A history of the authentically global beer.

Lagers may be ubiquitous but India Pale Ales are beers with a backstory

 From the print edition | Christmas Specials

Dec 24th 2016, 00:00

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BEER is for drinking. But beer is also an occasion for conversation—and, if good enough, a subject for it, too. That is where India Pale Ales, or IPAs, come into their own. Few beers incite and enrich conversation as much. Their distinctive character—the “firm bitterness [that] lingers long and clean” in one, the “complex aromatic notes of citrus, berry, tropical fruit and pine” in another—spur discussions that spill over from tap rooms to websites with ease. The plethora of craft brewers that has sprung up over the past few decades provides ample scope for arguments about the relative merits of local brews and far-flung ones—with far-flung, these days, meaning from more or less anywhere on Earth.

And then there is the beer itself. A child of Britain’s industrial revolution and imperial expansion that rose to world-straddling greatness, IPA went on to be humbled by its upstart rival, lager. It had all but vanished when plucky supporters restored it to life and once more put the world at its feet. Here is a beer with a back story.

In the 18th century the British East India Company, originally set up to trade spices, turned its attention increasingly to importing fine cotton and silk from India. Its East Indiamen, “lords of the ocean” bigger than any other sailing vessels at the time, brought holds full of fabric back to London from Bengal, Bombay and Madras. But on the outward journey the holds were largely empty. A generous outbound allowance of cargo, eventually up to 50 tonnes each, was offered to officers and crew as a perk.

Boredom between the comings and goings of the ships led company men in India to make an “art-form of feasting and boozing”, according to Pete Brown, whose book “Hops and Glory” tells the story of IPA. To help this art-form along, wily entrepreneur-seamen packed the holds with hams and cheeses, crockery and glassware and good supplies of drink, mainly beer and wine, sometimes madeira picked up en route. The Company encouraged the imports, even taking an interest in guaranteeing their quality. After all, if the men’s carousing was not supported by wholesome supplies from home they might turn to local alternatives such as arak, which would surely send them mad.

By the late 18th century George Hodgson’s Bow Brewery had become the main supplier to this trade. The brewery was close to the East India Company’s headquarters at the confluence of the Lea and the Thames in east London, so Hodgson could schmooze captains and crew in local taverns. He offered them beer on generous credit terms—necessary given that the round trip could put off payment for a year or more.

The troops in India may have preferred darker, sweeter porter, but the wealthier traders hankered after more refinement. Hodgson’s version of pale ale—a lighter-coloured bitter that was a recent innovation—gave them what they wanted. Its (relative) pallor came from its malt, which is a grain, usually barley, which has been heated and dried. Sometimes called the “soul of beer”, malt imparts sweetness, colour and the starch that is broken down into alcohol.

Until the 17th century the kilns used for malting were fired with wood or straw, which gave beers a smoky flavour, a deep brown colour, and a devilish lack of consistency. The development of coke, a coal from which impurities have been baked out, changed all that. Histories of the Industrial Revolution rightly point to coke’s importance in ironmaking. But as coke-fired blast furnaces began to produce cast iron in the early 18th century coke also found its way into maltings. Its clean burning produced a paler, subtler and more consistent product, and though darker, sweeter styles still predominated, brewers started to aim those pale ales at the palates of wealthier drinkers.

Pales into significance

Hodgson’s pale ale was strong and heavily dosed with hops, which are a preservative as well as a bitter counterpoint to the sweetness of the malt. Its strength and savour allowed it to withstand a long voyage in the bowels of a ship. Indeed its drinkers believed the beer got better and better as it withstood the buffeting of the waves and the wild swings in temperature on a journey around the Cape of Good Hope and up to the Bay of Bengal. On those occasions when the beer fell foul of bacterial infection—plenty of ales turned up “sour” in India—the pungent hoppiness went some way to disguising the problem.

The generous credit Hodgson offered, along with his willingness to flood the market with cheap booze when competitors tried to gain a foothold, gave him something close to a monopoly. Then he overreached. First he tightened the credit terms offered to his ad hoc salesforce of seafarers. Second, he started to export the beer in his own ships to exert more control over the trade and expand his business. Setting up as a rival trader, albeit in the opposite direction, changed the light in which the East India Company saw him.

The red triangle logo appeared round the world—the first global brand

In 1822 Campbell Marjoribanks, one of the Company’s directors, sat down to dinner with Samuel Allsop, a brewer from Burton-on-Trent, hoping to clip Hodgson’s wings. Burton, in England’s Midlands, was already an important centre for beer. Its waters contained minerals so amenable to brewing that to this day beermakers the world over “Burtonise” their water by adding salts to ensure that it mimics that which is drawn from the town’s wells.

