employment is touching new highs, wages have been flat for a decade. Recent research suggests that this is because substituting capital for labour through automation is increasingly attractive; as a result owners of capital have captured ever more of the world’s income since the 1980s, while the share going to labour has fallen.
At the same time, even in relatively egalitarian places like Sweden, inequality among the employed has risen sharply, with the share going to the highest earners soaring. For those not in the elite, argues David Graeber, an anthropologist at the London School of Economics, much of modern labour consists of stultifying “bullshit jobs”—low- and mid-level screen-sitting that serves simply to occupy workers for whom the economy no longer has much use. Keeping them employed, Mr Graeber argues, is not an economic choice; it is something the ruling class does to keep control over the lives of others.
Be that as it may, drudgery may soon enough give way to frank unemployment. There is already a long-term trend towards lower levels of employment in some rich countries. The proportion of American adults participating in the labour force recently hit its lowest level since 1978, and although some of that is due to the effects of ageing, some is not. In a recent speech that was modelled in part on Keynes’s “Possibilities”, Larry Summers, a former American treasury secretary, looked at employment trends among American men between 25 and 54. In the 1960s only one in 20 of those men was not working. According to Mr Summers’s extrapolations, in ten years the number could be one in seven.
This is one indication, Mr Summers says, that technical change is increasingly taking the form of “capital that effectively substitutes for labour”. There may be a lot more for such capital to do in the near future. A 2013 paper by Carl Benedikt Frey and Michael Osborne, of the University of Oxford, argued that jobs are at high risk of being automated in 47% of the occupational categories into which work is customarily sorted. That includes accountancy, legal work, technical writing and a lot of other white-collar occupations.
Answering the question of whether such automation could lead to prolonged pain for workers means taking a close look at past experience, theory and technological trends. The picture suggested by this evidence is a complex one. It is also more worrying than many economists and politicians have been prepared to admit.
The lathe of heaven
Economists take the relationship between innovation and higher living standards for granted in part because they believe history justifies such a view. Industrialisation clearly led to enormous rises in incomes and living standards over the long run. Yet the road to riches was rockier than is often appreciated.
In 1500 an estimated 75% of the British labour force toiled in agriculture. By 1800 that figure had fallen to 35%. When the shift to manufacturing got under way during the 18th century it was overwhelmingly done at small scale, either within the home or in a small workshop; employment in a large factory was a rarity. By the end of the 19th century huge plants in massive industrial cities were the norm. The great shift was made possible by automation and steam engines.
Industrial firms combined human labour with big, expensive capital equipment. To maximise the output of that costly machinery, factory owners reorganised the processes of production. Workers were given one or a few repetitive tasks, often making components of finished products rather than whole pieces. Bosses imposed a tight schedule and strict worker discipline to keep up the productive pace. The Industrial Revolution was not simply a matter of replacing muscle with steam; it was a matter of reshaping jobs themselves into the sort of precisely defined components that steam-driven machinery needed—cogs in a factory system.
The way old jobs were done changed; new jobs were created. Joel Mokyr, an economic historian at Northwestern University in Illinois, argues that the more intricate machines, techniques and supply chains of the period all required careful tending. The workers who provided that care were well rewarded. As research by Lawrence Katz, of Harvard University, and Robert Margo, of Boston University, shows, employment in manufacturing “hollowed out”. As employment grew for highly skilled workers and unskilled workers, craft workers lost out. This was the loss to which the Luddites, understandably if not effectively, took exception.

With the low-skilled workers far more numerous, at least to begin with, the lot of the average worker during the early part of this great industrial and social upheaval was not a happy one. As Mr Mokyr notes, “life did not improve all that much between 1750 and 1850.” For 60 years, from 1770 to 1830, growth in British wages, adjusted for inflation, was imperceptible because productivity growth was restricted to a few industries. Not until the late 19th century, when the gains had spread across the whole economy, did wages at last perform in line with productivity (see chart 1).
Along with social reforms and new political movements that gave voice to the workers, this faster wage growth helped spread the benefits of industrialisation across wider segments of the population. New investments in education provided a supply of workers for the more skilled jobs that were by then being created in ever greater numbers. This shift continued into the 20th century as post-secondary education became increasingly common.
