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Time has come to fix failing bird flu defences


LEADER

Dec 10, 2008           
     
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Our city's elaborate defences against bird flu have, once again, been breached. This time, dead chickens at a farm in Yuen Long have been confirmed to be infected by the H5 virus. The government must move swiftly to discover the source of the infection and review the system. It is clearly not working as well as it should do.

Most worrying is the discovery that chickens which had been vaccinated against the potentially deadly virus are among those infected. This would seem to confirm warnings sounded earlier in the year that the effectiveness of the vaccine, such an important component in our defences, is fading. Steps must be taken to ensure that, as far as possible, vaccines provide adequate protection.

There is a disturbing sense of deja vu about the return of the bird flu virus. It was only in June that poultry at four wet markets were found to be infected, leading to the culling of thousands of birds. The latest outbreak is a reminder that we remain vulnerable, despite all the efforts that have been made to guard against the virus.

About 80,000 chickens at the affected farm and 10,000 more it had sent to a wholesale market will have been culled by today. The import and export of live chickens will be banned for three weeks. Retail and wholesale markets have been shut as workers start disinfecting facilities. These are necessary measures, but not long-term solutions.

It is too early to determine the extent of the outbreak. Inspectors are collecting and testing samples from other farms and markets. Hopefully, the latest incident is confined to the single farm known to be affected so far. Its owner is to be commended for speedily reporting the incident to the authorities. But, if it had involved a less responsible owner, detection would have taken much longer, and the virus would have had more time to spread.

The infection of vaccinated birds raises fresh concerns. Scientists who monitor the vaccination programme have been warning about its declining effectiveness. The government introduced vaccination at all local farms in 2003. University of Hong Kong microbiologists say we are not far from the day when the vaccines will become useless. Worse, they warn that some vaccinated chickens may not show symptoms and so spread the virus as "silent carriers". Hong Kong has been using the same vaccine for years. It is time to consider whether a change would improve prevention.

Bird flu is a deadly threat to public health. The surest way to contain it is to end the live poultry trade. Yet, despite the September buyout deadline the government imposed on traders, a significant minority of retailers, wholesalers and farmers have refused to trade in their licences. They will continue in business until the government introduces central slaughtering. Now that the government is pushing for more public works to create new jobs in this economic downturn, it should make building a central slaughtering facility a priority. The latest outbreak shows there is no time to waste.


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One U-turn too many
To err is human, but repeated policy reversals suggest something is amiss with the government - and raise doubts about its credibility

POLITICS
Daniel Sin
Dec 11, 2008           
     
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It is somewhat ironic that the latest trouble to strike Donald Tsang Yam-kuen's government should have been caused by protests against another administration. On December 1, the government reversed its decision not to send charter flights to pick up Hong Kong residents stranded in Thailand by protests against the Thai government of Somchai Wongsawat which had closed Bangkok's international airport.

The U-turn came after it emerged that Hong Kong traveller David Yick Hok-ying had died in a road accident when rushing to Phuket to catch a flight home. By itself, it might have been seen as a policy change driven by circumstances and quickly forgotten.

However, the incident was the latest in a series of policy U-turns under strong public pressure which, taken together, have critics questioning the government's credibility and even its competence.

"The government has not thought through the implications and consequences before promulgating changes," said former chief secretary and lawmaker Anson Chan Fang On-sang. "Such knee-jerk reactions suggest a vacuum in leadership and dysfunctional government machinery."

The government's latest problems can be traced to May and the decision to appoint eight undersecretaries and nine political assistants as part of the process of augmenting the political appointment system.

When it was reported in the media that some of the appointees held foreign passports or had been given quantum leaps in salary, there was a public outcry and many lawmakers demanded full exposure of their nationality status and remuneration packages.

The government's initial response was that such personal information would not be disclosed. But, following public pressure, it changed tack, announcing on June 22 that all future political appointments would have their pay made public. A week later it said that nationality status would be disclosed as well.

Within weeks, Mr Tsang had stumbled into a row over the suspension of the levy on foreign domestic helpers. The two-year suspension, announced on July 16 as part of an HK$11 billion package of handouts, was to apply from September, but the start date was advanced to August 1, to reduce the burden on the middle class. When lawmakers pushed for the levy to be abolished altogether, the government was at first firm in resisting the proposal. Then, on November 11, it took a new course of action, extending the suspension for a further three years to July 31, 2013.

More trouble followed on August 1, when former buildings chief Leung Chin-man was appointed executive director and deputy chairman of New World China Land (SEHK: 0917), a mainland subsidiary of New World Development. The appointment immediately raised questions about a possible conflict of interest because Mr Leung had been involved in the sale of the Hung Hom Peninsula housing estate to New World Development in 2004. The controversy sparked debate over the system for safeguarding against conflicts of interest in post-retirement employment.

The Civil Service Bureau at first refused to reopen the case, nor would it review the system. But, on August 15, following a chorus of criticism, Mr Tsang instructed Secretary for the Civil Service Denise Yue Chung-yee to re-examine the case. The government followed up by setting up a committee headed by Ronald Arculli to review the system for approving post-service employment.

A month later, on October 15, Mr Tsang told the Legislative Council that the government planned to review whether it should raise the old-age allowance or "fruit money" to HK$1,000 a month on a means-tested basis. Following strong public criticism, Mr Tsang aborted the review and increased the allowance to HK$1,000 for all eligible people, using the existing system.

Then there was Thailand.

Two weeks ago, Hong Kong travellers were reported to be stranded in Thailand after anti-government demonstrators succeeded in closing Bangkok international airport. On November 30, Deputy Secretary for Security Ngai Wing-chit ruled out sending charter flights to pick them up. The position was reversed over the weekend. Chief Secretary Henry Tang Ying-yen later explained that it had been "a collective decision and it [was] also the responsibility of the whole governing team".

Radical lawmaker Wong Yuk-man, of the League of Social Democrats, said: "[It is undesirable that] the government announces a policy in the morning and changes it at night. What is worse is that the policies made were wrong in the first place. The government said that its decisions were made according to established procedure. From the effects of what happened, it was clear that the procedures were too rigid and inflexible."

Chinese University political scientist Ivan Choy Chi-keung said the government's policy reversals show it lacked public support. "The government can only keep shifting its ground because it cannot secure enough votes in Legco to avoid defeat," he said.

Mr Choy said the policy U-turns demonstrated to opponents that, if they were prepared to put sufficient pressure on the government, it would eventually give way.

For Mrs Chan, repeated policy changes reflected badly on the accountability system. "The so-called `accountability system' is clearly not working. No one is at the helm and it seems from the chief secretary's recent puzzling reference to `collective decision and collective responsibility' that, at the end of the day, no political officer need be held responsible at all," she said.

Mrs Chan also questioned why the government should ask the permanent secretary for security - a civil servant supposed to be politically neutral - to publicly defend a political decision.

"The government owes the public an explanation on who is in charge when the responsible policy secretary is away from Hong Kong - and I don't mean just responsible for answering questions in the Legislative Council - and what is the role of the chief secretary in co-ordinating and defending the government's action?"

Lawmaker Tam Yiu-chung, chairman of the Democratic Alliance for the Betterment and Progress of Hong Kong, said there were objective reasons for the government to have made drastic changes in the past few months, and, in general, policy changes might be necessary at times.

"It is necessary for the government to adjust its policies to respond to public opinion. That is quite normal. I would find it unacceptable if the government insisted on something that the public strongly objected to," he said.

Mr Tam said the best strategy for avoiding damaging U-turns was by being more careful in assessing the public reaction before introducing a policy. The art of damage control lay in the ability to be frank and honest, he said.

"In the traditional policymaking process, civil servants stress continuity and rely heavily on precedents. But such practice may make it difficult for the government to respond to the rapidly changing social environment and public expectations," he said. "When the government has to backtrack, it should admit publicly that it has failed to assess the situation accurately, and should be prepared to go along with the public demand."

City University professor Joseph Cheng Yu-shek said it was not uncommon for politicians or governments elsewhere to reverse decisions and, in many cases, they were effected without too much public outcry.

"To err is human. Governments can make mistakes. In cases like the decision on whether to send charter flights to Thailand, it should be acceptable for the government to admit that it could not master the situation on the ground. Very few people in Hong Kong would be competent enough to tell what was going on in Thailand," said Professor Cheng.

"Just look at how the US government shifted policies in handling the financial meltdown. It was adamant at first that public funds would not be used to rescue certain corporations yet, shortly after, it committed to helping them."

Professor Cheng said policy  U-turns hurt the government's credibility, but there were certain basic techniques to minimise damage.

"Honesty is the best policy. If the government decides to reverse its decision, it must come clean and admit that it had made a wrong decision and convince the public why a change of policy is necessary, and what a reasonable compromise solution should be," he said. "On the other hand, if the government has a strong ideological conviction, and has an important value to defend, it may have to stand firm."

Professor Cheng said the government should already have the skills and means to avoid such policy embarrassments.

"The government has a good system and practice. There are mechanisms that ensure that all the stakeholders are consulted, evaluations are made on public reaction, and assessments are made on whether majority support can be obtained in Legco. There are tools and means where the government can gauge the public pulse," he said.

"In the cases such as the suspension of the foreign maid levy, the government should have kept an inventory of measures which could be implemented when it had the resources and which could be cut when it was in deficit. This would enable the government to churn out sound proposals within a short time."

Mr Choy said that one way the government might consider avoiding policy shifts was by expanding its base.

"The government could consider incorporating pan-democrats into the Executive Council. There is no need to exclude them," he said.


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Turmoil could spark the unravelling of 'Chimerica'


Michael Richardson
Dec 12, 2008           
     
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In his book, The Ascent of Money,  historian Niall Ferguson describes the emergence of a new post-cold-war superstate, Chimerica, a fictional combination of China and the US. "For a time, it seemed like a marriage made in heaven," he writes. "The east Chimericans did the saving, the west Chimericans did the spending." Chinese benefited from export-oriented economic growth and rising living standards; the Americans from cheap imports and low inflation.

Will the bond of mutual interest survive the global financial turmoil and deepening recession? A few weeks ago, David McCormick, US Treasury undersecretary for international affairs, said that Beijing had been "a responsible participant and ally" in dealing with the crisis. Treasury Secretary Henry Paulson was in Beijing last week heading a cabinet-level team of US officials in talks with their Chinese counterparts on how to continue bilateral co-operation.

But, with president-elect Barack Obama due to take over next month, there is no assurance that the twice-yearly US-China Strategic Economic Dialogue, established by the Bush administration in 2006, will remain in place. During his election campaign, Mr Obama accused China of keeping the yuan weak and using other unfair means to expand exports and dampen imports.

At about the same time that Mr McCormick praised China, Russian Prime Minister Vladimir Putin urged Beijing to jettison the US dollar in favour of national currencies in bilateral trade. The appeal appeared to leave his visiting Chinese counterpart, Wen Jiabao , unmoved. Sino-Russian trade was worth US$43 billion in the first nine months of this year. It was dwarfed by the US$305 billion in trade that China did with the US in the same period.

China's accumulated trade surpluses, particularly with the US and Europe, have helped it amass the world's largest foreign exchange reserves, some US$2 trillion. Analysts say China has invested up to US$1.5 trillion of that in US debt, including that issued by the now government-controlled mortgage finance giants Fannie Mae and Freddie Mac.

China's prominent role as creditor to an increasingly indebted US was underlined by US Treasury figures released last month showing that, in September, China overtook Japan to become the largest owner of Treasury bonds, bills and notes, with US$585 billion of these securities.

The unwritten compact between Beijing and Washington is: Chinese credit in exchange for access to the US market. China needs to export to earn foreign exchange and for US consumers to keep buying its goods. So mutually dependent are the two economies that, if the US slowed by 1 per cent, China would slow by 1.3 per cent, Citigroup researchers estimate.

Derek Scissors, a research fellow in Asia economic policy at the Heritage Foundation in Washington, casts this mutual dependence in even more dramatic terms. "Our trade deficit with China was the equivalent of 6.5 per cent of China's gross domestic product through September," he said. "China is helping us try to avoid a 2 to 3 per cent decline in GDP in 2009 and 2010; we are enabling them to avoid a 6 to 7 per cent decline every year."

China and the US are like conjoined twins. They can only be separated by complex surgery that may result in death or severe disablement.

Chinese officials and analysts suggest that China will retain, and probably increase, its holding of US Treasury securities for the foreseeable future, provided it is confident America will recover from the credit crunch and recession. But the crisis has prompted Beijing to rethink how to manage its economy in future.

Expanding domestic demand and reducing reliance on exports are likely to be hallmarks of any new regime. Shocked by the sudden storm of adversity, China will not want to be so heavily dependent for economic health on any one country again.

Michael Richardson is an energy and security specialist at the Institute of Southeast Asian Studies in Singapore. [email]mriht@pacific.net.sg[/email]


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Time is running out
The economic crisis calls for aggressive government action to avoid a lengthy period of 'stag-deflation'

Nouriel Roubini
Dec 16, 2008           
     
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The latest macroeconomic news from the United States, other advanced economies and emerging markets confirms that the global economy will face a severe recession next year. In the US, recession started in December last year, and will last at least until December 2009 - the longest and deepest US recession since the second world war, with the cumulative fall in gross domestic product possibly over 5 per cent.
The recession in other advanced economies - the euro zone, Britain, European Union, Canada, Japan, Australia and New Zealand - started in the second quarter of this year, before the financial turmoil in September and October further aggravated the global credit crunch. This contraction has become even more
There is now also the beginning of a "hard landing" in emerging markets as the recession in advanced economies, falling commodity prices and capital flight take their toll on growth. Indeed, the world should expect a near-recession in Russia and Brazil next year owing to low commodity prices, and a sharp slowdown in China and India that will be the equivalent of a hard landing - growth well below potential - for these countries.

Other emerging markets in Asia, Africa, Latin America and Europe will not fare any better, and some may experience fully fledged financial crises. Indeed, more than a dozen emerging-market economies now face severe financial pressures: Belarus, Bulgaria, Estonia, Hungary, Latvia, Lithuania, Romania, Turkey and Ukraine in Europe; Indonesia, South Korea and Pakistan in Asia; and Argentina, Ecuador and Venezuela in Latin America. Most of these economies can avoid the worst if they implement the appropriate policy adjustments and if the international financial institutions - including the International Monetary Fund - provide enough lending to cover their external financing needs.

With a global recession a near certainty, deflation rather than inflation will become the main concern for policymakers. The fall in aggregate demand, while potential aggregate supply has been rising because of overinvestment by China and other emerging markets, will sharply reduce inflation. Slack labour markets with rising unemployment rates will cap wage and labour costs. Further falls in commodity prices - already down 30 per cent from their summer peak - will add to these deflationary pressures.

Policymakers will have to worry about a strange beast called "stag-deflation", a combination of economic stagnation/recession and deflation; about liquidity traps, when official interest rates become so close to zero that traditional monetary policy loses effectiveness; and about debt deflation - the rise in the real value of nominal debts, increasing the risk of bankruptcy for distressed households, firms, financial institutions and governments.

With traditional monetary policy becoming less effective, non-traditional policy tools aimed at generating greater liquidity and credit - via quantitative easing and direct central bank purchases of private illiquid assets - will become necessary. And, while traditional fiscal policies, such as government spending and tax cuts, will be pursued aggressively, non-traditional fiscal policy, such as expenditures to bail out financial institutions, lenders and borrowers, will also become increasingly important.

In the process, the role of states and governments in economic activity will be vastly expanded. Traditionally, central banks have been the lenders of last resort, but now they are becoming the lenders of first and only resort. As banks curtail lending to each other, to other financial institutions and to the corporate sector, central banks are becoming the only lenders around.

Likewise, with household consumption and business investment collapsing, governments will soon become the spenders of first and only resort, stimulating demand and rescuing banks, firms and households. The long-term consequences of the resulting surge in fiscal deficits are serious. If the deficits are monetised by central banks, inflation will follow the short-term deflationary pressures; if they are financed by debt, the long-term solvency of some governments may be at stake unless medium-term fiscal discipline is restored.

Nevertheless, in the short run, very aggressive monetary and fiscal policy actions - both traditional and non-traditional - must be undertaken to ensure that the inevitable stag-deflation of next year does not persist into 2010 and beyond. So far, the US response appears to be more aggressive than that of the euro zone, as the European Central Bank falls behind the curve on interest rates and the EU's fiscal stance remains weak.

Given the severity of this economic and financial crisis, financial markets will not mend for a while. The downside risks to the prices of a wide variety of risky assets, such as equities, corporate bonds, commodities, housing and emerging-market asset classes, will remain until there are true signs, towards the end of next year, that the global economy may recover in 2010.

Nouriel Roubini is professor of economics at the Stern School of Business, New York University. Copyright: Project Syndicate


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Easing the burden
A key review of how the government plans and funds social welfare could finally offer a fix for the 'ad hoc' system

WELFARE
Sarah Monks
Dec 17, 2008           
     
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Is Hong Kong finally going to fix chronic problems in how it plans and funds social welfare, a system often criticised as "ad hoc", "short term" and hostage to "whoever shouts loudest"? Wilfred Wong Ying-wai believes so. He is confident that another page will be turned for a welfare system under increasing stress from rapid economic and social change.

Mr Wong, a senior civil-servant-turned-businessman, recently stood down after six years as chairman of the government's 22-member Social Welfare Advisory Committee (SWAC). It was asked last year to produce a blueprint for Hong Kong's future social welfare system, along with "strategic principles" to guide future planning, a process expected to take another year.

Separately, Mr Wong will soon complete an independent review for the government of its problematic "lump sum grant" system, introduced in 2000 as a mechanism for dispensing funds to some 160 non-governmental organisations providing welfare services. He said the committee he chaired would recommend many changes.

A key issue is how to reconcile the fact that many NGOs need to plan for the longer term in light of changing welfare demands while the government only commits funds year by year, with amounts varying according to the state of the public coffers.

It wasn't always like this. The welfare system used to be based on rolling five-year plans that implemented policy objectives set out in white papers after comprehensive reviews. That approach was scrapped after 1999 because it was considered rigid and bureaucratic. Now, the government consults the welfare sector "from time to time" on service priorities and broad strategies.

Few lament the passing of the five-year-plan era, with its micromanagement by government and constant tugs of war with NGOs over money. But many in the sector think welfare planning has suffered since the last white paper was issued, 17 years ago. They are concerned that the system is unable to respond quickly enough to emerging needs.

"Hong Kong has changed so much. But we really haven't had a very comprehensive review of the strategy or direction of our social welfare policy," said Chua Hoi-wai, business director at the Hong Kong Council of Social Services. He cited social trends, such as a doubling of the number of single-parent families in the past decade.

He said there was a lack of integration in efforts to address many of today's welfare issues. One example was how the system responded to the problem of "night drifters" - teenagers staying out on the streets all night.

"The government's way was only to fix the problem, just to find somebody to take care of them," Mr Chua said. "Our thinking would be that we should lay out all the issues then try to work out a more cohesive, coherent way of dealing with them." This would mean "joining up" day and night services for such teenagers and adopting a "developmental" approach to help them "find the meaning of life and get back into school".

University of Hong Kong professor of social work Nelson Chow Wing-sun, a veteran observer of social welfare development in Hong Kong, said that while the government had spent more on people's livelihoods since the handover, its approach had become more politicised.

"It has nothing to do with social welfare development planning. Rather, the purpose of all these short-term measures is to gain popularity," said Professor Chow. "There are certain problems or outcries; certain groups of people urge the government to do more in certain areas, so the government has agreed to spend more. I think people are fed up with these piecemeal, ad hoc things."

Spending on social welfare has risen 123 per cent since the handover - from HK$17 billion in 1996-97 to HK$38 billion this year - second only to education spending.

One reason is the surge in the number of able-bodied, working-age people receiving Comprehensive Social Security Assistance, up from about 112,000 a decade ago to some 209,000 now. This is largely due to the disappearance of hundreds of thousands of blue-collar jobs in Hong Kong since the 1980s, which has left many working poor with no option but welfare.

"The trouble is that we have 1 million workers with very little education and who have worked in one occupation, such as construction or restaurants, for 30 or so years. They're still only in their late 40s," said Professor Chow.

"For this group of people, who have the capacity to work, we should not just give them support for basic living but get them back to work."

Professor Chow said there should be a separate category of CSSA offering the unemployed a more generous amount for a short period so they could dress better for, and have enough money to travel to, job interviews. That should be combined with more effective retraining, he said.

Unionist legislator Lee Cheuk-yan said Hong Kong's social welfare system did not offer enough protection for the working poor. Nor was it geared to middle-class families going through a crisis because of job losses. He said the government's only answer to poverty was the CSSA.

"It doesn't fit the so-called white collar unemployed, who may have their own housing and a mortgage to pay. They don't qualify as CSSA recipients. So there is no safety net in the sense that, when there are accidents in life, like unemployment or sudden reduction of wages, there is nothing to cushion them."

Mr Lee noted that the middle class had been hit hard twice in a decade, with the Asian financial crisis 10 years ago and the outbreak of severe acute respiratory syndrome five years ago. Now Hong Kong was facing another "white-collar recession" brought on by the global financial slump.

"We're in uncharted waters because, in the past, there was ample opportunity for the children of a poor family to have social mobility," he said. "Now we see a downward trend. Even the middle class is going down the ladder because of the latest financial crisis we're going through."

Mr Lee estimated there were about 300,000 "lower-middle class" families, who were vulnerable to layoffs and wage reduction if they were not in relatively secure jobs like teaching or the civil service.

Creating jobs with infrastructure projects during the downturn would have a limited ripple effect, he said. "We need more jobs in the white-collar or service areas. How about investing more in child care and elderly care? It can create jobs and also tackle social needs."

Mr Lee said social welfare spending should be seen as social investment rather than "pouring out money" for the poor and needy. "We should change our language," he said. "Social investment has a return. If people have more security and confidence in the future, it's also good for the economy. This [change] needs to start from government. They need to have a new way to look into social needs and social welfare."

Professor Chow said he would support the introduction of a guideline setting out the government's social welfare aims, policy and priorities, rather than a plan that tries to pin down specifics. Children should come first in social welfare, the family should be strengthened and the community used for delivery of services, he said.

Mr Wong believes the NGOs and government together are doing a good job on social welfare. "Let's not belittle them. I think it's a matter of how we cope with the rapidly changing social and economic environment."

The government had already reorganised, he said, to bring welfare and labour together in one bureau for better policy co-ordination. It was now aware of what was missing in its social welfare approach.

"That's why they've asked us to do the lump sum grant review and asked SWAC to do the welfare planning. It's really in the hope we could get all the inputs so that a clearer direction can be decided." The first round of consultation for the SWAC review ended recently, receiving 26 written submissions.

Mr Wong said social welfare in Hong Kong should have a mechanism that was a timely reflection of changing community needs. It also needed more policy research by academics into problems and needs stemming from changing social patterns. "The government should put more funding into this cross-border situation, with cross-border marriages and old people retiring and going back to [mainland] China."

