Latest / Stephanomics / Your Privacy May Be at Stake as Central Banks Develop Digital Currencies

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Your Privacy May Be at Stake as Central Banks Develop Digital Currencies · Stephanomics

• 0:05
  Speaker 1: Hello, and welcome to Stephanomics, the podcast that brings the
• 0:08
  Speaker 1: global economy to you. China is about to shrink. That
• 0:12
  Speaker 1: was the sobering message from its later census, which suggests
• 0:15
  Speaker 1: the fertility rate has slowed even faster than the more
• 0:18
  Speaker 1: pessimistic forecasts had suggested. If it carries on like this,
• 0:22
  Speaker 1: the population will start to shrink in five years, earlier
• 0:27
  Speaker 1: than previously thought, and even the mighty Chinese Communist Party
• 0:30
  Speaker 1: seemed powerless to stop it. We're going to talk about
• 0:34
  Speaker 1: that and the great baby battle underway in countries across
• 0:37
  Speaker 1: Asia in a few minutes. Our reporter in Spain, Jeanette Newman,
• 0:42
  Speaker 1: also has a story from Valencia on a radical experiment
• 0:45
  Speaker 1: to help small businesses come through the next stage of
• 0:47
  Speaker 1: the pandemic, which also features my favorite bicycle helmets. So
• 0:52
  Speaker 1: we definitely have variety this week. But first, there are
• 0:56
  Speaker 1: lots of things in our daily lives that are being
• 0:58
  Speaker 1: transformed by new technology. But what about money? Is bitcoin
• 1:03
  Speaker 1: the future or perhaps one of the other cryptocurrencies that
• 1:07
  Speaker 1: have been causing such a speculative frenzy in recent months. Ah,
• 1:11
  Speaker 1: we wake up in a few years and fine, We're
• 1:13
  Speaker 1: still fond of old fashioned dollars and cents, and that
• 1:16
  Speaker 1: talk of digital currencies was just a fad. Well, one
• 1:21
  Speaker 1: person who's been thinking very hard about all of these
• 1:23
  Speaker 1: issues is Professor prasad now Senior Professor of Trade Policy
• 1:28
  Speaker 1: at Cornell University and a senior Fellow of Brookings, but
• 1:31
  Speaker 1: previously a senior official at the International Monetary Fund, and
• 1:35
  Speaker 1: most recently author of a book about to come out
• 1:38
  Speaker 1: called The Future of Money, How the Digital Revolution is
• 1:41
  Speaker 1: Transforming Currencies and Finance. Welcome Professor Prasadhwa, and thank you
• 1:48
  Speaker 1: for writing this extremely useful book. Given how much has
• 1:52
  Speaker 1: been happening, how much news we've had over the last
• 1:55
  Speaker 1: few months about digital currencies and crypto and the like,
• 1:59
  Speaker 1: We've got a lot to cover, but I guess we
• 2:02
  Speaker 1: should just start with the basic assertion running through your
• 2:05
  Speaker 1: book that this time really is different. You know, we
• 2:08
  Speaker 1: are looking at a major disruption in how we use
• 2:11
  Speaker 1: money and and even what money is. That's why it's Deephanie.
• 2:16
  Speaker 1: First of all, thanks for having me on your show,
• 2:17
  Speaker 1: and this is indeed a good time to take stock
• 2:21
  Speaker 1: of what is happening in the worlds of money and finance.
• 2:24
  Speaker 1: There has of course been a lot of interest in
• 2:26
  Speaker 1: bitcoin and the cryptocurrency revolutions set off. But I think
• 2:30
  Speaker 1: the real legacy of bitcoin is that it has come
• 2:33
  Speaker 1: at a point in time and digital payments are becoming
• 2:36
  Speaker 1: preponderant around the world, including in developing economies, and there
• 2:41
  Speaker 1: is a move towards digitization, which I think is going
• 2:44
  Speaker 1: to leave its mark on both money and finance. Very
• 2:48
  Speaker 1: few of us use actual cash any more physical cash,
• 2:51
  Speaker 1: that is, we tend to make payments with this wipe
• 2:54
  Speaker 1: of a credit card or a phone for that matter,
• 2:58
  Speaker 1: and I think we're going to see a bit coin
• 3:00
  Speaker 1: leave its legacy, even if Bitcoin does not endure in
• 3:04
  Speaker 1: that form, that we're going to have digital forms of payment,
• 3:08
  Speaker 1: either through central bank digital currencies with some countries are initiating,
• 3:13
  Speaker 1: or private digital payment systems intermediated in the form of
• 3:17
  Speaker 1: these cryptical currencies. One thing you say in the book
• 3:21
  Speaker 1: is that in a sense, it's not bitcoin that is
• 3:24
  Speaker 1: the transformation in itself, it's the underlying technology. So just
• 3:29
  Speaker 1: explain that a little bit. So the technology is a marvel,
• 3:33
  Speaker 1: and it's worth thinking about the origins of bitcoins. So
• 3:38
  Speaker 1: the Bitcoin white Paper was released by a creator or
• 3:41
  Speaker 1: creator as we don't know who that is to this day,
• 3:44
  Speaker 1: right around the time of the global financial crisis is onset,
• 3:49
  Speaker 1: So that was the time when trust in central banks
• 3:52
  Speaker 1: and governments in traditional financial institutions was at its lowest end,
• 3:58
  Speaker 1: and the notion of being able to undertake transactions in
• 4:02
  Speaker 1: a somewhat anonymous way using only digital identities and without
• 4:07
