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The hidden hoards of 'small government'


Philip Bowring
Mar 17, 2009           
     
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Official hoarding of cash which belongs to Hong Kong citizens goes far beyond what is usually recognised. The government's fiscal reserves are listed at HK$488 billion. This is already about 28 per cent of gross domestic product and almost two years of recurrent government expenditure.

It makes the 2 per cent of GDP deficit announced by Financial Secretary John Tsang Chun-wah, in the face of the worst economic prospects at least since 1974, look more miserly.

But this is not half the actual reserves squirrelled away by leaders who fear that freeloaders and welfare seekers will want to raid the hoard. Coming from the mouths of overpaid officials and the inherited-wealth billionaires on the Executive Council, most of whom pay little, if any, tax, the arrogance is stunning.

Here is a list of other publicly owned reserve assets:


HK$480 billion (as at the end of 2008) in the undistributed profits of the Monetary Authority's Exchange Fund. In principle, none of this is needed to defend the currency peg which is protected by the convertibility of the note issue and by the operation of interest rates. Even if cash reserves also provide additional defence, as the fiscal reserves are mostly in foreign currency, they could be used to defend the currency - just as they were in 1998 to support the stock market.
Most should either be added to the fiscal reserves or, best of all, added to Mandatory Provident Fund accounts in a way that would recognise the contribution of older workers to Hong Kong's development in the 1960s and 1970s and relieve pressure on future recurrent spending on old-age-related benefits.

Then there is an additional almost HK$265 billion in unspent cash sitting in various funds as follows (from March 2008, the latest consolidated government accounts available).


HK$150 billion in the Land Fund. This fund received land sales revenue in the period of restricted land sales in the lead-up to the handover. Since then it has had no purpose - other than to obscure reality. It should be transferred to the fiscal reserves now.

HK$65 billion in the Capital Works Reserve Fund. This is unspent prior-year allocations for capital works, whether from land sales or transfers from the operating surplus. The hoard is now almost two years' worth of capital spending. Why?

HK$18.5 billion in the Civil Service Pension Reserve Fund - yet another sop to bureaucracy interests on top of the pensions paid out of recurrent revenue they are already promised.

HK$19 billion in the Loan Fund, HK$6 billion in the Lotteries Fund, HK$4.6 billion in the Innovation and Technology Fund: these are all allocations from prior years that remain unspent either because they were not needed or because of the lethargy of the bureaucracy in making them available. The Loan Fund should be sold to the private sector, the Lotteries money distributed to worthy causes for which it is intended, and the innovation fund either used or closed.
The above comes to HK$1.23 trillion, or 70 per cent of GDP - or five years of total operating expenditure!

All the above reserves are on a cash-accounting basis. On an accrual basis - used by companies - reserves were, according to the consolidated accounts at March 31, HK$1.22 trillion. That is after making provision for future civil service pensions of HK$497 billion. The difference between the accrual and cash accounts is primarily the HK$238 billion value of its income-generating businesses, and HK$280 billion in the depreciated value of buildings and infrastructure, minus the pension provision.

Even deducting HK$280 billion for essential services, net assets after pension provision are still HK$939 billion. That excludes land, which is still mostly government owned.

The administration may believe in "small government" when providing services and support to citizens. But it believes in "big government" when acquiring assets it can control.

Philip Bowring is a Hong Kong-based journalist and commentator


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Government should get out of wet markets


LEADER

Mar 18, 2009           
     
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Wet markets are an integral part of Hong Kong's cultural fabric. They are where many of us get our fresh food and produce and catch up on gossip. Few other places are as colourful, vibrant or friendly. Yet government complexes set up decades ago to make an often chaotic sector more orderly are more often than not forlorn and empty - and increasingly so.

The government auction of stalls at one such building in Tsuen Wan yesterday was telling. Such spaces should be in hot demand given how engrained wet markets have traditionally been in the lives of Hong Kong people. This was not the case, with only a small percentage of stalls on offer being taken up despite low rents.

Supermarkets have contributed to the decline. They have cleverly taken the wet market concept and used it to their advantage, providing a similar shopping experience in sections of their shops for fruit, vegetables, meat and fish in a considerably more comfortable environment. Prices can be higher, because bargaining is not permitted, but studies show that their market share is steadily growing. Air conditioning, labelling and cleanliness are clearly what shoppers favour.

Part of the problem is that the wet markets are run by the government - they are managed by the Food and Environmental Hygiene Department. This sort of commercial activity would be much better operated by the private sector. Yesterday's auction to rent out vacant stalls is a good example of where things are going wrong. Auctions are the government's preferred method of renting or selling property, but this is no way to operate a shopping centre. The right tenants have to be found and they have to sell an attractive mix of products. There has to be a pleasant shopping environment.

The government complexes are generally cramped and can be overly hot or cold, depending on the season. Smells can at times be overpowering. Poorly thought-out drainage means that the wet markets live up to their name. There is a sense they are unhygienic.

The government should not be in the business of managing wet markets. It realised this with shopping centres and wet markets in public housing estates and divested them to the private sector. That model may not suit the task at hand - co-operatives or a development corporation may be better alternatives. Regardless, the role of authorities should be plain: to provide the leadership to bring together hawkers and commercial expertise. Such a move will be politically difficult, given the history of wet markets. But it is the right way to proceed.

Getting shoppers into the wet market complexes will be challenging. The buildings have to be made comfortable to shop in. Products not available in supermarkets have to be a selling point. A friendly atmosphere has to be created. The to-do list is long, complex and perhaps expensive. What is certain, though, is that the government should step back and let the private sector take over.


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One-track minds
Beijing's 8 per cent growth targets may make political sense, but the economic argument is flimsy

Xu Sitao
Mar 19, 2009           
     
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As expected, Chinese leaders reaffirmed their commitment to achieve 8 per cent gross domestic product growth in 2009 during the annual National People's Congress session this month. Why did they do that? Rightly or wrongly, most Chinese policymakers adhere to the  8 per cent figure as the minimum growth threshold to create enough jobs for the country's enormous population. But this is a myth. There is no empirical evidence to suggest that if growth fell below 8 per cent, unemployment would rocket, sparking social unrest.

Still, it is worth asking whether Beijing can achieve 8 per cent growth this year. Let's begin with the Economist Intelligence Unit's baseline scenario. We believe that the world economy this year will be in a deep recession, but not a depression. A corollary to this is that protectionism will rise and cause more trade frictions but not a full-blown trade war. This is a good start.

For the mainland to reach the 8 per cent target for all of 2009, it must grow by more than that towards the latter part of the year. That is because the economy's downward momentum since mid-2007 may still be continuing. In the fourth quarter of 2008, GDP grew by only 6.8 per cent and evidence for this year so far indicates that the worst may not be over.

For instance, exports in January-February plunged 21.1 per cent, year on year, compared with a 2.8 per cent drop in December. If this presages a first-quarter performance similar to that of the fourth quarter, Beijing must deliver an average quarterly growth rate that is closer to 8.5 per cent for the rest of 2009.

The blow to growth from evaporating external demand should not be underestimated. As the yuan has remained strong against most other currencies throughout the global credit crisis, Beijing also faces a severe policy challenge in cushioning exporters' pain, as many of them operate in labour-intensive sectors employing large numbers of workers. But mindful of rising protectionist sentiment abroad, and the dangers of competitive devaluations, leaders have said they will keep the value of the yuan stable.

Instead, Beijing may dish out various subsidies to struggling exporters. Even this may not be enough to re-establish net exports as the robust source of growth that it has been in the past few years. Given the lack of global demand, it is possible that net exports could remain a drag on growth in 2009 (shaving off as much as 1.5 to  2 percentage points from the headline GDP growth rate).

In that case, the mainland must rely on government expenditure, domestic investment and, most importantly, private consumption to power the economy. The government has already turned on the fiscal spigot with its 4 trillion yuan (HK$4.54 trillion) stimulus package, and early signs are that investments are coming alive as a result. But, encouraging private consumption in this time of economic uncertainty will be very hard.

