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9 Stories That Will Move Markets in 2013

From the U.S. deficit to Mideast turmoil, the issues that could have the biggest impact on the global economy in the coming year.

If 2012 was the year of the "fiscal cliff" and unlimited bailouts in Europe, what will 2013 be? Making economic and financial forecasts is never easy -- and I usually stick to the long-term variety -- but here are some of the topics that may sway global markets in the coming year, for better or worse:

CENTRAL BANKERS

In the eurozone: The person who helped to calm markets most in 2012 was probably Mario Draghi, who became head of the European Central Bank only a year ago. With one short statement -- punctuated by the line "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough" -- he committed to keeping the euro area together essentially by printing as much money as necessary to buy up its bonds. The question is whether his credibility will last through another year. Even if the common currency is safe for now, it will not be stronger unless Draghi can force finance ministers to accept new rules about how countries enter, leave, and act in the euro area. Even then, setting a single monetary policy for a group of economies at different stages of boom and bust will be a thankless task. Their economies need to come into closer synch for the euro area to work as planned -- and that's unlikely in 2013.

In Britain: Meanwhile, the markets will be watching Mark Carney's first moves as governor of the bank of England. The former governor of Canada's central bank and Goldman Sachs alum has the respect of investors, but he's facing a much more difficult situation in Britain, which is currently hamstrung by a backwards fiscal policy, than he did in riding Canada's resource-fueled boom. In fact, he'll be working in an environment much closer to what Ben Bernanke, the chairman of the Federal Reserve, has had to deal with in the United States, where Republicans in Congress blocked fiscal stimulus even as the country struggled to recover. Bernanke was forced to take extraordinary measures to fulfill the Fed's mandate; Carney may also have to get creative in London, as he is surely in for a long slog. 

At the Fed: Investors are already starting to wonder who will replace Bernanke when his term ends in January 2014. The Fed is undergoing something of a policy shift now, having decided to target an explicit level of unemployment as well as a maximum threshold for inflation. It's unlikely that the Fed's pledge to keep rates low through 2015 will change, unless the global economy should suddenly boom. But the new chairman (or chairwoman!) will determine whether the Fed cements the first major change to monetary policy since Paul Volcker took over in 1979.

THE DEFICIT

Whether it happens before or after January 1, the United States will find a way to make sure taxes don't rise on most middle-class families, and also to avoid arbitrary spending cuts in some government departments. The fiscal cliff will turn into something like a fiscal ramp. Afterwards, the deficit will remain. As I and others have said, it is neither so big nor so difficult to control as some politicians might like the public to believe. Once the rhetorical fog clears, markets are likely to feel more comfortable with the nation's fiscal situation and respond accordingly.

JAPAN

Is it lucky that Japan's central bank is under the thumb of its politicians? Perhaps, since its once and future leader, Shinzo Abe, seems to be the only one with a plan to shock its economy back to life, à la Dr. Frankenstein. Markets welcomed his party's electoral victory earlier this month, but part of his platform was a tougher stance on China and territorial disputes in Japan's neighborhood. In terms of the health of the global economy, fueling conflict in East Asia could negate whatever gains Abe achieves at home. Here's hoping he leaves the nationalist rhetoric on the campaign trail and focuses on raising the living standards of his constituents.

CHINA

China's new leaders have much more power than Japan's Abe to reshape their economy, but, unlike him, they haven't signaled any sudden changes. Nevertheless, they have big challenges ahead: curbing overinvestment, building demand for goods and services in the domestic market, turning the renminbi into a convertible currency, reducing civil unrest, and managing a pile of foreign reserves with highly uncertain exchange and interest rates. Many of these problems would go away, or at least be less pressing, if the new leaders could unleash a new source of economic growth. A thorough legal and regulatory reform that instituted more transparency, stronger property rights, and better protection of investors would do the trick.

THE MIDDLE EAST

What will happen in the Middle East, and how will it affect the global economy? I don't know, but I am pretty sure that something will happen in the Middle East and it will affect the global economy in 2013. Syria and Egypt still look volatile, and Israel, Lebanon, and Iran are always wild cards. The main interest of the major economic powers now is containment -- how to stop a conflagration from disrupting trade and growth. But there are upsides, too. As soon as Egypt can stabilize and restart its economy, it can become a regional powerhouse: a country of more than 80 million people growing by more than 6 percent per year. Egyptian stocks, which should be a leading indicator of economic growth, have already started to climb.

COMMODITY PRICES

A return to faster growth will inevitably mean a return to higher prices for food, fuel, minerals, and metals. The global economy doesn't have to pick up much steam for prices to spike, since demand often increases more quickly than supply can respond. We've been seeing crop prices high enough to cause riots every couple of years now, and investors will likely seek out companies that can boost yields -- whether in harvests or extraction processes -- or come up with substitutes for resources in short supply, such as copper and rare earths. Those are long-term plays, though -- we can't count on innovation to solve shortages in the near term.