  Speaker 1: a central bank or a traditional commercial bank in being
• 4:10
  Speaker 1: involved was very alluring, and that is the remarkable aspect
• 4:15
  Speaker 1: of the technology. When you make a payment, either using
• 4:18
  Speaker 1: cash or using a credit or debit card, either a
• 4:21
  Speaker 1: central bank or a commercial bank is involved. What bitcoin
• 4:25
  Speaker 1: turned out to do was to provide a solution whereby
• 4:29
  Speaker 1: you could have transactions being validated through what is called
• 4:33
  Speaker 1: a public consensus mechanism, and Bitcoin, although it is supposed
• 4:38
  Speaker 1: to be anonymous, actually provides remarkable transparency. Every transaction is
• 4:44
  Speaker 1: out there for the entire world to see on the
• 4:46
  Speaker 1: bitcoin blockchain. The distributed aspect is also very important. The
• 4:51
  Speaker 1: Bitcoin blockchain, which is a record, public ledger of all
• 4:56
  Speaker 1: the transactions using bitcoin, is maintained on multiple puters around
• 5:00
  Speaker 1: the world, so hacking a particular computer or even a
• 5:04
  Speaker 1: set of computers, or having some computers go down is
• 5:08
  Speaker 1: not going to affect the system. So in that sense,
• 5:10
  Speaker 1: the technology is going to really set off a revolution
• 5:13
  Speaker 1: in itself. So, just to be clear, you could have
• 5:16
  Speaker 1: the end of cash but still not have this kind
• 5:19
  Speaker 1: of structural change in how money works that you're talking
• 5:22
  Speaker 1: about for bitcoin and other things. What is really crucial
• 5:26
  Speaker 1: here is what role the government and central banks are
• 5:29
  Speaker 1: going to have, and bitcoin provided the allere of getting
• 5:32
  Speaker 1: away from all of that, essentially democratizing finance by making
• 5:37
  Speaker 1: finance available to anybody with no restrictions, with no censorship,
• 5:43
  Speaker 1: and without a trusted third party involved. That creates a
• 5:48
  Speaker 1: lot of risks, even while it does have certain benefits. Well,
• 5:52
  Speaker 1: it's funny you say, the allure of getting rid of
• 5:55
  Speaker 1: the role of the central bank or this kind of
• 5:57
  Speaker 1: central authority. Of course there will be there will be
• 6:00
  Speaker 1: a lot of people who would consider that to be
• 6:02
  Speaker 1: deeply attractive, that you don't have government somehow involved in
• 6:07
  Speaker 1: inherently at the center of finance, and of course many
• 6:09
  Speaker 1: other people who would say, hang on a minute, isn't
• 6:12
  Speaker 1: is a rather frightening world that you have no central figure. Um,
• 6:17
  Speaker 1: you don't have the kind of relationship of trust that
• 6:19
  Speaker 1: you have with a central bank. So you talked about
• 6:22
  Speaker 1: how some central banks and if Sweden is thinking about
• 6:25
  Speaker 1: having the e Krona, have talked about having central bank
• 6:29
  Speaker 1: digital currencies. What's what's the thinking behind that and how
• 6:35
  Speaker 1: would that be different from what we have now. Many
• 6:39
  Speaker 1: central banks that on the world are initiating their own
• 6:43
  Speaker 1: digital currencies are central bank digital currencies CBDCs. That is,
• 6:48
  Speaker 1: UM and CBDCs are being instituted in some economies because
• 6:52
  Speaker 1: they provide easy access to households and businesses to a
• 6:56
  Speaker 1: low cost digital payment system. In countries such as sweet
• 7:00
  Speaker 1: even there is a concern that having the entire payment
• 7:03
  Speaker 1: system in the hands of the private sector may be
• 7:07
  Speaker 1: good for efficiency and bring down costs, but it could
• 7:10
  Speaker 1: leave concerns about financial stability. At a time of financial panic,
• 7:16
  Speaker 1: you could have the entire payment system shutting down if
• 7:19
  Speaker 1: the government has no role in it. In a country
• 7:21
  Speaker 1: like China, there is a concern that the major digital
• 7:25
  Speaker 1: payment providers like Ali pay and which I Paid are
• 7:29
  Speaker 1: dominating the payment's market and making central bank money irrelevant.
• 7:34
  Speaker 1: So I think central banks ce UM CBDCs as a
• 7:38
  Speaker 1: tool for promoting financial inclusion, providing a backstop to the
• 7:42
  Speaker 1: private payment system, and creating a more level playing field
• 7:46
  Speaker 1: for other payment innovators rather than just a major players
• 7:50
  Speaker 1: who would also start providing efficient payment services. So what
• 7:58
  Speaker 1: would if if you live in a country where the
• 8:00
  Speaker 1: central bank is going down this route? What does that
• 8:03
  Speaker 1: look like in practice? Would you you would know when
• 8:06
  Speaker 1: you were using a central bank digital currency? I mean,
• 8:09
  Speaker 1: how would it be different. Technology now exists for each
• 8:12
  Speaker 1: household in an economy or each business to have an
• 8:15
  Speaker 1: account with the central bank and use central bank money
• 8:19
  Speaker 1: through that account. That could drive banks sort of business,
• 8:22
  Speaker 1: and you don't want to be in a position where
• 8:24
  Speaker 1: the central bank is now allocating credit in the economy.