Mr Wong pinpointed contradictions in the current system, compounded by "some mistrust" between the government and NGOs. "The government is probably still exercising too much control," he said. "They're not allowing all the flexibility that has been promised, whereas the welfare sector is not doing enough thinking on what it should be doing under that system, for example by re-engineering [their services]."

As the government saw it, he said, for the past eight years, NGOs had been given money and it had been left up to them to decide how to spend it, as long as they delivered the required services. As the welfare sector saw it, needs were changing so quickly that they barely had the resources to deliver old services, let alone introduce new ones.

"If the lump sum system operates well and the planning system comes into place, then I think the missing links are going to be there," said Mr Wong.

He noted that what the government was thinking and doing on social welfare was seldom articulated. By the same token, neither the media nor the public had been very interested in the technicalities of the system.

"The social welfare system in Hong Kong has evolved into a very complex system," said Mr Wong. "I've been the chairman of SWAC for six years. I've now spent almost a year on the lump sum grant. And, God, I'm still learning. I'm unearthing things every day."


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American conservatives have lost the plot


Doug Bandow
Dec 18, 2008           
     
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Although Barack Obama will be setting the policy agenda in the United States next year, John McCain's defeat has set off a scramble to control the Republican Party's ideological soul. Republicans must learn from their mistakes, which seem to grow more obvious every day.

For instance, the embrace by both the Bush administration and Senator McCain of Georgia's unstable president, Mikheil Saakashvili, was especially foolish, as evidence continues to accumulate that Georgia was the aggressor.

Georgia has a convoluted history typical of Central Asia. There was no obvious reason to support either side when war with Russia erupted in August. True, Mr Saakashvili is American-educated and took power with US support. But he has exhibited a brutal edge.

Today Georgia is a "semi-authoritarian" state, argues professor Lincoln Mitchell, of Columbia University. After being accused of murder in September 2007 by his former chief prosecutor (and later interior minister and defence minister) Irakli Okruashvili, Mr Saakashvili had Mr Okruashvili arrested and, many think, tortured, after which the latter recanted his charges. The Saakashvili government also targeted journalists, shutting down critical broadcasters.

Then came the war. It has become increasingly obvious that Georgia struck first in August, lighting "a match in a roomful of gas fumes", as former secretary of state Colin Powell put it. The German publication Spiegel Online recently reported that Nato officers "thought that the Georgians had started the conflict and that their actions were more calculated than pure self-defence or a response to Russian provocation". Georgia's assault on Tskhinvali, the capital of South Ossetia, had long been planned, admitted Mr Okruashvili. The attack would have been criminally irresponsible even if Mr Saakashvili had been truthful in claiming that Georgia acted only after separatists shelled Georgian villages.

While Mr Saakashvili was the most culpable party, his American backers were no less irresponsible. Yet they continue to press for Georgia's membership in Nato, which would commit the US to defend Georgia from Russia in any renewed conflict.

If Mr Saakashvili was willing to start a war in the hope that the west would rescue him, imagine what the impetuous, irresponsible demagogue would do if he thought he could count on Nato support.

The American conservative movement has gone badly astray over the past eight years. It's not just the idea of preventive war and nation-building in Iraq. In countries like Georgia, Bush/McCain conservatives have exhibited the sort of arrogant delusions so characteristic of Wilsonian liberalism. As the US conservative movement regroups from its well-deserved defeat, it needs to rediscover America's more restrained foreign policy tradition.

Doug Bandow is the Robert A. Taft fellow at the American Conservative Defence Alliance, and a former special assistant to president Ronald Reaga

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Out of luck
Given the epic annus horribilis, it seems we have used up all the good fortune in the number '8'

Andy Xie
Dec 19, 2008           
     
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A fung shui master told me: "We have offended '8', always putting so much pressure on it to deliver. It's fed up and is taking revenge on us. This is why 2008 is so bad." This must be the most creative explanation for this annus horribilis. It will be remembered as the year that rich people become poor, en masse; US$50 trillion of paper wealth has vanished, often in unusually creative ways.

With the benefit of hindsight, it seemed that the rich and famous were competing to see who could lose money faster. A bewildering array of derivatives exploded violently before investment banks could make margin calls, to turn billionaires into negative billionaires.

Take the accumulator - also known as the "I'll kill you later" - financial derivative. It is merely a long volatility contract. So many poured borrowed money into the product that the volatility price collapsed - that is, buyers were sucked into a bubble of their own. Most of the Hong Kong upper crust may have lost big bucks in this folly. They are known for being stingy and not trusting even blood relatives with their money. So why did they fall for accumulators? Maybe they felt lucky in 2008.

The performance of shares lately appears to have an inverse correlation to the number of eights in the tickers. Last year's initial public offerings tried to squeeze as many eights into their tickers as possible. They were marketed like Prada bags. With famous chief executives and other big-name financial figures backing them, the IPOs came with an aura that one "couldn't lose". Unfortunately, if you bought into them, your wealth will be smaller now. The stock offerings made only the chief executives and their financial backers rich. And yes, their bankers got bonuses, too.

You may think cheating investors is the most immoral path to wealth. Actually, bribing government officials, not repaying bank loans or selling poisonous food seem equally bad. I am sure there are many eights in the amounts of bribes and loans. Even the prices of poisonous milk products may have had a few eights in them. But the lucky numbers didn't stop children dying.

Casinos are more honourable: they at least give better odds. Macau blasted past Las Vegas in gambling revenue last year. The market capitalisation of one casino was bigger than the gross domestic product of Macau itself. The good times kept rolling - until 2008 hit.

Casinos have used the number eight most liberally; it is plastered on walls and gaming tables. Maybe eight is especially angry with them. But at least Macau had it good for a while. Poor Singapore is stuck with unfinished casinos; all cost and no revenue. Even so, the unfinished casinos are still there, and they may pay something back, in the next bubble, better than shares in investment banks.

Now 2008 is going out with a big bang in the form of the Bernard Madoff US$50 billion scam. It seems the best and the brightest are among the victims, as are some of the most august financial institutions. This is more spectacular than the failures of Bear Sterns, Lehman Brothers and the like. Those eminent financial institutions needed elaborate theories, models, whizz kids and tens of thousands of MBAs. Mr Madoff did it all by himself, and he's an old man, too. Indeed, he outsmarted the Wall Street whizz kids who conned people all over the world to get their bonuses; Mr Madoff got their bonuses. But, in the end, eight got him.

A big shadow was once cast by US Federal Reserve chairman Alan Greenspan - so big that many crooks thrived under it. After he walked away, they have been busy finding new shade. But they ran out of time in 2008; eight got them, too. Well, not all of them: I still see many struggling to hold on, waiting for government bailouts.

But there is a silver lining here, too: all the eights at the Beijing Olympics paid off. China won the most gold medals. That is a huge thing, and it gives China a lot of face. If the nation doesn't win as many golds in the next Games, it's OK - we will always have 2008. Maybe eight shouldn't retire, after all.

What about nine? Will 2009 bring better luck? Historically, the number nine carries an unusual significance in Chinese culture. Lucky eight is a Cantonese fixation that has gone national and overwhelmed nine. Maybe nine can stage a comeback. Heaven, they say, has nine levels. But hell is supposed to have 18 levels - or nine times two - which takes some steam out of it. I suppose nine needs to be tested.

If 2009 turns out to be a good year, nine will gain prominence: Macau's casinos may plaster the number all over their walls and gaming tables, replacing eight.

I think the first quarter of 2009 will be very chilly. Companies will report horrific earnings for the fourth quarter of 2008. The current euphoria over the effectiveness of government stimulus packages may cool, and the second quarter may not be much better. The global economy will still be contracting in the first quarter, and the news then won't be that good.

It may feel much better by the middle of next year. The impact of government stimulus, especially in China and the United States, will be felt palpably. Inflation is not yet a serious issue. Central banks could still keep their super-low interest rates. The euphoria may return, but only temporarily. By late 2009, we will be worrying about inflation and rising interest rates in a still-weak global economy. Pessimism will return.

The world has caught a chronic disease. It feels better from time to time after taking medicine, but lapses back into pain soon after. The real recovery will occur only when all the excesses have been washed away with time, and structural reforms have established a new growth model for the global economy. That won't happen in 2009. If nine doesn't succeed, which number will volunteer to try next?

Andy Xie is an independent economist


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Vicious employers, weak laws throw maids into 'new slavery'


LEBANON
Yara Bayoumy
Dec 22, 2008           
     
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An Ethiopian housemaid lies bandaged in a government hospital after falling from a 12th floor balcony. She says her Lebanese employer pushed her off.

"Madam asked me to hang the clothes. Then she came and pushed me from behind," the 25-year-old woman said. Too frightened to let her name be published, she said her employer had frequently threatened and abused her.

"Madam would tell me, `I will spill hot oil on you', so I hid the oil. She would take a knife and threaten to kill me. She would beat me with shoes, pull my hair to the floor," the injured woman said, her face still bruised a month later.

According to the New York-based Human Rights Watch (HRW), nearly every week one of an estimated 200,000 migrant domestic workers in Lebanon dies. Suicide, falling while trying to escape their employer and untreated illness are the main causes of death. The employers are rarely prosecuted.

HRW says maids in Lebanon, as elsewhere in the Middle East and Asia, are vulnerable to beatings, rape and even murder for lack of national laws to protect them from abusive employers.

Live-in housemaids have been a fixture among well-off Lebanese families for years. They often do everything from heavy housework to nannying and helping with children's homework. Many get no days off, work for up to 18 hours and are locked indoors. Others leave the house only to shop or walk a dog.

Employers, who routinely confiscate their passports to deter them from running away, promise to pay maids US$150 to US$250 a month depending on their nationalities. But many employers don't pay as agreed. Some verbally and physically abuse their workers.

They often deduct the first three month's wages to pay a fee to the agencies that import the maids.

"We've definitely seen a lot of cases where the employer would beat, slap [a worker] when she makes a `mistake' - that could be breaking a plate, badly ironing a shirt or burning some food on the stove," added HRW senior researcher Nadim Houry.

When domestic workers get into distress, they may ask their embassies to help, but staff are often overwhelmed. The Sri Lankan embassy, for example, has two people to handle some 80,000 Sri Lankan workers in Lebanon.

The issues are laid bare in a recent documentary, Maid in Lebanon II: Voices from Home, directed by Carol Mansour in co-ordination with the International Labour Organisation (ILO).

The 40-minute film, narrated by a Lebanese woman awaiting the arrival of a maid from the Philippines, provides information about the rights and obligations of employers and workers, the full costs of hiring maids and how they should be treated. "It's so obvious that there is a problem here," Mansour said at her office in Beirut's Hamra district.

"The concept of having somebody at home whose language you don't speak, whom you don't trust, you don't know, who comes from a different culture ... it's a bit weird."

The ILO and other groups have helped set up a committee at the Labour Ministry to try to improve conditions for domestic workers.

One proposal is to approve a standard contract stipulating the rights and obligations of employers and workers, and to add specific legal provisions to guarantee workers' rights.

Abdallah Razzouk, the head of the committee, said he expected the contract to be approved and the draft law sent to parliament "in the immediate future", provisionally early next year.

Now, workers have little recourse if they are not paid. They come to Lebanon under a sponsorship system that ties them to employers. They forfeit any legal status if they run away from abusive employers.

Maids often go unpaid because their employers miscalculate the true expense of employing them. They often think a maid will cost only her US$150 monthly wage, but fail to factor in agency fees, food, clothes, medicine and return tickets.

"That's the biggest problem; people who cannot afford these workers are bringing them in," says Simel Esim, an ILO official.

Indrani, a 27-year-old Sri Lankan, lived for 18 months in a shelter run by the Christian charity group Caritas after running away from an abusive employer.

"I was paid the first year and a half. But then I wasn't paid for the next eight years. When I asked for money, Madam would swear at me, break glasses against the wall. She spoke to me like a donkey," she said recently at the Beirut shelter.

"I was only given some bread and rice to eat. Fruit was forbidden. I woke up at 9am and slept at 4.30 or 5am. I was not allowed to speak to my parents. They thought I had died," she said, tears welling up.

Indrani has since returned home. But, every day, countless other maids are physically and emotionally abused by employers across the Middle East and in Asia, where laws protecting their rights are flimsy, and abusive employers are rarely punished for their crimes.

Even if rights groups persuade the Lebanese government to improve the legal framework for domestic workers, they face a tougher task in changing attitudes among many Lebanese who refer to their maids openly in conversation as "slaves" or "liars and thieves".

"The way a large number of Lebanese deal with them is like a new slavery," Mr Houry said.

Reuters


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Iron congee bowl


PHILIP BOWRING

Dec 23, 2008           
     
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There have been many highlights in Donald Tsang Yam-kuen's long career as a servant of his superiors, British and Chinese - but last week was outstanding. At this time of growing unease in Hong Kong over the recession, there he was again in Beijing to get a pat on the head from President Hu Jintao.

Last Saturday's South China Morning Post (SEHK: 0583, announcements, news) front-page picture of a grinning "Santa" Tsang shaking hands with a serious-looking president says volumes about his self-image. That he needs to seek constant reassurance from those who appointed him, rather than those for whom he is responsible, is troubling.

As for the 14 measures by which, it is claimed, the mainland will help Hong Kong through the downturn, they deserve critical analysis. First, though, the principle that a rich Hong Kong should need or ask for help from a mostly still poor motherland is contrary to the principles of the Basic Law and Joint Declaration. If Hong Kong, with massive fiscal and foreign exchange reserves, cannot stand on its own feet in the same way as smaller Singapore, what justification does it have for retaining the exceptional economic and social freedoms that it regards as its birthright?

Missing from the 14 items is any reference to the one thing most important to Hong Kong's commercial role: that the recession should not be an excuse for protectionist actions to shield national industries or disrupt the free flow of capital. But, instead of focusing on Hong Kong's global role and commitment to open trade, Mr Tsang's ambition, seen through this list, is to further the city's integration into a Greater Shenzhen and to devalue its free-trade reputation by seeking preferential deals.

Two of the 14 items relate to currency trading use of the yuan. That's fine, if they are part of a broader mainland policy on yuan usage, or Hong Kong is being used as a testing ground. But, let the mainland make its own currency policies according to its needs, and not pretend that they should be devised for Hong Kong's special benefit.

Likewise, mainland policies on the listing of firms in Hong Kong have been, and should continue to be, based on China's perceived needs. It is dishonest to suggest that Beijing will, or should, put Hong Kong's interests before those of mainland markets.

Then there is speeding up cross-border physical links - the Hong-Kong-Macau-Zhuhai bridge, the rail links between airports, and to Guangzhou. These are politically motivated mega projects of scant economic benefit to Hong Kong which will generate few of the kind of jobs the city needs. They are part of "making the Pearl River delta a world-class metropolis" - a code phrase for submerging Hong Kong's identity with its poorer and disorderly neighbours.

Some of the 14 "gifts" are pleas for special treatment for Hong Kong which will be noticed by other members of the World Trade Organisation, who will then use them as an excuse to put up barriers to a Hong Kong as a mainland surrogate. One is the suggestion that the mainland should raise export tax rebates (a highly contentious issue in global trade) to help Hong Kong firms. Another is that Hong Kong companies should be supported in bidding for the next phase of the Shenzhen metro. Yet another is that more mainland services should be opened to Hong Kong (but not other WTO member) firms.

Others among the 14 items are platitudes such as "secure stable water, food and fuel supplies from the mainland" and "facilitate co-ordination between the delta's container ports". But they add to the impression that Hong Kong needs mainland support.

For sure, there might come a time when specific help is needed - for example, currency swap arrangements, should the Hong Kong dollar come under pressure. But, such deals already exist between countries - most recently between China and South Korea. They are part of international and intra-regional co-operation. Hong Kong should act in that context if it is to retain its separate economic and social system. As it is, the chief servant seems set - to use the biblical phrase - on "selling its birthright for a mess of pottage", or bowl of congee.

Philip Bowring is a Hong Kong-based journalist and commentator


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A humble reminder of wisdom and light


OBSERVER
Peter Gordon
Dec 24, 2008           
     
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Amid all the recent reports of redundancies, bankruptcies and disappearing billions, something more hopeful might be called for, especially at this time of year. A few weeks ago, I attended an anniversary celebration for Mu Kuang English School in Kwun Tong - it's 55th. Mu Kuang is a school co-founded and still supervised by someone with her own place in the annals of Hong Kong, Elsie Tu.

Any educational institution (or, indeed, any educator) still standing in Hong Kong after 55 years of teaching deserves a celebration, it seems to me, especially one educating children from what are not, after all, the most affluent neighbourhoods.

I was led, to my mild embarrassment, to the front row of an auditorium filled with invariably polite teenagers. The stage, adorned with red, white and blue bunting, triggered a twinge of nostalgia for my American youth, as did a flag-raising ceremony performed by a team of students kitted out in crisp uniforms with caps and braid.

As this was an "open day", I was later given a tour, which included English, science (popular experiments involved explosions of one sort or another; some things never change) and what was called "shop" in my day: the same hand-held jigsaws and drills hung against the wall, but this facility had a computer laser-cutting and engraving device and the students were battling robots.

Education is, as it should be, a subject of ongoing discussion and often fervent debate: curricular reform, purported declines in English standards, and how well students are being prepared for the world they will face after graduation. Recent results from the Trends in International Mathematics and Science Study once again ranked Hong Kong students among the world's best. But I am agnostic, if not sceptical, about the educational relevance of this result.

However, actually visiting a school is a reminder that theories and exam results alone cannot capture the essence of students learning from teachers. Malcolm Gladwell (author of The Tipping Point) wrote recently in The New Yorker that "the difference between good teachers and poor teachers turns out to be vast", and that "your child is actually better off in a 'bad' school with an excellent teacher than in an excellent school with a bad teacher".

American research estimated that students of a very good teacher can learn a year and a half of material in a school year, while a very poor teacher will only impart half a year's worth of material. "Teacher effects", he says, seem to outweigh class size, curriculum design or funding levels. Not, of course, that these factors don't matter, but I am sure all of us can remember instances of the "good teacher effect" in our schooling.

Gladwell ends by asking, in a reference to the development of financial professionals: "What does it say about a society that it devotes more care and patience to the selection of those who handle its money than of those who handle its children?"

I read the article after I visited Mu Kuang, but similar thoughts had crossed my mind as I watched teachers being warmly applauded for decades of service, as well as considering what must motivate someone to stick with educating in Kwun Tong through more than half a century: it surely isn't financial gain.

Columnists are prone to complaining; that is, I suppose, part of the job spec. But this visit provided salutary reminders that Hong Kong has many people, in many schools and many other walks of life, dedicated to making the community a better place, and that it is often people rather than policies that determine the degree of success, success that is sometimes shown by something as simple as Cantonese students giving a public reading in English.

Mu Kuang's school shield displays the motto Sapientia et Lux, "wisdom and light" if my minimal Latin serves: there are few better things to wish for these holidays.

Peter Gordon is a Hong Kong-based businessman, writer, editor and publisher


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Scraping the bottom of the (oil) barrel?


OBSERVER
Gwynne Dyer
Dec 29, 2008           
     
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Worried about "peak oil"? The International Energy Agency's (IEA) annual report, "The World Energy Outlook 2008", admits for the first time that "although global oil production in total is not expected to peak before 2030, production of conventional oil ... is projected to level off towards the end of the projection period". When The Guardian's environmental columnist, George Monbiot, pressed IEA director Fatih Birol on that opaque phrase, the actual date turned out to be 2020.

The IEA's previous reports, which assured everyone that there was plenty of oil until 2030, were based on what Dr Birol called "a global assumption about the world's oilfields": that the rate of decline in the output of existing oilfields was 3.7 per cent a year. But, this year, some of the staff actually turned up for work occasionally and did a "very, very detailed" survey on the actual rate of decline. It turns out that production in the older fields is really falling at 6.7 per cent a year.

There are still some new oilfields coming into production, but this number means that the production of conventional oil - oil that you pump out of the ground or the seabed in the good, old-fashioned way - will peak in 2020, 11 years from now. Dr Birol assumes, or rather pretends, that new production of "unconventional oil" will allow total production to match demand for another decade, until 2030, but this is sheer fantasy.

The IEA presumes that demand for oil will rise indefinitely, so the price of oil only gets higher after "peak oil" but, in technology, nothing is forever. Set into the front doorstep of my house (and most other 19th-century houses in London) is an iron contrivance called a boot scraper. It is a device for scraping the horse manure off your boots before coming into the house, and it is worn into a shallow curve by half a century of use.

London in the 1890s had 11,000 horse-drawn taxis and several thousand buses, each of which required 12 horses a day. There were at least 100,000 horses on the streets of London every day - each producing an average of 10kg of manure.

As the cities grew, even more horses were needed and the problem grew steadily worse. One Times writer in 1894 estimated that, in 50 years, the streets of London would be buried under three metres of manure.

In fact, within 35 years, the streets of London were almost completely free of horses, and filled with cars instead. They created a different kind of pollution. The same fate is likely to overtake petrol- and diesel-fuelled vehicles in the next 35 years.

The shift will be driven by concerns about foreign exchange costs and energy independence, and increasingly by the need to curb greenhouse-gas emissions. It is starting with ever-tightening standards for fuel efficiency. That will be followed by the first mass-market generation of electric vehicles, due in the next two or three years. The coup de grace will be delivered by third-generation biofuels, probably produced from algae that do not use valuable agricultural land, that are fully competitive with oil in price and energy content.

We will never get back the eight wasted years of the Bush administration, and it may now be too late to avoid drastic climate change, but US president-elect Barack Obama is clearly going to try. You do not appoint Steven Chu as your energy secretary, Carol Browner as your "climate tsarina", and John Holdren as your chief scientific adviser if you intend to evade the issue.

The same is true elsewhere. Indeed, it is a safe bet that the demand for oil is going to fall faster than the supply over the next 10 or 15 years, even if we are already at or near "peak oil", for the annual decline in oil production just after the peak is actually quite shallow - around 2 per cent. And, if demand falls faster than supply, the price will also collapse.

Ladies and gentlemen, place your bets.

Gwynne Dyer is a London-based independent journalist whose articles are published in 45 countries



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Hard times


LAURENCE BRAHM

Dec 30, 2008           
     
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For weeks, China's leading economists have been babbling away on news talk shows about how certain they are that the mainland's economy is insulated from the global financial crisis because of its "Chinese characteristics". The nation's leaders, however, may now be thinking otherwise, and possibly getting a bit jittery.

As the Communist Party Central Committee's economic working commission began meeting in Beijing early this month, the streets around Tiananmen Square were full of police armament and hardware. That was a far cry from the "social harmony" the state news tells everyone to strive for.

While the leadership may seem to be from the Jurassic era when it comes to the speed with which it makes decisions, once a choice is made, the dragon tends to overreact like a lumbering Tyrannosaurus rex. China's leaders decided to boost domestic consumption, so the new attitude is: who needs America's market? China's is big enough, so just shut the trade gates. They point to China's 4 trillion yuan (HK$4.53 trillion) stimulus package as equivalent to one year of exports to America and Europe.