One way to change Chinese consumers' behaviour would be to raise spending significantly on the social safety net so people feel less of a need to save. Another is to lower the tax burden. But the finance ministry is reluctant to raise the personal income-tax threshold. Neither is it keen to expand nationwide the experiment of handing out consumption coupons that has been tried recently in some localities. From the government's perspective, it has already assumed large fiscal burdens with the stimulus and tax reliefs for the property and export sectors.

With the threat of inflation rapidly receding, however, Beijing has ample leeway on monetary policy to pump-prime the economy. The fact that the central bank has set its inflation target for 2009 at 4 per cent when deflation has returned suggests that monetary policy could become much more accommodating in the coming months. With relatively healthy balance sheets, state-owned banks can also afford to live with a narrower interest-rate spread (which is more than 3 per cent now) should financial authorities slash lending rates.

Should growth lag more than expected, Beijing will pull out all policy stops, including some tinkering with the exchange rate. Unfortunately, policy-makers so far seem fixated on jump-starting investment rather than promoting more consumption - which is more sustainable in the long run.

Certainly, they are likely to get more bang for their buck by showering money on infrastructure projects than on consumption coupons. But, the danger is whether they can swiftly remove such potent booster shots to the economy when the recovery takes off without causing adverse side effects, such as industrial overcapacity and bureaucratic excess.

The government's commitment to underwrite 8 per cent growth at all costs may make political sense. The economic argument for such a policy, however, is dubious at best.

Xu Sitao is the Economist Intelligence Unit Corporate Network's director of advisory services in China


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Exemption from rules just another top-job perk


Stephen Vines
Mar 20, 2009           
     
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The Hong Kong government has an uncanny knack for trying to solve one problem by creating another. As legislators pursue their inquiries into the scandal surrounding former housing director Leung Chin-man's involvement in the Hunghom Peninsula redevelopment, the government has launched a more wide-ranging consultation on the whole question of civil servants' post-retirement employment. This exercise could have provided an opportunity to tackle the wider issue of post-retirement conditions for all senior public officials but, yet again, it has been ignored by a government which is developing a reputation for only being able to do one thing at a time.

So, as matters stand, there will be yet another review of regulations for senior civil servants while the need to impose post-retirement conditions on their bosses, the so-called ministers or political appointees, is ignored. This review will also exclude conditions to be imposed on the so-called "mini-ministers", who have been appointed more recently.

More significantly, there is still no plan to look at the post-retirement roles of some of the highest-paid public officials, such as the head of the Monetary Authority and the Securities and Futures Commission, who are not classed as civil servants but who have occupied key posts, with heavy regulatory responsibilities and access to sensitive information not in the public domain.

It is not as though this major oversight is somehow accidental. When the consultation exercise was announced, legislator Regina Ip Lau Suk-yee pointed out the problem - only to be told by Ronald Arculli, who heads the review body, that she was not the first to mention the issue but he had no intention of addressing it. Mr Arculli has emerged as the government's default safe pair of hands who is regularly called in to handle sensitive matters but who will never rock the boat.

However, this is a boat that needs rocking because the unanswered questions go to the very heart of the credibility and integrity of the public service. How can the public trust officials who are allowed to move without restriction from regulatory bodies to companies they once regulated? Why are the most senior people in government exempt from controls imposed on their subordinates? And why is the government afraid to even address these issues?

The suspicion lingers that senior officials are far too interested in protecting their own interests rather than those of the public at large.

Sure, civil servants have rights but, in most jurisdictions, it is understood that entering the public service entails giving up certain rights in return for job security and, in Hong Kong, very high pay. Moreover, public employees are supposed to sign up to an ethos of public service. All this amounts to the very real concept that, even in retirement, public officials have responsibilities that are not imposed on their counterparts in other forms of employment.

Protecting the civil liberties of public servants needs to be weighed carefully against their responsibilities. In Hong Kong, this is clearly recognised by the constantly changing regulations for the post-retirement employment of senior civil servants but curiously ignored for others paid from the public purse who occupy even more senior positions.

It is unfair to assume that those leaving public service deliberately set out to exploit their past experience and privileged access to knowledge (although there have been far too many instances of this happening). But, to provide confidence in the service as a whole, the public must see a fair and equal system is in place to ensure transparency and probity for anyone who has enjoyed high office at their expense.

Why the government fails to recognise this crucial issue is a mystery but I cannot help but point out that those primarily responsible for this negligence are precisely the people currently excluded from restrictions on their retirement employment.

Stephen Vines is a Hong Kong-based journalist and entrepreneur


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Stretched to the limit
Wildly varying human fertility rates among nations could threaten future global security

Joseph Chamie
Mar 23, 2009           
     
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The world's population could reach 7 billion in just two years, and perhaps 8 billion in the next two decades. But that's not the only story. Dramatic declines in fertility rates in some countries and high rates in others pose a critical challenge. Without restoring some balance, the world could be heading towards instability and turmoil.

One must be reminded that the growth of world population - which now stands at an estimated 6.8 billion - has had a great impact on all life forms and the entire natural environment on the planet.

Although the world's population continues to grow substantially, by 79 million per year, the rate has declined by nearly half over the past 40 years - from  2 per cent to 1.2 per cent per annum. The cause is declining fertility rates.

However, while average global fertility has dropped from about 5 to 2.6 births per woman during the past 50 years, considerable uncertainty exists about the future. Insofar as fertility is the engine driving the future size of world population, this uncertainty about the path of fertility in the coming years is one of the central and challenging questions of this century.

Before the 20th century, world population grew slowly because, while fertility rates were high, so were mortality rates. In striking contrast, the 20th century ushered in the world's most rapid rates of population growth because, while mortality rates fell to relatively low levels, fertility rates remained comparatively high. World population nearly quadrupled during the past century, with 80 per cent of the growth occurring during its second half. The 2 billion mark was reached in 1927; 3 billion in 1960; 4 billion in 1974;  5 billion in 1987; 6 billion in 1999.

Behind these global population figures are enormous differences among regions and countries. For example, of the 79 million people added to the world every year, six of the most populous countries - India, China, Nigeria, Pakistan, Indonesia and Bangladesh - account for about half of this growth. India alone accounts for 21 per cent of global population growth, followed by China, which contributes 11 per cent. India's population is expected to exceed China's in about 20 years.

In contrast, among the more developed regions, little demographic growth is taking place. Many European countries and Japan are entering a period of population decline, and these trends are likely to continue.

In terms of annual rates of growth, the world's most rapidly growing region is Africa due to the large gap between high birth rates and comparatively low death rates. During the past half a century, Africa's population more than tripled, increasing from 227 million to 819 million. High fertility and vigorous demographic growth are expected to continue, with the African continent projected to have 2 billion inhabitants by mid-century. The populations of Asia and Latin America are also expected to rise by about 25 per cent over the next 50 years.

While future population growth remains uncertain, most current rates of population growth are unsustainable over the long term. In the near term, there's little doubt that the world's population will reach 7 billion, probably by 2011. Will the world reach 8 billion? Most demographic observers would say that it's highly likely, perhaps by 2025. After that, things become considerably less certain.

While, on average, fertility levels continue to decline, considerable variations exist across and within regions. Among more developed countries, rates are often below replacement levels, that is, about 2 births per woman, with some populations already shrinking. The average level for Europe, for example, is well below replacement, at 1.5 births per woman. Fertility rates in less-developed countries, in contrast, are often well above replacement. A notable exception is China, where fertility is 1.8 births per woman.

Some demographers expect that world fertility will remain above replacement for some time to come, pointing out that nearly all of sub-Saharan Africa and most of South and West Asia have high fertility levels. Others, however, see below-replacement fertility becoming the global norm in coming decades. Average world fertility, they note, is about half the level it was in the 1950s.