• 8:28
  Speaker 1: So countries such as China and Sweden that are experimenting
• 8:31
  Speaker 1: with Serie dicis are going with a two tier system
• 8:34
  Speaker 1: where the digital wallets in which the central bank digital
• 8:39
  Speaker 1: uh dollars or you and reside are actually maintained by
• 8:43
  Speaker 1: the commercial banks side by side with their own intersparing
• 8:47
  Speaker 1: deposit accounts. So the CBDC is just like cash would
• 8:51
  Speaker 1: not be interstparing instruments, but now with the central bank
• 8:56
  Speaker 1: digital currency being in the form of token that can
• 8:59
  Speaker 1: be used across different payment platforms. So basically you could
• 9:03
  Speaker 1: use your central bank money across a variety of payment platforms,
• 9:07
  Speaker 1: again with the swipe of her phone. Um, so it
• 9:10
  Speaker 1: would be observation equivalent to using any other payment system,
• 9:14
  Speaker 1: except you would now be using central bank money. But
• 9:17
  Speaker 1: this also creates one issue that we may need to
• 9:20
  Speaker 1: consider the societal level. Do we really want to live
• 9:23
  Speaker 1: in a world where anytime I buy you a cup
• 9:27
  Speaker 1: of coffee, Stephanie, either a payment private payment provider, or
• 9:31
  Speaker 1: the government is going to know about it. Um, that's
• 9:34
  Speaker 1: going to be a slightly dystopian world we live in.
• 9:37
  Speaker 1: Central banks are going to great lengths to make the
• 9:40
  Speaker 1: case that they're going to have privacy protections in place,
• 9:43
  Speaker 1: but in my view, ultimately anything digital is going to
• 9:46
  Speaker 1: be traceable, and every central bank wants to make sure
• 9:49
  Speaker 1: it's money is not used for illegal purposes, so there
• 9:52
  Speaker 1: will be auditability and traceability. So whatever limited privacy we
• 9:56
  Speaker 1: have at this stage might very soon vanish well. And
• 9:59
  Speaker 1: of course that's why any self respecting criminal has always
• 10:02
  Speaker 1: used cash, because you don't have you don't have that
• 10:06
  Speaker 1: kind of traceability. I just want to come back to
• 10:08
  Speaker 1: you talked about the democratization of finance or than the
• 10:12
  Speaker 1: potential for this to do that. I mean historically, of course,
• 10:15
  Speaker 1: we have had periods where financial innovation have has brought
• 10:20
  Speaker 1: easier forms of financing to more and more people. We've
• 10:24
  Speaker 1: had sort of waves of that running through societies at
• 10:27
  Speaker 1: different times. And though it has made it possible for people,
• 10:31
  Speaker 1: say to buy their own homes who might not otherwise
• 10:33
  Speaker 1: have been und to do it, or have access to
• 10:35
  Speaker 1: borrowing at all that they might not have had, it
• 10:37
  Speaker 1: has tended to also leave a lot of those sort
• 10:39
  Speaker 1: of newly financially enfranchised people with a lot of risk
• 10:44
  Speaker 1: and have it blow up in a crisis of some sort.
• 10:47
  Speaker 1: I mean, if that's a risk here, how how can
• 10:50
  Speaker 1: we guard against that? There is a significant list. Stephanie're
• 10:54
  Speaker 1: right that the democratization of finance, while it is very
• 10:59
  Speaker 1: part sative sounding concept, does carry certain risks, and those
• 11:03
  Speaker 1: risks arise for a couple of reasons. In particular, digital
• 11:07
  Speaker 1: access is still quite unevenly distributed in many countries, and
• 11:12
  Speaker 1: financial literacy is certainly not prevalent, especially among the economically disadvantaged,
• 11:19
  Speaker 1: and we see that phenomenon even among people who ought
• 11:22
  Speaker 1: to be better informed. Um, the recent saga with Game Stop,
• 11:27
  Speaker 1: where there was a speculative frenzy that was fueled by
• 11:30
  Speaker 1: the robin Hood trading platform, which in principle made it
• 11:33
  Speaker 1: much easier for retail investors to be able to trade
• 11:37
  Speaker 1: both the stock and derivatives of this game stop company.
• 11:41
  Speaker 1: Certainly led to a speculative frenzy. And the problem in
• 11:44
  Speaker 1: that speculative frenzy, as in most others, is that retail
• 11:47
  Speaker 1: investors who came late to the party are the ones
• 11:50
  Speaker 1: who got burned. And of course we know we didn't
• 11:53
  Speaker 1: have to go far back. We only go back to
• 11:55
  Speaker 1: two thousand and eight to find very sophisticated, often very
• 11:58
  Speaker 1: senior members of the financial sector not understanding some of
• 12:01
  Speaker 1: the risks they were taking. So this is something that, um,
• 12:04
  Speaker 1: we've seen again and again. Finally, you've mentioned it a
• 12:09
  Speaker 1: few times already in this interview and in the book.
• 12:12
  Speaker 1: You keep coming back to trust as the basic glue
• 12:16
  Speaker 1: of the financial system and something that has also traditionally
• 12:20
  Speaker 1: supported any effective currency. Um, what's the future of of
• 12:26
  Speaker 1: of trust in this world and in this in this
• 12:29
  Speaker 1: new world that you paint m Are we going to
• 12:33
  Speaker 1: put the same kind of trust into these digital platforms
• 12:36
  Speaker 1: that we used to put into central banks, or are
• 12:40
  Speaker 1: we going to potentially end up with government actually more
• 12:44
  Speaker 1: involved in our lives, as you said, and more aware
• 12:47
  Speaker 1: of what we're doing. The great promise of bitcoin was
• 12:50
  Speaker 1: that it would replace trust in government institutions and traditional
• 12:55
  Speaker 1: financial institutions by essentially creating a public and census mechanism.
