Economic contagion: Hong Kong

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Hello and welcome to the Intelligence on Economist Radio. I'm your host Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. In Brazil, the signs of deep poverty are often right next door to signs of fabulous wealth. And the inequality seems to be getting worse. So why is the country chipping away at a social safety net that seems to be doing good? And there's a growing craze in Ethiopia for self help and self appointed good attitude gurus. Even the prime minister reckons economic growth is just a matter of positive thinking. Of course, it's a bit more complicated than that. First up, though, Today Hong Kong released its latest GDP result. And as expected, it doesn't look good. The city has been facing a range of economic and political challenges over the past year, and its fortunes are strongly tied to those of the mainland. So as China's trade war with America has crimped growth there, it's squeezed Hong Kong's exports. Yet last year, the biggest threat to Hong Kong's economy appeared to be a political one. A bill allowing extradition of Hong Kongers to the mainland sparked enormous protests and worries that the mainland would put them down violently. Now a new threat is compounding all these pressures. The coronavirus outbreak across the border.

Hong Kong's economy was already in a great deal of trouble.

Simon Cox is our Emerging Markets editor and is based in Hong Kong.

Figures released today showed that it shrank by 2.9% in the last three months of 2019, compared with the same period of 2018. That follows a quarter of contraction before that. And this recession reflects two big factors.

And what two factors are they?

So Hong Kong's economy has been going through a year of trial and tribulation. The trade war clearly hit Hong Kong's major industries. And then on top of that, we had the protests that started in June and have continued even to the Present day, peaking really in the last quarter of 2019, particularly in November, when violent clashes ended up with a virtual siege of a couple of universities here, including one quite close to where I live, which caused the shutdown of one of the major tunnels running under Victoria Harbour for two weeks. Hong Kong's economy, I mean, Hong Kong itself was founded on free trade, so it's extremely dependent on the free movement of goods, but also of people. A lot of local employment depends on tourism, particularly visitors from the mainland. And those visits have been dramatically curtailed by the protests, and they will be dramatically curtailed by the virus. We saw back in November, which was one of the worst months for the protests, that the number of visitors to Hong Kong dropped by about 56%. That's the worst drop since the SARS outbreak in 2003 that many people are using as a point of comparison for the current virus. Those industries in particular now face an even deeper winter, to quote the finance Secretary, Paul Chan. And there's also been damage to sentiment. People feel less like going out for an evening at a bar or restaurant if they fear getting tear gassed on the way home. And that damage to sentiment is often the most severe aspect of these sorts of troubles. And quite often people can find a way around the supply hiccups. You can find an alternative road, an alternative tunnel under the harbour, but if people don't feel like spending, then there's very little businesses can do.

And so from your perspective, you think the protests and the hit to sentiment will continue.

So the damage to economic sentiment is clearly going to continue. Protests have been somewhat eclipsed and transformed by the coronavirus. People are obviously less willing to call for mass gatherings, given the fears there are of contagion. But the sort of anger and distrust that the protests reflected has continued and it's taken a new form now. People don't think the Hong Kong government is doing enough to prevent transmission of the virus. In particular, people are very angry that the border with mainland China has not been completely shut. It has been restricted quite severely, but it hasn't been completely closed off. And in addition, they're angry because there's a shortage of surgical masks. The evidence for the efficacy of masks is somewhat limited, but nonetheless, people have seized on this as a measure they can take. Unfortunately, there's been a shortage and you can see long queues, even this lunchtime. I went to a nearby department store. There's a queue of over 100 people waiting for masks. Many people had been waiting so long they'd taken shopping baskets, turned them upside down and were sitting on them for a more comfortable weight.

And the GDP data out today don't even take into account the coming hit from the coronavirus. What's your view on how that will add to the existing pressures so the.