The uncertainty about the path of fertility is a central and challenging question of this century, given its impact on the future size of world population. Many demographers making long-range population projections see fertility levels eventually fluctuating around the replacement level. To do otherwise would lead in the long term to either extremely large, expanding populations or very small, shrinking populations. Assuming fertility rates gravitate to replacement during the coming decades and subsequently fluctuate closely around it, world population could in due course stabilise at around 9 to 10 billion.

Stabilisation of world population is perhaps the paramount issue of the 21st century. Without such stabilisation, humankind will find it much more difficult to deal with the critical issues facing the planet, like global warming, biodiversity, the environment, energy, food/water supplies, migration and security.

The path to population stabilisation requires sustained and critical attention, and informed policymaking at all levels. Today's decisions not only affect human well-being, but that of all life forms on Earth in the coming decades and beyond.

Joseph Chamie, former director of the UN Population Division, is research director at the Centre for Migration Studies.

Reprinted with permission from YaleGlobal Online. yaleglobal.yale.edu


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Look to 1989, not 1929, for a vision of the future


Dominique Moisi
Mar 24, 2009           
     
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As the economic crisis deepens and widens, the world has been searching for historical analogies to help us understand what has been happening. At the start of the crisis, many people likened it to 1982 or 1973, which was reassuring, because both dates refer to classical cyclical downturns.

Today, the mood is much grimmer, with references to 1929 and 1931 beginning to abound, even if some governments continue to behave as if the crisis was more classical than exceptional. The tendency is either excessive restraint (Europe) or a diffusion of the effort (the United States). Europe is being cautious in the name of avoiding debt and defending the euro, whereas the US has moved on many fronts in order not to waste an ideal opportunity to implement badly needed structural reforms.

For geostrategists, however, the year that comes to mind is 1989. Of course, the fall of Lehman Brothers has nothing to do with the fall of the Berlin Wall. Indeed, on the surface it seems to be its antithesis: the collapse of a wall symbolising oppression and artificial divisions versus the collapse of a seemingly indestructible institution of financial capitalism.

Yet 2008-2009, like 1989, may very well correspond to an epochal change. The end of the East-West ideological divide and the end of absolute faith in markets are historical turning points. And what happens in 2009 may jeopardise some of the positive results of 1989, including the peaceful reunification of Europe and the triumph of democratic principles over nationalist, if not xenophobic, tendencies.

In 1989, liberal democracy triumphed over the socialist ideology incarnated and promoted by the Soviet bloc. For many of his supporters, it was US president Ronald Reagan who, with his deliberate escalation of the arms race, pushed the Soviet economy to the brink, thereby fully demonstrating the superiority of liberal societies and free markets.

Of course, there are differences between 1989 and now. First, the revolutions of 1989 and the subsequent collapse of the Soviet Union put an end to global bipolarity. By contrast, 2009 is likely to pave the way to a new form of bipolarity, but with China substituting for the Soviet Union.

Second, whereas democracy and market capitalism appeared as clear winners in 1989, it is difficult in 2009 to distinguish winners from losers. Everyone seems to be a loser, even if some are more affected than others.

Yet, history is unfair, and the US, despite its greater responsibility for today's global crisis, may emerge in better shape than most countries. In better shape, but not alone. As a visiting professor at Harvard and Massachusetts Institute of Technology, I get a preview of what the world could look like when the crisis passes. One senses something like the making of an American-Asian dominated universe. From the incredible media lab at MIT to the mathematics and economics departments at Harvard, Asians - Chinese and Indians, in particular - are everywhere, like the Romans in Athens in the first century BC: full of admiration for those from whom they were learning so much, and whom they would overcome in the coming decades.

But before this new order appears, the world may be faced with spreading disorder, if not outright chaos. What, for example, will happen to a country as central and vulnerable as Egypt when thousands of Egyptians working in the Gulf are forced to return to their homeland as a result of the crisis in the oil-producing countries? And what about the foreign workers who have reached for the "European dream" and are now faced with potential explosions of xenophobia in Europe's supposedly open countries?

The consequences of 1989 ended up being less enduring than many observers, including me, would have assumed. We can only hope the consequences of 2009 similarly prove to be far less dramatic than we now - intuitively and in our historical reflexes - feel them to be.

Dominique Moisi is a visiting professor at Harvard University. Copyright: Project Syndicate


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Cash-help proposals merit serious G20 study


LEADER

Mar 25, 2009           
     
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Cognoscenti have been debating, with some urgency in the past few months, an arcane international reserve asset known as "special drawing rights" issued by the International Monetary Fund to its member states. Now, China's central banker Zhou Xiaochuan has put that debate at the centre of the global agenda dictated by the financial crisis. Ahead of next week's Group of 20 summit meeting, finance chiefs and central bankers of the world's leading economies are under intense pressure to prepare concrete and creditable measures. Proposals - by China and others - to expand the use of SDRs may also push forward discussion of a new economic order which, in future, could be less dependent on the US dollar.

SDRs are asset units created by the IMF and allotted to each member state in proportion to that country's quotas (or voting power) and financial obligations to provide funding to the organisation. The richest economies - the US and the European Union - have the most SDRs and therefore the most voting rights. But the asset units can also function as a quasi-currency and a credit facility among member countries for trading and lending purposes. However, such uses have been limited up to now.

Mr Zhou may well be right about the world being better off with SDRs as a new international reserve currency to replace the US dollar. But any such far-reaching overhaul of the global monetary system will surely lie in the future. G20 chiefs have a more urgent task - to contain the immediate damage inflicted by the economic turmoil. As a key G20 participant, Mr Zhou is no different. What he did not say about the envisioned wider use of SDRs is that it will directly address two of China's perennial economic concerns: the need to diversify its massive holdings of unstable US dollars in its foreign reserve without triggering a massive plunge in the dollar's value; and its quest for a greater say in IMF decisions.

The proposal's appeal is that countries like China could convert their excess US dollars into a diversified asset like SDRs, whose value is currently determined by a basket of four of the world's leading currencies. The beauty of such a "substitution", at least in theory, is that it has no net impact on the worldwide money supply - and therefore on inflation. It would not accelerate the dollar's decline.

Meanwhile, by explicitly promising to provide extra funding to the IMF for the first time this week, Beijing will surely expect to be allotted more SDRs and, therefore, greater voting power. In all this, China is pursuing its self-interest, but in a way which, through the increasing use of SDRS, would be for the good of all.

China currently has a massive reserve cushion; the US, despite being the originator of the global crisis, continues to be able to borrow cheaply - for example, from China. But many developing economies either cannot borrow or are made to pay exorbitant interest while the IMF may not have enough emergency funds to help them. The collapse or destabilisation of these economies will reverberate back to the developed countries and hinder the latter's economic recovery. Financier George Soros and Nobel Prize-winning economist Joseph Stiglitz have recently proposed richer countries should expand the use of their SDRs as a low-interest credit facility to lend hard currencies to troubled economies. Their proposal, along with China's, will help tackle a myriad of problems plaguing the world economy. But, despite Mr Zhou's assertion, they do not threaten the dollar's reserve currency status, at least for now. They do, however, deserve serious attention at the G20 meeting.


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Issuing bonds won't solve MPF problems


LEADER

Mar 26, 2009           
     
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When the Mandatory Provident Fund was set up more than eight years ago, only a third of Hong Kong workers had financial protection for their retirement. Now nearly all are using the MPF to save for their old age. With a rapidly ageing population, that is reassuring. But worries raised from the beginning remain, such as whether contributions are high enough to fund people's retirement as life spans increase, and whether exorbitant management fees will seriously erode their savings.

Inadequacies in the scheme have been cruelly exposed by the stock-market slump, with MPF investments having lost 10 per cent this year on top of a 31.5 per cent loss last year. It will take a sustained market recovery to make up these losses. Even then, someone facing retirement within 10 or 15 years could not afford another hit from a crash in the markets.

