THE WORLD IN 2012

135

Also in this section: Emerging importers 136 Bye-bye bonus 137 Rules and the City 138

Property prices 139 Gloomy executives 140 A garbage poll 140 Whistleblowing 141

OPEC to the rescue? 142 Just possibly 142 Bob Diamond: The next frontier for nance

Finance
143

Two views of the future

Philip Coggan

Heads you win

October 2007 = 100

250

The markets will reveal which is right

omebody is going to be proved wrong in 2012 and will lose a lot of money. Either the bullion market or the Treasury bond market is mistaken about the long-term inationary outlook. By early September 2011, gold was trading at around $1,900 an ounce, an indication that investors felt ination was set to soar. Such an outlook would normally be bad news for government-bond markets. But the ten-year Treasury bond was simultaneously yielding less than 2%, an indication that the bond vigilantes were far more concerned about deation than ination. Although the gold price fell and bond yields rose in October, the underlying contradiction didnt disappear. Such historically low bond yields might seem a very bad bargain indeed. But investors have the example of Japan to ponder. Many years of scal decits, a high debt-to-gdp ratio, low interest rates and quantitative easing (qe): Japan has tried the lot without escaping from its economic doldrums. By September 2011 its ten-year bond yield had slipped below 1%. If the rich world is following Japans template, equity markets are likely to have a rough 2012. A year in which Treasury bond yields stay at 2% or below would probably be one in which America at least irted with recession. But equity investors are unlikely to be much happier if the gold bugs turn out to be right. Although shares may be a better hedge against ination than government bonds, they are still prone to suffer if prices rise sharply, as they did in the 1970s. Equity valuations, as measured by the price-earnings ratio, tend to be highest when ination is low and stable. Furthermore, a sharp rise in ination would probably force the Federal Reserve to abandon its commitment to keep interest rates at their current low levels. That commitment is itself a sign of the Feds worries about the economic outlook. Indeed, unlike 2008 or 2009, the equity markets may not get much of a hand from the authorities in 2012, since policymakers seem to have run out of ammunition. Interest rates are about as low as they can go, while debt-burdened governments are opting for austerity rather than further pump-priming. Europes travails weighed on investors minds throughout 2011, as politicians looked for a way to deal with the high debts incurred in Greece and other countries. There is always the hope of further qe, with the cen-

200

Gold $ per troy ounce

150

Ten-year US Treasury bond yield, %

100

50

2007

2008

2009

2010

2011
Source: Thomson Reuters

tral bank creating money to buy nancial assets. But the policy has become controversial, with Texass governor, Rick Perry, a candidate for the Republican nomination for the American presidency, describing the idea as almost treasonous. Nor is it clear that previous rounds of qe did much to help the real economy. Political uncertainty may also weigh on the markets next year. Although Wall Street denizens may not be great fans of President Barack Obama The best hope for (and generally prefer equity investors is Republican leaders), they might also be that both the gold concerned if a teabugs and the bond party-inspired candivigilantes are wrong date took the White House. An immediate commitment to balance the budget might be a rather more austere economic diet than equity investors would desire, even if bond investors took cheer. Meanwhile, in Europe, the French presidential election may make it more difcult to make further progress on dealing with the debt crisis (not an easy matter at the best of times). However, the picture for equity investors is not nec-

2012 IN BRIEF
Mexico hosts a G20 summit in the resort of Los Cabos to strengthen the fragile world economy

Philip Coggan: capital-markets editor, The Economist

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THE WORLD IN 2012

Hey big spenders

Pam Woodall

Emerging economies will buy over half of the worlds imports in 2012

he idea that economic power is shifting from the old rich world to emerging economies is hardly new, but it is taking a new form. For the past couple of decades, emerging economies have grabbed a rising share of world manufacturing production and exports, thanks to their lower wage costs. They already produce more than half the worlds exports. But an important new milestone will be reached in 2012, when the upstarts will import more goods than rich economies. That is a dramatic change since 2000, when they imported barely half as much as rich countries did. This rapid growth in developing countries buying power will boost the prots of companies in rich

economies over the coming years. The rich worlds financial crisis has hastened the shift in global economic power towards the newcomers. At the beginning of 2012, the total real gdp of the

China will overtake America as the worlds biggest importer by 2014

rich economies will be no higher than it was at the end of 2007. In contrast, the output of the emerging economies will have jumped by almost a quarter over the same period. Their combined output (including Asias newly industrialised economies, such as South Korea and Taiwan) will account for over two-fths of world gdp at market exchange rates in the com-