• 13:01
  Speaker 1: I think what we have seen in the last few
• 13:03
  Speaker 1: years is that ultimately the government is still going to
• 13:06
  Speaker 1: have a crucial role. Cryptocurrencies and even stable coins, which
• 13:11
  Speaker 1: have their values linked to existing fear currencies, all actually
• 13:16
  Speaker 1: seemed to do a lot better when they get the
• 13:18
  Speaker 1: im perimeter of the government in some implicit form or
• 13:21
  Speaker 1: the other. Bitcoin actually did a lot better once um
• 13:26
  Speaker 1: the US Internal Revenue Service actually recognized it as a
• 13:29
  Speaker 1: financial asset that could be taxed. Bitcoin earners, we're not
• 13:33
  Speaker 1: happy about the taxes, but certainly were very happy that
• 13:36
  Speaker 1: this implicit government recognition actually helped the bitcoin community flower.
• 13:43
  Speaker 1: And ultimately you're going to need regulations for investor protection,
• 13:47
  Speaker 1: but also for these markets to move forward in a
• 13:51
  Speaker 1: stable way. Moreover, if you think about the promise of
• 13:54
  Speaker 1: decent allized finance and the ability to conduct transactions just electronically, still,
• 14:00
  Speaker 1: where the digital world meets the real world, you still
• 14:04
  Speaker 1: need the government to enforce property and contractual rights. Now,
• 14:07
  Speaker 1: the risk, of course, is that bitcoin may have set
• 14:10
  Speaker 1: up a set off a revolution which ends up, as
• 14:13
  Speaker 1: you suggested, Stephanie, with the government playing even more intrusive
• 14:17
  Speaker 1: roles in our lives. If central bank digital currencies do
• 14:20
  Speaker 1: take hold, we could lose any last vestige of privacy
• 14:24
  Speaker 1: to the government, and that would be a certainly a
• 14:27
  Speaker 1: dystopian future um and one that we should be very
• 14:30
  Speaker 1: concerned about. It's not obvious that private payment systems and
• 14:34
  Speaker 1: providers will be displaced by the government, but certainly one
• 14:37
  Speaker 1: can see this happening in a society, and we should
• 14:39
  Speaker 1: guard against that. This is such a I mean, it
• 14:42
  Speaker 1: is such a complicated and fast moving area, and you
• 14:46
  Speaker 1: have been such a calm and lucid guide to it.
• 14:51
  Speaker 1: Thank you very much, issue a product. It's been my pleasure, Stephanie.
• 14:55
  Speaker 1: Thank you so much for having me on. Well, that
• 15:04
  Speaker 1: was all very interesting, but many businesses in the US
• 15:07
  Speaker 1: and Europe haven't had the luxury of thinking about the
• 15:09
  Speaker 1: future over the past year and a half. They've been
• 15:12
  Speaker 1: mainly focused on surviving the week, and the threat of
• 15:15
  Speaker 1: bankruptcy still hangs over hundreds of thousands of small businesses
• 15:19
  Speaker 1: in Europe, though some bold experiments underwear in Spain and
• 15:23
  Speaker 1: France might make all the difference. Our Spain economy reporter
• 15:27
  Speaker 1: Jeanette Newman went to Valencia to eat payola and find
• 15:31
  Speaker 1: out more. M that's the sound of a chef turning
• 15:49
  Speaker 1: some brath rice and sat front into a Spanish culinary
• 15:52
  Speaker 1: treat pa. I'm in La Pepica, a restaurant that has
• 15:56
  Speaker 1: been serving pa in the city of Valencia for more
• 15:59
  Speaker 1: than a century. The recipes are traditional rice with vegetables,
• 16:03
  Speaker 1: rabbit and chicken. Peppe Ballagher is the third generation to
• 16:06
  Speaker 1: run this family restaurant. When he was a boy in
• 16:09
  Speaker 1: the nineteen fifties, he remembers Ernest Hemingway coming to dine
• 16:12
  Speaker 1: after bullfights. Hemingway would walk into the kitchen to taste
• 16:15
  Speaker 1: the paia or make himself as angria, and I've always
• 16:21
  Speaker 1: had the memory of this person who talked to everyone
• 16:24
  Speaker 1: and was really engaging. Lapapka has thrived as a temple
• 16:30
  Speaker 1: to tradition in Valencia, but some of those old ways
• 16:33
  Speaker 1: are threatening the survival of small European companies as they
• 16:37
  Speaker 1: emerge from the pandemic. I went to Valencia to learn
• 16:43
  Speaker 1: more about one of those problematic old habits companies over
• 16:46
  Speaker 1: reliance on banks for financing. That compares to the much
• 16:50
  Speaker 1: wider range of options open to businesses that are recovering
• 16:53
  Speaker 1: from the pandemic in the US, and financing is so
• 16:57
  Speaker 1: much more common, especially in continental of UM than than
• 17:02
  Speaker 1: cabin markets and markets financing, so that's a huge difference.
• 17:06
  Speaker 1: That's Katia langen Booker. She's a law professor at Frankfort University.