It is against this background that the government is suggesting that some of the retirement savings of 2 million workers could be invested in government bonds when they are issued for the first time this year. A government source says contributors with a low risk appetite may find the bonds an attractive alternative. Granted, they would offer a safe return, but this still leaves key problems with the scheme unresolved.

A review is needed to ensure that it can deliver the hoped-for social dividend and security in old age. The contributions formula of 5 per cent each from employer and employee, capped at HK$2,000 per month, are insufficient to guarantee a decent retirement sum for two reasons. First, as a defined contributions scheme, it does not promise account holders fixed benefits. Second, as things stand, a lot of the money is ploughed into shares.

Despite their superior performance in the long term, returns on shares can be erratic, making retirement planning more difficult. The government's move to provide MPF account holders with a means to invest in bonds is welcome, but with most contributions still likely to be invested in shares, the danger of fluctuating returns - a key weakness of the scheme - remains.

So do the problems with the performance of MPF funds. Tax deductions have been suggested to encourage account holders to contribute more, but this would be meaningless to more than half the working population, since they do not pay salaries tax. It would increase the retirement payouts of the better paid and remove some of the incentive to risk too much for too long in the stock market. But a review of the scheme should lead to an equitable way of encouraging higher contributions.

The authorities must expedite a plan to allow workers to choose which MPF provider will manage their own savings, but more than that must be done to bring down management fees that are estimated to cost investors up to 50 per cent of the contributions over a 40-year span.

Meanwhile, the issuance of government bonds should help broaden the depth of Hong Kong as a financial centre. The irony is that the government, with its massive fiscal reserves, does not need the money. That is an odd situation. In the US, for example, the government issues bonds to finance the public deficit, but Hong Kong does not want to use bonds to finance expenditure.

A review of the MPF scheme should come up with the reforms needed to achieve its objectives - ensuring an adequate sum of money is available when needed for each contributor's retirement.


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Financial 'experts'? A chimp could do as well


Nicholas Kristof
Mar 27, 2009           
     
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Ever wonder how financial experts could lead the world over the economic cliff? One explanation is that so-called experts often turn out to be a stunningly poor source of expertise. There's evidence that what matters in making a sound forecast or decision isn't so much knowledge or experience as good judgment - or, to be more precise, the way a person's mind works.

But first, let's acknowledge that even very smart people allow themselves to be baffled by an apparent "expert" on occasion.

The best example of the awe that an "expert" inspires is the "Dr Fox effect", named for a pioneering series of psychology experiments in which an actor was paid to give a meaningless presentation to professional educators.

The actor was introduced as "Dr Myron L. Fox" (no such real person existed), an "eminent authority" on the application of mathematics to human behaviour. He then gave a lecture on "mathematical game theory as applied to physician education" - except that it was devoid of substance. But, it was warmly delivered and full of jokes.

Afterwards, those in attendance were given questionnaires and asked to rate "Dr Fox". They were mostly impressed.

A different study illustrated the genuflection to "experts" another way. It found that a president who goes on TV to make a case moves public opinion by less than a percentage point. But experts trotted out on TV can move public opinion by more than 3 percentage points, because they seem to be reliable or impartial authorities.

But do experts actually get it right themselves? The expert on experts is Philip Tetlock, a professor at the University of California, Berkeley. His 2005 book, Expert Political Judgment, is based on two decades of tracking some 82,000 predictions by 284 experts. The experts' forecasts were tracked both on the subjects of their specialties and on subjects that they knew little about.

The result? The predictions of experts were, on average, only a tiny bit better than random guesses - the same as a chimpanzee throwing darts at a board. Other studies have confirmed the general sense that expertise is overrated. In one experiment, psychologists did no better than their secretaries in their diagnoses. In another, a white rat repeatedly beat groups of Yale students in figuring the optimal way to get food dropped in a maze.

The marketplace of ideas for now doesn't clear out bad pundits and bad ideas, partly because there's no accountability. We trumpet our successes and ignore failures.

For example, I boast about having warned in 2002 and 2003 that Iraq would be a violent mess after we invaded. But I tend to make excuses for my own incorrect forecast in early 2007 that the troop "surge" would fail.

So what about a system to evaluate us prognosticators? Professor Tetlock suggests that various foundations might try to create "trans-ideological consumer reports for punditry", monitoring and evaluating the records of experts and pundits as a public service. I agree: hold us accountable!

Nicholas D. Kristof is a New York Times columnist


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All hands on deck


REGINA IP

Mar 30, 2009           
     
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If you are looking for examples of the developmental state, there are plenty across the border in Guangdong province. A developmental state is, by definition, focused on development. As such, it is the antithesis of the free-market economy epitomised by Hong Kong. Three decades ago, when Hong Kong was riding high on the success of its "positive non-interventionism" - a term coined by former financial secretary Sir Philip Haddon-Cave to denote Hong Kong's brand of capitalism - China's developmental strategies would have been dismissed as either high-risk experiments with the market system or central planning in disguise. How do you make the markets work under state direction? That central issue has preoccupied scholars since Japan's post-second-world-war economic miracle.

Granted, even during the heyday of Hong Kong's positive non-interventionism, the government never totally withdrew from the markets. It always played a decisive role in determining land prices by controlling supply. It intervened in markets by providing low-cost public housing, student loans and export credit insurance, and by building the MTR. Our industrial estates, and more recently our science park, emanated from Sir Philip's willingness to diversify the economy. Since the handover, our government has all but abandoned the time-honoured refusal to "pick winners". The government invested directly in Cyberport, the Disney theme park, the film industry, the cruise terminal and, now, creative industries. But how do our developmental efforts differ from those north of the border?

There is a major, qualitative difference between our belated dabbling in government-directed development and Guangdong's developmental strategies. In the case of the latter, it's all hands on deck once a plan has been made. Beijing understands too well that its needs to grow out of its multifarious social and employment problems. To get rich is glorious, and the choice is "develop or die".

Meanwhile, Hong Kong shows all the symptoms of a sclerotic, post-modern society where the sprawling middle class spurns authority while putting individualism and subjective well-being above all else. Talk of building some of the MTR above ground in idyllic Southern district, hotels in Ocean Park, ventilation shafts near homes, schools, or even public housing estates, and you will be greeted with storms of protest on myriad environmental, health or traffic grounds. To develop is not an absolute imperative, even as we blame the government for its snail's pace in creating jobs.

Intensity of efforts and tenacity of purpose, not just middle-class values, separate us from our mainland cousins. Guangdong officials have a coziness with business enterprises and a developmental focus unmatched even by fabled Japanese or South Korean officials adept at picking winners and grooming national champions. Provincial officials set the strategic directions, summed up by Guangdong Communist Party secretary Wang Yang's motto of "emptying the cage and replacing the bird", meaning upgrading the economy. Once new directions have been set, officials pick the most strategic sectors for their city's comparative or competitive advantages, and charge full steam ahead with their plans. Massive resources are channelled to the new, strategic sectors, including education and technology.

Take the city of Foshan, for example. The Pearl River Delta city of 5.5 million people has chosen creative industries because of its tradition as a cradle of arts and Cantonese opera, and as one of the nation's main producers of ceramics. The city's success in regenerating the latter is impressive: teaming up with Italian and Spanish designers, some of its strongest ceramics manufacturers have acquired European brands, and can justly boast of much higher margins. All the while, Foshan's unique history and cultural niche have been drawn upon to give special meaning to the city's creative products.

In Guangdong, the credo is add value or be left behind. If Hong Kong does not play catch-up, we could one day be left eating dust.

Regina Ip Lau Suk-yee is a legislator and chairwoman of the Savantas Policy Institute


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Democratic cure


MICHAEL CHUGANI

Mar 31, 2009           
     
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Wall Street's greed did many other things aside from causing a catastrophic global recession. It wiped out the life savings of millions, made us question capitalism, forced us to live frugally, taught us to be smarter with our money, and injected a new sense of moral outrage into the world. Many of us have come to despise fat-cat executives who line their pockets at the expense of others. In London, where 35,000 demonstrators angered by the financial crisis are gathering for this week's G20 summit, security experts have warned attending bankers to hire bodyguards.