FINANCIAL INTEGRATION

Every day, emerging economies are becoming more closely linked to the global financial system. These economies are some of the fastest growing in the world, but it's not always easy for foreigners to buy into them. Rising issuances of stocks and bonds are gradually opening up these markets, connecting money from around the world with profitable opportunities. Issuances of debt securities in developing countries have risen steadily for the past few years even as the global economy struggled to grow, and bond funds covering emerging markets have performed extremely well. This trend has plenty more room to run, and it's no accident: Giving the billions of workers in developing countries access to new capital -- in this case, by bringing in foreign money to buy it -- is one of the best ways to make them more productive, helping them to earn higher wages and increase their own spending. The more this happens in 2013, the better 2014, 2015, and every year thereafter will be.

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Daniel Altman

A Real War on Inequality

The world could learn a lot from Brazil's fight against poverty.

Bashing the BRICS is all the rage these days -- I've done my share -- and it may even be time to abandon altogether this grouping of five big but exceedingly different economies. Yet one BRIC has come in for an unfair degree of criticism. Though Brazil may still be somewhat corrupt, its growth fueled by a temporary boom in natural resources, the country's future is getting brighter by the day. Just as important, the nature of its economic progress offers a valuable lesson for countries both rich and poor.

Up through the 1990s, Brazil was known as the country with the worst income inequality in the Western Hemisphere, and one of the most unequal countries in the world. The frightful conditions in its slums, cane fields, and mines were emblematic of a deep and apparently ingrained poverty that belied Brazil's ambitions of modernity. Poverty is still a serious problem, but for the past decade Brazil has been laying the foundation for a stunning new phase of growth.

No doubt, natural resources have helped Brazil to become richer. Revenues from selling minerals and fuels rose from 2.5 percent of the economy in 1990 to 5.3 percent in 2010, after peaking at 7.2 percent in 2008, according to the World Bank's figures. This resource boom won't last forever, even with Brazil's new offshore oil fields. But Brazil has invested some of these proceeds, along with other tax revenue from its sustained economic growth, very wisely indeed.

When Luiz Inácio Lula da Silva took office as president in 2003, public spending on education had fallen to 3.8 percent of GDP. His predecessor, Fernando Henrique Cardoso, had already set the stage for Brazil's surge by installing the bedrock of sound economic policies: a fiscal surplus, tight monetary policy, and a floating exchange rate. Lula, despite his association with leftist populism, committed to continuing these policies. But crucially, he also legitimized them by promising to share the gains of the resulting growth among all Brazilians.

By the time Lula finished his second and final term as president, spending on education had increased to almost 6 percent of GDP. School enrollment in Brazil has always been high, but the quality of education is climbing steadily, resulting in higher test scores and college graduation rates. Health spending also rose in both the public and private sectors, and here the progress is plain to see: mortality for children in their first five years has been cut in half, from 31.5 per 1,000 in 2002 to 15.6 in 2011.

Healthier and better-educated people can earn higher incomes, and the policies of Lula's government, along with Brazil's rapid urbanization and growth, have made a huge dent in inequality. Its Gini coefficient for income stood at 61 in 1990, according to the World Bank, and was still above 59 in 2002; by comparison, the United States had a coefficient of about 47 in 2010. This year, estimates from the Central Intelligence Agency put Brazil's number at 51.9, about the same as Chile and Mexico. Research by the International Monetary Fund suggests this enormous reduction in inequality could itself offer Brazil a further boost to economic growth.

Brazil's strides against inequality are even more remarkable when considered in context. In the past decade, the forces of globalization were at their apex. Though globalization has narrowed inequality between countries, it has aggravated inequality within them more often than not. Emerging economies like Brazil have seen millions escape poverty, but existing elites have also used their wealth, education, and international connections to exploit lucrative export markets and foreign investments. As a result, income distributions have polarized in countries ranging from Costa Rica to Côte d'Ivoire.

Brazil has shown that globalization need not be synonymous with burgeoning inequality -- in fact, quite the contrary: the benefits of globalization can be harnessed to reduce inequality. By bolstering the middle class and creating a workforce capable of competing globally, Brazil is equipping itself to take advantage of globalization to the fullest.

To be sure, times are tough right now. Brazil's economy likely grew just 1 percent this year, adjusted for inflation, after bouncing back from recession in 2010 and 2011. Moreover, the combination of a slipping exchange rate and a reliance on foreign cash has made investment in new capital especially difficult. The attractiveness of the Brazilian market is starting to dim, and domestic finance isn't picking up enough of the slack.

Yet to the degree this change in fortunes reflects short-term shifts in commodity prices and problems with liquidity, investors who are bearish on Brazil are missing the point. Brazil is on a much stronger path to long-term growth than its recent malaise would suggest, perhaps strong enough even to justify the flood of capital that entered the country beginning in the late 1990s. Its economy is sure to expand and diversify as its workforce becomes healthier and more educated. The changes won't occur in a few months or years, but they will happen. If investors can't look far enough into the future to see this, it'll be their loss.

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