Trading places
Share of world imports,%
70 60 50 40 30 20 10 0

ie Developed econom

Emerging economies

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012* *2011 and 2012 forecasts The Economist Sources: WTO; The Economist

ing year, almost twice the share in 1990. If gdp is instead measured at purchasingpower parity to take account of the fact that prices are lower in poorer countries, emerging economies have already overtaken the developed world. Rapid growth in incomes, and hence spending, has increased their appetite for foreign goods: imports into emerging markets have grown twice as fast as those into developed ones over the past decade. This partly reects increasing trade between emerging economies themselves, such as China and Brazil, but their purchases from rich countries have also grown strongly. Almost three-fths of American exports will head to emerging markets in 2012, nearly double the share in 1990. Emerging economies need to import advanced machinery and equipment from rich countries in order to build new factories and improve their infrastructure. But consumer spending is also rising rapidly. In 2012 emerging markets will account for nearly half of global retail sales. Even more important, the increase in their spending in absolute dollar terms will be twice as big as the increase in the developed world. They already buy over half of all motor vehicles (up from only 20% in 2000), and account for four-fths of mobile-phone contracts. China will overtake America as the worlds biggest importer by 2014. Within ten to 15 years emerging markets could produce half of the revenues of several big multinational rms. An enterprising Englishman in the 1850s famously said that if he could add an inch of material to every Chinamans shirt tail, the mills of Lancashire could be kept busy for a generation. Those mills have since turned to rust, but selling to China and the worlds other emerging markets will keep many Western firms busy for years to come.
Pam Woodall: senior economics writer, The Economist

2012 IN BRIEF
Indias tax authorities, cracking down on tax evasion, get increased help from Switzerland as new rules in their tax treaty come into effect

essarily one of total gloom. For a start, markets react not just to the economic fundamentals but to how the fundamentals differ from their expectations. Stockmarkets suffered a setback in the summer of 2011, for example, because economic growth turned out to be weaker than expected. All the bad news about 2012 may have been priced in by the time that year begins. Secondly, the markets are also forward-looking. So even if the developed world does slip into recession in 2012, at some point investors will start anticipating a recovery later in the year, or in 2013. A further cushion for investors is that the corporate sectors nancial position has been strong. American prot margins on some measures were even higher in

2011 than they were before the credit crunch; the last time they were so high was in the 1960s. Although that suggests margins are due for a fall, companies have built up a cash cushion to protect themselves against recession; some may even use the weakness of the economy as an opportunity to launch an acquisitions spree. The best hope for equity investors in 2012 is that both the gold bugs and the bond vigilantes are wrong. Rather than succumbing to ination or recession, the global economy will muddle through, as it has many times in the past. Such an outcome is perfectly possible, although investors will want to keep ngers, toes and everything else crossed before they commit their life savings to such a benign view.

THE WORLD IN 2012

Finance

137

Bye-bye bonus, bye-bye

Jonathan Rosenthal

Investment banks will have to slow down the millionaires conveyer-belt

oney, as bankers know only too well, cant buy you love. Yet enough of it surely provides some compensation to clever people for working unseemly long hours and being almost universally reviled. Over the course of 2012, however, the lives of a great many bankers will change for the worse. They will still be hated by politicians and the public. They will still work very hard and should, barring some unforeseen cataclysm, be as clever on average as before. But they will be considerably poorer for it. This will be the year in which most bankers in the worlds large banking markets will take their rst big pay cuts in the four years since the banking system blew up the global economy. Bankers pay has been remarkably resilient. In 2010 the total compensation paid out by Wall Street rms reportedly reached a record $135 billion after steadily increasing for two years. A dip in pay in the aftermath of the collapse of Lehman Brothers had been short-lived. Although economic output in most big Western economies is still lower than it was before the crisis, pay on Wall Street had recovered to pre-crisis levels by as early as 2009. In Europe the resilience has been all the more remarkable, given the concerted efforts by regulators and politicians to curb it. In Britain, the government imposed a tax on bank bonuses in 2010 and pressured rms into agreeing to cut them for 2011. Even so, the main effect was a change in The vast rump the distribution of pay between of employees regular salaries and performance-related bonuses. Although will see total the latter slipped by about 8% pay falling in 2011, reckons cebr, an ecosharply nomic consultancy, average pay increased by 7%. Elsewhere pay has increased at an even faster clip. In some markets in Asia pay is rising by as much as 25% a year, bankers say. Why should 2012 be the year in which this pay train goes into reverse? The two main reasons are the economic relapse in rich countries and a deep change in banking markets that is likely to make them signicantly less protable for years to come. A taste of Basel Start with the downturn. In 2008 many in the industry predicted sharp falls in bank protability and deep cuts in staff. The opposite happened as central banks slashed ofcial interest rates, which led to a boom in bond and currency trading. Instead of cutting back, many banks hired aggressively. Pay was also pushed up by the expansion of rms into established markets. Barclays, a British bank, bought the American businesses of Lehman. Nomura, a Japanese one, bought its European operations. In both cases the buyers paid hefty salaries to retain or attract key staff.