But Wall Street's greed has also produced an unintended sideshow not directly related to money. It thrust onto the world stage democracy at its rambunctious best - or worst, depending on how you choose to define democracy. We all watched spellbound as elected leaders from the world's loudest and proudest democracy rushed to override a key tenet of democracy - a citizen's rights. Some jeered but most cheered as American President Barack Obama played to the gallery, backed by a supporting cast of congressmen. Tapping into mob-like public fury, they threatened to strip American International Group's multimillionaire executives of exorbitant, taxpayer-financed bonuses they had been contractually promised. "If you don't return it on your own, we'll do it for you," one senator warned.

Dictators can, of course, renege on legally binding contracts. They can put a gun to your head and make you return what is legally yours. Democracy was the gun American lawmakers tried to use to recover US$165 million in bonus payments to AIG fat cats. When elected legislators act in unison, they become virtual dictators. It doesn't happen often, since democracy is more about confrontation than compromise but, in this case, the House of Representatives voted overwhelmingly to slap a 90 per cent tax on the bonuses, clawing most of it back.

A retroactive tax increase? Yes, it's morally wrong but it was democratically right in a country seething with outrage over joblessness, foreclosed homes and decimated pensions. The legislators could pass such a law because they were democratically elected to serve the whims of the people. And, on this occasion, the people were mad, resulting in democracy gone mad.

This could, of course, never happen in Hong Kong. We don't have a democratically elected legislature. We have an odd set-up where half the legislators are freely elected and the other half by privileged voters in so-called functional constituencies. The two sides hardly ever act in unison. The freely elected legislators are seen as pro-Hong Kong and the others as pro-Beijing and pro-government. Their voting records back this up. So, if there was ever public outrage over, for example, monetary affairs chief Joseph Yam Chi-kwong's excessive pay and bonuses, the Legislative Council would never vote unanimously to tax it back retrospectively. In fact, Legco has very limited rights to initiate legislation.

Much as I detest Wall Street fat cats, my initial jubilation over the congressional jab in their eyes gave way to second thoughts. Was it mob rule, an abuse of democracy, or even a rule-of-law violation? Could a retroactive tax survive a court challenge? Mr Obama himself has since backtracked, toning down his rhetoric and casting doubts on the legality of it. The Senate, which must also approve the tax claw-back passed by the House for it to become law, has put it on the back burner, relying instead on a voluntary return of the bonuses.

Still, America's flirtation with out-of-control democracy got me thinking about our own Legco, where the problem is not runaway democracy, but the lack of it. This fuels sizeable minority support for the banana-throwing and foul language in Legco by the League of Social Democrats, whose legitimacy would shrivel in a fully democratic Hong Kong. We can handle democracy, western-style or home-grown. It will not get out of control. The lack of it has allowed the league to get out of control. We can start by getting rid of the ludicrous functional constituencies.

Michael Chugani is a columnist and broadcaster. [email]mickchug@gmail.com[/email]


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Lawyer hits out at probe into PCCW buyout


Frederick Yeung
Apr 02, 2009           
     
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The securities watchdog came under fire yesterday over its investigation into alleged vote-rigging in the HK$15.9 billion PCCW (SEHK: 0008) buyout deal.

Benjamin Yu, senior counsel for PCCW's majority shareholder Pacific Century Regional Developments, told a High Court hearing on the privatisation move that the investigation by the Securities and Futures Commission had been biased, inaccurate and incomplete.

His comments came after it was revealed in court that Francis Yuen Tin-fan, a top lieutenant in Richard Li Tzar-kai's business empire, had made several phone calls and sent text messages to Lam Hau-wah, a regional head of Fortis Insurance.

The court was told that Mr Lam had bought over HK$1 million worth of PCCW shares in December and January on the market and distributed them to staff as bonuses.

The SFC has alleged that shares were given to Fortis Insurance agents in return for their support for the buyout.

Minority shareholders approved the buyout at a meeting on February 4, but vote-rigging allegations had surfaced before that gathering.

Mr Yu was critical of the SFC investigation that attempted to link Mr Yuen with the share transfer to Fortis Insurance agents.

Mr Yuen is the former chairman of Pacific Century Insurance, which changed its name to Fortis Insurance in 2007 after being sold to the Belgian bank, Fortis. He has been working with Mr Li for a decade.

Mr Lam bought PCCW shares from the market on January 5, the same day Mr Yuen and Mr Lam had talked on the phone. The SFC said Mr Lam was on the phone with Mr Yuen at 2.30pm at the same time as he was buying PCCW shares. Both Mr Yuen and Mr Lam denied that the phone call was related to the purchase of the shares.

"Mr Yuen and Mr Lam did have a phone conversation on January 5," Mr Yu told the court. "But it's a total coincidence and should not give rise to something improper."

Winston Poon, senior counsel for the SFC, said checks and balances in the case had been abused by several parties in order to strengthen support for the buyout deal.

Mr Poon said that, in a separate case involving brokerage Kingston Securities, the owner had told her staff to buy PCCW shares at the market price, and that she would buy them back at the higher offer price of HK$4.50 per share in exchange for staff transferring voting proxies to her to support the privatisation deal.

The privatisation launched by PCRD and China Unicom (SEHK: 0762, announcements, news) Group needs the green light from the court before it can go ahead with a planned delisting on April 14.

However, Madam Justice Susan Kwan Shuk-hing said it was unlikely she would make a ruling at the end of the two-day hearing today.

Hearings will resume this morning with Mr Poon concluding his oral submission. It will be followed by submissions from Daniel Fung Wah-kin, who is representing three minority shareholders.


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keep up the good work!
thanks!

Crisis offers a chance to rebalance Asia's growth


Jong-Wha Lee
Apr 03, 2009           
     
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Today's global economic crisis is the worst since the Great Depression. And developing Asia is being hit much harder than initially thought. It is now time - in fact, it is an opportunity - to rebalance our recent rapid economic growth to help protect us from future external shocks and to strengthen our internal sources of growth.

Average growth in the region declined about 3 percentage points last year - to 6.3 per cent. Our 2009 Asian Development Outlook now forecasts that growth will slow this year by close to 3 percentage points - to 3.4 per cent. Many emerging Asian economies will suffer severe recession. The region's two giants - China and India - are also seeing their rapid economic expansions curtailed.

Many Asian governments responded quickly to the crisis with appropriate financial, monetary and fiscal policies. And we believe Asia will weather the global recession in relatively good shape. Because external demand drives a major part of Asia's growth, our region should recover quickly when industrialised economies show signs of life. It would be easy for the region's policymakers to muddle through by relying on immediate short-term responses. But this certainly isn't the best route.

Although spawned by the US subprime mortgage meltdown, the fundamental cause of the crisis was lack of discipline and regulation in the financial system, and lax fiscal and monetary polices in the US.

Roots of the crisis lie in Asia's macroeconomic imbalances, as well. After all, it was excess savings in emerging economies that allowed the US to maintain its excessive household consumption and high current-account deficit.

Asia has already proved it can turn crisis into opportunity. In the 12 years since its own devastating financial turmoil, developing Asia has worked hard to improve its economic health. As Asia's share of the global economy continues to rise, it can no longer overly rely on exports as its primary engine of growth. A more balanced approach can boost social welfare by using its savings more productively.

Asia is hugely diverse. The optimal policy mix for rebalancing will necessarily differ across national economies. But the underlying principles will remain the same. Rebalancing growth will require developing Asia to adopt a judicious mix of polices to build strong domestic demand and apply its resources more efficiently.

First, policymakers must strive to strengthen domestic consumption. Promoting good corporate governance, requiring firms to pay dividends, and applying appropriate taxes to move undistributed profits to households, can work. In addition, expanding health, education and pension systems can help reduce incentives for precautionary household savings.