Coronavirus will make things worse? Some people have been hoping for a bit of recovery in the new year because the protests seem to have simmered down a bit. There was some evidence of people resuming normal life. All of that has now been dashed. The latest forecasts I've seen, for example ubs, a bank, think that Hong Kong GDP could shrink by over 6% this quarter compared with the first quarter of 2019. So an even deeper recession and you know, the Hong Kong economy might rebound once the virus is contained. We've seen that in the past with things like SARS that there's some pent up demand and so you do see a rebound, but that's never enough to offset all the damage.

And obviously Hong Kong's economy is intimately tied to that of the mainland. How has the virus affected the Chinese mainland economy? Economy so far?

So economic forecasters have also been slashing their predictions for China's growth. I saw one prediction today that the virus would knock 2 percentage points off its growth in the first quarter of this year compared with the same quarter last year. Of course, despite the worries building over the past week or two, that wasn't reflected in the stock markets which were closed for the China New Year holiday until this morning and then we saw them tank by about 9%. And Wuhan is quite an important auto manufacturing hub for China. Of more concern is the spread of the virus to other provinces that are an even more important part of China's economy. And of course, the government has been quite draconian in imposing quarantine measures that whatever their effectiveness in controlling the virus, will certainly have a fairly dramatic economic impact, at least in the short term. China does have this goal, which it set out years ago of doubling the size of its economy between 2010 and 2020. It had seemed to be on track for that goal, that the damage this virus might cause to growth this year could put that goal in doubt. For that reason and others, it may well try and goose the economy towards the end of the year, stimulate in order to make up lost ground. But again, this is something that can foreshorten the damage but not completely offset it.

So it seems that the economic pressures on Hong Kong are only going up here. I mean, where does Hong Kong go from here? What do you see in the sort of medium and the longer term.

So I think the important thing for Hong Kong is to try and rebuild the relationship between the government and the governed. Unfortunately, this crisis, which could have brought people together, seems to have only sewn divisions further. It's very important in a public health emergency that the government has credibility. The government has to make difficult calculations about to what extent to close off the border, which will damage the economy, to what extent it's worth suffering that economic damage in order to control the virus. And people here don't think those judgments are being made in the interests of Hong Kong alone. They still think that the Hong Kong government is doing the bidding of Beijing. Now, that may or may not be true. These judgments are always very difficult. But we've seen, for example, people trying to disrupt the rail link between Hong Kong and the mainland, throwing items onto the tracks. None of that is going to help the broader question for Hong Kong. In sort of global economy terms, the broader future for Hong Kong in the eyes of international investors depends on its security and safety as a financial hub there. I think the virus actually is of less concern. This isn't a homegrown problem. It's something that many parts of the world are facing. Indeed, Singapore has more confirmed cases of this virus than Hong Kong. So whereas the protests reflected very much domestic weaknesses, the virus is obviously something that transcends Hong Kong. And so I don't think it necessarily will further jeopardize its status as an international financial hub.

Thank you very much for your time, Simon.

Thank you. My pleasure.

Brazil is a country of the very rich and the very poor. The gap is getting bigger, and for the poor, life is getting harder.

If you go to any major Brazilian city, you see massive gaps between rich and poor mass. You'll see the favelas, which are the slums. They're very visible, and they're usually right next to some very wealthy neighborhoods.

Pedro Ferreira de Souza is the author of a history of top incomes in Brazil, and he's a researcher at the Institute for Applied Economic Research.

That's not a coincidence. That's because usually the servants and maids and doormen who serve the rich live right next door in the favela. And Rio is like the typical Brazilian city in that respect. You see very deep signs of poverty and wealth side by side.

It's a problem that successive governments have tried to address. In 2003, then President Luis Inacio Lula da Silva launched Pulsa Familia, or family fund. It works by giving conditional cash transfers to some of Brazil's poorest people and grew to be the country's flagship anti poverty program. Together with a commodities boom, it helped lift tens of millions out of poverty. But the progress was not to last. In 2014, Brazil was hit by its worst ever recession.

When the recession began in 2014, that progress stopped and really started going into reverse. GDP per person dropped by 10% and unemployment doubled.