In the 18th century Burton had set up a valuable bilateral trade with Russia, which provided the wood in which Burton’s beer was barrelled; Catherine the Great was said to be “immoderately fond” of its strong, sweet, dark-brown beers. But exports to the Baltic came to a sudden end with the Napoleonic wars, and when trade was set to recommence the Russian court decided to encourage a home-grown brewing industry by slapping prohibitive duties on imported beer.

Allsop needed a new export market; Marjoribanks needed beer. However he also knew that Burton’s sweet ale was unlikely to find favour in India. So after the pudding had been cleared the Company man poured the brewer a glass of Hodgson’s ale, promising him a fortune if he could brew something similar. Even if he could, he faced problems. Getting the beer from Burton to London added to the costs. Hodgson, who had a well-established brand, would probably swamp the market when he got wind of the plan. All this, though, was overcome. The beer from Burton proved excellent and arrived in tip-top condition. Burton’s other brewers, jealous of Allsop’s success, joined the party and the Burton-brewed beer drove Hodgson’s out of favour.

As British interests in India grew so did the market, and more brewers started to make “East India ales” or “Ales for the Indian Market”. From Burton there was Bass, the town’s biggest brewer, and Worthington, another name still familiar to older British drinkers. Charrington of London (which later opened a brewery in Burton) and Tennents of Glasgow joined in, too. By the 1830s IPA began to supplant madeira and claret.

As IPA conquered taste buds in India it spread around the world, turning up in America, Australia and South-East Asia. Its popularity spread in Britain as empire-builders returning from India wanted to keep drinking it. Bass’s pale ale (in style, an IPA) made it Britain’s biggest brewery and its red triangle logo appeared round the world—some call it the first global brand. Its bottles were to pop up in Manet’s “A Bar at the Folies-Bergère” and many pictures by Picasso.

Ice and a slice

Burton’s global dominance was short-lived. Other drinks came along to challenge its hot-climate stronghold. Tonic water, which became available in 1858, went nicely with gin and the quinine it contained warded off malaria. The growing availability of ice made brandy and soda a more acceptable drink for the tropics. Most damagingly, in the late 19th century industrial refrigeration made it possible to brew beers year round (it had previously been a seasonal business unsuited to summers) and to make more beers of the crisp, light lager style popular in Germany and Bohemia. In the tropics, a beer that was refreshing when cold and could be brewed nearby had a lot going for it. In America, European immigrants brought a taste for such things with them. The brewers of Burton remained committed to IPA, and missed the boat.

Even at home IPA fell from favour. In 1870 William Gladstone, the prime minister, introduced the first excise duties to tax beer on its strength, penalising heady IPAs. Further tightening of taxation encouraged ever weaker beer that required no ageing and brought bigger profits. During the first world war grain was commandeered for food, and beers became weaker still. Beer with less alcohol did not require ageing so needed less hopping, saving brewers money. Burton’s brewers fell into the arms of larger competitors, later to close down altogether. The immense brick shells of the great Victorian breweries still dominate the town; but only Coors, an American interloper, still makes beer there at scale.

The rout of IPA was not complete. Deuchars, in Edinburgh, and Greene King, in Suffolk, continued to make authentic IPAs, though the beers lacked the kick of hops and alcohol that their forerunners boasted. Ballantine, founded in New Jersey in 1840 and modelled on the breweries of Burton, survived America’s turn to lager and, worse, prohibition, which did for many other American brewers. According to Mitch Steele, former brewmaster at Stone Brewery and author of another book on IPA, Ballantine’s was the single most important influence on the craft-beer movement that grew up after America’s prohibition-era restrictions on home brewing were relaxed in the 1970s, allowing a new generation to embrace beer first as hobby, then as trade.

The movement’s subsequent rise was driven by a fascination with history, with taste and with authenticity—that proved easily marketed to people who wanted beers they could talk about and savour. Many of its early beers were influenced by IPAs; the first to embrace the name was Grant’s IPA, in 1983. The new brewers relished the opportunity the style presented for showing off their skills, running wild with new varieties of hops—which turned out to grow very well in the Pacific Northwest—in search of distinctive personality. And IPA had the added attraction of being a forgiving beer. In weaker brews imperfections are shown up in sharp relief. Just as in Hodgson’s day, heavy hopping—adding different hops to the beer at various stages of brewing—can cover flaws.

