Professor Niall Ferguson visited São Paulo in April to address Itaú’s annual MacroVision conference, and found time to sit down with Euromoney to talk fintech, social media and trade. In particular he focused on China and how it will impact Latin America’s future.
Euromoney meets with Ferguson later that day, a little uncertain about Ferguson’s range of knowledge and experience of Latin America. Such concerns were laid quickly to rest with Ferguson’s response to the opening question, which picked up on a point that he had made in his speech about the relative speeds of adoption of mobile payments in Asia (and China in particular) compared with the US. Could emerging markets in Latin America reach Asian levels of near-universal adoption of new payment technologies?
His answer revealed that he is on the board of directors of Argentinian financial technology firm Ualá, which already has 130,000 users of its mobile app that links to a pre-paid MasterCard, enabling payments and building credit histories for the large unbanked population in Argentina.
The reason, he says, that the US has been slow to adopt mobile payment apps is that the US system was good enough not to need urgent replacement, whereas in many emerging markets – and Asia is leading the way – the banking systems have evolved leaving large sections of the population behind.
He points out to another specific example of M-Pesa in Kenya.
“Any system of electronic, digital banking that lowers the entry barrier [for individuals] is likely to take off faster in emerging markets than in developed markets. We see this very clearly in Asia today, with Alibaba and Wechat; in different ways, these create very attractive and effective payment platforms that most Chinese people use. Even beggars take money on smartphones,” he says.
It’s not that I think there will be a China crisis, but at some point China is just going to slow down, like Japan did
– Niall Ferguson
As an interviewee, then, Ferguson has range. And if the sheer breadth of his argument seems implausible, he peppers it with personal experience to back up the expansive oratory. In January he was in Hangzhou meeting the people from what he calls “financial Alibaba”, and he believes their technology is attractive to deploy in other emerging markets, in large part because it is a benefit to the many small businesses in these countries that are not being well served by the traditional banks.
“I think this is a huge deal,” he says, “and it gives China a large edge in EM. And that’s already becoming apparent in India and parts of southeast Asia.”
He says Chinese companies have been quick to partner with local fintech startups to enable these domestic firms to scale up effectively.
“This is happening in India and then these markets get drawn into the Chinese fintech empire,” he says, which could end up being a problem.
“The obvious unintended consequence of getting involved in Chinese platforms is that there is just no data privacy at all,” he adds.
Unfortunately for Silicon Valley companies, the recent Facebook data scandals have weakened their ability to contrast themselves favourably in terms of privacy: “But there is still a counter argument to be made that, ultimately, the US will do better than China on this front – though we are not there yet. As long as the platforms that the US produce are less effective for e-commerce then China is likely to win this global competition.”
However, presumably Ferguson will be wary of Ualá getting involved with any Chinese partner. “You have to look very carefully about what you are getting involved with,” he says.
One of Ferguson’s warnings in his book is about the technological and data-driven infrastructure the Chinese government is building to monitor its own citizens. This is not only interesting as a Chinese phenomenon but has important implications for the many countries in Latin America that are reliant on the continued growth of the Chinese economy. The region’s annual trade, both exports and imports, with China grew 211% in the 10 years to 2016. It now stands at $234 billion.
“We should not build our futures on the assumption of unflagging demand for Latin American commodities – that might turn out to be a very bad bet,” he says. “It is unknowable whether China will risk radical reform, but my hunch is that they won’t and the evidence is this massive surveillance system they are building.
“It is costing more than their defence budget – it’s what I call a domestic defence budget. And you only build this if you really fear your own people – as they do. I sense that the reality of this centralization of power is not the prelude to a reform era. It’s a defensive strategy to make the system more resilient to the sort of exogenous shock that Trump is administering.”
Ferguson thinks those in Latin America trying to understand the growth path of one of the region’s biggest customers should look to what happened to Japan in the 1980s.
“It’s not that I think there will be a China crisis,” he says, “but at some point China is just going to slow down, like Japan did. At some point the arithmetic just doesn’t add up and the debt burden has reached a very high level of GDP. Even if you make quite friendly assumptions about growth and interest rates, there is still a scenario in which China must slow down, whether it does reforms or not, because the demographics just dictate that.”
Ferguson also believes China’s position in the face of president Trump’s increasingly belligerent standoff in terms of trade and protectionism is weaker than most appreciate. He points to Xi Jinping’s surprisingly conciliatory speech to the Boao Forum for Asia as proof of the Chinese leadership’s understanding. “They are pretty nervous, especially if the US can get Europe on its side.”
Ferguson argues that even vociferous critics of Trump are increasingly conceding that he has a valid point about trade and China.
“If you look over a 20-year horizon, China has been the main beneficiary of a global order that was tilted in its favour. US and European manufacturing has been significantly impacted. It’s not just American intellectual property that is being stolen – it’s European too. So there ought to be a common interest between Europe and the US, although it must be said that Trump is not the man to build that consensus.”
Ferguson thinks that China will not build an anti-US bloc easily.
“If you talk to European businesses, especially the big ones, they quietly agree with what [Trump] has been saying. Resentment of Chinese manufacturers has been there for quite a while in Germany or Italy, but the political elite allowed themselves to be played off against each other. The Chinese love to deal with the Europeans as if the EU doesn’t exist. So they deal with France, the UK and Germany, and those governments have been very tempted to fall for that [approach] and compete in Beijing for Chinese favour. But I think people are wising up now and realizing that, much as they hate to admit it, Trump was right.”
…And to finish on trade blocs, what future does Ferguson see for Mercosur? If a market-friendly president is elected in Brazil can he or she reinvigorate the alliance along with Argentina’s president Mauricio Macri?
“There’s a big ‘if’ there,” he responds in relation to the hypothesis that Brazil will elect a market-friendly president.
“Looking at social media, the populist possibilities on the left and right look pretty powerful. The centre ground, in contrast, has no strong candidates. You need to be a real optimist to think that a pro-markets centrist candidate is going to magically acquire five million followers on Facebook and win.”
Ferguson is referring to Bolsonaro, who has 5.2 million ‘likes’ on the platform, in contrast to the market friendly candidates Geraldo Alckmin (920,000) and Henrique Meirelles (124,000). The imprisoned former president, Luiz Inácio Lula da Silva, has 3.4 million.
He references a Samuel Beckett play and the France’s youthful president for an answer.
“I sense a certain kind of ‘Waiting for Godot’,” he says. “Everyone is waiting for a Macron figure to pop up and there won’t really be one.”
Full article: Latin America’s new geopolitical reality (EuroMoney)