Second, the investment climate and social infrastructure must be improved. Rather than seeking greater investment for its own sake, policymakers should concentrate on building a climate conducive to efficient investment.

Third, financial development needs to be accelerated. A mature financial system will better channel Asia's savings into Asian investment - as opposed to investing in low-yielding foreign government bonds.

Finally, Asia must strengthen regional integration and co-operation. Although trade within the region has grown rapidly, much of it has been feeding China's assemblers who export final goods outside Asia. Asia must build more substantive intra-regional trade.

Developing Asia's policymakers must make rebalancing growth a central medium- and long-term objective, even as they grapple with short-term responses to economic crisis. The region came out of the 1997-98 crisis stronger. It must use this crisis as an opportunity to strengthen itself further.

Jong-Wha Lee is the acting chief economist of the Asian Development Bank in Manila. The views and opinions expressed are those of the author


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Cashing in big on yuan trade
A trial allowing cross-border traders to settle transactions in renminbi will be a welcome, and eventually lucrative, business stabiliser

CURRENCY
Daniel Sin
Apr 06, 2009           
     
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Like any Hong Kong businessman involved in mainland trade, Edward Tsui Ping-kwong has one thing high on his wish list: the ability to settle transactions in the national currency. Locked into complicated multicurrency transactions and vulnerable to fluctuations in the relative value of the yuan and other units, people like Mr Tsui would like nothing better than to be able to do all their trade in yuan.

So Mr Tsui, his fellow businesspeople and Hong Kong's financiers are eagerly awaiting the details of a trial scheme that will allow the city's cross-border traders for the first time to settle transactions in yuan.

While the scheme is initially likely to be subject to strict limitations on who can benefit and where, the response among government officials, businesspeople and academics has been positive, as they eye the sizeable business opportunities it promises.

At present, cross-border trade transactions are mostly settled in a foreign currency, such as the US dollar.

Stanley Wong Yuen-fai, director and deputy general manager of the Industrial and Commercial Bank of China (SEHK: 1398), said that when a Hong Kong importer concluded a trade contract with a mainland supplier, he would ask his bank in Hong Kong to issue a letter of credit - the bank's undertaking to pay the supplier when the latter's contract obligations were met.

The letter of credit would be forwarded to the supplier's bank, which, in turn, would inform the supplier to deliver the merchandise. Upon consignment of the goods, the supplier would produce documentary proof to his bank to receive payment, in the specified foreign currency.

In issuing a letter of credit, the bank may receive a deposit from the importer, together with a fee equal to a certain percentage of the deposit. The bank may sometimes offer a credit line for the importer as an additional service.

Mr Tsui, an executive committee member of the Chinese Manufacturers' Association who owns a factory in Guangdong, said his trade with overseas buyers was transacted in US dollars, while he had to pay all local expenses in yuan. When the yuan's value rose, the value of the US dollar fell. To reflect the change in the exchange rate, buyers should, in principle, pay a higher price for the merchandise. But to stay competitive, most manufacturers would not demand a price increase but would absorb the loss as a manufacturing cost.

"If we can settle trade transactions in renminbi with overseas buyers, we can use renminbi in our quotations, and require buyers to pay in renminbi. This would make our business more stable and we would not have to convert the income to renminbi to pay local expenses," he said.

Mr Tsui said it was not feasible to use the yuan in trade transactions in Hong Kong without a change in mainland foreign-exchange controls.

"For example, even if you have a personal renminbi account, you cannot withdraw a million yuan and move it [between the mainland and Hong Kong]. The most you can move each time is 80,000 yuan [HK$90,850]. Even in a year's time, you cannot move all the 1 million yuan. But during that time, the exchange rate might have changed more than 10 per cent, and you may incur a considerable loss."

Renminbi business in Hong Kong was officially launched in February 2004, with five types of banking services available: deposit taking, currency exchange, remittance, debit and credit cards, and personal cheques.

By the end of January this year, yuan deposits held in Hong Kong's banks amounted to more than HK$54 billion. By contrast, last year, total merchandise trade between Hong Kong and the mainland amounted to more than HK$2.78 trillion, and Hong Kong dollar deposits were worth more than HK$2.74 trillion.

But a customer cannot change more than 20,000 yuan in each transaction, and cannot remit more than 80,000 yuan a day.

Things are changing, however. Last December, the State Council announced its support for the development of renminbi business in Hong Kong and agreed to expand the currency's scale of settlement in trades between China and neighbouring nations. Premier Wen Jiabao said last month that yuan trade settlement would be implemented in Hong Kong pending final State Council approval.

The new policy is seen as more central government support for Hong Kong to tackle the financial crisis and a positive response to the Hong Kong Monetary Authority's lobbying efforts.

A spokesman for the Monetary Authority explained the significance of the policy.

"It is a first trial for the use of renminbi to settle trade transactions through the banking system outside mainland China, and it is also an experiment that would promote the use of renminbi outside mainland China," he said.

"With this new business, the capabilities of Hong Kong's financial system in handling renminbi-denominated transactions will be strengthened, thereby enhancing the status of Hong Kong as an international financial centre. The use of renminbi can enhance the transparency of pricing of goods, thereby facilitating trade between the mainland and Hong Kong."

While details are yet to be announced, Mr Wong said these would be more than just replacing US currency with renminbi in the current trade-settlement process. "In the experimental stage, the scale of trade transactions settlement in renminbi would likely be small, as only designated cities and selected firms with proven track records could participate."

Mr Wong added that it was unlikely at this stage that banks would be allowed to offer yuan credits to customers to conduct trade transactions.

As more experience was gained, Mr Wong said, more cities and more companies might be permitted to participate, and in the long term, a renminbi clearing bank might even be unnecessary.

But he said that unless banks were allowed to provide yuan credits or trade financing services and other value-added services, a service in just renminbi trade transaction settlements was not profitable.

Francis Lui Ting-ming, professor of economics at the University of Science and Technology, said an increase in the use of the yuan in international trade would offer good business potential for Hong Kong's financial market.

"Currently, China's gross domestic product is worth about 30 trillion yuan and the nation's total exports last year were valued at about a third of GDP. If this volume of exports could all be settled in renminbi, and if we assume that a commission of 0.1 per cent can be collected from these transactions, we are talking about an annual income of 10 billion yuan," he said. "If Hong Kong participates in renminbi trade transaction settlement services, it can gain a good share of this income."

Many see promoting the use of renminbi in trade settlements as a first step by Beijing to raising the status of the currency in the international arena. Professor Lui said this strategy was important for China in that it would gradually reduce its reliance on US dollar assets and better protect its own economic interests.

"China has all along preferred US dollars to renminbi for its foreign trade," he said. "It has to exchange US dollars with its merchandise outputs. China has now accumulated some US$1.5 trillion in US Treasury bonds and other US dollar investments. Over the past few years, the renminbi has increased in value by about 5 per cent, but the returns from US dollar assets only averaged about 3.5 per cent each year. So China's wealth has been shrinking by some US$22 billion a year."

Professor Lui said the prospect of the US printing money to finance its deficit had caused alarm among central government officials, as the subsequent fall in the dollar's value would affect China's trade and investment in the US. So they must find ways to promote the use of the yuan in international business. Using it in settling trade transactions would be a first step.

But will the yuan replace the Hong Kong dollar? The director of Chinese University's Centre for Entrepreneurship, Hugh Thomas, thought this would not happen at least in the short to medium term.

"When the renminbi becomes fully convertible, the Hong Kong dollar may be less relevant. [But would] the renminbi be fully convertible overnight? I doubt it, because [Beijing is] extremely cautious when it comes to making the currency [fully] convertible. This would take several years."


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Rule-breaking weblog puts editorial standards to the test


MEDIA
Ed Pilkington
Apr 07, 2009           
     
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There's precious little good news from America's current-affairs media these days. Barely a week passes without another announcement of savage staff cuts, bankruptcies or even closures at newsrooms across the US.