As the craft-beer boom gathered pace, some sought to differentiate their brews by adding ever more hops. In 1994, Blind Pig Inaugural Ale marked the birth of the double IPA (with double the hops). Stone and Ballast Point in San Diego saw this hop-head market emerging and triple IPAs were born. West Coast IPA, fresh and fruity, has become a distinct style of beer.

Not all beer aficionados are pleased. Big, brash American hops like Cascade, Centennial, Columbus and Chinook lack the subtlety of their British cousins. Some IPAs are now almost undrinkably bitter. And the name is now applied willy-nilly. Red IPAs, wheat IPAs and black IPAs are really other styles of beer but with the hop count turned up.

Such are the bandwagon-jumping burdens of success. The flagship beers of small brewers are, more often than not, IPAs; almost every brewery makes one. They account for one in three craft beers sold in American bars; for many tipplers they are synonymous with craft beer itself. And as the movement has spread abroad, so has the inclination to make the heady, hoppy IPAs. It is the “global craft brew”, says Mr Brown.

Born in monopoly, IPA is triumphing through diversity. Everyone can have a home-town brew and an opinion. That is bad news for the vast brewers that dominate the large but shrinking global lager market. The competition flourishes at a local level and on a modest scale that the big brewers hardly know how to understand. The beer giants can, and do, buy up smaller “craft brew” IPA-makers; but there is always the risk that discerning drinkers could switch allegiance from their mass-produced lagers. The tipple that helped create the world’s first brewing giants could yet undermine the beermaking behemoths of today.

Lessons From A Trading Great: Stanley Druckenmiller.

The “greatest money making machine in history”, a man with “Jim Roger’s analytical ability, George Soros’ trading ability, and the stomach of a riverboat gambler” is how fund manager Scott Bessent describes Stanley Druckenmiller. That’s high praise, but if you look at Druckenmiller’s track record, you’ll find it’s well deserved.

Druck averaged over 30% returns the last three decades — impressive. But what’s even more astonishing is the lack of volatility… the guy almost never loses.

He never had a single down year and only had five losing quarters out of 120 altogether! That’s absolutely unheard of. And he did all of this in size. At his peak, Druck was running more than $20 billion and he was still managing to knock it out the park.

When you study Druckenmiller you get the sense that he was built in a laboratory, deep in a jungle somewhere, where he was put together piece by piece to create the perfect trader. Every character trait that makes up a good speculator, Druck possesses in spades… things like:

§  Mental flexibility

§  Independent thinking

§  Extreme competitiveness

§  Tireless inquisitiveness

§  Deep self-awareness

Maybe he’s a freak of nature or perhaps a secret Jesse Livermore / George Soros lovechild… or maybe he’s just a relentlessly determined trader who’s been on a lifelong path of mastery. Either way, it behooves us to study the thoughts and actions of one of the game’s greatest. And with that, let’s begin.

On what moves stocks

In Jack Schwager’s book The New Market Wizards, Stanley Druckenmiller said this in response to the question of how he evaluates stocks (emphasis is mine):

When I first started out, I did very thorough papers covering every aspect of a stock or industry. Before I could make the presentation to the stock selection committee, I first had to submit the paper to the research director. I particularly remember the time I gave him my paper on the banking industry. I felt very proud of my work. However, he read through it and said, “This is useless. What makes the stock go up and down?” That comment acted as a spur. Thereafter, I focused my analysis on seeking to identify the factors that were strongly correlated to a stock’s price movement as opposed to looking at all the fundamentals. Frankly, even today, many analysts still don’t know what makes their particular stocks go up and down.

The financial world is chock full of noise and nonsense. It’s filled with smart people who don’t know a damn thing about how the world really works. The financial system’s incentive structure is set up so that as long as analysts sound smart and pretend like they know why stock xyz is going up, they get rewarded.This holds true for all the talking heads and “experts” except for those who actually trade real money. They either learn the game or get competed out.

Being one of those who compete in the arena, Stanley Druckenmiller was forced to learn early on what actually drives prices. This is what he found:

Earnings don’t move the overall market; it’s the Federal Reserve Board… focus on the central banks and focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.

Liquidity is the expansion and contraction of money, specifically credit. It’s the biggest variable that drives demand in an economy. It’s something our team at Macro Ops follows closely.

The federal reserve has the biggest lever on liquidity. This is why a trader needs to keep a constant eye on what the Fed is doing.