Claudia Goldin, an economist at Harvard University, and Mr Katz have written that workers were in a “race between education and technology” during this period, and for the most part they won. Even so, it was not until the “golden age” after the second world war that workers in the rich world secured real prosperity, and a large, property-owning middle class came to dominate politics. At the same time communism, a legacy of industrialisation’s harsh early era, kept hundreds of millions of people around the world in poverty, and the effects of the imperialism driven by European industrialisation continued to be felt by billions.
The impacts of technological change take their time appearing. They also vary hugely from industry to industry. Although in many simple economic models technology pairs neatly with capital and labour to produce output, in practice technological changes do not affect all workers the same way. Some find that their skills are complementary to new technologies. Others find themselves out of work.
Take computers. In the early 20th century a “computer” was a worker, or a room of workers, doing mathematical calculations by hand, often with the end point of one person’s work the starting point for the next. The development of mechanical and electronic computing rendered these arrangements obsolete. But in time it greatly increased the productivity of those who used the new computers in their work.
Many other technical innovations had similar effects. New machinery displaced handicraft producers across numerous industries, from textiles to metalworking. At the same time it enabled vastly more output per person than craft producers could ever manage.
Player piano
For a task to be replaced by a machine, it helps a great deal if, like the work of human computers, it is already highly routine. Hence the demise of production-line jobs and some sorts of book-keeping, lost to the robot and the spreadsheet. Meanwhile work less easily broken down into a series of stereotyped tasks—whether rewarding, as the management of other workers and the teaching of toddlers can be, or more of a grind, like tidying and cleaning messy work places—has grown as a share of total employment.
But the “race” aspect of technological change means that such workers cannot rest on their pay packets. Firms are constantly experimenting with new technologies and production processes. Experimentation with different techniques and business models requires flexibility, which is one critical advantage of a human worker. Yet over time, as best practices are worked out and then codified, it becomes easier to break production down into routine components, then automate those components as technology allows.
If, that is, automation makes sense. As David Autor, an economist at the Massachusetts Institute of Technology (MIT), points out in a 2013 paper, the mere fact that a job can be automated does not mean that it will be; relative costs also matter. When Nissan produces cars in Japan, he notes, it relies heavily on robots. At plants in India, by contrast, the firm relies more heavily on cheap local labour.
Even when machine capabilities are rapidly improving, it can make sense instead to seek out ever cheaper supplies of increasingly skilled labour. Thus since the 1980s (a time when, in America, the trend towards post-secondary education levelled off) workers there and elsewhere have found themselves facing increased competition from both machines and cheap emerging-market workers.

Such processes have steadily and relentlessly squeezed labour out of the manufacturing sector in most rich economies. The share of American employment in manufacturing has declined sharply since the 1950s, from almost 30% to less than 10%. At the same time, jobs in services soared, from less than 50% of employment to almost 70% (see chart 2). It was inevitable, therefore, that firms would start to apply the same experimentation and reorganisation to service industries.
A new wave of technological progress may dramatically accelerate this automation of brain-work. Evidence is mounting that rapid technological progress, which accounted for the long era of rapid productivity growth from the 19th century to the 1970s, is back. The sort of advances that allow people to put in their pocket a computer that is not only more powerful than any in the world 20 years ago, but also has far better software and far greater access to useful data, as well as to other people and machines, have implications for all sorts of work.
The case for a highly disruptive period of economic growth is made by Erik Brynjolfsson and Andrew McAfee, professors at MIT, in “The Second Machine Age”, a book to be published later this month. Like the first great era of industrialisation, they argue, it should deliver enormous benefits—but not without a period of disorienting and uncomfortable change. Their argument rests on an underappreciated aspect of the exponential growth in chip processing speed, memory capacity and other computer metrics: that the amount of progress computers will make in the next few years is always equal to the progress they have made since the very beginning. Mr Brynjolfsson and Mr McAfee reckon that the main bottleneck on innovation is the time it takes society to sort through the many combinations and permutations of new technologies and business models.