But champagne corks were popping at the end of last month. The Huffington Post, the New York-based liberal weblog, announced it was setting up a US$1.75 million fund to help fill the gap left by the decimation of US investigative teams.

The site's founder, Arianna Huffington, said the initiative was an attempt to preserve good journalism in the US. "For too long, we've had too many autopsies and not enough biopsies. The HuffFund is our attempt to change this."

The aim is to dig away at weighty subjects, starting with the economic crisis. The fund will provide for up to 10 staff, supplemented by freelancers, many of them old media stalwarts sacked from failing news institutions.

The fact that the rescue mission is being launched under the flag of the HuffPo - a blog best known for its vibrant commentary rather than news - underlines the blurring effect of the internet revolution. Blogs are inheriting the investigative work of newspapers; newspapers are blogging.

The fund also signals ambitions to move to a more central position in the media landscape - the website began to call itself an "internet newspaper" last year. This month may well be seen as the moment The Huffington Post came of age.

The HuffPo's rise has been impressive. Less than four years old and with fewer than 60 staff, including seven news reporters, it is now a competitor to The New York Times, 158 years old and with more than 1,000 journalists. Ratings website Comscore said that in February, the HuffPo drew more than a third of the Times' traffic: 7.3 million unique users to 18.4 million.

Given the HuffPo's ambition and position, some have questioned its methods, which they see as more in keeping with a start-up company undergoing breathtaking growth than a beacon of journalistic hope and excellence.

Although The Huffington Post is household currency, the company remains relatively little known. The focus is almost always on Ms Huffington and her colourful life story - born in Greece, educated in England; married to and divorced from an oil millionaire; a right-winger turned left-wing scourge of former president George W. Bush and champion of his successor Barack Obama.

Yet a steady trickle of information has started to flow from people with experience of the site who raise concerns that standards are not keeping up with the exponential increase in its size and clout. In the past 18 months several experienced journalists have left core positions.

Marc Cooper, who left the website in January and now teaches journalism at the University of Southern California, has been on both sides of the old/new media divide, having worked as a magazine writer and editor. Before he quit, he approached the founders about extending citizen journalism throughout the website. He says they were resistant to having experienced journalists lead the project, which he felt was needed to maintain editorial standards.

"I found there was an unbreachable gap between the scope of the HuffPo as a very big and powerful website and its disproportionately undeveloped editorial processes." Mr Cooper stressed that he wanted the website to succeed and was proud of his involvement with it. Yet he believed its processes were at times immature. "I don't see enough news judgment, or emphasis on the quality of reporting."

Ms Huffington accepts that growth presents new challenges.

"We have put systems in place to make sure our reporters are properly edited, that there is constant communication between them and editors, and as we are growing and expanding, we are going to do more of that," she said.

None of this would matter were the HuffPo not the powerhouse it has become. While The New York Times is in a life-or-death struggle to pay its debts, the HuffPo in December attracted another  US$25 million in venture capital.

As news institutions crumble, the US news media are increasingly looking to the website to show the way forward, to combine open access and community interaction with a real commitment to serious and original journalism.

Last week The Huffington Post came of age. How will it mature?

The Guardian


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Leap of faith
The beginning of the end was when economists believed they could predict behaviour

Daniel Cloud
Apr 08, 2009           
     
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To understand how we got ourselves into our current economic mess, complicated explanations about derivatives, regulatory failure, and so on are beside the point. The best answer is both ancient and simple: hubris. In modern mathematical economics, many people in the rich world decided that we had finally devised a set of scientific tools that could really predict human behaviour. These tools were supposed to be as reliable as those used in engineering. Having ushered scientific socialism into its grave at the cold war's end, we quickly found ourselves embracing another "science of man".

Our new beliefs did not stem from some new experiment or unexpected observation, the way a real scientific paradigm shift does. Economists do not typically conduct experiments with real money. When they do, as when the Nobel laureate Myron Scholes ran the hedge fund Long Term Capital Management, the dangers often outweigh the benefits (a lesson we still don't seem to have learned). And, since almost every observation that economists make turns out in a way that wasn't predicted, no unexpected observation could ever actually change an economic paradigm.

What really produced the change in economics that led to disaster was the simple fact that you could now get away with saying certain kinds of things in public. Some of us honestly thought that history was over. And after all, you can't have a final, utopian society without having a final, scientific theory of human behaviour, together with some mad scientists or philosophers to preside over the whole thing.

The problem is that, no matter how "scientifically" these new beliefs were formulated, they are still false. Capitalism is, among other things, a struggle between individual people over the control of scarce resources. Like boxing and poker, it is a soft, restrained, private form of warfare.

In a real struggle over things that actually matter, we must assume that we are up against thinking opponents, who may understand some things about us that we don't know about ourselves. For example, if profit can be made by understanding the model behind a policy, as is surely the case with the models used by the US Federal Reserve, sooner or later so much capital will seek that profit that the tail will begin to wag the dog, as has been happening lately.

The truth is that such models are most useful when they are little known or not universally believed. They progressively lose their predictive value as we all accept and begin to bet on them. But there can be no real predictive science for a system that may change its behaviour if we publish a model of it.

Markets might once have been fairly efficient, before we had the theory of efficient markets. If investing is simply a matter of allocating money to an index, however, liquidity becomes the sole determinant of prices, and valuations go haywire. When a substantial fraction of market participants are simply buying the index, the market's role in ensuring good corporate governance also disappears.

The large bubbles of recent decades resulted partly from the commonness and incorrigibility of the belief that no such thing could ever happen. Our collective belief that markets are efficient helped make them wildly inefficient.

Despite this, over the course of the past 20 years, economists began to act as if we thought we could genuinely predict the economic future. If the universe didn't oblige, it wasn't because our models were wrong; "market failure" was to blame. It is not clear how we could know markets were failing whenever they fell significantly, but believed that we had no business second-guessing them when they climbed.

We repeatedly rescued bubbles, and never deliberately burst them. As a result, our financial markets became a pyramid scheme. Moral hazard, we thought, could safely be ignored, because it is "moral" which, as every true scientist knows, just means "imaginary".

But a market is not a rocket, economists are not rocket scientists, and moral hazard is, in human affairs, the risk that matters most. The false belief that we can collectively see the future using science has led us all to make various binding promises about things in that future that no human being can possibly guarantee. A promise of something that we should know cannot be guaranteed is also known as a lie. That vast tissue of lies is now tearing itself apart.

Governments think we can stop this process by throwing money at it, but there are many reasons to believe that this won't work. The banking system is probably already past saving - many institutions simply aren't banks any more, but vast experiments that didn't work out as predicted.

We could easily be "stimulating" and "rescuing" the economy for a rather long time, in ways that only delay the needed adjustment, before we are finally forced to allow the required creative destruction to occur. But that is not the real problem. The real problem is the pseudoscientific ideology behind today's crisis. A final science of man has no room for the unplanned and unpredictable recovery that is the only kind a capitalist economy can have after a crisis of this size.

If we cleave to the false security of a supposed science that isn't working and forget about the philosophy behind it - ideas like personal responsibility and the right to fail - our leaders will very scientifically give us no recovery at all.

Daniel Cloud teaches philosophy at Princeton University. Copyright: Project Syndicate/Institute for Human Sciences


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HK princesses rattle local hikikomori


OBSERVER
Alex Lo
Apr 09, 2009           
     
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The battle of the sexes is perennial. But in the past year or so, an active - at times vicious - online debate has flared up to give this battle a distinctive Hong Kong characteristic. The debate has essentially pitched men and women into two extreme camps and introduced new vocabulary into the Cantonese lexicon. Each side accuses the other of serious faults and flaws. Most of the complaints are borderline sexist (in both directions), silly and stereotypical, though some comments are amusing. Most of the ideological combatants appear to be young adults who have either recently graduated from school or are in the early stages of their working life.