• 17:11
  Speaker 1: There's no reason to say bank financing is bad in
• 17:14
  Speaker 1: any way. It's just as always the combination of the
• 17:16
  Speaker 1: two is where we would like to go. Selling stock,
• 17:20
  Speaker 1: issuing debt to investors, and other financing options known broadly
• 17:24
  Speaker 1: as capital markets. These tools aren't as widespread on the
• 17:27
  Speaker 1: continent as they are in the US. That's a problem
• 17:30
  Speaker 1: is Europe's small firms emerged from the pandemic and need
• 17:32
  Speaker 1: to invest and restructure their debts. European Union leaders have
• 17:36
  Speaker 1: talked for years about the need for deeper capital markets,
• 17:39
  Speaker 1: particularly in the South and in smaller countries. They've also
• 17:43
  Speaker 1: talked for years about the need to join up those
• 17:45
  Speaker 1: disparate markets into a capital markets union, but they've never
• 17:49
  Speaker 1: got very far. Why one hurdle is that small businesses
• 17:55
  Speaker 1: themselves are sometimes reluctant to let go of tradition. They
• 17:59
  Speaker 1: don't like the idea outside investors. They feel all letting
• 18:03
  Speaker 1: an outsider in and I don't really want that, and
• 18:05
  Speaker 1: it's better, you know, I know my banker, I've been
• 18:08
  Speaker 1: you know, doing business with them forever. Another hurdle is
• 18:13
  Speaker 1: the supply of funds. One issues that banks in Europe
• 18:16
  Speaker 1: have a lot of power to turn on and off
• 18:18
  Speaker 1: the financing tab I spoke to all funds, so are
• 18:21
  Speaker 1: hard from investment from Okendo Capital I Madrid. The banks
• 18:24
  Speaker 1: in the US. Everything is really specialized. Here are banks
• 18:27
  Speaker 1: big of credit cards. They do uh capital h leases,
• 18:32
  Speaker 1: they do working capital financing, they will finance your exports,
• 18:36
  Speaker 1: they will manage your payments. To ensure those powerful banks
• 18:40
  Speaker 1: didn't cut off funding during this crisis, European government's launched
• 18:44
  Speaker 1: loan guarantee programs. The power and reach of banks has
• 18:47
  Speaker 1: been an asset, channeling cheap loans backed by the state
• 18:50
  Speaker 1: to companies in need. The programs ensured that many companies
• 18:53
  Speaker 1: got the funds they needed to cover basic expenses, but
• 18:57
  Speaker 1: in the end it's still dead. People are starting a
• 19:00
  Speaker 1: worry that some bankruptcies have just been delayed. What if
• 19:03
  Speaker 1: banks are willing to restructure some loans or don't lend
• 19:06
  Speaker 1: some firms that need to invest to bounce back. Banks,
• 19:09
  Speaker 1: after all, have their own balance sheets to focus on.
• 19:12
  Speaker 1: I spoke to Carlos Ferrando and Valencia to learn what
• 19:15
  Speaker 1: the lack of financing options means for companies emerging from
• 19:18
  Speaker 1: the pandemic. He runs close to the startup that makes
• 19:20
  Speaker 1: water bottles and patented a collapsible helmet. You can reduce
• 19:24
  Speaker 1: the volume of the helmet like more than in less
• 19:28
  Speaker 1: than one second. No, he's collapsed. No, it's about hamlet.
• 19:32
  Speaker 1: When Carlos started his company several years ago, you've got
• 19:35
  Speaker 1: a taste for how hard it can be to get financing.
• 19:38
  Speaker 1: He says. It's tough for banks to understand the startup
• 19:40
  Speaker 1: business model. The risk team from the balance is the
• 19:45
  Speaker 1: same if the sp we the startup none with a restaurant.
• 19:49
  Speaker 1: It this is my This is a reality that is
• 19:52
  Speaker 1: happening here in his pain today. So turtles end up
• 19:55
  Speaker 1: stopping many startups from growing. You cannot go to other countries.
• 19:58
  Speaker 1: You cannot increase your your your your sales team, or
• 20:03
  Speaker 1: your marketing or your digital marketing. No, and then you
• 20:07
  Speaker 1: start to get smaller and this is a black hole.
• 20:11
  Speaker 1: Carlos was lucky and eventually got funding from Spanish venture
• 20:13
  Speaker 1: capital firms and a bank. He sells his helmets at
• 20:16
  Speaker 1: the Museum of Modern Arts design store. He sold close
• 20:19
  Speaker 1: to bottles to major companies, including Google. Then the pandemic
• 20:23
  Speaker 1: hit and funding dried up. Closker tried to pivot and
• 20:26
  Speaker 1: sell face masks. It didn't go well. He tapped some
• 20:29
  Speaker 1: stay back loans. It wasn't enough. In mind, with such
• 20:33
  Speaker 1: a good broad with such a good producde, we were
• 20:37
  Speaker 1: a thread to lose the company. Valencia's regional financing agency
• 20:41
  Speaker 1: came to the rescue. It gave close to a type
• 20:44
  Speaker 1: of equity loan that isn't considered debt and bolsters the
• 20:46
  Speaker 1: firm's balance sheet that's encouraged banks to keep lending. Carlos
• 20:50
  Speaker 1: says he considered leaving Valencia until the agency helped him
• 20:53
  Speaker 1: restructure his balance sheet. I know because the support of government.
• 20:58
  Speaker 1: I would love to to to pay in the present
• 21:00
  Speaker 1: of the Texas Here in the future. The man behind
• 21:04
  Speaker 1: these clever solutions for thousands of small companies like Kloska
• 21:07
  Speaker 1: and La Pepica is Manuel Uwica. He's the head of
• 21:10
  Speaker 1: Valencia's finance agency. Before Manuel joined the agency, he was
• 21:14
  Speaker 1: a finance professor. Now he's putting years of academic expertise
• 21:18
  Speaker 1: to work to ensure that viable firms survived the pandemic.