Sarah Maslin is our Brazil correspondent.

At the end of 2018, the number of people living on less than $1.90 a day reached 13.5 million people, which is the highest it's been since 2012.

But rising poverty has been accompanied by an assault on Brazil's much admired social safety net.

What's been happening in recent years is that the number of poor people has been going up, while the budget for Bolsa Familia has stayed at about 0.5% of GDP. And last, Brazil's government, which took office in January, started slowing the acceptance of new beneficiaries to Bolsa Familia and canceling payments to people already in the program. Economists have found that it's the most important contributor to the recent increase in inequality. The earnings of people at the top of the income bracket have now recovered from the recession, while the poor are still getting poorer.

But why would the government do that at the time when people need it most?

A lot of people suspect that that's because the president, Jair Bolsonaro, promised to give Bolsa Familia recipients an extra payment around Christmas. However, they didn't have the budget for it, so when he got into office, they had to find the money somewhere. The number of families admitted to Bolsa Familia has dropped from about 275,000amonth to fewer than 2,500. And the total number of people in the program has fallen by more than a million families. The government says they didn't need the money anymore or weren't complying with the conditions. But when I went to Bilagua, the poorest municipality in Maranho, which is Brazil's poorest state, I met dozens of people who have had their benefits cut for unexplained reasons and really need the money.

And so what's the government's attitude to poverty and social programs like Bursa Familia more broadly?

I recently interviewed the Minister of the Economy, Paulo Gediz, and he said that fighting poverty should be about bringing back growth and giving people jobs instead of giving them handouts.

The most important element of social inclusion is a job and not social citizens.

Getty's agenda is trying to cut back on state spending by doing pensions reform and tax reform and cutting back on public sector salaries. He thinks that improvements to the business climate and Brazil's fiscal situation will spark growth, which Brazil does really need. But growth alone is unlikely to banish poverty, and it's not necessarily going to reduce inequality, which has been so high in Brazil for over a century.

Well, aside from stopping the squeeze on bolsa familia, what do you think the government could do to reduce inequality?

Economists refer to the Brazilian state as Robin Hood in reverse. Taxes are a third of gdp, about the average for a rich country. The state could use these resources to lift up the poor. But instead, government transfers mostly go toward rich people. More than four fifths of transfers are pension benefits. Only two and a half percent of those go to the poorest kintile, while the richest gets more than half. According to Paulo Gadges, reforming Brazil's skewed spending is at the top of the priority list. And the government did pass a really important reform to the pension system this year. That's going to save it a lot of money. However, the government has yet to touch tax breaks for privileged industries and the rich, which cost about 4% of GDP each year. And it also lets certain groups like police and army officers keep their generous pensions. It needs to cut more of that wasteful spending, eliminate tax breaks, and narrow the gap between the public and private sector pay. There's plenty of room to make spending more progressive and more effective, but it's going to require cutting down on some of the privileges at the top.

And if that doesn't happen, if inequality and poverty are allowed to get worse.

This past year has seen protests throughout Latin America in a lot of places about the inequality that persists in those places. Some people have wondered why Brazil hasn't seen those kind of protests and speculated that maybe it's because the economy here is starting to get better, more people are finding jobs. However, the recovery hasn't yet reached poor Brazilians. And if there's one thing we've learned about protests is that they can happen really quickly. If the government doesn't start taking inequality more seriously, there could be a time when poor Brazilians say they've had enough.

Sarah, thank you very much for joining us.

Thanks, Jason.

Think positive. That's the key to prosperity. According to Ethiopia's Prime Minister, Abiy Ahmed, self help is taking the capital Addis Ababa by storm. And with motivational speakers appearing on national television, inspirational quotes shared via the messaging app Telegram and content from YouTube gurus, widely shared. Look at a man the way he could be and he becomes what he should. Now, spurred on by talks from from life coaches and his own advisor, Mr. Ahmed is taking a top down approach, developing initiatives to boost the nation's positive mental attitude and drive forward growth.