So Beijing thinks it can afford to isolate the country next year by avoiding exports, thereby thumbing its nose at major trading partners. That is how confident the leadership is. But didn't they try that in the Ming and Qing dynasties, too?

There might be a few intrinsic flaws in the stimulus-package-and-consumption theory. To begin with, the structure of the mainland's economy differs greatly from that of America. Savings remain strong; people rely on cash and do not borrow to consume. Americans do, and the whole financial system is structured to facilitate this. Consequently, the mainland's consumption is a mere one-thirty-fifth, per capita, of America's, and is considered lower than the average for most Asian countries. The situation has not improved in a decade. China's economy still depends on exports and fixed-asset investments, not consumption; exports currently account for almost 40 per cent of gross domestic product. There have been limited gains in value-added: for example, while 90 per cent of the world's laptops are "made in China", all the parts are imported and China only assembles the pieces, because of its cheap labour. What happens when the cost of labour and administration goes up? That is how vulnerable the mainland's value-added economy is.

But the leadership needn't worry: the stimulus package is all about boosting fixed-asset investment. In 1998, this accounted for 34 per cent of gross domestic product, rising to 41 per cent this year. Industry - meaning overproduction of cement and steel - accounts for nearly 50 per cent of GDP; agriculture just 12 per cent.

So China will continue exploiting Africa's resources, ignoring genocide in Darfur and destroying the environment, just to keep greedy officials in the manner to which they have become accustomed. At least officials will be happy, if not the people.

How might the stimulus package work? It is estimated that only 1.18 trillion yuan will come from central government coffers - with the rest covered by local governments and business, and the issuance of 500 billion yuan of state treasury bonds per year over the next two years. But remember: local governments have hardly any fiscal income; they can only raise money by auctioning off land. That means forcibly removing people, confiscating the land for property tycoons who are usually officials' relatives.

Development will be financed by local bank loans. Local governments will ensure banks assume all responsibility; officials will also force branches to offer conciliatory loans to developers. There will be lots of highways, ports and the like - and non-performing loans will build up massively, making China's black hole bigger than America's credit pyramid.

Putting things in perspective, the 1997 Asian crisis was small fry compared with today's turmoil. In 1998, then-premier Zhu Rongji managed to control the mainland's economic contraction, calling it a "soft landing". In 2009, expect anything but.

Laurence Brahm is a political economist, author, filmmaker and founder of Shambhala. [email]laurence@shambhala-ngo.org[/email]


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No time for another botched US presidency


Richard Halloran
Jan 02, 2009           
     
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At noon on January 20, the United States will have experienced 16 years of contentious, divisive and mediocre government. This bleak period will have been evenly split between Democrats, led by president Bill Clinton and Republicans, led by President George W. Bush.

That dismal record will test Barack Obama, who takes office that day, as much as, or more than, the economic recession; the issues of immigration, energy, education and health care; the bog of Iraq and Afghanistan; the eruption of conflict between Israelis and Palestinians; and a litany of other difficulties.

Moreover, the new president's task will be hard because only 33 per cent of the eligible voters in America cast their ballots for him. Mr Obama cannot claim a mandate to ram through his proposals.

Nevertheless, all Americans should wish Mr Obama well and hope that his presidency is successful, if for no other reason that America cannot afford another four or eight years of discordant, second-rate government.

The same wish should be true for allies and friends of the US, particularly in Asia.

Despite America's troubles, the constructive application of American power is still vital to the well-being of nations from Britain to South Africa and Japan.

Further, potential adversaries such as China should hope that Mr Obama can steer a course that serves America's interests, as well as preclude an armed conflict with them.

It won't be easy. In Asia, the incoming administration will be confronted immediately with a looming crisis between India and Pakistan caused by the attack in late November on Mumbai, the financial centre of India, presumably by Pakistani terrorists.

"If there's another Mumbai, India will have to respond," said an informed US officer. Both sides have moved troops to the border between them.

A conflict between India and Pakistan would jeopardise US military operations in Afghanistan. A main supply route from the Pakistani port of Karachi through Peshawar in northwest Pakistan, thence through the mountains via the Khyber Pass into Afghanistan, has already been cut either by Taleban terrorists or Pakistani troops pursuing the terrorists.

In a larger context, several US administrations have tried to treat India and Pakistan in an even-handed manner but have not acquired enough influence to restrain either.

A complication is the posture of China, a long-time ally of Pakistan and a rival with India for prominence in Asia.

Moreover, both India and Pakistan have nuclear weapons and a nuclear exchange would have unpredictable consequences.

So far, Mr Obama has said little about South Asia. On his website, he does not mention India and says about Pakistan only that it will be held "accountable for security in the border region with Afghanistan".

Richard Halloran is a former New York Times foreign correspondent in Asia and military correspondent in Washington


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Lifting our game
Governance could be worse in Hong Kong. But the city needs a new vision to secure a bright future

Anthony Cheung
Jan 05, 2009           
     
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Reading commentaries on the state of Hong Kong's governance or economy towards the latter part of last year, one gained the strong impression of an annus horribilis (a term made popular by Britain's Queen Elizabeth in 1992). Hong Kong is not alone in experiencing such frustrations; newspaper headlines and commentaries worldwide have all described the past year as a terrible one.

The unfolding global financial crisis is widely believed to have compounded Hong Kong's governance problems. Government mishaps - such as political appointments; the foreign domestic helper levy; the old-age allowance; Lehman minibonds; and the alleged slow response in repatriating Hong Kong tourists stranded in Thailand - have been much talked about since mid-2008.

A knee-jerk view has been that the administration lacks legitimacy because it is not democratically elected, hence its insensitivity to public opinion and alienation from ordinary people. The government needs to take such sentiments seriously.

Yet, would democracy have saved Chief Executive Donald Tsang Yam-kuen and his government from the current influx of distrust and hostility? The answer may not be a definite "yes". Even though only 23 per cent of those polled are satisfied with the government's performance, the new cohort of elected legislators has not fared better, despite their role as government watchdogs - only 26 per cent are satisfied with their overall performance, according to the polls.

Other developed economies in the region such as Japan, South Korea and Taiwan are facing similarly high levels of dissatisfaction and distrust in political institutions. Taiwan's president, Ma Ying-jeou, and South Korean President Lee Myung-bak were both elected with high popularity ratings; these are now far lower than that of Mr Tsang. This, of course, is not a defence of Hong Kong's faulty political system, but serves to illustrate the need to put things in a broader perspective when assessing government systems.

Many local academics and commentators have long questioned Hong Kong's system of governance. The media has often painted a terrible picture of government performance and the competence of our officials. However, if one refers to the World Bank's governance indicators, Hong Kong has persistently been doing very well compared to other countries, despite its lack of a fully democratic system.

The World Bank's worldwide governance indicators project has been following 212 countries and territories since 1996, using six factors of governance. The 2007 indicators show that both Hong Kong and Singapore stand at the top end in terms of political stability and absence of violence; government effectiveness; regulatory quality; rule of law; and control of corruption. Hong Kong's only drawback is in "voice and accountability" but, on that score, it still does much better than Singapore and is on a par with South Korea and Taiwan, both democracies.

Despite economic setbacks, Hong Kong still enjoys a stable currency, a relatively healthy fiscal reserve, high standards of government effectiveness and regulatory quality, overall competitiveness and a global financial centre. These are institutional assets not to be discarded casually despite the gloomy climate. Besides, it has one of the highest per capita gross domestic products in Asia, and has the best opportunity to take advantage of China's rise in the 21st century.

No doubt, Hong Kong faces multiple problems in governance. Since 1997, it has been suffering one legitimacy crisis after another. It is embroiled in an increasingly fragmented polity. Public distrust is spreading and tension between the executive and legislative branches persists, making it difficult for any government to govern. The lack of democratic progress has made it harder to build trust, at a time when trust is needed for political institutions to co-operate and for the government to lead society, to find policy solutions to various social problems.

While Hong Kong people should in no way be complacent, they do not have the luxury to be unduly pessimistic about the city's future - lest it become a self-fulfilling prophecy. Optimism has to be earned. Hong Kong's future lies in its capacity to be a leading global city of China that is able to shape events whether nationally or internationally. That calls for a new vision that cannot grow from a mindset still too bogged down in its colonial "legacy".

Anthony Cheung Bing-leung is an executive councillor and founder of SynergyNet, a policy think-tank


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Dwindling job pool and loss of benefits will raise social tensions


SPAIN
Sonya Dowsett
Jan 06, 2009           
     
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Tensions mounting between native job-seekers and immigrants competing for a declining pool of work in Spain will intensify this year as generous benefits for those laid off reach the end of their fixed terms.
Unemployment, at 12.8 per cent in November - a 12-year high and by far the highest rate in the European Union - could reach 20 per cent of the workforce in 2010 as a slump in construction spreads into the wider economy, experts say.

That is a level not seen since the 1990s and, as Spain heads for its deepest recession in 50 years, it may trigger social unrest like that of the 1980s, when high unemployment and low wages led to countrywide demonstrations and violent strikes.

Spain makes payouts of up to 70 per cent of salaries for up to two years, depending on how long workers have been paying into the social security system.

With nearly 3 million out of work, many of those laid off during 2008 will come to the end of dole payouts next year and will struggle to make ends meet in a worsening labour market with no sign of paid work.

"This coming year, a lot of people will stop receiving the dole," said Sandalio Gomez, professor of labour relations at IESE Business School. "We could end up with social unrest as people take to the streets."

The makeup of Spain's workforce has changed drastically with the arrival of nearly 5 million immigrants boosting the population by 15 per cent over the past decade.

Desperate Spaniards who have lost jobs in construction are taking up work they formerly shunned, from cleaning bars to fruit-picking, displacing immigrants who struggle to find alternative work.

Thousands of Andalusians applied to pick olives for this year's harvest from December to January, according to an Andalusian job agency, leaving the previous workforce of African immigrants without employment.

Despite offers from local authorities to pay their coach fares back to Africa, immigrants are sleeping rough or in homeless shelters in a situation described by one charity as a genuine social problem. Another flashpoint in the southern region could be February's strawberry harvest in Huelva, on the border with Portugal, where migrants traditionally find work.

Felix Veliz, a Madrid-based former construction-sector worker from Ecuador who worked for a firm that installed safety equipment in building sites, says many of his colleagues were forced to sleep rough when the company filed for administration in September.

The 49-year-old, who came to Spain nearly 10 years ago, cannot claim welfare or seek other work as, under Spanish law, he is still tied to his former company while it files for administration.

"All we want is that the judge and the labour authorities reach a decision as soon as possible so we can claim the dole or get a job with another company," he said at a commercial court in Madrid where he and fellow former employees have put in a plea to break their ties with the company. "This is like a charity case now."

Married with two adult children, Mr Veliz used to earn up to 1,300 euros (about HK$14,000) per month - equal to his mortgage repayments.

"They started docking our salaries in May," he said, his hands thrust into the pockets of a blue corduroy jacket in the cold wind outside the wrought-iron doors of the court.

"In July, the company stopped paying altogether. That's nearly six months, up to now. We are living off loans from friends and family."

Ripples from a crumbling construction sector are spreading out into the wider economy, bringing down peripheral businesses like air-conditioning installers and tile manufacturers.

The number of companies entering administration in the third quarter nearly quadrupled from the same period a year ago, according to the National Statistics Institute.

"It's the domino effect from the construction sector," said Jose Luis Corell Badia, a lawyer and head of corporate restructuring at Ernst & Young Abogados. "I don't see light at the end of the tunnel. It's job destruction."

Cristina Ballesteros, a 29-year-old former secretary for the vice-president of a multinational cement company, said competition for work is such that potential employers ask her if she plans to have children, even though it is illegal to do so.

She lives with her boyfriend but has taken to saying she is single to improve her chances.

"I share a rented flat, but if it was not for that, I'd be back living with my mother," she said. "I studied to be a secretary: it's not a degree, it's a two-year diploma, but now I find there are many employers who want you to have a degree to do a secretary's job. People accept it, because they have no choice. They are asking for more and more, when it's really not necessary."

Outside the Madrid commercial court, others are fighting to receive payments to which they are entitled. Rafael Pliego, 54, was recently fired from his job as a security guard and has already signed up for the dole but had not yet received his cheque.

"I have an illness and they told me I couldn't continue working and they fired me. It happened on October 30. I had only been working with them for five months," he said.

"I carry on looking for work, of course. I had the bad luck to get sick, and this happened."

Spain's government ran the second-highest surplus in the euro zone in 2007, equal to 2.2 per cent of gross domestic product, but the public accounts are sinking into the red as tax income falls and the number of people claiming unemployment benefit rises.

The central government budget deficit leapt to 14 billion euros in the first 11 months of 2008 - equivalent to 1.28 per cent of GDP. The central government deficit is part of Spain's wider public sector budget, which includes the social security system, regional and municipal accounts.

Social security payouts alone in 2009 will double to 3 per cent of GDP, according to Funcas savings bank consultancy. "It's grown this year at an incredible rate," said Funcas analyst Angel Laborda.

Funcas forecasts for the budget deficit in 2009 and 2010 are already obsolete, he said, and will probably come in at around 6 per cent of GDP in 2009 and 7.5 per cent in 2010.

That would shatter a European Union limit of 3 per cent of GDP.

Prime Minister Jose Luis Rodriguez Zapatero said on Saturday the country would start to see the first shoots of economic recovery within the coming year.

But Vicente Balmaseda, 36, who lost his job as a conference-stand designer six months ago, is pessimistic.

"I've sent around 200 resumes. At best, I've had three or four interviews. It's getting me down. From what they say on the TV, it's only going to get worse next year."

Reuters


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Workable solution
China wants better, cleaner industry for tomorrow, but needs jobs and stability today

Joseph Cheng
Jan 08, 2009           
     
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The Guangdong leadership has been promoting industrial upgrading in the Pearl River Delta for many years, and this is perceived as the inevitable path of economic development. The processing factories in the delta are mainly labour-intensive manufacturing; their products are low value-added with minimum technological content. They are also responsible for the region's environmental pollution. Hence, their demise is considered progress.

In the last two or three years, labour shortages in the delta have been pushing up wages, and industrial land is in short supply. The Guangdong authorities are also eager to tackle the issue of environmental protection, as pollution has had an adverse impact on the quality of life. These are obvious intermediate and long-term trends, and are not unexpected.

In early 2007, the Guangdong leadership began to take active steps not only to promote industrial upgrading, but to exert pressure on the processing factories in the delta as well. Hong Kong businessmen in the region felt the pressure.

Their plight was exacerbated by other developments. China's export boom and huge trade surpluses pushed the yuan higher, and the Bush administration in the US, as well as other western governments, exerted pressure on Beijing to further appreciate its currency.

The Labour Contract Law was scheduled to be fully implemented at the start of 2008, which added a range of pension and insurance expenditure to the wages bill. Most processing factories operate at very low profit margins, sometimes only 3 per cent to 5 per cent, and it was natural that some had to cut back, relocate or even close down.

The Guangdong policy was in line with the central government's broad economic development strategy. The Chinese leadership endorsed the approach. The new Guangdong Communist Party secretary, Wang Yang , appealed to local cadres to "adopt new thinking and to further liberate their thoughts". However, when the impact of the global financial crisis began to be felt in late summer last year, the situation became different.

The crisis has certainly worsened the situation. Many processing factories have stopped operating, and millions of migrant workers have lost their jobs. Some have begun to return to their villages.

There are over 200 million migrant workers in China, according to Ministry of Agriculture assessments; 10 per cent of them losing their jobs means more than 20 million unemployed. The fact that factories are closing down has also generated a lot of labour disputes; migrant workers who have not received all their wages and benefits have joined street protests. This has affected social stability.

From the Guangdong leadership's point of view, an economic downturn may be a good opportunity to accelerate industrial upgrading, as demonstrated by past experience in Japan. Developing more advanced, innovative industries and weeding out backward processing factories would raise Guangdong's international competitiveness.

The Guangdong authorities are, therefore, inclined to keep with the existing policy, and are reluctant to help the labour-intensive small and medium-sized industrial enterprises.

The return of migrant workers to their villages, again, will not cause serious social and economic problems for Guangdong as most of these low-wage, unskilled workers come from less-developed neighbouring provinces. In fact, their departure will reduce pressure on Guangdong's social services.

The central government, on the other hand, has a national, macro view. The current leadership accords the highest priority to stability. For many years, it has been trying hard to maintain an annual growth rate of 8 per cent or more.

The objective is to offer employment to new entrants in the labour market, as well as underemployed rural workers. Keeping a low unemployment rate is essential to maintaining social stability.

The promotion of industrial upgrading and reducing pollution in the coastal provinces have been supported by Beijing.

In the past decade, some labour-intensive industrial enterprises in the Yangtze River Delta have moved to central provinces. Less-prosperous Jiangxi province, for example, has been actively attracting factories to relocate there to boost its own industrialisation.

At this stage, however, the central government is more concerned with containing unemployment and ensuring social stability. Premier Wen Jiabao now advocates state support for small and medium-sized enterprises, for fear that their failure would cause only more unemployment.

Hence, this has become an issue to be negotiated between Guangdong and Beijing - but whose outcome will affect Hong Kong businessmen in the Pearl River Delta.

Joseph Cheng Yu-shek is a professor of political science at City University of Hong Kong


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Boom and bust, again
Smart investors would do well to ignore the exuberance over the latest surge in stock markets

Sin-ming Shaw
Jan 09, 2009           
     
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Stock markets are suddenly showing signs of breaking out from their respective lows reached late last year. As of Wednesday, the Hang Seng Index was up more than 40 per cent, the Dow Jones, 21 per cent and the Nikkei, 32 per cent. These broad indices mask even more impressive performance of individual stocks.
China Life (SEHK: 2628, announcements, news) , in an industry plagued by the implosion of American giant AIG, is up 60 per cent from its low. Bank of East Asia (SEHK: 0023), hurt by rumours and by a rogue trader, is up 44 per cent.

Shipping stocks have staged a comeback that seems to ignore all the daily bad news about slower world trade. Former chief executive Tung Chee-hwa's flagship company, OOIL (SEHK: 0316), at HK$19.60 on Wednesday, is up almost 100 per cent from its October low of HK$9.92.

What is going on? Do investors read the same papers as we do? Are we not watching the greatest meltdown since the Great Depression, with shrinking world trade and massive deleveraging of banks and companies? The economic realities remain depressing and grim. China, the "factory of the world", is facing its largest economic challenge since 1949. Factories are dropping like flies. Those that are surviving face a Hobson's choice: if you accept an order, the buyer might default but, if you don't take it, production must be cut and workers fired.

Property prices in Hong Kong, London and elsewhere are down between 30 per cent and 50 per cent. Interest rates are already close to zero but deflation in the US is at minus 13 per cent per annum, indicating lower rates are not having a positive effect on consumer behaviour. Banks flush with liquidity are afraid to lend as they are unsure whether the borrowers are creditworthy.

Nouriel Roubini, a professor at New York University, was one of the few academics to predict the crisis, yet his warnings were disastrously dismissed as drivel by Wall Street. He is predicting an "uglier" 2009. So are stock markets irrational again? Think of a play with three acts.

Act One consists of the financial meltdown, with stock markets plunging and Wall Street and parts of Main Street decimated. That act is drawing to a close, if it hasn't done so already.

Act Two is unfolding, with Main Street melting down at a speed substantially slower than that of Wall Street. The very nature of engaging in making "real" things in factories - moving industrial materials around the world to be made into parts and then assembled into a product to be distributed to global sales points - means that the process takes longer to start and is slower to unwind. We are far from at its end right now. Professor Roubini was spot on about it getting "uglier" in this respect.

Act Three is what the stock market investors are turning their sights to: highly inflationary policies pursued by governments around the world. They are keeping the money printing press running around the clock and are announcing massive "New Deal"-type programmes.

The popular press has crowned US president-elect Barack Obama a modern-day Franklin D. Roosevelt whose historic New Deal helped get the US out of the Great Depression.

Governments around the world have finally understood that the deadly combination of US housing folly and Wall Street machinations was not a localised US phenomenon. They are now acting to save their own countries.

Zero interest rates alone have proved to be inadequate. John Maynard Keynes long ago warned that a "liquidity trap" in a depression would require massive government action. Japan, in the 1980s, found itself in the same trap with a lethargic government politically unable to inflate the economy through massive spending.

These days, public policymakers are less restrained. Mr Obama has chosen as his close economic advisers experts on the Great Depression. Larry Summers, Mr Obama's top adviser, chastened after years of complacency regarding the stability of the US financial system, has urged Mr Obama to err on the side of "overspending". US federal deficits are now projected to be well over US$1 trillion for 2009 and probably in 2010.

So Act Three is music to the ears of the financial markets. In this script, the world economy should get back on an even keel in less than a year, saving it from a lethal hard landing. Some experts expect the global economy to hit bottom by, at latest, the fourth quarter of this year.

Should retail investors jump back into stocks with both feet, assuming the current budding exuberance is on the mark?

Is the market going to go higher in the months to come? Lee Shau-kee, who made his fortune selling apartments in Hong Kong's rigged property market and was once nicknamed "Asia's Warren Buffett" has now humbly disowned that honorific because he has fallen flat too often with his flawed forecasts.

Before regaining our exuberance, we should remember what the real Warren Buffett said long ago: every minute spent guessing what the markets will do is a minute wasted. He made his reputation and fortune by focusing on company realities. He finds great companies selling at reasonable prices, rather than guessing what market indices will do. It pays to remember his words.

Sin-ming Shaw is a former professional investor


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Macau needs to put eggs in more than one basket


LEADER

Jan 12, 2009           
     
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A financial downturn tends to expose the weaknesses of any economy. That is doubly so in Macau, where the gaming industry is at once a strength and weakness because the city has too many eggs in the one basket. As a result, the global crisis has delivered a body blow to the city's growth. The tightening of restrictions imposed by the central government on travel by mainlanders to the gambling mecca has exacerbated it.

Understandably, the city had high hopes that its first visit from Vice-President Xi Jinping , who is in charge of Hong Kong and Macau affairs, might result in relief measures such as a relaxation of travel restrictions. Alas, Mr Xi departed yesterday without any sign of such a move. Instead, he called for unity in the face of difficulties and pointed out that the city's government had already taken steps to mitigate the effects of the downturn. Indeed, the government unveiled two generous assistance packages last year. It is arguable, however, that they restored a measure of social equity to ordinary people who missed out on the benefits of the gaming boom after the liberalisation of casino licences.

Mr Xi also called on Macau to diversify its economy to make it more resilient and said the development of nearby Hengqin Island would offer opportunities to do so. In the long term, it is in this regard that help from the mainland can offer lasting, sustainable benefits. Macau remains a small economy dependent on the gambling industry, and to a large extent on the mainland for tourists and gamblers. It cannot escape its structural economic problems. If it is to make a serious attempt to do so by diversifying, it must ensure that its economy is more integrated with that of the mainland. That raises complicated questions that cannot be solved without Beijing's support.