All bad things must come to an end

Yet by 2011 boom had turned to bust. Troubles in Europe and slowing economies everywhere discouraged rms from selling bonds or shares, and investors from trading them. The industry also faces structural change. From January 1st 2012 banks around the world will have to hold signicantly more capital against assets in their trading books. The new rules, known as Basel 2.5, will make many of their trading businesses unprotable. In America, 2012 will also be the year in which many of the rules proposed under the Dodd-Frank Act will make their way into regulations. These will include limits on how much trading banks can do for themselves. McKinsey, a consulting rm, reckons that the average return on equity of the worlds biggest investment banks will slump from 20% to about 7% unless banks take steps to lessen the impact of the new rules. The biggest steps they will take will be to cut the number of people they employ, and to pay those who remain less. The logic is pitiless. Employees typically account for 40-60% of income at big investment banks. Over the past year, revenues have slumped while many banks have been locked into big payouts, pushing their compensation ratios up to 60-80%. The cuts, although swift and brutal, will not be right across the board. The very best bankers will still be able to demand an outsize share of the revenue they generate for the bank, but the vast rump of employees will see total pay falling sharply. A good number of bankers in their 50s will be encouraged to take early retirement. The best among them will try to move into hedge funds, or start their own. New talent is also likely to look farther aeld. Its getting very difcult to convince young people to join the industry by offering them a dream, laments the boss of one large investment bank. Now we ask them to work very hard and say: by the way, you may not have a job in two years time.

2012 IN BRIEF
The bare facts: from November, the EU bans the naked short-selling of shares (where the underlying stocks to be sold have not rst been borrowed)

Jonathan Rosenthal: banking editor, The Economist

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Finance

THE WORLD IN 2012

Drip Drip
Lionel Barber

Regulation and its discontents in the City

uring the Roaring Noughties, the City of Londons low taxes and light-touch regulation made it the location of choice for hedge funds, investment banks and Russian oligarchs. Thanks to the Olympics, London will still come across as cool and cosmopolitan in 2012but the City will have to work much harder to make anything like the handsome returns of the past. Light(soft?)-touch regulation, long since discredited, will move towards two-touch oversight in 2012. An all-powerful Bank of England will subsume the Financial Services Authority, taking charge of nancial stability and monetary policy. As for tax rates, the coalition government will resist pressure to reduce the 50% rate for the wealthy, despite catcalls from Boris Johnson, the super-ambitious mayor of London, and the Tory right. Bankers will still be in bad odour in 2012, but talk of decamping to New York, Hong Kong or Singapore will remain an empty threat. Barclays Capital, hsbc and Standard Chartered will seethe over the annual bank levy imposed by the coalition, but their pique will give way to a grudging acBankers ceptance of a new status quo. will still In 2012 British banks will prepare for bigger capital buffers and a clearer be in bad distinction between their commercial odour lending and investment-trading arms. All banks will spend time and money implementing the recommendations of the Vickers commission, the panel of wise men (and one wise woman) set up by the chancellor of the exchequer, George Osborne, in the wake of the nancial crisis. Bankers lobbied furiously for a dilution of Vickers, particularly the proposal to ring-fence retail businesses from capital-markets trading to prevent cross-subsidy of the latter. In theory, separation should allow both entities to survive without the other. But, in practice, the devil will be in the legislative detail. Expect plenty of to-and-fro argument between the big banks and the Treasury. The other body to watch in 2012 will be the embryonic Financial Conduct Authority (fca), charged with regulating a vast array of products sold to consumers, from retail consumers taking out mortgages to major organisations raising capital in the international markets. The fca will come into full force by the end of 2012, but its headMartin Wheatley, formerly of Hong Kongwill have long since made his presence felt. Over the past two decades, British nancial rms have enjoyed an inglorious record of mis-selling to consumers. Dubious peddling of personal pensions, mortgage endowments and split-capital trusts has already led to 15 billion ($23 billion) in compensation. And that is before the nearly 7 billion earmarked to redress the