This is not to say that things like sales and earning don’t matter. They are still very important at the singular stock level. Here’s Druckenmiller again (emphasis mine):

Very often the key factor is related to earnings. This is particularly true of the bank stocks. Chemical stocks, however, behave quite differently. In this industry, the key factor seems to be capacity. The ideal time to buy the chemical stocks is after a lot of capacity has left the industry and there’s a catalyst that you believe will trigger an increase in demand. Conversely, the ideal time to sell these stocks is when there are lots of announcements for new plants, not when the earnings turn down. The reason for this behavioral pattern is that expansion plans mean that earnings will go down in two to three years, and the stock market tends to anticipate such developments.

The market is a future discounting machine; meaning earnings matter for a stock, but more so in the future than in the past.

Most market participants take recent earnings and just extrapolate them into the future. They fail to really look at the mechanism that drives the bottom line for a particular company or sector. The key to being a good trader is to identify the factor(s) that will drive earnings going forward, not what drove them in the past.

Stanley Druckenmiller said in a recent interview that his “job for 30 years was to anticipate changes in the economic trends that were not expected by others, and, therefore not yet reflected in security prices.” Focus on the future, not the past.

Another thing that sets Druck apart is his willingness to use anything that works; as in any style or tool to find good trades and manage them.

Another discipline I learned that helped me determine whether a stock would go up or down is technical analysis. Drelles was very technically oriented, and I was probably more receptive to technical analysis than anyone else in the department. Even though Drelles was the boss, a lot of people thought he was a kook because of all the chart books he kept. However, I found that technical analysis could be very effective.

I never use valuation to time the market. I use liquidity considerations and technical analysis for timing. Valuation only tells me how far the market can go once a catalyst enters the picture to change the market direction.

Druckenmiller employs a confluence of approaches (fundamental, macro, technical and sentiment) to broaden his view of the battlefield. This is a practice we follow at Macro Ops. It doesn’t make sense to pigeonhole yourself into a single rigid scope of analysis… simply use what works and discard what doesn’t.

How to make outsized returns

Stanley Druckenmiller throws conventional wisdom out the window. Instead of placing a lot of small diversified bets, he practices what we call the “Big Bet” philosophy, which consists of deploying a few large concentrated bets.

Here’s Druckenmiller on using the big bet philosophy (emphasis mine):

The first thing I heard when I got in the business, not from my mentor, was bulls make money, bears make money, and pigs get slaughtered. I’m here to tell you I was a pig. And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig. I think diversification and all the stuff they’re teaching at business school today is probably the most misguided concept everywhere. And if you look at all the great investors that are as different as Warren Buffett, Carl Icahn, Ken Langone, they tend to bevery, very concentrated bets. They see something, they bet it, and they bet the ranch on it. And that’s kind of the way my philosophy evolved, which was if you see – only maybe one or two times a year do you see something that really, really excites you… The mistake I’d say 98% of money managers and individuals make is they feel like they got to be playing in a bunch of stuff. And if you really see it, put all your eggs in one basket and then watch the basket very carefully.

A lot of wisdom in that paragraph. To earn superior long-term returns you have to be willing to bet big when your conviction is high. And the corollary is that you need to protect your capital by not wasting it on a “bunch of stuff” you don’t have much conviction on.

Avoiding loss should be the primary goal of every investor. This does not mean that investors should never incur the risk of any loss at all. Rather “don’t lose money” means that over several years an investment portfolio should not be exposed to appreciable loss of capital. While no one wishes to incur losses, you couldn’t prove it from an examination of the behavior of most investors and speculators. The speculative urge that lies within most of us is strong; the prospect of free lunch can be compelling, especially when others have already seemingly partaken. It can be hard to concentrate on losses when others are greedily reaching for gains and your broker is on the phone offering shares in the latest “hot” initial public offering. Yet the avoidance of loss is the surest way to ensure a profitable outcome.

You need to keep your powder dry so that when the stars align you can go for the jugular and turkey neck that son of a gun.

The importance of striking when the iron is hot is something Stanley Druckenmiller learned while trading for George Soros.

I’ve learned many things from [George Soros], but perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong. The few times that Soros has ever criticized me was when I was really right on a market and didn’t maximize the opportunity.

An intense focus on capital preservation coupled with a big bet approach is the barbell philosophy used by many of the greats.

Keeping your losses small and pushing your winners hard is the name of the game in profitable speculation.

The fund washout we’re seeing today is not just because of the glut of mediocrity in the money management space, but also because even decent managers are scared to take the necessary risks to have big return years. They manage too much to the benchmark and are too short-term focused. That’s a recipe for average performance. Here’s Druck on how it should be done:

Many managers, once they’re up 30 or 40 percent, will book their year [i.e., trade very cautiously for the remainder of the year so as not to jeopardize the very good return that has already been realized]. The way to attain truly superior long-term returns is to grind it out until you’re up 30 or 40 percent, and then if you have the conviction, go for a 100 percent year. If you can put together a few near-100 percent years and avoid down years, then you can achieve really outstanding long-term returns.