A startling progression of inventions seems to bear their thesis out. Ten years ago technologically minded economists pointed to driving cars in traffic as the sort of human accomplishment that computers were highly unlikely to master. Now Google cars are rolling round California driver-free no one doubts such mastery is possible, though the speed at which fully self-driving cars will come to market remains hard to guess.
Brave new world
Even after computers beat grandmasters at chess (once thought highly unlikely), nobody thought they could take on people at free-form games played in natural language. Then Watson, a pattern-recognising supercomputer developed by IBM, bested the best human competitors in America’s popular and syntactically tricksy general-knowledge quiz show “Jeopardy!” Versions of Watson are being marketed to firms across a range of industries to help with all sorts of pattern-recognition problems. Its acumen will grow, and its costs fall, as firms learn to harness its abilities.
The machines are not just cleverer, they also have access to far more data. The combination of big data and smart machines will take over some occupations wholesale; in others it will allow firms to do more with fewer workers. Text-mining programs will displace professional jobs in legal services. Biopsies will be analysed more efficiently by image-processing software than lab technicians. Accountants may follow travel agents and tellers into the unemployment line as tax software improves. Machines are already turning basic sports results and financial data into good-enough news stories.
Jobs that are not easily automated may still be transformed. New data-processing technology could break “cognitive” jobs down into smaller and smaller tasks. As well as opening the way to eventual automation this could reduce the satisfaction from such work, just as the satisfaction of making things was reduced by deskilling and interchangeable parts in the 19th century. If such jobs persist, they may engage Mr Graeber’s “bullshit” detector.
Being newly able to do brain work will not stop computers from doing ever more formerly manual labour; it will make them better at it. The designers of the latest generation of industrial robots talk about their creations as helping workers rather than replacing them; but there is little doubt that the technology will be able to do a bit of both—probably more than a bit. A taxi driver will be a rarity in many places by the 2030s or 2040s. That sounds like bad news for journalists who rely on that most reliable source of local knowledge and prejudice—but will there be many journalists left to care? Will there be airline pilots? Or traffic cops? Or soldiers?

There will still be jobs. Even Mr Frey and Mr Osborne, whose research speaks of 47% of job categories being open to automation within two decades, accept that some jobs—especially those currently associated with high levels of education and high wages—will survive (see table). Tyler Cowen, an economist at George Mason University and a much-read blogger, writes in his most recent book, “Average is Over”, that rich economies seem to be bifurcating into a small group of workers with skills highly complementary with machine intelligence, for whom he has high hopes, and the rest, for whom not so much.
And although Mr Brynjolfsson and Mr McAfee rightly point out that developing the business models which make the best use of new technologies will involve trial and error and human flexibility, it is also the case that the second machine age will make such trial and error easier. It will be shockingly easy to launch a startup, bring a new product to market and sell to billions of global consumers (see article). Those who create or invest in blockbuster ideas may earn unprecedented returns as a result.
In a forthcoming book Thomas Piketty, an economist at the Paris School of Economics, argues along similar lines that America may be pioneering a hyper-unequal economic model in which a top 1% of capital-owners and “supermanagers” grab a growing share of national income and accumulate an increasing concentration of national wealth. The rise of the middle-class—a 20th-century innovation—was a hugely important political and social development across the world. The squeezing out of that class could generate a more antagonistic, unstable and potentially dangerous politics.
The potential for dramatic change is clear. A future of widespread technological unemployment is harder for many to accept. Every great period of innovation has produced its share of labour-market doomsayers, but technological progress has never previously failed to generate new employment opportunities.

The productivity gains from future automation will be real, even if they mostly accrue to the owners of the machines. Some will be spent on goods and services—golf instructors, household help and so on—and most of the rest invested in firms that are seeking to expand and presumably hire more labour. Though inequality could soar in such a world, unemployment would not necessarily spike. The current doldrum in wages may, like that of the early industrial era, be a temporary matter, with the good times about to roll (see chart 3).
These jobs may look distinctly different from those they replace. Just as past mechanisation freed, or forced, workers into jobs requiring more cognitive dexterity, leaps in machine intelligence could create space for people to specialise in more emotive occupations, as yet unsuited to machines: a world of artists and therapists, love counsellors and yoga instructors.