• 21:23
  Speaker 1: I mean we need to do it otherwise I mean
• 21:25
  Speaker 1: the this, this company is gonna be bankrupt. Manuell's agency
• 21:30
  Speaker 1: has also contributed millions of euros to restructuring fund that
• 21:34
  Speaker 1: will be run by Okendo, the investment firm. We heard
• 21:36
  Speaker 1: all phones of talk about banks earlier. They're all putting
• 21:39
  Speaker 1: money on the on the big companies, on the best
• 21:41
  Speaker 1: performing company. So the good businesses which are struggling uh nobody,
• 21:45
  Speaker 1: Nobody looks after them. And and Manuela has been quick
• 21:48
  Speaker 1: to support that. There are people like us UH that
• 21:52
  Speaker 1: invest in in those types of instruments and those type
• 21:55
  Speaker 1: of situation. There's an important of happening in France too,
• 22:01
  Speaker 1: on a greater scale. Frances in the process of rolling
• 22:04
  Speaker 1: out a twenty billion euro fund to provide financing too
• 22:08
  Speaker 1: small and medium sized companies. Banks will issue equity loans
• 22:11
  Speaker 1: to around twelve thousand French companies. The banks will keep
• 22:15
  Speaker 1: some of those loans on their balance sheet and spin
• 22:17
  Speaker 1: off the rest into a fund. That fund is partially
• 22:20
  Speaker 1: guaranteed by the French state, that makes it less risky
• 22:23
  Speaker 1: for investors. Alberto nvo Potro founded in Boni's a credit
• 22:27
  Speaker 1: rating firm for smaller businesses. His company will analyze the
• 22:30
  Speaker 1: default risk of some of those French companies. This program
• 22:34
  Speaker 1: alone twice the size of the private marketing fronts and
• 22:40
  Speaker 1: and twelve thousand companies is four time more than the
• 22:44
  Speaker 1: companies that have today in France access to some sort
• 22:49
  Speaker 1: of private debt private equity. The fund is expected to
• 22:52
  Speaker 1: draw new types of investors, such as insurance companies and
• 22:55
  Speaker 1: investment firms based outside France. In the past, they haven't
• 22:59
  Speaker 1: been able to easily beat on the prospects of so
• 23:01
  Speaker 1: many small French companies. These are players that didn't used
• 23:05
  Speaker 1: to play in this market, so they're bringing insurance companies
• 23:09
  Speaker 1: directly into this market and this is new. In the
• 23:12
  Speaker 1: short term, this fund should help provide financing the companies
• 23:15
  Speaker 1: so that they recovered from the pandemic and invest. The
• 23:18
  Speaker 1: longer term play is to shape a copy side market
• 23:22
  Speaker 1: for these compex Many hurdles remain to develop a deep
• 23:25
  Speaker 1: capital market in Europe. The pandemic, though, has triggered a
• 23:28
  Speaker 1: shift in places like Valencia and France. New tools are
• 23:32
  Speaker 1: important so that European startups like Closca can get off
• 23:35
  Speaker 1: the ground and so traditional firms like Lapepka can last
• 23:39
  Speaker 1: another one years. Jeanette Newman, Bloomberg News m H and
• 24:01
  Speaker 1: those conhapsible bicycle hermits really are very good. My sister
• 24:04
  Speaker 1: gave me one for my birthday. Best present ever. Now.
• 24:09
  Speaker 1: It's often said that demography is destiny. How quickly your
• 24:13
  Speaker 1: population is growing and how old it is can have
• 24:16
  Speaker 1: an enormous impact on what kind of country you live
• 24:19
  Speaker 1: in and how fast you grow. The US and much
• 24:22
  Speaker 1: of Europe has been grappling with the consequences of people
• 24:25
  Speaker 1: living longer for some time, but probably no country has
• 24:28
  Speaker 1: seen such a dramatic shift in its demographic fortunes in
• 24:32
  Speaker 1: the last few years as China. The latest Chinese censors
• 24:37
  Speaker 1: brought this out very clearly, and I thought it was
• 24:39
  Speaker 1: a good opportunity to get more from our chief Asia
• 24:42
  Speaker 1: economist Chang Shu in Hong Kong and Bloomberg's senior Asia
• 24:45
  Speaker 1: Economy reporter, Michelle jam Risco in Singapore. So Chang, Michelle,
• 24:50
  Speaker 1: thanks for staying up to talk to me. And there's
• 24:54
  Speaker 1: long been discussion about China's one child policy and how
• 24:58
  Speaker 1: that had had put it on course for a pretty
• 25:03
  Speaker 1: challenging time demographically, we've had this this latest census changing
• 25:08
  Speaker 1: were there any surprises there? Indeed, the demographic issues in
• 25:14
  Speaker 1: China have been discussed for some time, but the latest
• 25:18
  Speaker 1: census still brought some surprises. It really shows how acute
• 25:22
  Speaker 1: the demographic challenges have become. The latest censors put the
• 25:28
  Speaker 1: Chinese population at one point four billions later, up from
• 25:32
  Speaker 1: a decade ago, but the growth rate was very slow,
• 25:35
  Speaker 1: point five percent on average each year in the past decades,
• 25:40
  Speaker 1: down from the previous decades. And the biggest surprise in
• 25:44
  Speaker 1: the way is the fertility rate. It was estimated at
• 25:48
  Speaker 1: one point three in twenty That would place China close
• 25:53
  Speaker 1: to the low fertility case in the United Nations projections.
• 25:57
  Speaker 1: In such scenario, China's population started to decline around twenty
• 26:03
  Speaker 1: five that's much earlier than the government anticipated. In a
• 26:07
  Speaker 1: twenty seventeen and again twenty nineteen reports, government reports, the
• 26:14
  Speaker 1: population peak was put at around twenty thirty so this
• 26:19
  Speaker 1: situation is really much more serious than previously anticipated. That's amazing.