abuses over payment-protection insurance, which was supposed to cover people falling sick or losing their jobs. The fca will adopt an intrusive approach in 2012. The price will be less nancial innovation and fewer products. The system will be marginally safer, but more bureaucraticwith costs not necessarily offset by fresh retail competitors led by Virgin and Lord Levenes nbnk. In 2011 Bob Diamond, the razor-blade-chewing American ceo of Barclays, called for a truce between the banks and the politicians and media. He was blown a raspberry and in 2012 hostilities will continue. Bonuses will be down, reduced more by performance than statute. Lower margins will mean lower payouts for traders, still the really big earners. Investment banks will cut jobs, because the new emphasis on xed salary leaves less room than a exible bonus system to cut costs. One feature will remain: a division between Lloyds tsb and Royal Bank of Scotland (rbs) and the rest. Lloyds and rbs will remain in the casualty ward, victims of speculative excess during the credit bubble (rbs) and a catastrophic merger (Lloyds-hbos). Do not expect early sales of the governments shareholdings. A better gauge of market sentiment will still be if Santander goes ahead in 2012 with an ipo of its British businesses. That missing mojo Can the City regain its mojo of the rst decade of the 21st century? It enjoys the advantage of sitting in the middle of the global time zone, the English language and the rule of law, all of which ensure it will retain its world leadership in commodities and foreign-exchange trading. But institutions such as the London Stock Exchangeno longer a regulator but now a mere trading platformface tough competition from behemoths such as Chicago Mercantile and the potential Deutsche Brse/nyse Euronext combination. The likes of icap and Tullett Prebon, world leaders in providing interestrate swaps and money broking, will continue to provide the Citys nancial plumbing, but they have already outsourced some secondary technology platforms to Singapore. The South-East Asian entrept, along with Hong Kong (and London), is already eyeing mouth-watering opportunities associated with offshore trading of the Chinese yuan, starting with trade settlement. The slow leakage of technology and investment from London will not attract the same headlines as threats of a wholesale banking exodus. But in the global competition for funds, talent and resources, Drip Drip could ultimately prove a much bigger story than Big Bang.

Lionel Barber: editor, Financial Times

THE WORLD IN 2012

Finance
2011. Rents will continue to rise in both regions in 2012, but, with condence low and demand remaining muted, landlords will still have work to do to woo new tenants. A sluggish recovery will have other effects. Some new buildings will be completed in 2012, none of them more visible than the Shard, a thrusting London skyscraper that will become western Europes tallest building. But dont expect to see too many new cranes on the horizon while demand from occupiers is still feeble. At the same time, property investors will remain focused on the prime markets, the prestige locations in the big world cities such as London and New York, where demand is most assured. Prices for commercial properties in duff locations will remain becalmed, which means that lenders will have to keep rolling over debts on many of these buildings in order to avoid taking big losses. Sky high in the east If the rich worlds property markets could do with a dose of exuberance, the emerging markets will be an altogether bouncier place in 2012. Asian skylines are being transformed by construction. The Council on Tall Buildings and Urban Habitat reckons that some 72 skyscrapers will be completed over the course of the year in Asia, 27 of them in China alone. Even so, ofce supply in Asia will be outstripped by heavy occupier demand, in turn

139

Floor plans
Andrew Palmer

2012 IN BRIEF
The Carlyle Group, noted for its political connections, becomes the latest privateequity rm to go public

Look to America for propertys symbolic moment of 2012, and to Asia for growth
he financial crisis has changed shape so many times, from the banks to the real economy to the state of the public nances, that it is easy to forget where it all beganin Americas housing market. American house prices rst began falling in 2006. Aside from a hiatus in 2009-10 (thanks to a tax credit for rsttime homebuyers), they have not stopped falling since. But 2012 will be the year that American housing at last reaches a bottom. Such predictions have been made before, of course. Further economic shocks would again delay the moment when prices atten out. And as with any propertyrelated forecast, location matters: the market in Nevada will continue to feel very different from the bouncier one in Texas, say. But prices have been posting monthon-month upticks since mid-2011; rental costs are rising, making it more attractive for people to buy; there is plenty of pent-up demand for housing from all those 20-somethings still living with their parents; and homes have not been this affordable for years. A oor for housing is not the same as a bounceback, however. The drag on Americas residential market from a subdued economy will remain powerful. Banks will still be wary of extending credit to anyone but the most gold-plated borrowers. There may be a shortage of new homes but masses of existing ones will nd their way to market in 2012 because of the huge pipeline of houses Some 72 skyin foreclosure. And millions scrapers will be of American households will remain caught in negative completed over equity, making it hard for them to contemplate a move. the course of the European homeowners year in Asia face an even bleaker prospect in 2012. Prices have not fallen as far as in America, leaving them further away from fair value as measured by the long-run average ratio of prices to rents (Germany is an obvious exception). Spanish house prices are still down by only 16% or so from their peak, for example, compared with more than 30% in America. Demography provides less of a boost to demand in the old world, too. And Europes housing markets are caught in an unenviable trap because so many households have variable-rate mortgages. If the economic environment remains poor, then buyers and banks will hold back. If the clouds lift and the euro-zone crisis is somehow resolved (dont bet the house on this), then the European Central Bank will tighten monetary policy and add to borrowers mortgage payments. The headwinds facing residential property in America and Europe will also slow the recovery in commercial property (offices, retail and the like). European ofce rents began rising again back in the third quarter of 2010, according to cb Richard Ellis, a consultancy; American rents started growing in the second quarter of