Such emotional and relational work could be as critical to the future as metal-bashing was in the past, even if it gets little respect at first. Cultural norms change slowly. Manufacturing jobs are still often treated as “better”—in some vague, non-pecuniary way—than paper-pushing is. To some 18th-century observers, working in the fields was inherently more noble than making gewgaws.
But though growth in areas of the economy that are not easily automated provides jobs, it does not necessarily help real wages. Mr Summers points out that prices of things-made-of-widgets have fallen remarkably in past decades; America’s Bureau of Labour Statistics reckons that today you could get the equivalent of an early 1980s television for a twentieth of its then price, were it not that no televisions that poor are still made. However, prices of things not made of widgets, most notably college education and health care, have shot up. If people lived on widgets alone— goods whose costs have fallen because of both globalisation and technology—there would have been no pause in the increase of real wages. It is the increase in the prices of stuff that isn’t mechanised (whose supply is often under the control of the state and perhaps subject to fundamental scarcity) that means a pay packet goes no further than it used to.
So technological progress squeezes some incomes in the short term before making everyone richer in the long term, and can drive up the costs of some things even more than it eventually increases earnings. As innovation continues, automation may bring down costs in some of those stubborn areas as well, though those dominated by scarcity—such as houses in desirable places—are likely to resist the trend, as may those where the state keeps market forces at bay. But if innovation does make health care or higher education cheaper, it will probably be at the cost of more jobs, and give rise to yet more concentration of income.
Even if the long-term outlook is rosy, with the potential for greater wealth and lots of new jobs, it does not mean that policymakers should simply sit on their hands in the mean time. Adaptation to past waves of progress rested on political and policy responses. The most obvious are the massive improvements in educational attainment brought on first by the institution of universal secondary education and then by the rise of university attendance. Policies aimed at similar gains would now seem to be in order. But as Mr Cowen has pointed out, the gains of the 19th and 20th centuries will be hard to duplicate.
Boosting the skills and earning power of the children of 19th-century farmers and labourers took little more than offering schools where they could learn to read, write and do algebra. Pushing a large proportion of college graduates to complete graduate work successfully will be harder and more expensive. Perhaps cheap and innovative online education will indeed make new attainment possible. But as Mr Cowen notes, such programmes may tend to deliver big gains only for the most conscientious students.
Another way in which previous adaptation is not necessarily a good guide to future employment is the existence of welfare. The alternative to joining the 19th-century industrial proletariat was malnourished deprivation. Today, because of measures introduced in response to, and to some extent on the proceeds of, industrialisation, people in the developed world are provided with unemployment benefits, disability allowances and other forms of welfare. They are also much more likely than a bygone peasant to have savings. This means that the “reservation wage”—the wage below which a worker will not accept a job—is now high in historical terms. If governments refuse to allow jobless workers to fall too far below the average standard of living, then this reservation wage will rise steadily, and ever more workers may find work unattractive. And the higher it rises, the greater the incentive to invest in capital that replaces labour.
Everyone should be able to benefit from productivity gains—in that, Keynes was united with his successors. His worry about technological unemployment was mainly a worry about a “temporary phase of maladjustment” as society and the economy adjusted to ever greater levels of productivity. So it could well prove. However, society may find itself sorely tested if, as seems possible, growth and innovation deliver handsome gains to the skilled, while the rest cling to dwindling employment opportunities at stagnant wages.
(Source: The Economist)

The new GE: Google, everywhere

AT GOOGLE they call it the toothbrush test. Shortly after returning to being the firm’s chief executive in 2011, Larry Page said he wanted it to develop more services that everyone would use at least twice a day, like a toothbrush. Its search engine and its Android operating system for mobile devices pass that test. Now, with a string of recent acquisitions, Google seems to be planning to become as big in hardware as it is in software, developing “toothbrush” products in a variety of areas from robots to cars to domestic-heating controls.