• 26:26
  Speaker 1: So that's it's basically it's taken five years off the
• 26:29
  Speaker 1: forecast for when the population was gonna was going to peak,
• 26:32
  Speaker 1: from from twenty thirty to twenty five means extraordinary. Looking
• 26:35
  Speaker 1: at this as an economist, what does that mean for
• 26:38
  Speaker 1: China's growth rate? Because obviously we know that China is
• 26:42
  Speaker 1: going to be going from this very dramatic fast growth
• 26:45
  Speaker 1: period for several decades. We know that it's going to slow.
• 26:49
  Speaker 1: But does it mean it's going to slow that much
• 26:51
  Speaker 1: more dramatically. Yes, that does mean the demographic trained well
• 26:59
  Speaker 1: turned into a negative contribution to China's growth. The working
• 27:04
  Speaker 1: population has to already started to decline. The share of
• 27:07
  Speaker 1: the working age population failed to six or three percent
• 27:12
  Speaker 1: in twenty from seven percent a decade ago. If we
• 27:16
  Speaker 1: look at international comparison, China's employment growth was already slower
• 27:22
  Speaker 1: than what other major economies experienced as similar income levels.
• 27:28
  Speaker 1: This suggests the slowdown in labor growth is an increasing
• 27:32
  Speaker 1: challenge for China to break through the middle income TRAPP
• 27:37
  Speaker 1: and UM and UH. If not dealt with, that really
• 27:43
  Speaker 1: would stop China rise into a developed economy status. Now
• 27:48
  Speaker 1: we know that that the government's pretty concerned about this,
• 27:51
  Speaker 1: and it has changed its one child policy. In fact,
• 27:54
  Speaker 1: I saw that it's gone from not only being able
• 27:55
  Speaker 1: to have too but maybe have three children. Is that
• 27:58
  Speaker 1: going to come faster to reduce the challenges you've just
• 28:02
  Speaker 1: been talking about. Yeah, I mean that might not come
• 28:06
  Speaker 1: fast enough. And certainly there's three child policy itself is
• 28:09
  Speaker 1: not sufficient to tend the tight The relaxation you talked
• 28:14
  Speaker 1: about in twenty sixteen to allow two children only resulted
• 28:19
  Speaker 1: in a very short term post to childbirth, and birth
• 28:22
  Speaker 1: jumped to just for two years in twenty sixteen seventeen,
• 28:26
  Speaker 1: but then quickly dropped again. So the latest relaxation to
• 28:31
  Speaker 1: three children may not really move the needle much or
• 28:36
  Speaker 1: for any sustained period. The the officials at the National
• 28:41
  Speaker 1: Statistics Bureau of Statistics said the average number of desired
• 28:46
  Speaker 1: children is about at one point eight certainly below too,
• 28:50
  Speaker 1: so China will have to do more, much more, all
• 28:54
  Speaker 1: sort of france employment attacks and housing policies to reduce
• 28:58
  Speaker 1: financial and time burden for raising children, Increasing mobility and
• 29:03
  Speaker 1: raising the retirement age is really critical for the country's
• 29:07
  Speaker 1: long term growth. Out book. I mean, it's interesting because
• 29:11
  Speaker 1: it's the same challenge that lots of countries, certainly across Europe.
• 29:13
  Speaker 1: You have. Italy has got a shrinking population now and
• 29:17
  Speaker 1: has made great efforts to try and effectively bribe families
• 29:21
  Speaker 1: to have more children, has not had so much success.
• 29:24
  Speaker 1: In France, they seem to have been a bit more
• 29:26
  Speaker 1: successful at maintaining the fertility rate. And I don't. They
• 29:29
  Speaker 1: often say that's because of the fine wine and fine food.
• 29:32
  Speaker 1: But Michelle, I'm risk let me, let me bring you
• 29:34
  Speaker 1: in here. I'm interested in whether there are other countries
• 29:37
  Speaker 1: around the region that are concerned about the fertility rates
• 29:40
  Speaker 1: and whether actually COVID has done anything to change the conversation. Yes, certainly, certainly.
• 29:45
  Speaker 1: I mean, I think several have endured this struggle for
• 29:48
  Speaker 1: many years, even before COVID. And outside of China, so
• 29:51
  Speaker 1: South Korea, Thailand, Singapore, Taiwan, and of course Japan. I'll
• 29:56
  Speaker 1: i'll really stand out. South Korea appears to be clinging
• 29:59
  Speaker 1: to the world it's lowest fertility rate, and several of
• 30:02
  Speaker 1: the others are in that territory as well, and Japan's
• 30:05
  Speaker 1: population could plunge another fifteen percent by according to UN estimates,
• 30:10
  Speaker 1: so COVID, as it has on many other issues, has
• 30:13
  Speaker 1: made a bad situation so much worse. We saw a
• 30:16
  Speaker 1: lot more record lows in fertility rates last year, and
• 30:20
  Speaker 1: there is hope that some of the demographic damage of
• 30:22
  Speaker 1: the past year will be temporary. But the question still
• 30:24
  Speaker 1: remains on how to tackle this long term trend that
• 30:27
  Speaker 1: was cemented even before the pandemic. I think governments are
• 30:30
  Speaker 1: finding that it's quite difficult to work against cultural and
• 30:34
  Speaker 1: behavioral norms, and they've often joked about how difficult it
• 30:37
  Speaker 1: is just to convince people to have more babies. And
• 30:40
  Speaker 1: Singapore Prime Minister Lesia and Loon mentioned this in an
• 30:43
  Speaker 1: interview with our own editor and a chief a couple
• 30:45
  Speaker 1: of years ago. Our Type Hay Bureau chief recalls all
• 30:48
  Speaker 1: the press briefings with the former Central Bank governor there,
• 30:51
  Speaker 1: who would exhort his young reporters in briefings to to
• 30:55
  Speaker 1: go home and get married and have children. But none
• 30:57
  Speaker 1: of this seems to work. It is because we've had
• 31:01
  Speaker 1: most of the time when we talk about Asia, or
• 31:03
  Speaker 1: when we think indeed about the twenty one century and
• 31:05
  Speaker 1: what it's going to look like, we've tended to think
• 31:08
  Speaker 1: it will be the Asian century, that the march of
• 31:11
  Speaker 1: Asia is unstoppable. But if Asian economies continue to face
• 31:15
  Speaker 1: this demographic challenge, if populations continue to shrink, I mean,
• 31:19
  Speaker 1: does that really put some of that at risk? Does
• 31:22
  Speaker 1: it really stop Asia's development at some level? Well, I
• 31:26
  Speaker 1: think that's the big question. But that's what we're starting
• 31:28
  Speaker 1: to see cracks and a lot of these measurements, and
• 31:31
  Speaker 1: and not just the tapline growth figures though those are
• 31:34
  Speaker 1: certainly focused on and a lot of these discussions, but
• 31:36
  Speaker 1: there's a lot of long term repercussions of these aging
• 31:39
  Speaker 1: societies and low fertility rates UM. One other measure that
• 31:42
  Speaker 1: we look at a lot is the dependency ratio, the
• 31:45
  Speaker 1: lack of younger residents available to care for the elderly,
• 31:48
  Speaker 1: which certainly is a strain on government pension and healthcare systems,
• 31:52
  Speaker 1: but also of course the cultural and a personal strain UM.