Tread carefully!

driving fast rental growth. On the residential side of the fence, policymakers will intervene further to keep a lid on rising house prices. Over the past few years, the authorities in China, Hong Kong and Singapore have tweaked the rules in all manner of ways (restricting how quickly people can sell properties on, and increasing the deposits they have to put down) to restrain price growth. An enormous affordable-housing programmesome 36m new homes in ve yearswill also dampen upward pressure in China. Nonetheless, price growth in swathes of the emerging world will still look explosive to observers in the West.

Andrew Palmer: finance editor, The Economist

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2012 IN BRIEF
Roland Berger, a consultancy, establishes a new European credit-rating agency, no doubt to the delight of Eurocrats who have criticised Americas Moodys and S&P

Alexandra Fattal: researcher, The World in 2012

September 2008, when a similar survey put condence at minus 37 points. Executives in western Europe and Latin America are Alexandra Fattal particularly gloomy: nearly three out of ve think things will get worse over the next six months. Of executives Global business sentiment does not bode well in the Middle East and Africa, one in ve expects better times ahead, compared with only one in ten in Europe. What is driving this gloom? Economic and market ow the world economy fares in 2012 will depend heavily on business confidence. With govern- risk is the biggest worry for executives, troubling three ments and consumers bogged down by debt in out of every four. They have become less concerned many countries, business investment will be crucial to about ination, but increasingly fretful about currency any economic recovery. A lot of companies are sitting on volatility: it now alarms 25% of executives. Similarly a quarter of businesspeople are worried about skills piles of cash. Will their bosses risk investing it? The Economist/FT Global Business Barometer, a shortages; in Asia a third of them are concerned about it. Executives in the chemicals industry, property, nanquarterly survey by the Economist Intelligence Unit of cial services and manufacturing more than 1,500 senior execuare especially pessimistic; those in tives, suggests they enter 2012 in Sinking confidence expecting global defence and telecoms a little more bearish mood. Just 14% of those Balance of respondentsimprove, 2011, percentage points business conditions to cheery. (See box below for views polled in October expected busifrom the sanitation industry.) ness conditions to improve in the 20 Not so long ago it might have next six months, down from 23% 10 been hard to nd many execuin July and nearly 40% in May. 0 tives who thought the euro zone Overall confidence, measured would fracture. That one in ve as the balance of executives who executives now believes it will is think the global economy will -10 a measure of how much things improve against those who ex- -20 have changed. The good news pect it to worsen, plunged from a for the euro, though, is that this bullish plus 19 percentage points -30 means that four out of ve rein May to minus 39 by October spondents think the single-cur(see chart). Thats worse than on -40 May July October rency zone will stick together. the eve of the nancial crisis in Source: The Economist/FT Global Business Barometer

Betting on business?

The futures rubbish

Alexandra Fattal

Might dustmen be the people to ask about 2012?

ack in 1984 The Economist conducted an unusual survey for its Christmas issue. We invited four former nance ministers, four chairmen of big multinational companies, four Oxford University students and four London dustmen to offer their predictions on the economy over the next ten years. A decade later we checked the accuracy of their forecasts, and marked their performance. The dustmen scored joint top, along with the company bosses. On the price of oil, the binmen demonstrated more foresight than any other group. Strangely, since then the worlds banks and news organisations have not rushed to rummage through dustmens economic forecasts. Until now. In October The World in 2012 put three questions on the year ahead to ve London dustmen (our careful sample took in Mile End, Chelsea and Earls Court). And we put the same questions to businesspeople around the

world through The Economist/FT Global Business Barometer. The dustmen and the global executives have similar views on global growth: 58% of businesspeople and 80% of binmen expect it to be between 2.5% and 5%. One in three executives and one in ve dustmen think it will be a recession-irting 0-2.5%. The prospects of the world economy will depend in part on the price of oil. Roughly two-thirds of both groups reckon it will be somewhere between $90 and $120 a barrel. But about a third of the executives think it will be cheaper, at $60-90. And 40% of the dustmen predict it will be $120-plus (remember, they have a particularly distinguished forecasting record when it comes to oil). Finally, as Americas presidential-election campaign heats up, we wanted to know whether Barack Obama could feel safe in his job. More than half of the executives expect Mr Obama to win a second term whereas four out of ve dustmen think he will be booted out of the White House. Of course, that may turn out to be garbage.