Once you’ve earned the right to be aggressive and can bet with the house’s money (profits), you should plunge hard when that high conviction trade arises and push for outsized returns.

The trader’s mindset and handling losses

According to Druck, to be a winning trader you need to be “decisive, open-minded, flexible and competitive”.

The day before the crash in 1987, Stanley Druckenmiller switched from net short to 130% long because he thought the selloff was done. He saw the market bumping up against significant support. But through the course of the day he realized that he made a terrible mistake. The next day he flipped his book and got short the market and actually made money. You see this type of mental flexibility in all the greatest traders. And Druckenmiller is one trader that epitomizes it perhaps better than anybody else.

The practice of having “strong opinions, weakly held” is difficult but paramount to success.

In order to attain that level of mental flexibility, you need to learn to detach ego from your immediate trade outcomes. If you allow losses to affect your judgement, you’ll inevitably make bigger mistakes.Druckenmiller learned this lesson early on from Soros.

Soros is the best loss taker I’ve ever seen. He doesn’t care whether he wins or loses on a trade. If a trade doesn’t work, he’s confident enough about his ability to win on other trades that he can easily walk away from the position. There are a lot of shoes on the shelf; wear only the ones that fit. If you’re extremely confident, taking a loss doesn’t bother you.

One of the best parts about this game is that as long as you stay alive (protect your capital) you can always make another trade. Stanley Druckenmiller said the “wonderful thing about our business is that it’s liquid, and you can wipe the slate clean on any day. As long as I’m in control of the situation — that is, as long as I can cover my positions — there’s no reason to be nervous.”

I remember watching Charlie Rose interview Druckenmiller a few years ago. Charlie asked him why, after all these years, and with all the money he’s made, does he still put in 60-hour weeks trading? Druck responded (and I’m paraphrasing here) “because I have to… I love the game and I love winning, the money isn’t even important.”

To get to Druck’s level, you have to trade because that’s just what you do. It’s what you live for.

Trillions Rotate From Bonds to Stocks After Election.

Since the US election in November the total market cap of world stock markets is up by $3trn while the global market cap of world bond markets is down by $3trn, see chart below. While some of this is driven by the appreciation of the dollar this great rotation roughly suggests that all the money that was taken out of bond markets since the US Presidential election was put to work in the stock market.

Source: Deutsche Bank Securities

Indian business prepares to tap into Aadhaar, a state-owned fingerprint-identification system

THERE are two ways to sign up to Jio, a new and irresistibly priced mobile-telephony service which Mukesh Ambani, the boss of Reliance Industries, a conglomerate, launched in September 2016 and which is luring tens of millions of new customers each month. One way requires a wad of documents, multiple signatures and plenty of patience, since Jio takes days or weeks to go through “know-your-customer” procedures. The second way is magically simple: the person rests a finger on an inch-wide scanner, and if the print matches the identity the customer is claiming, Jio downloads the information it needs from the Indian authorities and activates the phone line within minutes.

Jio is tapping a database called Aadhaar, after the Hindi word for “foundation”. It is a cloud-based ID system that holds the details of over a billion Indians. The government’s purpose in setting it up in 2009 was to help the state correctly direct welfare payments to those entitled to them. By early 2017 all Indian adults should have provided their fingerprints, iris scans, name, birth date, address and gender in return for a single, crucial, 12-digit number.

In the public sphere Aadhaar helps to distribute subsidies worth about $40bn a year. Around 300m biometric entries are linked to citizens’ bank accounts, so that money can be paid to them direct. Billions of rupees used to be lost each year through “leakage” of benefits—a euphemism for fraud in India’s often corrupt bureaucracy. Aadhaar has already saved perhaps $5bn, says the government.

But the system was designed with more than just the needs of the state in mind. The team of techies behind the project, led by Nandan Nilekani, a founder of Infosys, a champion of Indian IT, from the outset understood the importance of making Aadhaar available to all who might be able to use it, not just official departments. Aadhaar is open-access and can be used by third parties free of charge. By now, fingerprint readers are a common sight in phone shops,insurance offices, banks and other sellers of regulated products.