• 31:55
  Speaker 1: Labor markets are getting a rude awakening fewer working age
• 31:58
  Speaker 1: residents and automation and not moving fast enough to fill
• 32:01
  Speaker 1: the void. Some institutions, like universities that banked on certain
• 32:05
  Speaker 1: enrollment numbers will now see strains when those applicants don't materialize,
• 32:10
  Speaker 1: and there's an interesting one. In South Korea, the shrinking
• 32:13
  Speaker 1: population there is a concern, especially for the military, which
• 32:16
  Speaker 1: is still an arms standoff with its northern neighbor. Military
• 32:20
  Speaker 1: officials are turning to robots for help, reasoning that, you know,
• 32:23
  Speaker 1: losses of robot soldiers are less tragic anyway. But you know,
• 32:26
  Speaker 1: any of these solutions, Um, you know, as we said,
• 32:29
  Speaker 1: it's it's very difficult, and these institutions and aspects of
• 32:33
  Speaker 1: society are certainly understrain. But less we think it's all
• 32:37
  Speaker 1: downhill for Asia's population. And of course we should always
• 32:40
  Speaker 1: also be reminded that you can't you shouldn't generalize about
• 32:43
  Speaker 1: such an incredibly varied continent. UM. I think you found
• 32:47
  Speaker 1: a couple of economies in Asia that are actually have
• 32:49
  Speaker 1: got too many babies. Well, that's right, and there's two
• 32:53
  Speaker 1: notable exceptions in this category, and then they're very different
• 32:56
  Speaker 1: from each other, I would say too, But that's Indonesia
• 32:59
  Speaker 1: and the Philippine. UM. Indonesia has been a bit more
• 33:02
  Speaker 1: vocal recently about needing to resolve this. We we had
• 33:05
  Speaker 1: a story just a few months ago about the government
• 33:07
  Speaker 1: doubling down and efforts to push later marriages. Family planning
• 33:11
  Speaker 1: enhance birth control UH officials. They're arguing that such a
• 33:15
  Speaker 1: rapid pace of population growth threatens the living standard in
• 33:19
  Speaker 1: the Philippines. There are some other real cultural debates on
• 33:22
  Speaker 1: how to address the situation. Religion also comes into play there,
• 33:26
  Speaker 1: where the majority Catholic country hasn't been quick to embrace
• 33:29
  Speaker 1: the thought of having fewer children per family, and birth
• 33:32
  Speaker 1: control isn't very well available or supported, so, especially among
• 33:35
  Speaker 1: lower income individuals, lack of access to birth control, healthcare,
• 33:39
  Speaker 1: and education has resulted in more unwanted or unexpected pregnancies,
• 33:44
  Speaker 1: which also have spiked during the pandemic. So there's been
• 33:48
  Speaker 1: less traction than the Philippines and how to get to
• 33:49
  Speaker 1: a more desirable pace of population growth. But both countries
• 33:53
  Speaker 1: are are in that different camp as as opposed to
• 33:57
  Speaker 1: the majority of of these other countries we discussed, and
• 34:00
  Speaker 1: as you said, COVID sort of throwing a lot of
• 34:02
  Speaker 1: these issues up into the air in an interesting way
• 34:05
  Speaker 1: in many places. Well, Michelle dan Risco Chang Shoo. Thank
• 34:08
  Speaker 1: you very much. So that's it for this episode of Stephanomics.
• 34:21
  Speaker 1: Will be back next week. In the meantime, please rate
• 34:24
  Speaker 1: the show and follow our economics on Twitter for more
• 34:27
  Speaker 1: news and analysis during the week from Bloomberg Economics. This
• 34:30
  Speaker 1: episode was produced by Magnus Hendrickson, with special thanks to
• 34:33
  Speaker 1: Professor Hua Prasad, Jeanette Newman, Chang Shoe, and Michelle jam Risco.
• 34:38
  Speaker 1: Mike Sasso is executive producer of Stephonomics and the head
• 34:41
  Speaker 1: of Bloomberg Podcast is Francesca Levy.