In the shorter term, there is a case for liberalising the travel restrictions. Curbing everyone's freedom of movement is not the way to deal with the problem of officials and businessmen gambling with ill-gotten funds. It only treats the symptoms of social problems, such as corruption in the public and private sectors, instead of addressing a lack of transparency and accountability. Limiting or vetting individual visits to Macau by mainland officials may be a justifiable measure for the time being to safeguard public funds, but travel curbs on ordinary mainlanders should be relaxed.

Mr Xi gave no public clues as to who might succeed Edmund Ho Hau-wah as chief executive when he retires in December after 10 years in office. Mr Ho was seen as having done well during his first six or seven years. It is worth remembering, however, that even as Mr Ho basked in Beijing's praise of Macau as a model of "one country, two systems", President Hu Jintao added a warning about deep-rooted problems that called for diligent, clean and effective government. Two years ago, Mr Ho's standing was diminished by a corruption scandal involving a former minister who is now in jail.

The need for government to be seen to be clean will be a priority for his successor. This means strengthening public institutions to ensure transparent oversight of the gaming and construction sectors. The task calls for a person of the highest integrity, with the political and administrative skills and determination to maintain public confidence in a gambling-led economy. In such a small, closely connected society as Macau's, that will be no easy task.


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Asian immigrants are turning to technology in quest for a son


UNITED STATES
Mike Swift
Jan 13, 2009           
     
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Researchers are finding the first evidence that some Asian immigrant families are using US medical technology to have sons instead of daughters, apparently acting on an age-old cultural prejudice that has led to high ratios of boys to girls in parts of China and India.

The new research, produced by independent teams of economists who arrived at similar conclusions, focused on Indian, Chinese and Korean families who first had girls and then used modern technology to have a son.

With birth records in Santa Clara County, California, showing that Asian mothers are more likely to give birth to sons than white or Latino mothers are, the new data could reawaken a local controversy. Some local South Asian women have pressured local Indo-American newspapers and magazines in recent years to stop running ads for medical procedures that offer prospective parents the promise of a son.

For some South Asian couples, having a boy is a "status symbol", said Deepka Lalwani, the founder and president of Indian Business & Professional Women, a non-profit business support network. "If a woman has male children, she feels in her family, certainly with her in-laws, that her status will go up because now she is the mother of a male child."

Such cultural pressures may explain the recent findings. A Columbia University study suggests that Chinese, Indian and Korean immigrants have been using medical technology, most likely including abortion, to assure their later children were boys. And a soon-to-be published analysis of birth records by a University of Texas economist estimates there were 2,000 "missing girls" between 1991 and 2004 among immigrant families from China and India living in the US - children never born because their parents chose to have sons instead.

"We didn't expect to see a male bias. And, for the first child, we didn't find one. It seems to appear after a first daughter, and more strongly after a second daughter," said Douglas Almond, co-author of the Columbia study.

Among Indian families in Santa Clara County in the 1990s, Texas economist Jason Abrevaya found a 58 per cent chance of having a son among families that first had two girls - significantly higher than the natural 51 per cent chance of having a boy.

The teams found no comparable bias toward boys among white, African-American and Japanese-American families that first had girls.

Dr Abrevaya found evidence that female infanticide, a practice documented in India and China, is not happening in the US. The economists' data indicates only that some couples have manipulated the natural odds of having a son or daughter; it does not identify the means they used to do it.

"If gender-selective abortion is the cause for the unusual Asian Indian boy birth ratios, then the abortion rate would be 20 per cent to 25 per cent of female fetuses who otherwise would have been the family's third or fourth child," he said.

For Jeffrey Steinberg, a doctor, the demand for a son is a business opportunity. While abortion might have been the common medical procedure available for sex selection in the early 1990s, one of the methods advertised among ethnic communities today is PGD — pre-implantation genetic diagnosis.

Dr Steinberg, the medical director of the Fertility Institutes of Los Angeles, uses PGD to harvest fertilised embryos, identify their sex after a few cellular divisions, and implant the chosen gender. Chinese and Indian couples, who pay up to US$18,000 per attempt to have a boy, are a major source of his clients, he said.

"Clearly, among the Chinese population, there's heavy interest in male children. The Indian population also has a heavy interest in boys," he said. The US is one of a very few countries that does not ban using techniques like PGD for gender selection. It was developed to screen for hereditary diseases like cystic fibrosis.

Among Dr Steinberg's Chinese clients who use PGD to assure a son, 40 per cent come from the San Francisco Bay Area, 40 per cent travel from China, and 20 per cent come from Southern California and the rest of the world.

"It's emotional for them, and it's emotional for us," Dr Steinberg said. "They come in feeling that they owe me an excuse for wanting to be there."

Not all his clients are interested only in boys. Canadians, for instance, tend to prefer girls. "That keeps us very comfortable with what we're doing ethically," he said.

The normal ratio of boys to girls at birth is about 105 boys per 100 girls. But in parts of India and China, as ultrasound and other medical technology became available to reveal the sex of unborn children, the ratio of boys to girls aged four or younger jumped from 104 boys per 100 girls in 1981 to about 108 boys in 2001, according to a recent UN Population Fund report.

The preference for sons goes back 2,500 years in some parts of China, with economic and social roots through marriage dowries and other traditions. In India, some Hindus believe only a son can perform certain funeral rites for a father. And sons are expected to financially care for their parents in their old age.

Some who study the Indian diaspora say son-selection may not die out, even in the US. Dr Abrevaya, who found much stronger evidence for son selection among Indians than among Chinese living in the US, worries that more people will use PGD as it becomes cheaper.

Preeti Shekar, a Berkeley -based journalist and activist who believes there are "sexist and racist consequences" to medical technologies like PGD, has urged a petition campaign to stop the ethnic media from running ads for Dr Steinberg's clinic.

"There needs to be a lot of consciousness-raising," she said. "We do need to do things with the South Asian community because, especially in Silicon Valley, they are pretty conservative."

McClatchy-Tribune


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One world, one crisis
Only a worldwide fiscal stimulus can counteract falling private demand

Kemal Dervis and Juan Somavia
Jan 14, 2009           
     
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As recession spreads around the world, the global production networks that arose with the globalisation of the world economy have become sources of cutbacks and job losses. Postponing purchases of new winter coats in the United States means job losses in Poland or China. These losses then translate into reduced demand for American or German machine tools.

Unemployment and reduced sales then feed back into new losses in banks' loan portfolios, further weakening the battered financial sector. As a result, anxiety, hopelessness and anger are spreading, as what was a financial crisis becomes an economic and human crisis. Unchecked, it could become a security crisis.

Trying to rescue the financial sector without supporting a recovery in terms of businesses, jobs and family purchasing power will not work. What is needed is a large worldwide fiscal stimulus to counteract falling private demand.

Different countries' capacity to act depends on their indebtedness, foreign exchange reserves and current-account deficits. Germany and China can do more than others. America can do a lot, in part because of the US dollar's status as the main international reserve currency. Low interest rates mean that the additional debt burdens that public borrowing will create can remain manageable.

Moreover, if the stimulus succeeds and leads to an early recovery, the additional income gained may more than offset the increase in debt. Given the collapse of commodity prices and excess production capacities, there is no short-term inflation danger, even if part of the stimulus is financed directly by central banks.

The argument for a strong fiscal stimulus is overwhelming. Several countries have already announced measures, but there is a need to evaluate what they all amount to in reality.

The argument is strong for providing stimulus through increased government expenditure rather than relying on, say, tax cuts, because panicked consumers might save the money instead of spending it. Debt and inflation will reappear as medium-term problems, so it is critical that the fiscal ammunition used helps long-term productivity, growth and sustainability.

Of course, fiscal stimulus does not mean just throwing money at the problem. There needs to be a strategy, priorities must be weighed, and empirical evidence analysed. We should also remember that what growth there is in the world economy in 2009-10 will come mostly from developing economies. Policies supporting their growth are critical to prospects in the advanced economies, too.

Each country may hope that others will stimulate their demand while it preserves its fiscal headroom, thereby relying on exports as the engine of recovery. Each country may also be tempted by protectionist measures, trying to preserve domestic jobs at the expense of imports. Such "beggar-thy-neighbour" policies in the 1930s aggravated and deepened the Great Depression.

The car industry is a good example. Measures to keep it afloat in one country look like unfair competition to others. But the answer is not to let a collapse in the world's car industry fuel a deeper recession. The answer is to co-ordinate a global recovery package, which creates the opportunity to point recovery in the direction of a new generation of fuel-efficient and low-carbon-emission vehicles and green jobs.

Sovereign countries will have the final say on their recovery packages, but global co-ordination will increase the effectiveness of everyone's actions. Moreover, fairness and security considerations demand that the most vulnerable, who had no role in the making of this crisis, receive support.

Extending social safety nets helps the most vulnerable and is likely to have high multiplier effects, as the need to spend is most urgent for the poorest people. Training programmes, including for green jobs, should be significantly increased. Public expenditure must be focused on programmes with strong employment content, such as in small- and medium-scale infrastructure projects and support to local governments.

Credit lines should be kept open to smaller businesses, which employ the bulk of the world's workers but have the least access to credit. Donors must maintain the promised (and very modest) levels of development aid for the poorer countries, and the drive to achieve the Millennium Development Goals must be renewed. The availability and affordability of trade finance should be improved.

The Bretton Woods institutions have a key role to play. The International Monetary Fund and central banks should increase liquidity in a co-ordinated fashion in the form of short-term credit to emerging-market economies suffering from cuts in capital inflows and export earnings.

The World Bank should increase lending to help finance growth-supporting expenditure in developing countries. Tangible progress is needed in global trade negotiations.

While these recovery measures are put in place, the world must also build the institutions for the 21st-century economy. The International Labour Organisation's Decent Work Agenda of employment and enterprise, social protection, sound labour relations and fundamental rights at work creates a solid stage for fair globalisation.

Any crisis is also an opportunity. This crisis has demonstrated that the destinies of countries around the world are linked. Policy co-ordination and a global strategy that instils confidence and hope will bring a quicker and stronger recovery to us all.

Kemal Dervis is executive head of the UN Development Programme. Juan Somavia is director general of the International Labour Organisation. Copyright: Project Syndicate


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Gaza goals
As with Hezbollah in 2006, Israel should be trying to 'educate', not annihilate, Hamas

Thomas Friedman
Jan 15, 2009           
     
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I have only one question about Israel's military operation in Gaza: What is the goal? Is it the education of Hamas or the eradication of Hamas? I hope that it's the education of Hamas. Let me explain why. I was one of the few people who argued back in 2006 that Israel actually won the war in Lebanon started by Hezbollah. You need to study that war and its aftermath to understand Gaza and how it is part of a new strategic ball game in the Arab-Israel arena, which will demand of the Obama team a new approach.
What Hezbollah did in 2006 - in launching an unprovoked war across the UN-recognised Israel-Lebanon border, after Israel had unilaterally withdrawn from Lebanon - was to both upend Israel's long-standing peace strategy and to unveil a new phase in the Hezbollah-Iran war strategy against Israel.

There have always been two camps in Israel when it comes to the logic of peace, notes Gidi Grinstein, president of the Israeli think-tank, the Reut Institute. One camp says that all the problems Israel faces from the Palestinians or Lebanese emanate from occupying their territories. "Therefore, the fundamental problem is staying - and the fundamental remedy is leaving," says Mr Grinstein.

The other camp argues that Israel's Arab foes are implacably hostile, and leaving would only invite more hostility. Therefore, at least when it comes to the Palestinians, Israel needs to control their territories indefinitely. Since the mid-1990s, the first camp has dominated Israeli thinking. This led to the negotiated and unilateral withdrawals from the West Bank, Lebanon and Gaza.

Hezbollah's unprovoked attack from Lebanon into Israel in 2006 both undermined the argument that withdrawal led to security and presented Israel with a much more vexing military strategy aimed at neutralising Israel's military superiority. Hezbollah created a very "flat" military network, built on small teams of guerillas and mobile missile-batteries, deeply embedded in the local towns and villages.

And this Hezbollah force, rather than confronting Israel's army head-on, focused on demoralising Israeli civilians with rockets in their homes, challenging Israel to inflict massive civilian casualties in order to hit Hezbollah fighters and, when Israel did strike Hezbollah and also killed civilians, inflaming the Arab-Muslim street, making life very difficult for Arab or European leaders aligned with Israel.

Israel's counterstrategy was to use its air force to pummel Hezbollah and, while not directly targeting the Lebanese civilians with whom Hezbollah was intertwined, to inflict substantial property damage and collateral casualties on Lebanon at large. It was not pretty, but it was logical. Israel basically said that, when dealing with a non-state actor, Hezbollah, nested among civilians, the only long-term source of deterrence was to exact enough pain on the civilians - the families and employers of the militants - to restrain Hezbollah in the future.

Israel's military was not focused on the morning after the war in Lebanon - when Hezbollah declared victory and the Israeli press declared defeat.

It was focused on the morning after the morning after, when all the real business happens in the Middle East.

That's when Lebanese civilians, in anguish, said to Hezbollah: "What were you thinking? Look what destruction you have visited on your own community! For what? For whom?"

Here's what Hassan Nasrallah, Hezbollah's leader, said the morning after the morning after about his decision to start that war by abducting two Israeli soldiers on July 12, 2006: "We did not think, even 1 per cent, that the capture would lead to a war at this time and of this magnitude. You ask me, if I had known on July 11 ... that the operation would lead to such a war, would I do it? I say no, absolutely not."

That was the education of Hezbollah. Has Israel seen its last conflict with Hezbollah? I doubt it. But Hezbollah, which has done nothing for Hamas, will think three times next time. That is probably all Israel can achieve with a non-state actor.

In Gaza, I still can't tell if Israel is trying to eradicate or "educate" Hamas, by inflicting a heavy death toll on militants and heavy pain on the Gaza population. If it is out to destroy Hamas, casualties will be horrific and the aftermath could be Somalia-like chaos.

If it is out to educate Hamas, Israel may have achieved its aims. Now its focus, and the Obama team's focus, should be on creating a clear choice for Hamas for the world to see: are you about destroying Israel or building Gaza?

But that requires diplomacy. Israel de facto recognises Hamas' right to rule Gaza and to provide for the well-being and security of the people of Gaza - which was actually the original campaign message of Hamas, not rocketing Israel.

In return, Hamas has to signal a willingness to assume responsibility for a lasting ceasefire and to abandon efforts to change the strategic equation with Israel by deploying longer- and longer-range rockets.

That's the only deal. Let's give it a try.

Thomas L. Friedman is a New York Times columnist


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The other Bush legacy


PETER KAMMERER

Jan 16, 2009           
     
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In a matter of days, I will have the wish I have wanted for years: the 43rd president of the US, George W. Bush, will saddle up and ride off into the sunset. From retirement at the US$2.1 million house he has bought in Dallas at a bargain-basement price - thanks to a plunge in the property market that I am sure he had nothing to do with - he will work on his designer presidential library and write his memoirs. There is no need to partake of either when they are finished as he has made clear the content during his farewell tour. In essence, he has no regrets and even less remorse for the decisions made during his eight years in the White House.

As one American leader gives way to another, talk traditionally turns to legacies. Mr Bush believes he will be remembered as a liberator of 50 million people in the Middle East. He contends he has done much for the American education system with his "no child will be left behind" policy. But, first and foremost, he is proud that he will leave Washington with the same set of values that he arrived with; in other words, he did not sell his soul for the sake of politics.

Legacies are a matter of opinion. The US remains deeply divided, politically, despite the feel-good factor of Barack Obama's election win. Mr Bush's Republican Party supporters offer a long list of perceived achievements while detractors from the soon-to-be-in-power Democrats have little good to say about his presidency. History is the final judge, of course - but for now, I prefer to stay firmly with the detractors.

Look at the record: the humiliation and torture of prisoners at Abu Ghraib; the illegal incarceration of terror suspects at Guantanamo Bay; the mishandling of Hurricane Katrina; the intelligence failure over Iraq's alleged weapons of mass destruction; and the go-it-alone diplomatic approach that tore to shreds previous international co-operation. He censored science, battered American prestige and spent as if there was no tomorrow.

Given my lack of anything good to say, it is best that I do not even attempt to mark the end of Mr Bush's presidential era with my take on his place in history. There is, however, another person from his administration who, in my humble estimation, has left a sizeable legacy: his wife, Laura.

There are no guidelines as to the role of the first lady. She does as she wishes, taking up whichever cause or issue seems warranted. Mrs Bush, a former teacher and school librarian, naturally turned to what she knew best, initially: the rights of children, specifically literacy, health, cognitive development and life-long learning programmes. As she grew into the position, she broadened the scope of her work to encompass a range of weightier issues far wider than any previous first lady had tackled.

There has been determined support for the pro-democracy movement in Myanmar, and efforts to improve the lot of the victims of last year's devastating cyclone; pushing the rights of women and girls in Afghanistan through repeated visits; high-profile trips to the Middle East and Africa; and encouraging - against China's wishes - contacts between the US and Tibet's exiled spiritual leader, the Dalai Lama. Her quiet-spoken diplomacy was in marked contrast to the approach adopted by her husband. He may have made the tough decisions, but it is her grit and determination that, for me, shone through.

All the while, Mrs Bush found time to do what first ladies are expected to: stand by the president. This she did to the hilt, even when it was probably against her interests - as when Mr Bush vetoed a children's health insurance bill. While his popularity has sunk, her ratings have remained high. She is universally liked across the American political spectrum.

Politics gets in the way of determining Mr Bush's legacy. There is no such problem in evaluating his wife's contribution to the Bush years. She has created the template for the first lady which Michelle Obama and whoever follows her will have to do their utmost to fit into. It is a legacy to be proud of.

Peter Kammerer is the Post's foreign editor. [email]peter.kamm@scmp.com[/email]


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No on-off switch for lasting change in Iraq


David Ignatius
Jan 19, 2009           
     
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US President George W. Bush teased his ambassador in Baghdad by giving him the nickname "Sunshine", because of his sometimes-gloomy assessments of the political situation there. But Ryan Crocker persisted down to the last days in describing things precisely as he saw them.

Journalists probably shouldn't have heroes, but Mr Crocker is one of mine. We first met in 1981 in Lebanon, and I've watched over the years as he took on the toughest challenges in the Foreign Service and became a superstar diplomat, without losing his mordant sense of humour or his determination to speak truth to power.

What made Mr Crocker so unusual was his raw curiosity about the world. In the summer of 1970, when he was a student at Whitman College and determined not to spend the rest of his life in Walla Walla, Washington, he hitchhiked from Amsterdam to Calcutta. Travelling across the vast arc of the Middle East, he developed a fascination that never left him.

Mr Crocker joined the State Department in 1971. He served in Iran and Qatar and then spent two years at a language school in Tunis, where he acquired his fluent Arabic. In 1981, he was sent to Lebanon as a political counsellor, an assignment that shaped his career.

Mr Crocker's innate scepticism made him wary about Mr Bush's decision to invade Iraq. He won't talk about his policy views, except to say: "It was all opaque to me. I couldn't see what would happen." But he argues: "It doesn't matter what I or anyone else thinks about the wisdom of going in 2003. It's a distraction. We're in. We've been in for six years ... The focus has to be on where we go now."

Mr Crocker arrived as ambassador in Baghdad in March 2007. Mr Bush had already decided on a surge of additional US troops there, but Mr Crocker remembers wondering in the early days: "How on Earth are we going to make this a better place?"

The key to success in Iraq, Mr Crocker said, was the impact of Mr Bush's decision to add more troops. "In the teeth of ferociously negative popular opinion, in the face of a lot of well-reasoned advice to the contrary, he said he was going forward, not backward."

Soon, Iraq will be Barack Obama's problem. Asked what mistakes the new administration could make, Mr Crocker says he thinks they will avoid these errors, but lists them anyway: "Concluding this was the Bush administration's war; that it's stable enough now; that we don't want to inherit it, so we're going to back away."

Most of all, he says, policymakers must understand that this is a long game. A lasting change in Iraq isn't an on-off switch: "Not this year, not in five years, maybe not in 10 years."

The overriding lesson, not just of Iraq but of his entire career, is that events have consequences that cannot be predicted, or escaped: "When we are part of a sweeping and traumatic set of events, we've got to understand that currents are set in motion that will play themselves out for many years, in ways we can't always understand."

David Ignatius is a Washington Post columnist


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Credibility gap


FRANK CHING

Jan 21, 2009           
     
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When results of the Pew Global Attitudes Survey were released last summer, something odd was apparent: Chinese people generally thought their country was popular abroad, but the survey showed international views of China were actually increasingly negative. While 77 per cent of Chinese surveyed said their country enjoyed international popularity, in reality, majorities in only seven of 23 nations had a positive opinion of China.

Now, Beijing appears set to do something about improving its image abroad - by giving 45 billion yuan (HK$51 billion) to Xinhua, CCTV and other government-controlled media organs to vastly increase its outreach, especially to the English-speaking world.

But throwing money at the issue will not solve the problem. All it will do is improve the packaging. For the rest of the world to take the official Chinese media seriously, there must be a basic change in China: it must no longer be subject to censorship.

Even in the mainland, the official media lacks credibility. Last week, a group of 22 Chinese intellectuals issued an open letter calling for a boycott of CCTV, saying it broadcasts propaganda rather than news. It cited a broadcast days before the outbreak of the tainted-milk scandal in which the Sanlu Group's dairy products were praised as being nutritious and safe. Meanwhile, stories about social unrest went unreported.

Such a boycott is unlikely to be effective, since viewers do not have a viable alternative. As Wang Jianhong, deputy director of the CCTV general editing department, said: "China has more than 1.2 billion TV viewers. Even if 22 people boycott, I personally don't think it'll have any effect or harm the reputation of CCTV."

But, where the international community is concerned, it is a different story. There, the mainland will be competing with genuine news organisations such as CNN and the BBC. If the Chinese outlets continue the policy of reporting only good news, they will have little credibility. Sure, people interested in China may watch, but they will have at the back of their minds doubts as to the accuracy and completeness of the news, features and documentaries being aired.

These programmes will be seen as propaganda that presents the official Chinese government line rather than objective accounts. Beijing will benefit little from spending billions of dollars, except to create jobs for the many foreign journalists that it will have to hire to work as "foreign experts" for the mainland media.

If Beijing does not want its overseas broadcasts and publications to be seen as mere propaganda, it will have to end the censorship. And that is actually possible if the Chinese government has a little more confidence in itself.

Only a few days ago, the website of the official Beijing Daily carried an article by Shen Minte, a professor at the Communication University of China, in which he called for genuine freedom of speech, which is after all enshrined in the Chinese constitution. Some comrades, he wrote, do not have a deep understanding of freedom of speech and raise the argument that "absurd speech" should not be allowed. But, he said, there is actually no way of knowing in advance whether "an unspoken speech is `absurd' or not" unless one is "an omniscient god who can judge unspoken speech".

The fact that the Beijing Daily can allow such an article to be published is a sign of progress. The next logical step is to actually allow freedom of speech, which inevitably means freedom of the press. With genuine freedom of the press, Chinese media would have the same credibility as foreign media.