Some firms, such as Jio, will use Aadhaar to save huge amounts of time for their customers—not to mention a small forest’s worth of paper. The architects of Aadhaar reckon that is just the beginning. On the top of it, India is building a complex public digital infrastructure, called “India Stack”: a series of connected systems that allow people to store and share their data. These could include bank statements, medical records, birth certificates or tax filings. When connected up to a new payments system called the Unified Payments Interface (UPI), the potential is huge.

Already, businesses ranging from Bangalore startups to international banks operating in India are looking to build new businesses on the capabilities of Aadhaar and the coming India Stack. Venture-capital firms are funding hackathons to encourage software developers to come up with new ways to use the technology. 

Any firm can “ping” Aadhaar to see, for example, if a job applicant is who he claims to be. One Bangalore startup, Babajob, does this for the service staff it connects to employers. It can instantly verify if a potential employee’s name and age matches that attached to the phone number he is calling from, that is in the Aadhaar database (or he must supply a code number received by text). It can be done remotely, an advance over card-based ID schemes. A similar, more secure check, using iris scans or fingerprints, can be done with mobile phones or tablets with Aadhaar-compatible iris scanners (at under $200).

This is no small feat: merely establishing someone’s identity is grit in the wheels of commerce. A typical firm in India spends some 1,500 rupees ($22) obtaining and validating client data, be it to bring a taxi driver onto a ride-hailing platform or to accept a new mutual-fund customer. Bringing down the cost can vastly expand a firm’s target market. If a lending outfit, for example, can afford to spend only 0.5% of the value of a loan on such tasks, its smallest credit will be 300,000 rupees, an amount which will limit it to the richest 15m Indians, says Sahil Kini of Aspada, a venture-capital firm. Reduce the validation cost to 10 rupees—the figure many in Aadhaar circles use—and you can viably lend to over 500m people.

The benefits of cheap, secure ID could go further. Mr Nilekani argues that verifying identity, and in turn reputation, is ever more important in business: consider star-rating systems devised by firms such as eBay, an auction giant, or Uber, a ride-hailing firm. Web users now often establish their identity using logins for Facebook, Google or WeChat to access third-party services such as newspaper websites. But none can claim to rest on a person’s real, verified legal identity in the way Aadhaar-accessed services can.

It all stacks up

For now, the Aadhaar system is used chiefly to confirm identity (which has been done 3bn times since 2010) and to share know-your-customer information such as someone’s address (300m times in the past year). But since any information can be linked to a sort of digital “locker” tied to each Aadhaar ID, there are more possibilities. A file of past digital interactions—a sort of eBay star system accumulated over different services—could also be attached. This would most obviously be useful in financial services, particularly among those who have little or no access to them now.

A potential borrower could allow a lender to have access to anything linked to his Aadhaar number: his bank statement, utility-bill payments, life-insurance policy, university diplomas and much else besides. “It increases trust,” says Mr Nilekani. “You can combine proven legal identity with lots of data. You become trustable.” Sean Blagsvedt, the founder of Babajob, compares India Stack to the advent of the social-security number system in America, which paved the way for credit bureaus, credit cards, mail-order services and, later on, e-commerce.

The economic consequences are sizeable. Instead of borrowing against assets, as is currently the norm in India, people could borrow against projected cashflows proven by past tax returns, for example. Better yet, “digitally driven” credit would shift people into the formal economy and away from the informal realm where nine in ten Indians currently work.

Another element of India Stack, the UPI, a payments system, was launched in August. Under pressure from regulators, banks have agreed to let their customers send or receive money not just through their banks’ apps but through third-party ones as well. A client of State Bank of India, for example, can just as easily make payments from his account through PhonePe, a subsidiary of Flipkart, an e-commerce website, or any other of about two dozen UPI-based apps. Mr Nilekani speaks of a “WhatsApp moment” for Indian banking, in which newcomers usurp sleepy banking incumbents, much as the American messaging app deprived telecoms operators of revenues from text messages.

Techno-optimism always warrants some caution. Just because Aadhaar has succeeded in slashing subsidies fraud does not mean the products built atop it will catch on. The UPI apps received a one-off boost from the government’s push forcibly to “demonetise” the economy (it cancelled banknotes representing 86% of all cash on November 8th), but other, private PayPal-like services did much better.

Still, other public technologies have prompted big leaps when opened to private enterprise. Once available to the general public from 2000, the GPS location system (previously reserved for the American military that developed it) did more than merely disrupt map-making firms. In time, GPS spawned Google Maps, which in turn facilitated Uber. Backers of Aadhaar argue that no one can imagine what will be built around the platform in years to come any more than the internet’s pioneers three decades ago could foresee social media or bitcoin, a digital currency.