What do you expect world GDP growth to be in 2012?

Less than 0% 02.5% 2.55% More than 5% Dustmen, % of sample 0 20 80 0

Executives, % of sample 3 35 58 5

What will a barrel of oil cost?

Less than $60 $6090 $90120 More than $120 0 0 60 40 1 31 63 5

Will Barack Obama be re-elected?

Yes No 20 80 56 44

Percentages may not add up to 100% because of rounding Sources: The Economist/FT Global Business Barometer; The Economist

THE WORLD IN 2012

Finance

141

Year of the bounty hunter

Matthew Valencia NEW YORK

Whistleblowing will become a global industry

2012 IN BRIEF
Following the Dodd-Frank Act, Americas SEC and Commodity Futures Trading Commission introduce new rules for the global swaps market

ollywood has long had a fascination with the little guy who battles to expose illegal or unethical behaviour by big corporations, from the nuclear industry (The China Syndrome, Silkwood) to pharmaceuticals (The Constant Gardener) and tobacco (The Insider). More recent releases include The Whistleblower, in which Rachel Weisz outs human trafcking by a United Nations contractor, and Chasing Madoff , a documentary on Harry Markopoloss efforts to alert the world to Bernie Madoff s Ponzi scheme. In the real world, the whistleblowers plight is decidedly un-Hollywood-like. Exposing wrongdoing at powerful companies is hugely stressful. Employers denounce those who do as snitches or cranks. It is easy to descend

Foul!
Fraud cases detected in private companies by method, %* External audit 5

Tip 36

Management review 15

Other 7 Document examination 8 Account reconciliation 8 By accident 11

* Adds up to more than 100% because of rounding Sources: Association of Certified Fraud Examiners, 2010 Global Fraud Study; National Whistleblowers Centre

Internal audit 12

into paranoia or self-doubt. Mr Markopolos still beats himself up wondering what he might have done differently to expose Mr Madoff sooner. Life will get a bit easier, and a lot more lucrative, for fraud-busters in 2012. Countries around the world will further strengthen protections for whistleblowers. And the monetary incentives to come forward will grow. Thank the global nancial crisis. Governments, in a scal pickle after bailing out their banks, will devote more effort to stamping out the types of fraud that pillage the public purse (in Medicare, say, or military procurement). Financial regulators, having failed abysmally to root out wrongdoing before 2008, will increasingly look to outsource policing to corporate sleuths and insiders who are closer to the action. Tips are by far the leading source of fraud detection (see chart). This will be most apparent in America. The DoddFrank Act, passed after the crisis, offers whistleblowers strong protections from retaliation and bounties of up to 30% of awards resulting from their tip-offs. The measures, which went into effect in August, could be a game-changer because they turn everyone into a poten-

Matthew Valencia: special assignments editor, The Economist

tial whistleblower, says Gary Aguirre, who exposed the soft treatment by the Securities and Exchange Commission (sec) of Wall Street bigwigs in an insider-trading case. All the sec, which will administer the programme, has to do is be patient enough to listen, he adds. The new incentives should encourage more of those who uncover wrongdoing to step forward, greatly reducing the number who tell nobody for fear of reprisals from their employer (30-40%, according to one study). They will receive help from a fast-growing cottage industry of whistleblower lawyers, advocacy groups, such as Americas National Whistleblowers Centre (nwc), and document-publishers. Anticipating a bonanza, tort lawyers have begun to switch from other practice areas. Celebrated whistleblowers, too, will become stronger pillars of the supporting infrastructure. Since the Madoff affair, Mr Markopolos has coaxed disaffected insiders into bringing allegations of price-gouging against banks that trade foreign exchange. He wants to make a career of digging up skeletons, one at a time. Mr Aguirre, a lawyer, has nurtured, among others, an sec insider who wanted to publicise the agencys shredding of documents relating to closed investigations. All of which suggests that 2012 will be a bumper year for fraud detectives. Payouts are not new, to be sure: some $3 billion has been distributed to whistleblowers since 1987 under Americas False Claims Act, which covers government contractors. But expect the number of bounties in the tens or even hundreds of millions to jump. Financial services will be fertile territory, given the temptation for stressed rms to cook the books. Some corporate executives squeal that the new rules will produce waves of frivolous claims by gold-diggers. But the evidence so far suggests that the quality of tips has gone up, not down. Deep down, bosses know there is no going back. The costs of overhauling internal-compliance procedures will grow sharply in 2012, as many discover how inadequate existing systems are. Big companies will begin to offer what Gregory Keating of Littler Mendelson, an employment-law rm, calls mini Dodd-Franks: extra bounties for employees who report their concerns internally before approaching regulators. What worries chief executives most is the global reach of Americas new rules. Dodd-Frank mandates payments for whistleblowers whose tips lead to penalties Digging up under the Foreign Corrupt Practices Act. This applies to skeletons, one companies based anywhere, at a time so long as their securities are traded in America, even if the corruption took place overseas and the whistleblower is a foreign national. This marks a powerful turning-point in transnational whistleblowing, says Stephen Kohn of the nwc. For the rst time, whistleblowers from countries with weak democratic institutions can come to America to get due process. Such cases are likely to proliferate in 2012. As a result, multinationals will grow warier of operating in countries where they have to pay to play. Meanwhile, whistleblowers will continue to face harassment in countries that insist on viewing them as a national embarrassment. And, everywhere, bounty hunters will still need a thick skin and plenty of patience.