Of course, there will be times when China may be seen in a negative light if news about protests, injustices and poverty are carried. But, then, foreign viewers will see that even the official media is allowed to carry such reports, and that itself will help bolster the country's image. Then, if Beijing still wants to spend billions of dollars to enable foreigners to learn more about China, it will be money well spent because the message will go to a receptive, rather than sceptical, audience.

Frank Ching is a Hong Kong-based writer and commentator. [email]frank.ching@scmp.com[/email]


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The monster devouring our English capability


Philip Yeung
Jan 22, 2009           
     
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Opinions are plastic. But facts are stubbornly metallic. Of 100,000 candidates at last year's Hong Kong Certificate of Education Examination, more than 12,000 earned a score of "0" in English. The failure rate is nearly 60 per cent, if you consider scoring 2 out of 5+ a failure. The repeater rate is 30 per cent. In A-levels, it is downright disastrous: more than 70 per cent of students from the Chinese-medium schools failed their English, dashing their dreams of going to university.

Yet, those who fathered the much-maligned mother-tongue teaching policy are fighting tooth and nail with those who favour change. But they are all barking up the wrong tree. Label or no label, the problems will not go away. What is defeating our children and our schools is an exam system that turns classrooms into torture chambers.

Local teachers are one-trick performers: herding students through a maze of drills towards the exam inferno. There are no cultural crossings, no joy, no love of the world's most flexible language. For all its billions of educational dollars, Hong Kong is simply not getting its money's worth. Forget about being a hub. We are too damaged educationally for such a pipe dream.

This twisted system dictates what is taught, how it is taught and where. It defines the role of principals and marginalises native English teachers who are underutilised by not being a part of the exam charade. Exam results are a principal's report card. No principal will risk his or her reputation or the survival of the school by not overdrilling students for the monster exams. The teachers themselves are older victims of the same system. How do you expect them to teach differently?

Providers of teacher-training programmes are gearing up to breed more English teachers to feed the need enlarged by the loosening of the language leash. But, until the exam evil is exorcised, there is not a ghost of a chance that English will improve in Hong Kong. It will most certainly bedevil any reform.

Judging by the educational ills, Hong Kong is ill-qualified to design English exams. Ours is a system that has given us idiotic essay topics such as "Lemon Tea".

It has also given us the deadly benchmark exams for teachers. These exams are an unmitigated disaster. The exam paper on metalanguage, in particular, has been the downfall of many popular and passionate teachers. In one truly tragic case, a Harvard graduate whose father donated tens of millions of dollars to set up local schools for the poor volunteered to teach in his father's schools. But, to his utter dismay, he flunked this single baffling benchmark paper. Today, he hides in shame and is lost to teaching. He, alas, is not alone.

Don't pin our hopes on changing the school labels. Pin them on the head of the examination authority issuing a one-word command to his English team: "disband". Until that happens, you can argue till kingdom come about the pros and cons of mother-tongue teaching, but it won't affect the number of victims of, or refugees from, our wretched education system.

Philip Yeung is a Hong Kong-based university editor. [email]philipkcyeung2@yahoo.com[/email]

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Was Bush al-Qaeda's best friend, after all?


Gwynne Dyer
Jan 23, 2009           
     
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President Barack Obama's inauguration increases the likelihood of a major terrorist attack in the US. That was the stark message of the South Waziristan Institute for Strategic Hermeneutics (Swish), a think-tank that offers strategic advice to some of the leading players in global politics.

Swish warned in its mid-December report to Mr Obama's transition team that al-Qaeda "will attempt a 9/11-level attack, probably within the United States, at some point between now and mid-2010. If and when that happens, your country will require exceptional levels of political leadership if you are to avoid yet another misguided military response."

Unfortunately, the institute only exists in the fertile brain of British academic and strategic analyst Paul Rogers, who publishes its reports on the website of Open Democracy.

The Swish phenomenon began as an attempt to educate western analysts in the thinking of their Islamist enemies. The reports mimicked the format used by the think-tanks that advise the US government and the Pentagon, but came from the mythical South Waziristan Institute, supposedly also hired by al-Qaeda.

The Swish reports, however, were based more deeply in reality than most of what passed for political analysis in Washington over the past eight years. Professor Rogers assumed (correctly) al-Qaeda leaders were intelligent and had coherent long-term strategies.

In particular, he assumed that a primary purpose of the September 11 attacks was to lure the US into invading Afghanistan (and other Muslim countries), as that would radicalise Muslim populations and generate waves of recruits. Once George W. Bush did that, he was al-Qaeda's man, and its main interest was keeping him in power.

So, in its first report to al-Qaeda in 2004, Swish said it could not recommend a further large terrorist attack on the US, since its impact on American public opinion was unpredictable. It might strengthen support for Mr Bush in the November 2004 election, but equally it might turn opinion against him.

The notion that the US could be a pawn in somebody else's game has gradually been making headway among US analysts. Former Homeland Security chief Tom Ridge conceded, a couple of years ago, that his success in "preventing" further al-Qaeda attacks after September 11 might have been due to the fact that it wasn't actually planning any.

But, by the same token, Mr Obama's arrival may make a new September 11 desirable. While he is not proposing a US withdrawal from Afghanistan or a complete troop withdrawal from Iraq, he seems less persuaded than Mr Bush that invading and occupying Muslim countries is a good idea.

So, if there is any way that al-Qaeda can organise a major attack on US soil in the coming 12 to 18 months, it will do so. Its main goal must be to stampede the American public back into the fearful mindset that allowed Mr Bush to launch his wars in the first place, and hope that Mr Obama will be swept along by it.

Gwynne Dyer is a London-based independent journalist whose articles are published in 45 countries


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Public lacks stomach for food and politics


OBSERVER
Alex Lo
Jan 29, 2009           
     
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Most people like to savour a good dish. Some develop a taste for cooking. It is impossible, however, to be a true foodie without knowing something about ingredients, spices and seasonings, how to handle raw meat and negotiating your way through wet markets. If you have acquired some cooking skills, you owe it to your family and friends to show them off. And, if you are a politician, what better way to win hearts and minds than through the palate? As with most endeavours, practice is much more important than true culinary talent. So, every opportunity and friend counts.

Unfortunately, some recent scandals in Asia have probably put politicians and civil servants off public gastronomy for a while. A top Singaporean civil servant was rapped this month by his boss and became the butt of jokes in countless internet chat rooms after boasting in a newspaper article about extravagant cooking courses he and his family took in Paris. And a Thai premier was removed from office last year for hosting a cooking programme on TV.

Sex and gambling used to be the usual causes of many public men's downfall; now, food can do them in just as well.

Ousted Thai prime minister Samak Sundaravej used to routinely entertain friends and visiting foreign leaders by cooking up a feast. He got such excellent feedback - well, some of his guests were diplomats, after all - that he decided to host a morning cooking show, Tasting and Grumbling, on TV. By all accounts, it was more entertaining to watch him wield a kitchen knife than making speeches. However, the country's constitutional court intervened in September and ordered him to stand down for accepting payments to host the show. He said he only claimed expenses for buying ingredients and for travel costs, but he had left an opening for his enemies to exploit successfully.

This month, Tan Yong Soon, permanent secretary in Singapore's environment ministry, caused a storm after writing in the lifestyle section of the Straits Times about his experience learning to cook French cuisine at the prestigious Le Cordon Bleu school in Paris. Singaporean bloggers and internet chat rooms blasted him for boasting about taking the extravagant five-week classes - which cost S$42,000 (HK$216,638) - with his investment banker wife and young son. He took paid leave for the trip but he and  his family paid for the cooking courses themselves.

Since then, parliamentary members have questioned the propriety of his article. Defence Minister Teo Chee Hean, who is also in charge of the civil service, described it as showing "a lack of sensitivity and was ill-judged", given the economic downturn.

In Mr Tan's defence, I would say the 2,000-word article picked the right angle and was an interesting piece of immersion journalism. He described the intensive course, which ran for 10 hours a day over three weeks. As a top pampered civil servant unused to physical work, he was cut, burned and bruised in the kitchen. By the end of the course, he was mentally and physically exhausted. His only offence was this paragraph, which he put in brackets, indicating he realised it was superfluous to his otherwise interesting narrative: "Taking five weeks' leave from work is not as difficult as one thinks. Most times, when you are at the top, you think you are indispensable. But if you are a good leader who has built up a good team, it is possible to go away for five weeks or even longer."

It was exceptionally stupid and arrogant of him to write it. But my guess is that most people who have denounced him haven't read the original article.

Public men who want to show off their kitchen skills can learn from former police commissioner Dick Lee Ming-kwai. When most police chiefs in Hong Kong have taken lucrative private sector jobs faster than you can say "conflict of interest", Mr Lee wrote a magazine food column and gathered a cult following among housewives. That's class.

Alex Lo is a senior writer at the Post


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How economic freedom declined under Bush


Robert Lawson and Joshua Hall
Jan 30, 2009           
     
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There is no doubt that US president George W. Bush's "war on terror" will dominate any assessment of his legacy. However, the marked decline in economic freedom during this time, despite Mr Bush's repeated acknowledgement of its importance, should not be overlooked.

The importance of economic freedom, domestically and abroad, was a consistent theme for Mr Bush, going back to his first presidential campaign. In 2002, the Bush administration unveiled a new approach to foreign aid, the Millennium Challenge Account, with the goal of a US$5 billion annual budget by 2006.

Mr Bush stated that aid would be given to countries that "govern justly, invest in their people and encourage economic freedom", and the US would no longer dole out funds to corrupt, autocratic governments.

Unfortunately, while he was actively trying to promote economic freedom abroad, his domestic policies were eroding that freedom for Americans. In a recent study - the "Economic Freedom of the World: 2008 Annual Report" - released by a consortium of think-tanks, America was tied for eighth place, with a score of 7.86 on a scale of 0-10, with 10 being an extremely high level of economic freedom.

The results are based on 42 different factors taken from a variety of international data sources. Hong Kong came top and the US also ranked below Switzerland, Chile, and Canada, among others. That is troubling enough. Yet, this one-year snapshot misses the significant decline in economic freedom since 2000 and how that decline reversed a long-term trend of increasing economic freedom in the US.

In 1970, the US also ranked eighth, with a score of 7.61. That rose steadily over the next three decades, to 8.55 in 2000, second only to Hong Kong. Starting in 2000, economic freedom began to decline sharply, losing nearly two-thirds of a point. Only eight countries had a decrease of half a point or more during this period. And only Niger, Venezuela, Argentina and Zimbabwe fared worse than the US.

America's decline came from three areas: government spending, legal and property rights, and regulation. First, Washington was spending and regulating more at the end of Mr Bush's presidency than at the beginning. The ranking associated with government spending fell to 39th from 18th, and the regulation ranking fell to 14th from 2nd. Second, and most disturbing, is Mr Bush's legacy in the legal and property rights arena, where the ranking fell to 28th from 9th highest in the world.

Mr Bush's attempts to highlight the importance of economic freedom around the world with the Millennium Challenge Account were laudable. Emphasising economic freedom abroad is surely the best way to promote growth and poverty alleviation. Unfortunately, Mr Bush's presidency left his own citizens less free economically.

Auburn University professor Robert Lawson is a co-author of the annual Economic Freedom of the World report, published by the Fraser and Cato institutes. Joshua Hall is an assistant professor of economics at Beloit College


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Can two faulty tools fix the economic mess?


J. Bradford DeLong
Feb 02, 2009           
     
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When an economy falls into a depression, governments can try four things to return employment to its normal level and production to its "potential" level. Call them fiscal policy, credit policy, monetary policy and inflation.

Inflation is the most straightforward to explain: the government prints lots of bank notes, and spends them. The extra cash in the economy raises prices. As prices rise, people don't want to hold cash in their pockets or their bank accounts - its value is melting away every day - so they step up the pace at which they spend, trying to get their wealth out of depreciating cash and into real assets that are worth something. This spending pulls people out of unemployment and into jobs, and pushes capacity utilisation up to normal and production up to "potential" levels.

Sane people would rather avoid inflation. It is a dangerous expedient that undermines standards of value, renders economic calculation virtually impossible and redistributes wealth at random.

The standard way to fight incipient depressions is through monetary policy. When output and employment threaten to decline, the central bank buys up government bonds for immediate cash, thus shortening the duration of the safe assets that investors hold. With fewer safe, money-yielding assets in the financial market, the price of safe wealth rises. This makes it more worthwhile for businesses to invest in expanding their capacity, thus trading away cash they could distribute to their shareholders today for a better market position that will allow them to reward their shareholders in the future. Boosting future-oriented spending today pulls people out of unemployment and pushes up capacity utilisation.

The problem with monetary policy is that the world's central banks have bought so many safe government bonds for so much cash that the price of safe wealth in the near future is absolutely flat - the nominal interest on government securities is zero. Monetary policy cannot make safe wealth in the future any more valuable.

The third tool is credit policy. We would like to boost spending immediately by getting businesses to invest not only in projects that trade safe cash now for safe profits in the future, but also in those that are risky. But few businesses are able to raise money to do so at present.

And so to the fourth tool: fiscal policy, where the government borrows and spends, thereby pulling people out of unemployment and pushing up capacity utilisation to normal levels. There are drawbacks: the subsequent deadweight loss of financing all the extra government debt, and the fear that too rapid a run-up in debt may discourage private investors from building physical assets, which form the tax base for the future governments that will have to amortise the extra debt.

But when you have only two tools left, neither of which is perfect, the rational thing is to try both - credit policy and fiscal policy - at the same time. That is what the Obama administration is attempting to do.

J. Bradford DeLong is professor of economics at the University of California at Berkeley. Copyright: Project Syndicate


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Why should we bail out the bungling bankers?


Paul Krugman
Feb 03, 2009           
     
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Question: what happens if you lose vast amounts of other people's money in America? Answer: you get a big gift from the government - but the president says some very harsh things about you before handing over the cash.

Am I being unfair? I hope so. But right now that's what seems to be happening. Just to be clear, I'm not talking about the Obama administration's plan to support jobs and output with a large, temporary rise in federal spending, which is very much the right thing to do. I'm talking, instead, about the administration's plans for a banking system rescue - plans that are shaping up as a classic exercise in "lemon socialism": taxpayers bear the cost if things go wrong, but shareholders and executives get the benefits if things go right.

When I read recent remarks on financial policy by top Obama administration officials, I feel I'm in a time warp - as if it's still 2005, Alan Greenspan is still the Maestro, and bankers are still heroes of capitalism.

"We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system," says Timothy Geithner, the Treasury secretary, as he prepares to put taxpayers on the hook for that system's immense losses.

Meanwhile, a Washington Post report based on administration sources says that Mr Geithner and Lawrence Summers, President Barack Obama's top economic adviser, "think governments make poor bank managers" - as opposed, presumably, to the private-sector geniuses who managed to lose more than US$1 trillion in just a few years.

And this prejudice in favour of private control, even when the government is putting up all the money, seems to be warping the administration's response to the financial crisis.

Now, something must be done to shore up the financial system. Letting major financial institutions collapse can be very bad for the economy's health. And a number of them are dangerously close to the edge.

So banks need more capital. In normal times, banks raise capital by selling shares to private investors. You might think, then, that if banks currently can't or won't raise enough capital from private investors, the government should do what a private investor would: provide capital in return for partial ownership.

But bank shares are worth so little these days that pumping in enough taxpayer money to make the banks sound would, in effect, turn them into publicly owned enterprises.

My response: so? If taxpayers are footing the bill for rescuing the banks, why shouldn't they get ownership, at least until private buyers can be found? But the Obama administration appears to be tying itself in knots to avoid this outcome.

If reports are right, the bank rescue plan will contain two main elements: government purchases of some troubled bank assets and guarantees against losses on other assets. The guarantees would represent a big gift to bank shareholders; the purchases might not, if the price was fair - but prices would, the Financial Times reports, probably be based on "valuation models" rather than market prices. That suggests the government would be making a big gift here, too. And, in return, for what is likely to be a huge subsidy to shareholders, taxpayers will get nothing.

Will there at least be limits on executive compensation? According to The Washington Post, "the administration is likely to refrain from imposing tougher restrictions on executive compensation at most firms receiving government aid" because "harsh limits could discourage some firms from asking for aid". This suggests Mr Obama's tough talk is just for show.

There's more at stake here than fairness, although that matters too. Saving the economy is going to be very expensive. We can't afford to squander money, giving huge windfalls to banks and their executives, merely to preserve the illusion of private ownership.

Paul Krugman is a New York Times columnist


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thanks a lot for your sharing

Net gains
If Hong Kong's tax base is too narrow, then the government should be brave enough to broaden it

Joseph Wong
Feb 04, 2009           
     
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In his consultation document on the 2009-10 budget, Financial Secretary John Tsang Chun-wah mentions a narrow tax base as one of our future challenges. The document says that, among the 3.55 million total working population, only 1.3 million (36.6 per cent) pay salaries tax. Is this problem really as serious as Mr Tsang suggests? And how shall we broaden the tax base?

Eleven years ago, the then-financial secretary, Donald Tsang Yam-kuen, in his 1997-98 budget, rejected the argument that increasing the basic allowance in salaries tax would make the tax base too narrow. "I have looked carefully at the statistical evidence on this subject," he said. "In each of the last five years, we have raised the basic allowance in real terms. Yet the total number of taxpayers - the tax net - has remained relatively stable, at around 1.4 million. I hope that members will accept my assurance that today's tax concessions will not undermine the productivity of salaries tax as a source of revenue."

At that time, 44 per cent of the city's workforce paid salaries tax. Since then, salaries tax concessions have been proposed in seven of the 10 subsequent annual budgets, including the last one. As a result, despite the increase of several hundred thousand wage earners in the past decade, the number of salaries-tax payers has declined by 100,000.

It was against this background that the government put forward a proposal in the second half of 2006 to broaden our tax base with the introduction of a goods and services tax (GST). A year later, it shelved the proposal in the face of strong opposition by the business sector and general public. Yet, in the same year, the then-financial secretary, Henry Tang Ying-yen, proposed a number of substantial salaries tax concessions that cost HK$4.9 billion annually and narrowed the tax base further. Last year, his successor, John Tsang, honoured the chief executive's election pledge and increased the level of personal allowances.

So is it not appropriate to conclude that the narrow tax base we face today is the result of the actions taken by successive financial secretaries over the past 11 years (except for Antony Leung Kam-chung, who raised salaries tax in the 2003-04 budget)? Is it not fair to say that, in winning the applause of taxpayers at the time, Donald Tsang, Henry Tang and John Tsang did not have sufficient regard for the long-term sustainability of our tax system?

The present situation is unsatisfactory and needs to be addressed. But a GST is not the answer, for two reasons. First, a tax based on goods and services is a most regressive and unfair one. It is not suited to a place with an increasing income disparity like Hong Kong. Also, while only one-third of our wage-earners pay salaries tax, almost all households pay rates based on the estimate of the annual rent of their properties. So, it is reasonable to say that most people already pay some tax.

Second, a GST is inherently complex and, once introduced, will have a lasting effect on our simple tax system. Shelving the proposal was the right decision; it should now be buried permanently.

The solution to the narrow tax base lies in increasing the percentage of salaries-tax payers to at least the previous level of 44 per cent and, preferably, higher. In the consultation document on a GST, the government did offer another option to broaden the tax base: a major reduction in personal allowances. As the administration did not favour this option, it was presented as a one-off exercise. But, if our present narrow tax base is the accumulated effect of 10 years of concessions, it is not fair to resolve the problem in one go, nor is it necessary.

The government may have to incur substantial expenditure in 2009-10 and even in the next two to three years as we brave the worst impacts of the financial crisis. But we have one of the largest foreign-exchange reserves in the world and the unfailing support of one of the financially strongest economies, in the mainland, whenever we need it. The government could afford to spend more than it receives for several years without putting our financial system or currency at risk.

The financial secretary should, therefore, propose a target for the percentage of wage earners in the salaries tax net, say 50 per cent to 60 per cent, and set a timeframe, of say 10 to 12 years, for achieving it. He should initiate a public debate on the matter. There is no urgency to reduce personal allowances. But he should send a clear message to the public that any future salaries tax concessions would be limited. Given the government estimate of a medium-range annual inflation rate of 4 per cent, our tax base will be widened substantially in the next five to 10 years, even without a major reduction in personal allowances in any year.

Widening the salaries tax net is fair and reasonable. There is no reason why most wage earners should not pay a small percentage of their income to benefit the community. It is a simpler and more equitable alternative to a GST.

In last year's budget speech, the financial secretary challenged Hong Kong citizens to have courage and aspirations, and "dare to hope" for our future. May I, in return, challenge him to take decisive steps to broaden our tax base, starting with a clear commitment that the present base will not be further narrowed during his term in office?

Joseph Wong Wing-ping, formerly secretary for the civil service, is an honorary professor at the University of Hong Kong


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Bank depositors dump roubles and seek safe places for cash


RUSSIA
Alex Rodriguez
Feb 16, 2009           
     
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The rouble has plummeted like a piece of space junk, unemployment is climbing steadily and Russian economists are predicting the worst is yet to come. Last month, Sergei Postnikov decided he had seen enough.
He withdrew from his bank accounts all the roubles he owns, converted the stack into US$33,000 and stuffed it into a safe-deposit box.



"Most of my colleagues did the same thing," said Mr Postnikov, 28, an economist at a major Moscow bank. "We are all very well aware of what's going on. We need to do this for the sake of access and security."

Legions of Russians are moving money into safe-deposit boxes in a wave of hoarding reminiscent of behaviour during the 1998 financial crisis, when Russia's economy collapsed under the weight of crippling debt and falling oil prices.

Russia bounced back from that crisis to become an energy powerhouse intent on regaining the geopolitical say-so that it once wielded as the Soviet Union. Today, however, Russians find themselves fretting about a return to the dark days of 1998, and that has many of them abandoning trust in financial institutions and stashing away their money in places that give them certain access.

The trend is the latest warning sign for a Kremlin struggling to stave off a wholesale economic meltdown — and the spread of social unrest that could come with it.

Recent demonstrations in Russia's Pacific port of Vladivostok were sparked by outrage over higher tariffs for car imports, but underpinning that anger was a growing dissatisfaction with Prime Minister Vladimir Putin's handling of the economic crisis.

During the eight years that Mr Putin was Russia's president, protests against his authoritarian rule were rare, largely because Russians were satisfied that he had the country's economy on the right track towards a swift and prosperous resurgence.

Today, that collective satisfaction with the state of the country is eroding, and a growing number of Russians are laying the blame on Mr Putin. Mr Putin, who became prime minister last year, faces his biggest challenge yet as he struggles to allay the fears of a nation worried about a return to bleaker days of the 1998 crisis, when Russians saw their life savings vanish.

"I think authorities here should start to think twice about what they're doing," said Yevgeny Chagurov, a 43-year-old pressman, as he marched with protesters through central Vladivostok, "because more and more people are coming out to the streets".