There's very definitely a growing market for these kind of self help ideas in Ethiopia.

Tom Gardner is the Economist's Addis Ababa correspondent.

You just need to spend a little bit of time on Ethiopian social media to listen to the radio, to watch national tv, especially on Sunday evening, to witness their ubiquity. Go to a university campus and motivational speakers are regular guests. And most obviously just look at the mobile book stands which in the capital, Addis Ababa are absolutely everywhere.

So what kind of advice, what's the sort of general tenor of these books and these motivational speakers?

Well, ultimately the message is one of individual uplift in a country which right now is burdened by poverty and ethnic divisions. Essentially they're offering rags to riches stories which offer hope to frustrated Ethiopians basically by saying you can change your life if you can change your mind. So it's self help gospel. But it's more than that too. There are implications for the country as a whole. This is the idea that if Ethiopians can just change their attitude, then the country too can rise. Bear in mind Ethiopia right now is going through quite a traumatic political transition. There's lots of violence, people are feeling insecurity and lawlessness and that doesn't seem to be going away anytime soon.

And so among the self help gurus, are there real stars or is this just a mass of undifferentiated happy messages?

It's still very much a kind of rising generation. There's only a few who have really made the big time. I spoke to one, Ebati.

Hello everyone, this is your boy Ebati. Very glad to be with you once again. Thank you for watching the previous videos and for sharing them.

And this, this is a guy who says he was bullied remorselessly at school, he went through a period of drug addiction. And then, and this is kind of a common theme among these type of people, he has this moment of personal redemption, revelation.

If you don't learn to appreciate yourself while you are here now, you will not have the habits or the character.

Which set him on the journey upwards, which in his case led to university, then his own radio show, national stardom, his own consultancy, he does services to government agencies and his own TV show, advising government agencies.

Even this self help Movement reaches all the way into the government.

Yeah, it does. So a couple of rungs above Abati, you have Abiy Ahmed, the prime Minister's advisor, who's a psychiatrist and self help guru called Dr. Merettebeh, certainly the most prominent of the self help gurus in Ethiopia today. He was one of the first to turn positive thinking into big business by launching a series of conventions shortly after Aby took office in 2018. These were then screened on on national TV. Every Sunday evening to this day, he has a show and Dr. Mira argues poverty is at root an attitude problem. That's his big claim. And he said things like, the land is locked, if the mind is locked, which is this idea that Ethiopia is a land abundant with resources, but problems of mindset and attitude have prevented that potential being unlocked.

And if this guy is an advisor to the prime minister, then perhaps the prime minister subscribes to this same sort of attitude.

Absolutely. I think you just need to listen to some of his speeches or hear him speak, an interview to see the importance of these ideas and his thinking.

Madamer, an Amharic word, signifies synergy, convergence and teamwork for a common destiny.

He also published a book last year which supposedly sold about a million copies, in which he blames negative thinking for many of Ethiopia's problems.

And so how does that belief translate into the way that he governs?

I think the most obvious way is in these government initiatives like weekly cleaning days, in which he himself participates very publicly, and a huge nationwide tree planting project last year, 4 billion trees supposedly planted within a year. Abiy himself, when he was asked about the flowers which had recently been arranged along the road in Addis Ababa to the airport, he said, a mind that doesn't see a good thing will not create a good thing.

What's your view on this as a sort of observer of this? It sounds as if it makes people happy, it makes people do good works, it makes people feel better about what they're doing and that they feel empowered. Is it good?

So I can defer to a very thoughtful Ethiopian scholar who I spoke to in the course of my reporting, Teclan Neger, who said, yes, optimistic medicine messages at this time are helpful. They are a good thing, but they have to go hand in hand with concrete, tangible strategies for development. He said, you know, whether it's true or not, sometimes it doesn't matter. Without hope, you cannot live. And I agree with that.

Tom, thank you very much for joining us.

Thank you very much, Jason.

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Sam.