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THE WORLD IN 2012

OPEC to the rescue?

Anatole Kaletsky

The world economys improbable saviour

an anything save us? With the United States paralysed, Europe tearing itself to pieces and China desperate to control ination, there seems to be no safety net for a world economy on the brink of recession. But what about opec? Every global recession since the 1970s has been preceded and painfully aggravated by a sharp spike in oil prices, so opec may appear an unlikely saviour. In 2012, however, a collapse in the price of oilnot just a modest decline, but a plunge deep enough to revive American consumption and to transform the Greek, Portuguese, Spanish and Italian trade decitscould be the deus ex machina that averts a catastrophic double-dip. An oil-price decline of 40% from the peak of May 2011 would bring down Brent crude from $127 to $77 a barrel. For the American economy, which consumes 7 billion barrels of oil annually, a $50 fall in the oil price would offer a stimulus roughly equivalent to a $350 billion tax cut, even without alWhat goes up lowing for parallel declines in Oil, $ per barrel natural gas and coal. If most of the price reductions were concentrated in the months around the new year, they could well be sufcient to avert an American recession and revive financial condence in the euro zone. But is it reasonable to hope for such a happy outcome? The answer, as usual in economics, is yes and no. Yes, in the sense that a $50 decline from the 2011 peak would merely reect the slowdown in the global economy and would bring the Brent oil price back to where it was in the autumn of 2010. Most commodity analysts believe, however, that such an 2007 08 abrupt reversal is very unlikely. Source: Thomson Reuters They insist that the $50 increase in oil prices that occurred in the rst half of 2011 was not just a temporary response to supply disruptions in north Africa and the surge in demand for fuel oil caused by the Japanese nuclear disaster. Instead, the oil ination of 2011 was widely believed to reect a long-term structural increase in demand from China and other developing economies running into the inexorable limit of a global oil supply that is at or near its geological peak. Whatever the geology behind this peak oil theory, there are reasons to ignore it in assessing the interaction between oil prices and global growth in 2012. The most obvious is the price of the American oil benchmark, West Texas Intermediate (wti). By early October 2011, wti had already fallen by roughly $30 from its May peak of $113 and was back to its level of October 2010. In America, then, the oil-price surge triggered by the Arab spring

had been reversed by October 2011and the benets of cheaper oil seemed likely to help American consumer spending and investment by the turn of the year. Analysts committed to the peak oil theory have ignored this evidence, insisting that the fall in American oil prices was a temporary aberration and the much higher Brent price was a more accurate global benchmark. And indeed the opec reference basket, a blend 2012 of prices charged by opec producers, remained much IN BRIEF closer to the European than the American benchmark. Sadara, a joint Economic and political logic venture of Saudi both suggest, however, that OPEC could Aramco and the unprecedented divergence do more to Dow Chemical, of $30 between Brent and wti taps the banks is much more likely to be ar- prevent a global for $13 billion bitraged away by a fall in the recession than to nance European oil price than a rise an industrial the Fed in the United States. complex in The economic logic is that Jubail demand is certain to weaken as a result of the near-recession in the global economy. So it is hard to imagine why American oil prices would suddenly rebound. Much more likely is that the shortage of light sweet crude in Europe will be made good as 2012 progressesrst out of excess American inventories and then by recovering Libyan output. The political logic is equally compelling. If opec decided to 160 cut production, global oil prices could, in theory, converge up140 wards to the $100-plus EuroRED Brent pean level instead of falling to the UCE D crude $115 120 American benchmark of $80 or $100 $77? below. But will opec really try to 100 defend a price of over $100 and watch the world economy sink West Texas 80 into a new recession? Unlikely. Intermediate A worldwide recession could ? cause oil prices to plunge by far 60 more than $30. In 2008 Brent and wti both collapsed by 40 $120from $150 to $30. After the Arab spring, Middle Eastern 20 governments feel more vulnerable than ever before. This is par0 ticularly true of Saudi Arabia, the 09 10 11 12 only oil producer with the ability to vary output in a big way and inuence prices. The last thing the Saudis want is another 2008-style plunge. By pumping more oil and thus helping to ease global oil prices into a range of $60-80, the Saudis and opec could do more to prevent a global recession than the Fed, the White House or the European Central Bank. This could be the year when opec nally realises that it serves its own interest by supporting, instead of sabotaging, global growth.