The latest dose of bad news came last month, when the Russian government predicted that gross domestic product would shrink by 0.2 per cent this year, marking the first contraction of the country's economy since 1998. Oil prices, the bulwark of the Russian economy, have fallen to below US$40 a barrel from record levels that topped US$140 last summer.

Across Russia, companies have begun carrying out mass layoffs, shortening working weeks and scaling back production. Authorities estimate that nearly 1 million people have lost their jobs since the crisis began, and predict unemployment will reach 7.5 per cent, or 5.5 million people, this year. The rouble has lost a fifth of its value since the summer and now trades at about 36 rubles to the US dollar.

"It's going to be a very hard year for Russia and its economy," said Yulia Tseplyayeva, chief economist at Merrill Lynch's Moscow office. "And it could be much worse than it was in 1998. In 1998, the crisis wasn't global, and there were healthy parts of the world economy that boosted demand for oil. Today's crisis is deeper."

The rouble's decline has triggered a frenzy among Russians to safeguard their cash. Businesses and consumers alike have been rushing to convert their roubles into US dollars or euros. At Alfa Bank, one of Russia's leading banks, 70 per cent of deposits were in roubles before the crisis, said Alfa executive Vadim Yudin. Today, more than 80 per cent of Alfa Bank's deposits are in either US dollars or euros.

Banks also have begun to run out of safe-deposit boxes. Nearly 95 per cent of Alfa Bank's safe-deposit boxes are now in use, Mr Yudin says. VTB24 Bank, another leading Russian bank, reports a 30 per cent increase in demand.

"This seems the most convenient way of keeping their assets liquid and handy," Mr Yudin said.

The Russian government's Deposit Insurance Agency insures up to 700,000 roubles (HK$156,500) of a bank customer's deposits. "But that's a limited amount of money," Mr Postnikov said. "And no one can guarantee that I'd get it quickly. It could take months."

Even Moscow's moneyed elite are withdrawing large amounts of cash and moving it into safe-deposit boxes. "There have been cases in which VIP customers have been hiring courier vehicles because they were physically incapable of carrying away their cash in bags," the Russian newspaper Gazeta reported earlier this month.

"This trend is creating serious problems for Russian banks," said Alexei Buzdalin, an analyst with Moscow's Centre for Economic Analysis.

"The amounts of money that wealthy clients are withdrawing from accounts can cause liquidity shortages and hinder the resources banks need to function."

McClatchy-Tribune


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The party's over
Business has slumped and expats are scrambling for flights out as Dubai's boom turns to bust

MIDDLE EAST
Paul Lewis
Feb 17, 2009           
     
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Arab tycoons wrapped in traditional headscarves sipped fruit-juice cocktails as they watched Russian models twirl in silk dresses. It was the most exclusive ticket in town, a private catwalk show to which the Middle East's biggest spenders had been personally invited. But, if the smiles at last week's Dubai fashion event looked more false than usual, it was for a reason. The net worth of the VIPs in attendance is a fraction of what it was six months ago.

A six-year boom that turned sand dunes into a glittering metropolis, creating the world's tallest building, its biggest shopping mall and, some say, a shrine to unbridled capitalism, is grinding to a halt. Dubai, one of seven states that make up the United Arab Emirates (UAE), is in crisis.

So too are the western expatriates, many of whom came expecting to make millions in property, and to soak up a lavish lifestyle living alongside footballers, actors and supermodels.

But the property bubble that propelled the frenetic expansion of Dubai on the back of borrowed cash and speculative investment has burst. Many westerners are being made redundant, or absconding before the sharia legal system catches up with them.

Half of all the UAE's construction projects, totalling US$582 billion, are either on hold or cancelled, leaving a trail of half-built towers stretching into the desert.

Among the casualties is the tower that tycoon Donald Trump promised would be the ultimate in luxury, a US$100 billion resort complex by the beach, and four huge theme parks and an artificial island developed by the state company Nakheel.

It is not all bad news for Dubai: the building projects still in play are almost the equivalent of the US stimulus package. And the city remains a haven for super-rich sheikhs, billionaire hedge fund managers and Russian oligarchs.

But the banks have stopped lending and the stock market has plunged 70 per cent. Scrape beneath the surface of the fashion parades and VIP parties, and the evidence of a slowdown is obvious. The luxury hotels are three-quarters empty.

Shopkeepers in newly built malls are reporting a drop in sales. In Dubai, you expect to see a Ferrari parked beside a Rolls-Royce, but not with scruffy "For Sale" signs taped to the windows.

Nowhere sums up the fortunes of expatriates in Dubai quite like Palm Jumeirah, an artificial island which fans out into the Persian Gulf and is populated by the likes of David Beckham, Michael Schumacher and even, it is said, Afghanistan's president, Hamid Karzai.

At the top of the island stands the Atlantis, a garish US$1.5 billion hotel complex with 1,539 rooms and a whale shark swimming in a million-litre fish tank.

The Atlantis' US$20 million inauguration celebration, where A-list celebrities were treated to 1.7 tonnes of lobster and 1,000 bottles of Veuve Clicquot champagne, was promoted as the world's biggest party.

For Palm residents, it was followed by an equally impressive hangover. The value of their villas and apartments fell by as much as 60 per cent in just a few months.

"Drink your last cocktail and get out of here," was the advice of Sasha Reynolds, a 33-year-old air stewardess. "My boyfriend is an engineer and work has dried up. He's been offered work in Qatar but who wants to go there? People are still making money here but the parties aren't quite the same. I'm lucky - I didn't buy."

Though there is much evidence of mass redundancies, the exact number of unemployed is not known - the Dubai government does not release figures, and prevents the press from running stories that damage the economy.

But there were sacked expatriates - bankers, lawyers and architects - in all but one of the hotel bars visited in Dubai last week.

Employees who lose their job in the UAE automatically have their visas rescinded, and generally have 30 days to leave.

"I look out of my balcony every day and I see Brits by the pool on their laptops," said Andrew Hillocks, 29, a sacked telecommunications consultant whose passport has been seized. He will be escorted to the airport this week.

"They're looking for work that just isn't there. I sold my car to cover my loan, but other people are panicking," he added.

Under Dubai's legal code, defaulting on a debt or bouncing a cheque is punishable with jail. Any expatriate in financial difficulty knows the safest bet is to take the next outbound flight.

At the airport, hundreds of cars have been abandoned in recent weeks. Keys are left in the ignition, with maxed-out credit cards and apology letters in the glove compartment.

Officials put the number of abandoned vehicles at 11. "No one believes that. There are 11 cars abandoned just on my street," said Anne, 26, a fashion editor from London. "Over the past two months, I've been getting an e-mail a day from people trying to sell their stuff. `New Jaguar - need to sell before the end of the week'."

In a world of self-made millionaires and property entrepreneurs, some remain bullish. Simon Murphy, 42, runs the exclusive Crest of Dubai social club for Palm residents. "My job is to keep people smiling," he said.

The former hedge fund adviser's apartment is a "boy's paradise". Beside the snooker table and darts board are photos of Mr Murphy beside Richard Branson and footballers Alan Shearer and Pele.

"I have the beach there. My local is that bar a couple of yards away. That's the pier where they're going to dock the QE2. People ask about the whole `living-the-dream' scenario? Ain't this it?"

Some people had to lose out, he said. "As they say: eagles fly with eagles. The motivating factor to come here is greed. You have to be selfish, have minimal social responsibility, and want to make money quick. It's the nature of the beast that not everyone wins."

In Dubai, however, the losers are the invisible majority.

Taxi drivers from Egypt, Yemen and Iraq compete for work. Their clients often ask to go to hotel bars where, at night, they will find prostitutes from eastern Europe, Africa and Asia.

Expatriates from developing countries helped maintain Dubai's orgy of consumption during the boom years. They, too, are being forced to leave.

Perhaps those who suffer most are the construction workers from South Asia, who have carried out perilous work on building sites for as little as US$100 a month.

The Indian embassy is reportedly anticipating an exodus with 20,000 seats on flights to India already "bulk booked" for next month.

Buses come to pick up 250 workers every night from one dusty street on the edge of Sonapur, a labour camp on the edge of the desert. As night falls, the gangly silhouettes of construction workers file out of the camp gates. "There is no work," said Jasvinder Singh, 24, placing his suitcase in a pick-up truck, the words "Dubai to Delhi" taped to the side.

"It has been such a drama. We came here to earn money. We are going home to see our wives but our pockets are empty," Mr Singh said.

"We were treated badly here. We were slaves to the Arabs," said Sanjit, 44, another construction worker from Punjab, gesturing angrily in the air.

But unlike their British counterparts, construction workers from India, Bangladesh and Pakistan cannot abandon lives in the glove compartment of a four-wheel drive. Most took loans to pay agent fees to come to Dubai, and their debts will follow them home.

"I sold our land and took loans in the village to come here," said Imran Hassan, a 20-year-old Bangladeshi farmer. "I paid the agent US$3,000 to bring me.

"He said I would earn 1,500 dirham [HK$3,170] a month, but we are paid 572 dirham. When I return people in the village will want their money but I have none."

A Welsh construction site manager, who would not give his name, said he had protested to his boss about the treatment of workers. "We tell them to bring their clothes to work one day and then we send them home. It makes me feel sick. I asked why it had to be done so quickly and I was told a lot of them commit suicide and we don't want that on our hands," he said.

Dubai's future will actually be decided well away from the shimmering skyscrapers. To find out why, you need to drive 150km south along the Gulf coastline, past tiny Bedouin enclaves and shimmering desert mosques.

Abu Dhabi, the oil-rich capital of the UAE and the richest emirate, has opted for a more conservative, some would say prudent, approach to growth that contrasts with Dubai's giddy expansion.

But it boasts 95 per cent of the UAE's oil reserves and more than half of its gross domestic product, and regional experts predict it will overtake Dubai as the destination of choice for westerners in the Middle East.

Dubai, which has barely a trickle of oil, is projecting a 42 per cent increase in public spending on infrastructure projects, to compensate for vanishing private investment.

But it cannot go it alone. Abu Dhabi is increasingly expected to bail out its poorer neighbour, and the two ruling families are meeting regularly to decide how to transfer cash into Dubai's ailing economy.

"The question is not if Abu Dhabi will come to the rescue, but how big it will be and how public," a source close to the negotiations said. "Abu Dhabi cannot let Dubai sink."

Abu Dhabi has its own problems, however. The emirate's sovereign wealth fund - once said to be worth US$1 trillion - has taken a hit in the global recession, while the price of the country's lifeblood, oil, is down more than 60 per cent.

Fifty kilometres from the capital, dust rises from the barren horizon where a 10km building site is being turned into al-Raha Beach, an US$18 billion waterfront city. It is a joint venture between Aldar, Abu Dhabi's largest property developer, and Laing O'Rourke, the largest construction company in Britain.

"A lot of staff have been moved over here from Dubai," said Paul, 35, a Laing O'Rourke project manager. "But it is all coming to a stop here too. There are mass redundancies now. We've gone from an expat workforce of about 1,000 to about 400. There are more waves of redundancies coming this week."

Back in Dubai the next day, a Mercedes snaked along the city's main street, Sheikh Zayed Road.

Firas Darwish, 35, an Emirati property magnate dressed in traditional Arabic clothing, sat in the driver's seat, listening as Veronica Chapman, 65, a British property agent, recalled what the city was like when she first arrived in 1980.

"No milk, no bread, no schools. It was a desert and a couple of buildings," she said.

Mr Darwish slowed the car to point out abandoned building sites where cranes stood still in the baking heat. "Here we are completely reliant on foreigners," he said. "Maybe Dubai grew too fast."

The Guardian

More bank bailouts won't get credit flowing


Douglas Diamond and Raghuram Rajan
Feb 18, 2009           
     
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Little political enthusiasm exists for further support for the banking sector. One reason is that banks which received money in the initial rescues do not seem to have increased their lending, without which monetary and fiscal stimulus are unlikely to be effective. For banks to start lending again, even more intervention may be needed.

To see why, we need to understand why banks are still so reluctant. One possibility is that they worry about borrowers' credit risk. A second possibility is that banks fear a lack of resources to meet their own creditors' demands if they lock up funds in long-term loans.

But perhaps banks fear being short of funds if investment opportunities arise. Citicorp chief executive Vikram Pandit said as much when he indicated it was cheaper to buy loans on the market than to make them.

Consider, for example, the real possibility that a large indebted financial institution faces a run on its deposits, as Lehman did, and starts dumping loans onto the market. Not only will those loans' price fall if only a few entities have the spare funds to buy them, but other distressed entities' scramble to borrow will also make it hard for any institution without funds to obtain them. Anticipating the prospect of such future fire sales, it is understandable that even strong banks will restrict their lending.

This may also explain why markets for some assets have dried up. Some distressed banks clearly possess large quantities of mortgage-backed securities, and are holding onto them in the hope that their prices will rise in the future, saving them from failure. At the same time, buyers expect even lower prices down the line. While there is a price today that reflects those expectations, it is not a price at which distressed banks want to sell.

As a result, there is an overhang of illiquid financial institutions, whose holdings could be unloaded if they run into difficulties. For some, low prices would render them insolvent. For others, low prices would be a tremendous buying opportunity. Political exhortations to lend can have some, albeit limited, impact. Any voluntary resumption of lending will necessitate reducing both fears and potential opportunities.

There are ways to reduce the overhang. First, authorities can offer to buy illiquid assets through auctions and house them in a government entity, much as was envisaged in the original Troubled Asset Relief Programme. This can reverse a freeze in the market caused by distressed entities that don't want to sell at prevailing market prices.

A second approach is to have the government ensure the stability of significant parts of the system that hold illiquid assets by recapitalising regulated entities that have a realistic possibility of survival, and merging or closing those that do not.

The sooner the authorities bite the bullet and clean up the financial system, the sooner the economy will be on the road to recovery.

Douglas Diamond and Raghuram Rajan are professors at the Booth School of Business at the University of Chicago. Copyright: Project Syndicate


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Science class no place for creationist dogma


OBSERVER
Alex Lo
Feb 19, 2009           
     
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Academic freedom does not mean university scholars are free to teach whatever they see fit in the classroom. The fact a scientist admits he has been secretly teaching what, by the scientific consensus of his peers, is a pseudo-science and a creationist dogma should have set off alarm bells.

Chris Beling, an associate physics professor at the University of Hong Kong, has appeared in the media to openly attack his faculty for banning him from formally teaching a course on intelligent design and the origins of the universe. He has also complained that the university would not let him invite prominent speakers who advocate such views. He is not shy about telling of holding secret weekly meetings in his office to teach students about the topic. A self-described Christian, it appears Dr Beling feels emboldened enough to go on the offensive and to make it sound like he is being censored.

No one is questioning his faith. As a Hong Kong resident, he must be free to believe in, and openly practise, whatever religion he subscribes to. He should be completely free to teach intelligent design in a church, or even in university classes for theology or philosophy. He should enjoy the same freedom if he were a devotee of fung shui or astrology. Indeed, I applaud him for taking part in an RTHK radio debate last week about creationism and evolution to mark the 200th anniversary of Charles Darwin's birthday. By arguing for the contentious doctrine in public, he has performed a valuable service to the community.

However, he is absolutely not free to teach the doctrine as a scientific theory that deserves equal time in a physics or biology classroom. He is no freer to do so than he would be if he were to insist on teaching fung shui or astrology as science. The HKU faculty is absolutely right - and must have the courage of its convictions - to continue to ban him from teaching the doctrine as a physics lecturer and university employee using science faculty facilities and time.

Intelligent design is a creationist dogma posing as an empirical-scientific theory. It has been primarily an American phenomenon, though it is slowly spreading elsewhere. It is not a rival to the theory of evolution and natural selection; and no responsible scientist should teach it as such. Core arguments similar to intelligence design have been around for centuries; they were levelled against Darwin in his lifetime.

But intelligent-design theory today is often clothed in modern biological or physics terminology to make it sound more scientific. Its leading advocates at the Seattle-based Discovery Institute argue "certain features of the universe and of living things are best explained by an intelligent cause, not an undirected process such as natural selection". But beneath their rhetoric, they are creationist at the core. They insist on the theory's scientific status because of the peculiar culture and politics in the US. Creationism is practically banned in all American states from being taught as science. So to get creationism through the back door into schools, fundamentalist Christians came up with intelligent design as the camouflaged vehicle.

Centuries ago, the scientific revolution came about in the west by abandoning teleological or intelligence-directed causes as scientific explanations. Now, advocates of intelligent design want to reverse this basic scientific paradigm. Investment in research based on the edifice that Darwin built has yielded compound-interest-like returns in major scientific and medical breakthroughs and technological advances.

If we were to fund intelligent design "scientists" with all the money we have now and allow them to teach their "science" everywhere, a century from now, it's a safe bet that their followers would still be repeating the same old arguments with nothing scientifically creditable to show for it. It will be a major divestment in science and cultural enlightenment the day we allow intelligent design to be taught as science.

Alex Lo is a senior writer at the Post


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The US that can say 'no' to pleas for help


Ian Bremmer
Feb 20, 2009           
     
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Early this month, Kyrgyzstan's president, Kurmanbek Bakiyev, went cap in hand to Moscow to ask for financial aid. To make his request more palatable, Mr Bakiyev announced that he was demanding that the United States close its airbase in Kyrgyzstan, which resupplies Nato troops in neighbouring Afghanistan. Similarly, late last year, Iceland's government asked Russia to help bail out its banking system, while Pakistani President Asif Ali Zardari visited China in the hope of securing an emergency infusion of cash.

Some observers cite these episodes as evidence of a decline in America's international clout. But there's a larger point: so far, except for relatively small sums offered to the Kyrgyzs, Russia and China haven't offered much help.

Amid much talk of a "post-American world", many observers see a shift from a US-dominated international order towards a multipolar system, in which countries like China and Russia compete for global leadership on a range of common challenges.

More than five years ago, President Hu Jintao proclaimed "the trend towards a multipolar world is irreversible and dominant". When Russia's then president, Vladimir Putin, complained during a conference in Munich last year that US unilateralism stoked conflict around the world, an offended Senator John McCain responded that confrontation was unnecessary in "today's multipolar world".

When Mr Putin welcomed Venezuelan President Hugo Chavez to Russia last September, he said that "Latin America is becoming a noticeable link in the chain of the multipolar world that is forming".

All of them have it wrong. US dominance is clearly on the wane, but a multipolar order implies that several emerging powers hold competing views about how the world should be run, and that they are prepared to act to advance their global agendas. That is not the case.

Instead, we are witnessing the birth of a non-polar order, in which America's chief competitors remain too busy with problems at home to shoulder the heaviest international burdens or accept responsibilities that the US can no longer afford.

Despite its growing ties with Venezuela and efforts to co-ordinate energy policy with natural-gas-rich countries in North Africa, Moscow has no aspirations to rebuild Soviet-scale influence in Latin America, Africa or Southeast Asia.

China's hunger for imported oil and other commodities has given it an international presence. But its influence is more commercial than political. Leaders must devote their attention to pressing problems at home: averting an economic slowdown, the fallout from rural land reform, and environmental and public health issues.

In short, there is a vacuum of global leadership just when it is badly needed. For the next few years, when those in crisis turn to the US for help, they are more likely to hear the word "no". And it is not at all clear that anyone else is willing and able to say "yes".

Ian Bremmer is president of Eurasia Group and a senior fellow at the World Policy Institute. Copyright: Project Syndicate


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Fulfilling the promise of US-India relationship


Frank Wisner, Charles Kaye, Vishakha Desai and Alyssa Ayres
Feb 23, 2009           
     
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Few places in the world offer as daunting a set of challenges as South Asia. A narcotics-fuelled insurgency threatens newly democratic Afghanistan. A resurgent Taleban in its tribal areas has destabilised Pakistan. The carnage in Mumbai has prompted another standoff between nuclear-armed India and Pakistan.

Each of these crises demands urgent action. But, as a new Asia Society taskforce argues, in tackling them, the world must not lose sight of the promise of the India-US relationship.

Today, both countries stand on the brink of a historic opportunity: a new relationship that will foster global security, stronger economies, nuclear non-proliferation and progress in combating climate change. But these potential gains will be realised only if US President Barack Obama gives India the attention it deserves, and if both countries broaden the strategic stake by involving their private sectors in issues that governments alone cannot resolve.

Already, the end of the cold war and painstaking diplomacy have brought the US-India relationship to a point unimaginable just 10 years ago. The US presence in Afghanistan highlights the need for stability in South Asia. India's democracy and burgeoning economy make it a major factor in the Asian balance of power, and the recent terrorist attacks in Mumbai underscore a shared struggle against violent Islamic extremism.

The recent civil nuclear agreement between the two countries paves the way for co-operation in halting the spread of nuclear weapons. At the same time, bilateral trade has soared to more than US$40 billion in 2008, from about US$12 billion in 1998. Even where the two governments continue to disagree - for example, on the Doha round of trade negotiations and the solution to climate change - the potential for co-operation outweighs differences.

To begin with security, India is a vital piece of the puzzle on questions of stability in Afghanistan and the balance of power in Asia. On global non-proliferation, the US should push for a role for India in next year's nuclear Non-Proliferation Treaty review conference to complete the country's transformation from being part of the problem to being part of the solution. In terms of counter- terrorism, the tragic events in Mumbai present an opportunity to ratchet up intelligence sharing.

Over the past decade, economics has pulled the US and India closer. It will continue to power the relationship; the US should tap India's potential as an engine for economic recovery. In the long run, a global trade agreement will not be completed without India's engagement. By getting India into the Group of Eight and other institutions, the US can ensure that India's growing global role carries commensurate responsibilities.

Beyond government co-operation, the creativity and dynamism of businesses, non-governmental groups and private citizens in both countries hold the key to what India and the US can offer each other and the world. Consider climate change. Without India, it is hard to imagine a successful conclusion to the 2009 Copenhagen conference to draft a successor agreement to the Kyoto Protocol. India and the US are natural partners in meeting this challenge, with innovative scientists and venture capitalists who can take technology breakthroughs from the lab to the market, and NGOs with vast conservation and advocacy experience.

For too long, the world's oldest and largest democracies have failed to fulfil the promise of their relationship. But if Mr Obama seizes what we believe is a rare historic opportunity this could change decisively - for the long-term benefit of America, India and the world.

Frank Wisner was US ambassador to India from 1994-1997; Charles Kaye is former chairman of the US-India Business Council and chairman of the Asia Society; Vishakha Desai is president of the Asia Society; and Alyssa Ayres is director for India and South Asia at McLarty Associates. Copyright: Project Syndicate


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No pain, no gain
Unpleasant adjustments are necessary for the future healthy development of the mainland economy

David Dollar
Feb 24, 2009           
     
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This is not the coming out party that China envisaged. Just as it emerges as the largest exporter in the world, the global market collapses and the world turns to the mainland to offer a reprieve. Beijing's export machine is in a stall. Its stimulative measures will help, but they may not be enough to generate the growth that the world and Chinese people have come to expect.