Privacy campaigners worry that it has Orwellian overtones. In theory it remains voluntary to enroll in Aadhaar. In practice it is compulsory, since it is becoming the only way to gain access to important social services. Wary of relying on a state-backed scheme, American tech giants have treated it cautiously. Google has expressed enthusiasm for its potential, but it and Apple have yet to agree to install Aadhaar-compatible scanners on their phones.

For India’s citizens, who can use Aadhaar and India Stack to mobilise their data for their own benefit, the advantages are clearer, starting with access to cheaper credit. Some of the system’s teething problems—one hurdle has been that the hands of many manual labourers are so worn that Aadhaar cannot register their fingerprints—show just what an advance the technology could be. Indian businesses will have the chance to serve and make sense of legions of new customers. Like the scanners it utilises, the scheme’s potential is not hard to put your finger on. 

The other kind of immigration

The flow of people from poor countries to other poor countries is little-noticed but vital.

IN MOST ways, it is a typical immigrant success story. Ouesseni Kaboréq was once a butcher in Burkina Faso, a poor, landlocked west African country. Encouraged by an uncle who was flourishing abroad, he left his country in search of better-paying work. He has done so well that he now employs 41 people. All but two are immigrants like him. The natives cannot bear to get their hands dirty, he says.

But Mr Kaboréq did not migrate to Paris or New Jersey. Instead he crossed just one land border, into neighbouring Ivory Coast. He works in the large meat market in Port Bouët, on the outskirts of Abidjan, near a store that demonstrates its classiness with a picture of Barack Obama on the awning. Mr Kaboréq is not the kind of immigrant whom economists obsess over, nor the kind who irks voters and brings populists to power in the West. But his kind is already extremely common, and is set to become more so.

International migration can be divided into four types. The most important is the familiar one, from developing countries to developed ones. About 120m people alive today have made such a move, calculates the McKinsey Global Institute, an arm of the consultancy—from Mexican grape-pickers in California to Senegalese street vendors in France. But the second-largest flow is between developing countries (see chart). Between 2000 and 2015 Asia, including the Middle East, added more immigrants than Europe or North America.

Some are war refugees, like the Syrians who live in Jordan and the Somalis in Ethiopia and Kenya. But many developing-world migrants are like Mr Kaboréq: people who leave a poor country for a somewhat less poor neighbouring one in search of higher wages. The World Bank estimates that 1.5m migrants from Burkina Faso alone live in Ivory Coast. Relative to Ivory Coast’s population of 23m, Burkinabé immigrants are more numerous than Indians in Britain, Turks in Germany or Mexicans in America.

Ivory Coast is still very poor—about as poor as Bangladesh. It is, however, better off than Burkina Faso. Batien Mamadou, a farm labourer who works 120km north-west of Abidjan, says wages are at least twice as high. And Ivory Coast is a much better place to start a business. The contrast between the two countries is like the difference between a grand African home and the White House, says Bernard Bonane, who fled Burkina Faso following a coup in 1987 and now runs a security firm. 

Mr Bonane, who lives in a stylish house in a street crawling with guards, says that few of his neighbours are immigrants. That, he thinks, is because most new arrivals send money home rather than splashing out on property. The World Bank estimates that $343m in remittances flowed from Ivory Coast to Burkina Faso in 2015. The exact amount is unknowable, not least because the two countries share a currency, meaning money can easily be moved across the border in ways that officials do not notice. But the importance of these short-range remittances is plain. Ivory Coast is thought to account for fully 87% of all remittances to Burkina Faso.

Rather little of the cash that flows out of the world’s richest countries ends up in the poorest ones. Gulf states such as Dubai and Saudi Arabia take in millions of remittance workers from lower-middle-income countries such as India, but hardly any from really poor ones such as Chad and Malawi. The world’s poorest people cannot afford to travel to the West or the Gulf.

They can, however, hop on buses bound for nearby countries. “The poorer the people, the shorter the distance they want to travel,” says Dilip Ratha of the World Bank. Such migrants might not be able to send much money home, but what they do send is badly needed. Whereas fairly poor countries like Nigeria can send many people to the West, households in very poor countries like Mali depend on workers who have migrated within west Africa (see chart in this article).

Neighbouring countries often share a language and sometimes a currency. Tribes often span borders, too: national boundaries in Africa were drawn to suit colonial powers, not to accord with cultural and ethnic divisions. All that smooths the migrant’s path. And although south-south migrants tend to have informal jobs, as farm labourers, builders, market traders and so forth, this is no special hardship. In rich countries, where most workers have above-board jobs, informal work is precarious and exploitative. In poor and middle-income ones it is the norm.