Its latest purchase is Nest Labs, a maker of sophisticated thermostats and smoke detectors: on January 13th Google said it would pay $3.2 billion in cash for the firm. Google’s biggest move into hardware so far is its $12.5 billion bid for Motorola Mobility, a handset-maker, in 2011. In recent months it has been mopping up robotics firms (see table), most notably Boston Dynamics, which makes two- and four-legged machines with names like BigDog and Cheetah that can walk and run. Google’s in-house engineers have also been busy working on driverless cars and wearable gadgets such as Google Glass.

Nest takes Google into the home-appliance business, which is how another, much older American conglomerate got started. General Electric (GE) produced its first electric fans in the 1890s and then went on to develop a full line of domestic heating and cooking devices in 1907, before expanding into the industrial and financial behemoth that is still going strong today.
The common factor shared by GE’s early products was electricity, something businesses were then just learning to exploit. With Google’s collection of hardware businesses, the common factor is data: gathering and crunching them, to make physical devices more intelligent.
Even so, the question is whether Google can knit the diverse businesses it is developing and acquiring into an even more profitable engineering colossus—or whether it is in danger of squandering billions. Concern that the firm could make overpriced acquisitions has grown along with the size of its cash pile, now around $57 billion. Eyebrows were raised this week when the price for Nest was revealed. Morgan Stanley, a bank, reckons it represents ten times Nest’s estimated annual revenue. (Google’s executive chairman, Eric Schmidt, is a non-executive director of The Economist Group.)
Why fork out so much for a startup that makes such banal things as thermostats? Paul Saffo of Discern Analytics, a research firm, argues that Google is already adept at profiting from the data people generate in the form of search queries, e-mails and other things they enter into computers. It has been sucking in data from smartphones and tablet computers thanks to the success of Android, and apps such as Google Maps. To keep growing, and thus to justify its shares’ lofty price-earnings ratio of 33, it must find ever more devices to feed its hunger for data.
Packed with sensors and software that can, say, detect that the house is empty and turn down the heating, Nest’s connected thermostats generate plenty of data, which the firm captures. Tony Fadell, Nest’s boss, has often talked about how Nest is well-positioned to profit from “the internet of things”—a world in which all kinds of devices use a combination of software, sensors and wireless connectivity to talk to their owners and one another.
Other big technology firms are also joining the battle to dominate the connected home. This month Samsung announced a new smart-home computing platform that will let people control washing machines, televisions and other devices it makes from a single app. Microsoft, Apple and Amazon were also tipped to take a lead there, but Google was until now seen as something of a laggard. “I don’t think Google realised how fast the internet of things would develop,” says Tim Bajarin of Creative Strategies, a consultancy.
Buying Nest will allow it to leapfrog much of the opposition. It also brings Google some stellar talent. Mr Fadell, who led the team that created the iPod while at Apple, has a knack for breathing new life into stale products. His skills and those of fellow Apple alumni at Nest could be helpful in other Google hardware businesses, such as Motorola Mobility.
Google has said little about its plans for its new robotics businesses. But it is likely to do what it did with driverless cars: take a technology financed by military contracts and adapt it for the consumer market. In future, personal Googlebots could buzz around the house, talking constantly to a Nest home-automation platform.
The challenge for Mr Page will be to ensure that these new businesses make the most of Google’s impressive infrastructure without being stifled by the bureaucracy of an organisation that now has 46,000 employees. Google has had to overcome sclerosis before. Soon after returning as boss, Mr Page axed various projects and streamlined the management.
Nest is being allowed to keep its separate identity and offices, with Mr Fadell reporting directly to Mr Page. Google has also protected its in-house hardware projects, such as Google Glass and self-driving cars, from succumbing to corporate inertia by nurturing them in its secretive Google X development lab. It has also given its most important projects high-profile bosses with the clout to champion them internally. The new head of Google’s robotics business is Andy Rubin, who led the successful development of Android.
Such tactics are good ways to avoid the pitfalls of conglomeration. But to ensure success, Google will need to avoid another misstep. Its chequered record on data-privacy issues means that Nest and other divisions will be subject to intense scrutiny by privacy activists and regulators. Provided it can retain the confidence of its users on this, Google should be able to find plenty of new opportunities in both software and hardware that pass the toothbrush test and keep a bright smile on its shareholders’ faces.
(Source: The Economist)