Each month's data is most disheartening; January's export figure showed an 18 per cent decline from the year before. More alarming was the 43 per cent drop in imports - many of those are parts and material for future processing, and their disappearance signals worse export performance in the months ahead. The government estimates that, already, 20 million migrant workers have lost jobs in manufacturing and construction. Painful as it is, the adjustment on the mainland is necessary for the future healthy development of the economy. The trick is managing that adjustment.

In recent years, half of mainland China's output has gone to investment and net exports. Yet they cannot be a source of growing demand forever. Trading partners cannot go on borrowing forever to cover consumption. As demand for imports from the US and other deficit countries dropped sharply, this reduced demand for mainland exports, with a quick spillover effect on construction of both factories and residences. Growth of investment in the property sector dropped to zero in the last months of 2008. Steel production was down 20 per cent from the year before; electricity use, down 10 per cent. These are indicators that the old model of growth based on exports and investment hit a wall.

Alarmed at these declines, the government quickly put together a 4 trillion yuan (HK$4.54 trillion) stimulus package, mostly of infrastructure projects. Some pundits immediately called this an attempt to hang on to the old model, but such criticism was unfair. First, there have been few efforts to try to maintain exports. Second, the infrastructure programme contains a lot of projects aimed at strengthening consumption and quality of life. However, not all details have been worked out yet, and there are some risks. The challenge is keeping the stimulus programme focused on legitimate future needs, not white elephants.

Another concern is that the package aims to limit damage in the industrial sectors. Of course, the government wants to avoid allowing these to decline too rapidly. But, over time, one would want a relative decline of industry and a shift in the growth model. The other half of the mainland's gross domestic product represents consumption. The half of the population that lives in rural areas consumes 9 per cent of GDP; the urban half about three times more (26 per cent). Government consumption - which includes public spending on health and education - is only 13 per cent. Both the welfare of Chinese people and sustainable long-term growth depend on increasing all those shares. The government has measures in all these areas: programmes to subsidise appliance purchases by rural households; stimulus to the property sector; and 850 billion yuan over three years to spread health insurance to 90 per cent of the population. These programmes all go in the right direction, and the issue is simply are they big enough to maintain a healthy rate of growth? Simple maths shows it will be hard to get growth out of consumption increases over one year.

What all this adds up to is uncertainty about the mainland's growth in 2009. The consensus view is that the fourth quarter of 2008 and first quarter of 2009 will be the bottom of the trough. The consensus forecast for 2009 is still 7 per cent. Two caveats: there is a wide range of views, from 5.5 per cent up to 8 per cent; and, forecasts for 2009 have been consistently marked down over the past year as new information, all bad, became available.

This leaves the question of how much China can contribute to global growth and stability. The first task is to limit the decline in its own growth. In academic circles there are some negative predictions that mainland growth could decline to 2 per cent or 3 per cent in 2009.

That would be a shock to global confidence and a further blow to the commodity-exporting developing countries that supply China. If growth continues to falter, my advice is, "think big" when it comes to government programmes and spending this year.

A second key task for Beijing is to keep open its trade regime and look for opportunities to liberalise further. It would be a smart move to open its service markets further, including sectors like financial services, logistics, airlines, media, telecom and transport.

While it's a bold move to liberalise during a crisis, there are two good reasons for Beijing to consider: first, global rebalancing will result in its trade surplus gradually declining. If service imports rise rapidly, then the adjustment can accompany moderate expansion of manufacturing exports. If imports do not rise, however, the adjustment may force a painful absolute decline in manufacturing. Second, more of the nation's future growth will depend on service industries. More openness and competition would create the same dynamism in services that China has already in manufacturing.

The long-term health of the mainland's economy and the global economic system largely depends on whether it successfully uses the crisis to make these adjustments.

David Dollar is World Bank country director for China and Mongolia, based in Beijing. Reprinted with permission from YaleGlobal Online. yaleglobal.yale.edu


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Think big
Hong Kong will need to make major changes to survive a new world economic order

Joseph Cheng and Anthony Cheung
Feb 25, 2009           
     
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At the recent meeting of the Group of Seven finance leaders in Rome, Italy's finance minister called for a "new world economic order" and argued that while this "might seem rhetorical ... it is a true goal we should be aiming towards". In support of this call, US Treasury Secretary Timothy Geithner agreed that "we need to begin the process of comprehensive reform ... so the world never again faces a crisis this severe".

At a Global Business Forum, held recently in Hong Kong, professional economists agreed that the global crisis will be severe, widespread, and unpredictable in its speed and shape. All this will lead to a protracted slowdown of economic activity worldwide, and a deep deterioration of confidence among investors, manufacturers and consumers. The emerging world economic order, and "disorder" in the interim, will be characterised by: much less independence for the financial sector worldwide; far greater government intervention and oversight; tighter credit across all economic sectors; rising unemployment across all salary levels; further coupling of developed and emerging economies; increased protectionism; and a trend towards globally co-ordinated fiscal and monetary polices.

Given these changes, can Hong Kong survive a new world economic order when it finally arrives? Traditionally, the city's economic prosperity (SEHK: 0803, announcements, news) has come from four major revenue sources: opportunistic property development; speculative stock market investment; entrepot cargo shipment; and, in recent years, financial services in support of mainland-related businesses. All this has been done within a macro environment, with the government expected to play a minimal role in economic affairs.

Past wisdom and success no longer suffice to equip Hong Kong to meet the challenges ahead. Increased government involvement in economic planning and oversight of financial institutions is somewhat alien to Hong Kong and will dampen opportunistic and speculative investment. The erosion of the city's position as both a trading platform of sourcing for mainland-made goods and a logistics hub for cargo shipments will further cut into its revenue base. Hong Kong people and businesses need to develop new capabilities to weather the storm and emerge as winners when the dust settles. Five major adjustments are necessary to facilitate fundamental changes and "out-of-the-box" thinking.

First, given such great uncertainties, companies need to be innovative; experience no longer applies. An innovation culture encourages people to be creative and rewards them when successful, but an experimentation culture goes one step further, by supporting and being committed to research-based creative endeavours, even if they fail. Hong Kong and many other Asian societies currently lack such a culture; taking risks that could end in failure are to be avoided.

Second, as the world's resources become increasingly constrained, coupled with the tightening of credit and increased oversight by regulatory bodies, future investment decisions will only be made after careful deliberation, not through speculation or opportunistic reasoning. A strong value-added commitment has to be instilled in Hong Kong business, with a dedication to value creation, rather than profits from transactions, as the primary means of securing returns.

Third, we need to develop a co-operative competitive environment to replace the current self-centred, tribal mentality in the Hong Kong psyche. We should encourage partnerships with neighbouring cities and nations, to launch large joint projects that strengthen the region's global competitiveness.

Fourth, we need new thinking about Hong Kong as a global city. Historically, it had benefited immensely from China's economic failure and subsequently its opening up and reform. Now, and in the future, prosperity has to come from mainland China's rise. Hong Kong must not allow itself to be marginalised but should opt to integrate effectively with the mainland and play an active role in its modernisation.

Hong Kong's international connectivity, and human and financial capital, make the city of great relevance to the mainland. The city should have global leadership aspirations, grounded in the richness of its human, capital and geographic resources.

Finally, decision-makers, in both the private and public sectors, need to develop a proactive strategic mindset. Given its colonial history, Hong Kong has not been accustomed to thinking strategically.

At a time of turbulent change, where there are no guidelines for what may come next, decision-makers need to set visionary and motivating goals that can lift the hearts and minds of the people, as well as mobilise the necessary resources to create a better tomorrow.

Otherwise, the new world order will arrive before we know it; and the opportunities will pass us by just as quickly, leaving Hong Kong lagging behind our competitors in the region, and the rest of the world.

Joseph L. C. Cheng is professor of international business and director of the Illinois Global Business Initiative at the University of Illinois. Anthony Cheung Bing-leung is an executive councillor and president of the Hong Kong Institute of Education


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A real world crisis


CHRISTINE LOH

Feb 26, 2009           
     
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As the world faces a breakdown of the global financial system, governments are negotiating a new climate-change deal this year to reduce carbon emissions. It is unclear whether the current problems will hinder or help the climate negotiations. Many say governments and business leaders will probably focus on the short term because it is easy to go along with a "business as usual" way of doing things.

The global financial crisis is intricately linked to the widespread environmental breakdown. Both are the result of an economy powered by vast quantities of fossil fuels. The accepted notion of economic growth stresses the creation of immediate value that is often far beyond the regenerative capacity of our assets or capital, whether financial or natural.



As vast sums of money are pumped into financial markets just to help stabilise them, the attention of world leaders is being diverted from the climate-change crisis. They are unable or unwilling to acknowledge that the world economy is physically limited by the resources and services provided by the environment.

Human activity cannot be separated from what nature is able to support. However, the way we waste our natural capital, through overexploitation and pollution, is seriously degrading the environment in many parts of the world. Accelerating greenhouse-gas emissions are changing the world's climate at an alarming rate, affecting agriculture, commerce and even human life through droughts, floods, extreme storms and forest fires. Species are threatened; others are adapting in unwanted ways, notably crop pests and disease-causing pathogens. The threat to civilisation is very high.

During a recent visit to South Africa for a meeting between the Tallberg Foundation - a Swedish non-profit organisation - and public- and private-sector leaders, there was a growing sense that many parts of Africa will be among the worst hit. The continent's forests are dwindling, removing a vital carbon "sink", while deserts are expanding. Governments are still allowing new coal mines to open rather than turning to renewable power. Safe water supplies are under stress as droughts and floods become more severe. The rising population only puts greater demands on limited resources.

A lot of solutions have been suggested for Africa's problems, many of them common sense rather than hi-tech. Many opportunities exist in rural areas for small solar-powered energy systems to be developed using affordable, existing technology. Conservation and efficiency projects are a priority. Low-tech farming methods such as intensive organic production can reduce water use, eliminate reliance on proprietary seeds and fertilisers, and lock up carbon in soils while raising farm productivity and improving nutrition.

The key to these solutions is that they must be practical. Our African friends complained that, all too often, foreign governments want to press on them technology and methods that are inappropriate for their communities. The message was about being disconnected. Good intentions are wasted if those who offer technology and development assistance do not understand the needs of the African people. Many Africans feel that developed countries are too quick to pass on outdated technology, to make a quick profit, while simpler and cheaper solutions are available.

The Tallberg Foundation has identified four main goals for government and business leaders. First, they must address climate change within the wider challenge of preserving the regenerative capacity of global ecosystems. Second, they should ensure that a new climate regime is developed using the most up-to-date science. Third, they must embed ethics and principles of equity at the core of the global response to climate change. Finally, they must recognise that the effectiveness of a new climate deal depends on global governance reform that promotes the common good and not just economic interests. This applies not only to Africa, but to China and the rest of Asia, too.

Christine Loh Kung-wai is chief executive of the think-tank Civic Exchange. [email]cloh@civic-exchange.org[/email]


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He's only human


PETER KAMMERER

Feb 27, 2009           
     
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Barack Obama has been compared to Martin Luther King, the greatest American presidents of the past century and a half and, in a recent Harper's magazine article by South African writer and painter Breyten Breytenbach, Nelson Mandela. Mr Obama took office a little more than a month ago on a sea of the highest of hopes and exuberance; he has not had it all his own way with his cabinet appointments but, still, the shine has not worn off. All the world's problems have been laid at his feet and we expect him to fix them. It's time for a reality check before we get totally carried away and start referring to him as the next Jesus: he is a mere mortal, not a miracle-maker.

I don't mean to be a killjoy. Times are bad and, if a rare politician comes along who inspires and brings cause for optimism, we should give him or her our every support. Mr Obama is a breath of fresh air to a world that has lost faith in its leaders. In the absence of anyone else who inspires confidence, let's give him the ball and the opportunity to shoot a few hoops.

That said, we should not get carried away. For all his apparent qualities, he is not yet a great leader. He has no track record at the international level. Our wish list is far-reaching and broad; the majority of these issues have been on the global to-do list for decades and will not be resolved in two years, one or two presidential terms, or perhaps ever.

To his credit, the president has told us not to get too carried away. The economic meltdown will take time to come to grips with, he has said. Climate change will similarly be a tough nut to crack. But he has nonetheless told us his administration will come up with solutions and steer the world out of the gloom.

Economies move in cycles; Mr Obama is correct to say that the good times will one day roll again. Given that no one is exactly sure of just how deep the crisis will be, whether the upswing will occur while he is at the helm is a matter of guesswork. Global warming could be here to stay. Mr Obama may well get leaders together and deals struck, but just how effective they will be is a matter of wait and see.

His promised approach to foreign policy is laudable. He wants to reach out to old friends and talk to foes. Iraq-style invasions are not on his agenda. But past diplomatic failures make up the bulk of the State Department's in-tray: North Korea, Iran, the Arab-Israeli conflict and terrorism.

With this latter issue in mind, the president has taken up Afghanistan as his foreign-policy priority. Among his first orders was to send in 17,000 additional American troops. History is not on his side, though: time and again, the country's tribes have outfoxed foreigners. Two British occupations in the 19th century and the Soviet Union's invasion in 1979 ended with defeat. The US-led war is seven years and four months old and gains are being turned into losses. Taleban-inspired tribes in neighbouring Pakistan are widening the challenge; some observers are portraying the conflict as America's new Vietnam.

As daunting as all this may be, it is not enough for the Obama enthusiasts. They want him to go even further, getting leaders to reshape the multilateral framework centred on the International Monetary Fund and World Bank, restart the Doha Round of trade talks, and eradicate disease and poverty. Even activists dedicated to issues barely on the radar, like Myanmar and Sri Lanka, see him as their saviour. Expectations are irrationally high.

Mr Obama is not Superman. What he wants to get done is perhaps too broad to be achievable. Proving that he is only human, he has run into problems getting his cabinet filled. Three of his choices had to withdraw their names over tax irregularities. Treasury Secretary Timothy Geithner has proved less adept at his job than was anticipated.

The world is not in good shape. Mr Obama breaks the mould of recent American presidents and, in him, many of us see a chance for change. But, given the scale and scope of what has to be done, it would be wise to tone down the optimism a notch or two. That election campaign chant of "Yes, we can" should perhaps have been, "We'll try to do the best we can".

Peter Kammerer is the Post's foreign editor. [email]peter.kamm@scmp.com[/email]


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India should have been on Clinton's Asia itinerary


Lee Cheong Seong
Mar 02, 2009           
     
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There is excitement throughout Asia that US Secretary of State Hillary Rodham Clinton chose the continent for her maiden international voyage, bypassing the more traditional choices of Europe or the Middle East.
This was good thinking from the new US administration; global economic power continues to shift to Asia, despite the current global crisis. But, leaving India out signalled a lack of forward thinking and, in doing so, President Barack Obama missed an exceptional opportunity.

For some, Mrs Clinton's agenda appeared flawless. A visit to China is mandatory in any Asian schedule. Key allies such as Japan and South Korea were duly included.

Indonesia - the world's most populous Islamic country, a bustling  democracy, the re-emerging power in Southeast Asia - and Mr Obama's home for four of his formative years - was a clever choice.

But a visit to India - the world's largest democracy and one of the emerging poles of political and economic power - would have been an inspired one.

In contrast to the waning US- Pakistan relationship, America's engagement with India is blossoming. The US-India nuclear pact, discussed since 2005 and signed in mid-2007, was a milestone for relations.

As former US undersecretary of state Nicholas Burns - who played a key role in the negotiations - declared, the agreement signalled the beginning of a "strategic partnership" between the two nations.

It is noteworthy that the term has not yet been used to characterise Sino-US relations even though they were initiated by president Richard Nixon in 1972.

But while the India-US bilateral relationship continues to evolve, the concern is that America under Mr Obama will continue to take a narrow, unimaginative view of the broader strategic opportunities of partnership with India.

To be sure, India takes seriously its long-standing status as an "independent rising power". Few things would be more unpalatable to New Delhi than being passed off as an American lackey.

But there are reasons to believe that a US-India partnership is plausible. For example, Washington would be happy to allow New Delhi to have a growing pre-eminence in the Indian Ocean.

Despite some co-operation, tensions between New Delhi and Beijing remain, especially since China's militarisation of the Tibetan plateau. It is estimated that Beijing has  deployed about a quarter of its nuclear intercontinental ballistic missiles in Tibet.

India might not agree to become one spoke in America's "hub-and-spokes" model of security alliances in the region, but New Delhi and Washington have common strategic interests when it comes to "managing" China. An emerging India-US partnership should be an essential pillar of this "shaping" strategy.

Although Mr Obama's Asian strategy is still being formed, the fear is that the centrepiece of the administration's regional security strategy - which largely means managing China's rise - will be to deepen its  relationship with Beijing.

Critically, this might be done primarily through direct and bilateral engagement with the Chinese, while partners such as Japan and perhaps India are left on the sidelines.

American appreciation of the possibilities for India's role in the region have historically been poor. India's absence from the Asia-Pacific Economic Co-operation forum is an enormous oversight which has not helped.

But any future American grand strategy in Asia, especially with respect to a rising China, cannot exclude India if it is to be successful.

Mrs Clinton would have done well, and displayed admirable foresight and creativity, had New Delhi been part of her inaugural overseas trip as America's top diplomat.

John Lee Cheong Seong is a foreign policy fellow at the Centre for Independent Studies in Sydney. Copyright: OpinionAsia


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No longer a local bank, HSBC faces global trials


LEADER

Mar 03, 2009           
     
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HSBC has launched a massive capital raising from its shareholders to shore up its strength following a 70 per cent fall in profits last year. Given that it remains one of the world's most strongly capitalised banks, that says something about the impact of the financial crisis on the global banking industry. It also says a lot about HSBC's relative strength that it can turn to shareholders at a time when bank stocks have little appeal to investors and major British and American rivals have had to accept government bailouts and controls.

The US$17.7 billion rights issue at five-for-12 is priced at HK$28 a share, or a discount of more than 50 per cent to Friday's closing price. In considering it, shareholders will have to weigh poor market sentiment now and likely deteriorating conditions in the bank's markets against the prospect of future gains when the global economy recovers.

For many Hongkongers who have held HSBC shares for a long time, it would mean raising their stake in a vastly different bank from the conservatively run local institution they originally invested in - one with broad international exposure to a downturn that has left its mark. Net profit fell to US$5.7 billion last year from US$19.1 billion the year before, largely as the result of losses on consumer finance in the US subprime mortgage crisis.

HSBC is still making profits in the worst environment for financial institutions since the Great Depression. It says the rights issue will raise its Tier One capital reserves - a key indicator of a bank's financial strength - to 9.8 per cent, in excess of the target range, after they fell 1 per cent to 8.3 per cent last year. The question is whether shareholders will be persuaded that the group can put the worst of the fallout from the financial crisis behind it - that it is well-placed to ride out the financial storm and acquire good assets being sold off by rivals who have been bailed out by governments.

Last night, a number of Hong Kong tycoons pledged their support for the bank, with a few even agreeing to be an underwriter for the rights issue. Others have doubts, however, given recession in the US and Europe - a major profit contributor - and slowing down in its growth markets of Asia and South America raises a lot of uncertainty.

Before the handover, when HSBC was still identified as a Hong Kong bank (SEHK: 0005, announcements, news) , it enjoyed a lot of confidence from retail investors because it was a conservatively managed, prudent institution that rode on the back of the city's success. Slowdowns and crises came and went without the bank or its shareholders losing money in the long run.

As evidenced by relatively robust capital reserves during the current crisis, expansion has not come at the cost of prudence. For example, HSBC acted before many others to account for the meltdown in the US subprime mortgage market. It has now even decided to close its operations in the US.

However, now that it has become a global institution that bills itself as the "world's local bank", shareholders need to bear in mind the tougher challenges posed by operations in different parts of the world. There has long since been more to it than putting your money in safe hands in a money-making town with the ability to bounce back stronger from adversity.


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A scholar of many talents
After a lifetime devoted to learning, Jao Tsung-I, who just won a prestigious mainland fellowship, is still passionate about knowledge

ACADEMIA
Ella Lee
Mar 04, 2009           
     
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Talking to 91-year-old Jao Tsung-I is like being in the presence of a living encyclopedia of Chinese history. Indeed, it would be very easy to lose one's way as the internationally recognised sinologist races through topics such as oracle bone inscriptions (the earliest form of Chinese writing, dating back to 1700BC), relations among ancient fortune-tellers and the Dunhuang manuscripts.

To most "modern people" - as he calls them - the topics that Professor Jao has dedicated the past seven decades to studying may appear too difficult and remote.

"Modern people are always eager for entertainment, which doesn't leave much time to pursue knowledge," Professor Jao said, in between sips of tea at the University of Hong Kong's Jao Tsung-I Petite Ecole research centre, which was set up in his name.

Professor Jao's voice was impassioned as he spoke in his signature Cantonese with a Chiu Chow accent on how to get young people interested in Chinese studies.

The first thing "modern people" need to do was maintain a calm mind and learn to live with solitude; too many spend too much time watching TV or at a computer, he said. "They are now like machines or half-machines. Their spirits are caught by the virtual world. Soccer, for example, has occupied many people's minds. How can they have time for knowledge?" Professor Jao said

There are many ways to describe Professor Jao: an outstanding contemporary scholar in Chinese literature and history; a walking encyclopedia in philosophy, art, religious studies, archaeology and etymology; or a painter, poet and an expert in classical prose, essays and the history of music.

Last month, he became the first Hong Kong scholar to be awarded a fellowship of the mainland's Central Research Institute of Culture and History, a position that is directly appointed by the premier.

In 2003, HKU set up the Jao Tsung-I Petite Ecole research centre to store his more than 20,000 books, and collection of paintings and calligraphy.

The centre was named after the French petite ecoles, which in the Middle Ages provided training in ancient Latin and Greek rhetoric.

One of Professor Jao's works best known to Hong Kong people, the ancient Buddhist prayer the Heart Sutra, is now a popular tourist attraction called The Wisdom Path, in which the prayer is displayed on 38 giant timber columns on the Lantau Trail near Ngong Ping.

The inspiration for Professor Jao to create a calligraphy of the Heart Sutra came during a visit to China in 1980, when he saw the stone carvings of the Buddhist text the Diamond Sutra on Mount Taishan in Shandong.

Professor Jao said he had dedicated his calligraphy of the Heart Sutra, which teaches people to acquire the wisdom of "emptiness", to Hong Kong people because he wanted them to regain their spirit in this "messy" world.

Professor Jao's teenage years were in stark contrast to those of most "modern" youngsters. Born in 1917, he came from a wealthy family in Chaozhou, a city in eastern Guangdong: his father was a banker and scholar who collected books on Chinese literature, Buddhist culture and history.

As a youngster, the self-confessed "bookworm" spent most of his time in the family library. At the age of 16, his father died, leaving his work, the Chaozhou Literature Gazetteer, unfinished. The teenage boy went on to complete it.

In 1935, he was appointed the editor of the Guangdong history centre by the Zhongshan University in Guangzhou.

His works included The Gazetteers of Chaozhou and The Geography of Chuci.