Widespread though migration is in west Africa, it cannot match the mighty human rivers of Asia. In November India’s home-affairs minister, Kiren Rijiju, declared that about 20m people from Bangladesh were living illegally in India. Sanjeev Tripathi, the former head of India’s Research and Analysis Wing, thinks that an overstatement. His estimate, based on census data, is that more than 15m Bangladeshis are living in India. If either is right, the Bangladesh-to-India migration corridor is the largest in the world.

It is also one of the most fraught. Immigration from Bangladesh not only raises anxieties about national security; it also suggests to those who worry about such things that a predominantly Hindu society is being diluted. In the 1980s students in Assam, a state that touches Bangladesh, led a revolt against mass migration and forced the national government to introduce tougher laws. Nationalist politicians still make hay out of the issue. Narendra Modi, India’s prime minister, has accused Bangladeshis of “destroying” Assam and has insinuated that rhinos are being killed to make space for immigrants.

In fact Bangladeshis are spread across India. One of them is Salma, a young woman living in Navi Mumbai, a suburb of India’s commercial capital. She was brought to India as a child by her parents, who later returned to their farm in Bangladesh. She is married to an Indian man and has children, who go to school in India. She even has Indian identity papers, which say, falsely, that she was born in Kolkata. Sometimes she is turned down for jobs when she tells people her name. But many Mumbai employers are too hungry for workers to care. Salma was recently hired to work in one house on the condition that she stay out of the kitchen.

Sometimes Indian police officers round up Bangladeshi immigrants and push them over the border. “But they often come back,” says a cop in Mumbai. “They have to earn a living.” Even in Assam, where feelings run high, just 2,442 illegal immigrants were deported between 1985 and 2012, according to a report by the state government. Asked for their papers, suspected illegal immigrants say they will fetch them, then disappear. Or they produce false documents. “If you pay money, you’ll get any papers you want,” says Mr Tripathi.

The World Bank estimates that more money is remitted to Bangladesh from India—$4.5bn in 2015—than from any other country. As in west Africa, this is an economic lifeline. Remittance workers tend to respond quickly to economic shocks in their home countries: the flow of money to Nepal jumped after the Gorkha earthquake in April 2015, for example. And studies of other countries show that remittances are commonly invested, especially in children’s education.

Following footsteps

It is likely that developing-world migration will become even more important. In the 1970s the world looked fairly simple, point out Gordon Hanson and Craig McIntosh, both academics at the University of California, San Diego, in a new working paper. The global south was poor and had lots of children; the global north was rich and had few. People tend to move not just from poorer countries to richer ones but also from countries with high birth rates to those with low ones. The imbalance between North America and Latin America fuelled the northward migration that so distresses some American voters.

By mid-century China, India and almost all of Latin America, including Mexico, will be members of the low-fertility club. Only sub-Saharan Africa will still be having a baby boom. If UN projections are right, in 2040 more than a third of all children under the age of 14 will be living in Africa. Mr Hanson and Mr McIntosh predict huge pressure for migration from Africa to Europe, making the Mediterranean into a new (somewhat wider) Rio Grande.

Yet that pressure will not necessarily find an outlet, says Michael Clemens of the Centre for Global Development, a think-tank. European voters are not keen even on current levels of immigration and will be still less enthused by a doubling or even a tripling of their immigrant populations. So there will be an enormous number of potential African migrants and not enough places for them in the West. They are highly likely to head for other African countries, for the Middle East and perhaps even for Asia. Countries such as China and South Korea have resisted mass immigration, but they badly need more young people. In short, says Mr Clemens, south-south migration is likely to grow a lot.

Many poor countries are unprepared for an influx, and unwilling too. Purges of migrants are already common. Pakistan is trying to evict hundreds of thousands of Afghan migrants; Gabon is kicking out immigrants from central Africa; Thailand has expelled Cambodians. But many slip the net. Many Burkinabé migrants were pushed out of Ivory Coast during the civil war that erupted in 2002, only to return. Burkina Faso is too poor, too politically unstable and, for people who have lived in Ivory Coast for years, too foreign.

“They will never go back,” says Moumouni Pograwa, who runs a mining and construction company in Abidjan and is an unofficial spokesman for Burkinabé. Recently Mr Pograwa offered to help immigrants whose homes had been demolished in a slum clearance. Would any of them perhaps like a bus ticket to go back to Burkina Faso? Of perhaps 4,500 people who had been evicted, just two took him up on the offer.