Just possibly
Germany, the euro-zone paymaster, loses its triple-A rating. Gold breaks through the $2,500 price barrier.
Anatole Kaletsky: editor-at-large, the Times

A yuan-denominated bond is issued in London.

THE WORLD IN 2012

Finance

143

The next frontier for nance

ashionable as it is to focus on the bric countries as the motors of the global economy, 2012 will be the year when the world has a golden opportunity to shift its perceptions about the role Africa can play in driving global economic growth. Huge potential is about to be unlocked. Africa has a population of over 1 billion and its combined gdp has grown at more than twice the rate of the developed world for the past decadeprogress that has not yet fully been recognised. At $1.7 trillion, its gdp is larger than Russias or Indias and is expected to grow by 6% a year over the next few years, with consumer spending growing at double the rate of oecd countries. Four out of ve adults are currently unbanked in Africa and capital markets are underdeveloped, so as the economy grows nancial markets will mature. Across the continent the infrastructure that developed economies take for granted is being put in place. For example, high-speed broadband is becoming available in many more places, allowing businesses to conduct video conferences or compare the prices of their suppliers more easily. But politicians in Africa know that even the best physical infrastructure can go only so farjust as important is ensuring that businesses and consumers have access to nance. Banks are critical to the development of money and capital markets which enable governments, state-owned enterprises and private companies to nance themselves and raise capital. Larger businesses that export goods and services need support with hedging foreign-currency risk and commodity prices. At the smaller-business level, banks must be on the ground, ready to supply nance to allow growth and expansion. For retail customers banks must be there too: providing basic banking services for those currently unbanked; improving access to banking as well as reducing costs by extending mobile and internet banking; then, in time, providing mortgages and loans for those who want to invest in their familys future. So Africa is looking to the banks to full their role, with the understanding that the regulatory framework, the credit-rating systems and appropriate oversight of an independent judicial system are also critical elements with a part to play in ensuring that nancing is available at a reasonable cost. The current conuence of these developments puts Africa in a unique position with exciting momentum. The success of mobile

nancial services and branchless banking in Africa is a case in point, and testament to the benets which are owing from such conuence. For that success is based on a combination of factors: a simple, low-cost and non-traditional technology platform; partnerships with mobile providers and distribution channels; and a light-touch regulatory framework. The right things are being brought together in the right way. Out of Africa Against this backdrop, the temptation will be to say that the time of the developed economies is over. I think that would be too hasty a judgment. I believe that Africas rise can be an inspiration to us all, offering timely lessons in a world where nancial markets have been rocked by turbulence and uncertainty. And 2012 can and should be the year we start to get back on the move. The deleveraging of the private sector is nearly complete and governments have taken steps to clean up their own balance-sheets and create the room for economies to breathe. I am condent that governments around the world will take measures to encourage and support business and we will start to see real economic growth. Taking Africa as a model proves instructive. In Africa, it is clear from the meetings I have with political leaders, central-bank governors and businesses that they value the contribution the nancial-services industry makes to a growing economy. African countries are seeing how sound governance, economic and political stability and pro-market economic policies are producing a new entrepreneurial class eager to create new industries and services to meet the needs of growing numbers emerging from poverty. The same principles can be applied elsewhere. Political leaders must ensure that businesses (especially small businesses) are freed from unnecessary regulations. They must also support the drive to rebuild certainty and condence around a safe and sound nancial sector, which is critical to enabling banks, in turn, to support growth. The nancial-services industry must also play its part. Banks must provide the nance to households and businesses to enable them to succeed. As in those African economies, it is the banks that provide the oxygen to sustain growth. But governments must set the lead in creating the conditions that encourage consumers and businesses to believe in themselves with renewed condence.

Bob Diamond, chief executive of Barclays, argues that Africas success will hold lessons for reviving nance and the economy elsewhere

Political leaders must ensure that businesses (especially small businesses) are freed from unnecessary regulations