He moved to Hong Kong in 1949 and, between 1952 and 1968, taught at HKU where his studies included poetry and oracle bone inscriptions. In 1962, he won a French award for outstanding achievement in Chinese studies, the Prix Stanislas Julien. He was made the first chair professor and head of the department of Chinese studies at the University of Singapore in 1968.

Five years later, he returned to Hong Kong and was appointed chair professor and head of the department of Chinese language and literature at Chinese University. He specialised in the study of Dunhuang.

During his teaching years, he lectured in France, Japan, on the mainland, in Taiwan and Macau before officially retiring in 1979. Today, he remains active and recently held exhibitions at the Palace Museum of Beijing and the Shenzhen Art Museum.

He said it would be difficult for others to follow in his footsteps because his family background was unique. "My father was wealthy and he was also a scholar; I learned a lot from him," he said.

"Money has never been a problem to me, I can put all my time into studies and research. Even now, I don't have the concept of money in my mind. I never do any research for money, but only for interest.

"I am interested in many things, and I cannot stop chasing the truth. I find much joy in learning."

Professor Jao follows a "multiple-point" research method. Apart from using previously published documents and literature to aid him, he also studies related archaeological discoveries.

Visits to archaeological sites have proved fruitful in supporting his research, and he has studied the culture and history of other countries - including India, Japan and those in the Middle East - to see how Chinese culture has influenced other parts of the world.

Professor Jao said his teaching at the University of Hong Kong during the 1950s and 1960s proved to be a significant period in his academic life.

He loves Hong Kong because it is his window on the world; the city has given him academic freedom and international exposure.

At HKU, Professor Jao had many opportunities to attend overseas conferences, where he established international links. "The University of Hong Kong is a foundation of my achievement."

Because he left the mainland decades ago, Professor Jao said he did not know much about simplified Chinese characters, and therefore could not say whether they had destroyed Chinese culture, as some critics have claimed.

"Simplified characters caused some difficulties to scholars because, very often, they have to make reference to ancient books written in traditional Chinese characters," he said.

"But simplified characters do have their function, they help many people who are not very educated to understand the Chinese language easier. So, as a scholar, you have to learn both. But even now, I don't know some of the simplified characters."

Professor Jao's younger daughter, Angeline Yiu, said her childhood was influenced by her father's academic life. "My father has many friends, they used to visit us very often to chat about poetry or Chinese paintings. Sometimes they practised calligraphy together. Our home was always busy."

Ms Yiu said it had never been easy to have private time with her father. "Sometimes, he promised to take me and my elder sister to buy ice cream but he would have to cancel because he was too busy with his friends."

She said she had tried hard to learn like her father, but in vain. "When I was about 12 and 13, my father taught me Egyptian and oracle bone inscriptions. I made a lot of notes but I found those subjects too difficult. I do not have the talent and I finally gave up."

Lee Chack-fan, director of the Jao Tsung-I Petite Ecole, said Professor Jao had a "pure heart for knowledge" and a strong curiosity that made him a remarkable scholar.

"Like many successful scientists, such as Isaac Newton or Albert Einstein, Professor Jao has a very strong sense of curiosity. He thinks like a child, pursues knowledge with a pure heart and always gets great fun out of it."

Professor Lee said the research centre would continue to promote Chinese studies and hold exhibitions and seminars.

Peter Cheng Wai-man, research co-ordinator at the Petite Ecole, said Professor Jao was like "a man living in ancient times". "Professor Jao's hobbies are so different from other people. He loves playing the guqin [an ancient Chinese stringed instrument] in the countryside or composing poems with his students."

Mr Cheng, Professor Jao's student, said it would be hard for other people to be as successful. "It is very difficult for a single academic to research on a very wide range of topics like Professor Jao has done; there are too many rules and restrictions in today's academic institutions," he said.

Even after decades of study, Professor Jao, who is also interested in Chinese-Indian cultural exchanges, still has unanswered questions: he says he has still not been able to prove the hypothesis that Chinese languages came before Indian languages. "This is an answer I need to find," he said.


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Dealing with the legacy of a bankrupt ideology


Kevin Rudd
Mar 05, 2009           
     
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From time to time in human history there occur events of seismic significance, when one orthodoxy is overthrown and another takes its place. Today, the scale of the global financial crisis demands that we re-evaluate the economic policy and philosophy that brought us to this point.

George Soros has said that "the salient feature of the current financial crisis is that it was not caused by some external shock ... the crisis was generated by the system itself". Mr Soros is right. The current crisis is the culmination of a 30-year domination of economic policy by a free-market ideology that has been variously called neo-liberalism, economic liberalism or economic fundamentalism. The central thrust of this ideology has been that government activity should be constrained, and ultimately replaced, by market forces. In the past year, we have seen how unchecked market forces have brought capitalism to the precipice.

Instead of distributing risk throughout the world, the global financial system has intensified it.

Just as it fell to Franklin D. Roosevelt to rebuild American capitalism after the Great Depression, and to American Democrats strongly influenced by John Maynard Keynes to rebuild post-war domestic demand, so it falls to a new generation to reflect on and rebuild our national and international economic systems.

Centrist governments face three challenges if they are to save capitalism. First, to use the agency of the state to reconstitute properly regulated markets and to rebuild domestic and global demand. With the demise of neo-liberalism, the role of the state is once more seen as fundamental.

The second challenge for social democrats is not to throw the baby out with the bathwater. As the global financial crisis unfolds and the hard impact on jobs is felt by families, the pressure will be great to retreat to some model of an all-providing state and to abandon altogether the cause of open, competitive markets. Protectionism is a sure way of turning recession into depression, as it exacerbates the collapse in global demand.

A further challenge for governments in dealing with the current crisis is its almost unprecedented global dimensions. Governments must craft consistent global financial regulations to prevent a race to the bottom, where capital leaks out to the areas of the global economy with the weakest regulation. We must establish stronger global disclosure standards for financial institutions. We must also build stronger supervisory frameworks to provide incentives for more responsible corporate conduct, including executive remuneration.

The world has turned to co-ordinated governmental action through the G20: to help provide immediate liquidity to the global financial system; to co-ordinate sufficient fiscal stimulus to respond to the growth gap arising from the global recession; to redesign global regulatory rules for the future; and to reform the existing global public institutions - especially the International Monetary Fund - to give them the powers and resources to meet the demands of this century.

The longer-term challenge for governments is to address the imbalances that have helped destabilise the global economy - in particular, between large surplus economies such as China, Japan and the oil- exporting nations, and large debtor nations such as the United States.

For governments, it is critical that we get it right - not just to save the system of open markets from self-destruction, but also to rebuild confidence in properly regulated markets and prevent extreme reactions from the far left or far right taking hold.

Governments must get it right because the stakes are so high: the economic and social costs of long-term unemployment; poverty that is once again expanding across the developing world; and the impact on long-term power structures within the international political and strategic order. Success is not optional. Too much rides on our ability to prevail.

Kevin Rudd is the prime minister of Australia. This is an edited extract from an essay published in the Australian magazine The Monthly


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Wolves rule as wildlife returns to Chernobyl exclusion zone


BELARUS
Vasily Fedosenko
Mar 06, 2009           
     
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We venture out at dawn from a dilapidated shack nestled in a forest in Babchin, Belarus, to see the animals, although rising early is not always necessary.

Still inhospitable to humans, the Chernobyl "exclusion zone" - a contaminated 30km radius around the site of the nuclear reactor explosion of April 26, 1986 - is now a nature reserve and teems with wolves, moose, bison, wild boars and bears.

Boars, which generally confine their sorties to dusk, plunder what remains of gardens in the daytime, strolling down empty village streets, wandering into farms and settlements in search of food.

Moose also venture out - like the cow and her two calves which appear on the roadside to munch on low-hanging branches.

"Moose are very curious creatures," said Grigory Sys, one of the naturalists who oversee the animals in the still-radioactive forest.

"They'll want to have a good look at us for a couple of minutes before heading off into the forest."

Since I met him about four years ago, I've accompanied Mr Sys half a dozen times round the 2,162 sq km zone, emptied of people by the fire and explosion at the plant just over the border in Ukraine.

Belarus, downwind from the blast, was the country worst affected by the world's worst civil nuclear accident.

A quarter of its territory was contaminated and villages were deserted on both sides of the border between what were then Soviet republics.

The human hardship is untold: dozens died putting out the blaze; there were mass evacuations of tens of thousands of people - some twice as the authorities underestimated the extent of radiation - and thousands developed thyroid cancer.

But it was undeniably a good thing for wildlife. "You'll see - they run off a bit, but will then stop," Mr Sys said of the moose.

Touring the zone with Mr Sys means spending several nights in a forest shack, with few comforts beyond three simple beds and a stove.

We take my car through the zone's abandoned villages. Houses, personal possessions, shops, even amenities like amusement parks, are left untouched from late in the Soviet era.

Mr Sys says the wolves, now numbering 300, are in charge. "The wolf is very clever and cunning. He earns the respect of any adversary," he said.

"They used to be killed off at any opportunity in the hundreds, even from helicopters. But they adapted and survived."

Killing wolves is now prohibited, with only a handful culled each year for scientific research.

That has let them dominate the abandoned forests and meadows, although some farmers outside the zone say wolves raid their livestock. Residents of two villages saw wolves in the streets and one woman was killed in a confrontation with them.

Wolf tracks are everywhere. Guides hear them howling in the night.

During a break for a snack in one village, Mr Sys suddenly stops and hisses at me not to move.

The grey animal is now visible on the road about 200 metres away, trying to assess what we are doing there with our car. In an instant, it darts to the left and disappears into the forest.

Now free from the influence of human habitation, wolves have altered their feeding habits and their main prey has become the packs of boars.

The free-roaming boars now push their way into what is supposed to be a feeding station for the reserve's bison herd.

"We feed the bison here in the winter. The boars often come here in the evening to try to get their share of the feed," Mr Sys said. "It's quite fun to see how the bison chase them away."

Guides report plenty of bear tracks in the area as well as lynx - animals classed as an endangered species in Belarus.

Some wildlife have disappeared because of the changes.

The white stork, once a familiar figure in the towns, disliked the isolation and headed off in search of populated areas. But the black stork, fond of thick forests, stayed.

One newcomer is the white-tailed eagle, the largest bird of prey in Belarus, rarely spotted in proximity to man. Mr Sys said he had seen five nests in an area now clearly suited to the birds. Some birds even choose to spend their winter in the zone - catching their fill of fish at unfrozen lakes.

The Polessk State Radiation and Environmental Reserve - and the freedom afforded to animals by the absence of human habitation - remains a huge magnet to researchers. But tourists and the curious are not welcome.

"We are happy to welcome here fellow scientists from other countries to work on joint projects," said its director, Pytor Kudan.

"But I am afraid we don't want tourists or amateur bird- or animal-lovers. We have very specific conditions here. And one of them remains high radiation, sometimes very high radiation."

Reuters


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A short-lived affair with the protectionist temptress


Daniel Ikenson
Mar 09, 2009           
     
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Despite the apparent political appeal of ideas like "Buy American", and the decisions by some governments to raise tariffs and other trade barriers in response to the global economic meltdown, trade protectionism isn't nearly as resurgent as some may fear.

The world will, in the end, reject the deceptive comforts of the protectionist temptress. Yes, India did recently raise tariffs and place other restrictions on some imported steel products, and Ecuador raised tariffs by 5 per cent to 20 per cent on 940 different products. There have been similar actions in other countries and more are likely in the months ahead.

But that kind of "backsliding" is permitted under World Trade Organisation rules. The WTO affords some flexibility to governments to occasionally indulge protectionist pressures, which allows the system to bend rather than break. The risk of such measures causing a perceptible drop in global trade flows is remote.

According to recent estimates from the International Food Policy Research Institute, if all WTO members raised all tariffs to their maximum allowable rates, the value of global trade would fall by 7.7 per cent over five years. That's a substantial decline from the 5.5 per cent yearly rate of growth during this decade, and would be quite painful.

But, to put matters in perspective, global trade plummeted 66 per cent during the protectionist pandemic in the first half of the 1930s. The absence of rules in the 1930s meant that there were no proffered courses of action, no sources of adjudication or remediation, and no limits to the actions governments could take in response to external economic policies. Today, we have rules and respected institutions that have worked reasonably well to ensure the integrity of the trading system. Nearly 400 disputes have been resolved successfully during the 14-year history of the WTO, and there have been no trade wars.

In the 1930s, there were far fewer domestic constituencies advocating against protectionism. Today, there are burgeoning interests in a diversity of countries who favour lower tariffs because their livelihoods depend on access to imported raw materials, components and capital equipment. The fact that most WTO members' tariffs are well below their maximum allowable rates suggests that something besides the rules compels openness to trade.

Perhaps it has something to do with the fact that trade barriers are costly to the country imposing them. Higher prices, fewer choices, lower-quality goods and services, and the absence of competition to motivate local business have always been ingredients of economic stagnation. But the proliferation of transnational production, cross-border investment, multinational joint ventures, and equity tie-ups has rendered the "us versus them" characterisation of global competition less applicable.

Global commerce is less "our" producers competing against "their" producers as it is a competition between global supply chains to produce and deliver products in multiple countries. The most successful supply chains encounter the fewest frictions - physical and administrative, including trade barriers.

While "Buy American" proponents perpetuate the myth that imports have destroyed US jobs, there is a strong correlation between imports and job growth, and between imports and economic growth.

That dynamic is easier to appreciate when one considers that 55 per cent of all US import value in 2007 consisted of raw materials, intermediate goods and capital equipment - the kinds of products the construction and manufacturing sectors purchase. Put in this light, it is more obvious that tariffs raise the costs of production, which undermines economic growth - or, as in the current case, economic recovery.

Although governments might indulge in occasional protectionist trysts in the months ahead, a durable commitment to global engagement will emerge in the end.

Daniel Ikenson is associate director of the Centre for Trade Policy Studies at the Cato Institute



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A bigger hole
Flooding mainland businesses with cheap money won't solve the main problem of low household demand

Andy Xie
Mar 10, 2009           
     
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Liquidity has been inspiring hope lately. The mainland's banking system is flooded with liquidity, and lending has increased massively since December, mostly in the form of discounted bills. The liquidity boom has inspired hope that a quick and vigorous recovery will follow. Instead, it could be a trap, leading to stagflation. China's problem is not liquidity, but household demand. Reform, not liquidity, can bring back prosperity (SEHK: 0803, announcements, news).

The current liquidity results from the mainland's huge trade surplus due to a faster decline of imports than exports. Banks have lent some of the extra liquidity to state-owned enterprises in the form of discounted bills. As the interest rate on such loans is very low, the businesses can deposit the borrowed money without incurring significant costs and, sometimes, even pocket a small profit. The practice has rapidly expanded the balance sheet of the banking system from an accounting perspective.

The lending, however, won't turn into demand any time soon. Most industries, especially capital-intensive ones, face overcapacity. The steel industry, for example, may have 30 per cent overcapacity. The shipbuilding industry is seeing massive defaults in orders; many shipbuilders are facing bankruptcy. Most developers cannot sell their properties and, if given money to build more, would only dig a deeper hole for themselves. The mainland's supply side has too much capacity. It is unlikely that more business loans would spark an economic recovery.

Lending to government projects can support demand. It serves as a multiplier on the fiscal stimulus programme. Bank lending may double its impact. The government has budgeted a 1 trillion yuan (HK$1.13 trillion) fiscal deficit, or 3 per cent of gross domestic product, for 2009. The stimulus could stabilise the economy but not restart high growth. Exports and property were contributing 6 to 8 percentage points to the GDP growth rate per annum during the last cycle. They are now contributing a negative amount of a similar magnitude. No amount of stimulus could completely offset the impact of their contraction. Further, Beijing is already investing too much and shouldn't go too far to pump up the economy temporarily, only to face a worse downturn later.

A big drop in exports, following the bursting of the global credit bubble, and the popping of the property bubble are the sources of the shortfall in demand. To solve the problem, Beijing must boost household demand to offset the export weakness, and reduce property purchase costs to clear the existing inventory. The mainland economy cannot resume its high growth until both problems are solved. Confidence is not the main reason for the relative weakness of household demand; low household income and wealth are. The quickest solution is for the government to distribute to the people the shares it holds in listed state-owned enterprises. That will have a powerful short-term effect on consumption. As business profits improve in a rising economy, the shares will appreciate, which would further support household demand, and ensure another decade of economic boom.

To distribute the shares, the government could automatically set up an account for each citizen, with his or her ID card number, at one of the state banks.

To clear the property inventory (now equivalent to one-third of existing housing stock) the cost per square metre should be cut. In some cities, the average price per square metre is three times the average monthly salary - or higher. This should be halved. That is not low by international standards. But, as the mainland could sustain high economic growth for another 15 years or more, property prices could become higher than the international average. The reduction in purchasing costs probably needs to be shared evenly between price cuts and tax incentives. The mainland property market is enormous, but unless its health is restored, domestic demand is unlikely to resume robust growth.

Some people hope greater liquidity will improve the economy by inflating asset markets - that is, by creating another bubble. This is what then-US Federal Reserve chairman Alan Greenspan did after the tech bubble burst in 2000. Of course, his glory has become today's nightmare. But creating another bubble to deal with the consequences of a burst bubble would be irresponsible - even if it could be done, which I doubt. Some of the liquidity did flow into the mainland stock market in December and January. At its recent peak, the market had risen 40 per cent in three months. But, it is extremely hard to manufacture a stock market bubble in a difficult economy because speculators are quicker to take profits than when the economy is booming.

Further, it is virtually impossible to inflate the mainland property market by encouraging speculation (by making it easier for people to obtain funding and keeping interest rates low). The current inventory is unprecedented; it is probably the biggest overhang per capita of physical properties completed or under construction in history. It will take three years to clear even with the best policymaking. Re-inflating the bubble with liquidity is just a pipedream.

Liquidity worship became entrenched during the Greenspan era. Its effectiveness was actually a bubble phenomenon. The liquidity inflated asset prices, which boosted consumption, and created the perception of effectiveness. For two decades, the world watched Mr Greenspan's magic as he fine-tuned economic growth rates to just the "right" level. It was a bubble.

Liquidity worship today seems so out of date. Trying a liquidity fix now is dangerous. Liquidity is debt. It is neither capital nor income. When a credit bubble bursts, it forces deleveraging; liquidity can't revive the appetite for debt in such an environment. Instead, liquidity could turn into inflation through rising commodity prices, which in turn pushes up wages. What awaits today's liquidity binge could be stagflation rather than economic revival.

Andy Xie is an independent economist


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Magic number
Every year, Beijing's growth target is 8 per cent. The figure is as intriguing as it is convenient

Drew Thompson
Mar 16, 2009           
     
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There are few constants during a time of economic uncertainty. But for those seeking solace in the midst of economic torment, look to the just-concluded meetings of the National People's Congress in Beijing. Premier Wen Jiabao launched the sessions by delivering China's version of the State of the Union address. Although the world, rattled by the global financial crisis today, looks vastly different than it did a year ago, he repeated with all the certainty of a pastor pronouncing "amen" that in 2009, yet again, Beijing would be setting a target of 8 per cent annual growth.

In recent years, this official target has drastically underestimated China's actual growth. This time, many observers think it may be an overestimate. In both cases, the question remains: why is 8 per cent considered the magic figure?

Most China watchers will tell you, as though it were a certain fact, that 8 per cent growth is the approximate level needed to keep employment up - and the potential for "social unrest" down. It is typically assumed that 8 per cent is what is required to create enough jobs to absorb laid-off workers from failing state-owned enterprises and new graduates entering the labour pool. Too much more than 8 per cent, and you risk runaway inflation; much less, and unemployed workers will march in the streets and chaos will ensue. So how did 8 per cent become sacrosanct?

In all questions of faith, look first to one's creator. In this case, that means Deng Xiaoping. At the 12th Party Congress, in September 1982, Deng determined that the national economic goal would be to quadruple the annual industrial and agricultural output of the entire country by the end of the century. Prior to the big meeting, Deng asked then general secretary Hu Yaobang how the country could quadruple its economy, from 710 billion yuan in 1980 to 2.8 trillion yuan in 2000, and Hu responded that 8 per cent annual growth would do the trick. That's it.

The end of the century has come and gone, but the target has remained the same. Subsequent five-year plans have all set an annual growth target of between 7.5 and 8.5 per cent. This national objective has since become the obsession of officials at each level of the vast bureaucracy.

The truth is, it's hard to tell exactly what China's annual growth rate actually is. Because officials receive promotions based on how well they tend their economic gardens, there's a strong incentive for mandarins at all levels to fudge the figures they report up the bureaucratic food chain. Invariably, almost every province reports growth exceeding the national average - which, of course, is impossible.

This presents difficulties for senior leaders in Beijing, who have to somehow adjust for such bureaucratic "inflation". At least by now they are well aware of the phenomena. In the late 1950s, local officials showed similar zeal (and political acumen) when they inflated grain outputs in their reports to higher authorities, resulting in mass starvation when the central government failed to recognise the trend of inflationary reporting, known as "the winds of exaggeration".

China is not a federal system. Although Beijing does occasionally dispatch secret investigators, the central government remains almost entirely dependent on provincial reporting chains.

Although Beijing's obsession with employment is well known, its fear of inflation is an equally important motivator. Officials feel they must walk a fine line between creating jobs and keeping a lid on prices. Chinese historians point out that the Red Army alone did not defeat the Nationalists in 1948 - hyperinflation, which resulted in skyrocketing food prices, was an equally essential factor in undermining the Kuomintang. Later, the Communist Party saw its own authority tremble in 1988, when inflation reached 20 per cent, resulting in panic-buying and contributing to discontent that culminated in the Tiananmen Square protests of 1989.

Today, as Beijing grapples with a global financial crisis, it might all come down to pork - not wasteful government spending, but the other white meat. On the Chinese mainland, fuel and grain prices are tightly controlled. So food prices, and pork in particular, will play a significant role in the mainland's economic recovery. Food contributes to at least a third of the mainland's consumer price index (CPI) basket. As a measure of inflation, the CPI is closely watched as a barometer for potential unrest. Because lower-income families have to devote a larger portion of their income to food, the government is particularly concerned about the impact of rising food prices on citizens who have not benefited from economic development - and are potentially dissatisfied with Beijing.

Recognising this, the National Development and Reform Commission, China's economic planning ministry, placed price controls on a number of food staples and building materials last year, trying to rein in rising prices, including a pork price increase of almost 60 per cent over the previous year.

When I see Mr Wen on Chinese TV, I am often filled with sympathy for him. Taking on the challenge of creating 9 million jobs a year amid global financial turmoil and the anxiety caused by falling exports, the premier's annual work report at the NPC is reassuring in its predictability and sense of certainty. It's no secret that 8 per cent gross domestic product growth will be a difficult target this year.

But, Mr Wen is seeking to reassure his troops, preaching a message that resonates with his flock and silently invoking the convictions of Deng that China's economic growth is an article of faith.

Drew Thompson is director of China studies and Starr senior fellow at the Nixon Centre in Washington


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