Hong Kong men, according to the women, are mostly withdrawn and unrefined. Most are gong nam, or "tram men", a term derived from a Japanese hit movie, Densha Otoko (Tram Man), describing males who live in a fantasy land of video games, anime, manga (Japanese comics) and Japanese-made pornography. They have trouble communicating in the real world and refuse to take up their manly duties. In Japan, such men are called hikikomori - adolescents and young adults who shut themselves away at home and shun human contact. Hong Kong women, or gong nui, are supposed to suffer from the "princess syndrome", obsessed with money, labels and beauty products; even if many cannot tell a fake brand from the real thing. Others insist they need to slim down, even if they weigh less than 45kg.

Both sides accuse the other of being narcissistic and completely ignorant of current and world affairs. I am inclined to think both sides are probably right about each other. But the fact the debate has gone on for so long may be a symptom of the state of contemporary culture. Even comedian Jim Chim Sui-man is making it the theme for his upcoming stage act.

Here, I will venture a simple (and simplistic) explanation of a supermarket pop-sociology variety. In Hong Kong, and indeed other Chinese societies, most young and/or unmarried women expect - and are expected by parents, relatives and peers - to marry men who make more money than they do and hold a job with greater social prestige. A marriage where the economic situation is reversed among the couple is still considered odd in Chinese society. This was never a problem when men were workers and the wives stayed in the kitchen.

But in the past two decades, Hong Kong women became better educated, earned more and rose to senior positions in many sectors of the economy - a trend that shows no signs of slowing. Their economic development has been transformed faster than their social and gender expectations. Their social-economic improvement needs to be reflected by their appearance and sense of self - hence the need to wear the right fashion brands and to use trendy beauty products. But it also means raising the bar for men able to meet their high expectations.

This would not have been a bad thing if it had triggered a Darwinian male response - men must fight to earn more and take up better jobs to prove their alpha male status. You witness this social ritual in countries like the US, a highly competitive capitalist society. But men in Hong Kong are never taught or conditioned to be aggressive, beginning early in school. Cram schools throughout childhood have made many docile; doting parents hardly encourage independence.

Further, it is possible that Hong Kong's high-economic-growth years may be behind us. We may be the first post-war generation where our children become economically worse off than their parents. Today, Hong Kong has an army of young men in low-paying, dead-end jobs, obsessed with comics, computer games and Japanese porn stars. These conditions come together to produce today's hikikomori males, who must be the ultimate turnoff in nature.

Where can a woman find love when all the men around her are weaklings?

Alex Lo is a senior writer at the Post. [email]alex.lo@scmp.com[/email]


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Globalisation is here to stay, but in what form?


Joseph Nye
Apr 14, 2009           
     
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The world economy will shrink this year for the first time since 1945, and some economists worry that the current crisis could spell the beginning of the end of globalisation. Hard economic times are correlated with protectionism, as each country blames others and protects its domestic jobs. In the 1930s, such "beggar-thy-neighbour" policies worsened the situation. Unless political leaders resist such responses, the past could become the future.

Ironically, however, such a grim prospect would not mean the end of globalisation, defined as the increase in worldwide networks of interdependence. Globalisation has several dimensions, and, though economists all too often portray it and the world economy as being one and the same, other forms of globalisation also have significant effects - not all of them benign - on our daily lives.

The oldest form of globalisation is environmental. For example, the first smallpox epidemic was recorded in Egypt in 1350BC. It reached China in 49AD, Europe after 700, the Americas in 1520, and Australia in 1789.

Since 1973, 30 previously unknown infectious diseases have emerged, and other familiar diseases have spread geographically in new, drug-resistant forms. In the 20 years after HIV/Aids was identified in the 1980s, it has killed 20 million people and infected another 40 million worldwide. Some experts say that number will double by 2010. The spread of invasive species may result in economic losses of several hundred billion dollars per year. Global climate change will affect the lives of people everywhere. The effects will include stronger storms, and floods and deeper droughts.

Military globalisation consists of networks of interdependence in which force, or the threat of force, is employed. The world wars of the 20th century are a case in point. The prior era of economic globalisation reached its peak in 1914, and was set back by the world wars. But, while global economic integration did not regain its 1914 level until half a century later, military globalisation grew as economic globalisation shrank.

Today, al-Qaeda and other transnational actors have formed global networks of operatives, challenging conventional approaches to national defence through what has been called "asymmetrical warfare".

Finally, social globalisation consists of the spread of peoples, cultures, images and ideas. Migration is a concrete example. In the 19th century, some 80 million people crossed oceans to new homes - far more than in the 20th century.

Ideas are an equally important aspect of social globalisation. Technology makes physical mobility easier, but local political reactions against immigrants had been growing even before the current economic crisis.

The danger today is that short-sighted, protectionist reactions to the crisis could help choke the economic globalisation that has spread growth and raised hundreds of millions of people out of poverty over the past half-century. But protectionism will not curb other forms of globalisation.

Modern technology helps pathogens travel more easily. Easy travel plus hard economic times means that immigration rates may reach the point where social friction exceeds economic benefit. Hard times may also worsen relations among governments, as well as domestic conflicts that can lead to violence.

At the same time, transnational terrorists will continue to benefit from modern information technology, such as the internet. And, while depressed economic activity may slow somewhat the rate of greenhouse-gas build-up in the atmosphere, it will also slow the types of costly programmes that governments must enact.

Unless governments co-operate to stimulate their economies and resist protectionism, the world may find the current economic crisis does not mean the end of globalisation, just the end of the good kind, leaving us with the worst of all worlds.

Joseph S. Nye is a professor at Harvard. Copyright: Project Syndicate


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Jumping the gun
The global economy is nowhere near recovery, suggesting recent market rallies are just 'dead cat bounces'

Nouriel Roubini
Apr 15, 2009           
     
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Mild signs that the rate of economic contraction is slowing in the United States, China, and other parts of the world, have led many economists to forecast that positive growth will return to the US in the second half of the year, and that a similar recovery will follow in other advanced economies. The emerging consensus is that growth next year will be close to the trend rate of 2.5 per cent.

Investors are talking of "green shoots" of recovery and of positive "second derivatives of economic activity" (continuing economic contraction is the first, negative, derivative, but the slower rate suggests that the bottom is near). Stock markets have started to rally in the US and around the world. Markets seem to believe there is light at the end of the tunnel for the economy and for the battered profits of corporations and financial firms.

This consensus optimism is, I believe, not supported by the facts. Indeed, I expect that, while the rate of US contraction will slow from minus 6 per cent in the last two quarters, US growth will still be negative (around minus 1.5 per cent to minus 2 per cent) in the second half of the year (compared to the bullish consensus of 2 per cent). Moreover, growth next year will be so weak (0.5 to 1 per cent, as opposed to the consensus of 2 per cent or more) and unemployment so high (above 10 per cent) that it will still feel like a recession.

In the euro zone and Japan, the outlook for 2009 and 2010 is even worse, with growth close to zero even next year. China will have a more rapid recovery later this year, but growth will reach only 5 per cent this year and 7 per cent in 2010, well below the 10 per cent average of the last decade.

Losses by banks and other financial institutions will continue to grow: my latest estimates are US$3.6 trillion in losses for loans and securities issued by US institutions, and US$1 trillion for the rest of the world.

It is said that the International Monetary Fund, which earlier this year revised upwards its estimate of bank losses, from US$1 trillion to US$2.2 trillion, will announce a new estimate of US$3.1 trillion for US assets and US$0.9 trillion for foreign assets, figures very close to my own. By this standard, many US and foreign banks are effectively insolvent and will have to be taken over by governments. The credit crunch will last much longer if we keep zombie banks alive despite their massive and continuing losses.

Given this outlook for the real economy and financial institutions, the latest rally in US and global stock markets has to be interpreted as a bear-market rally. Economists usually joke that the stock market has predicted 12 out of the last nine recessions, as markets often fall sharply without an ensuing recession. But, in the last two years, the stock market has predicted six out of the last zero economic recoveries - that is, six bear market rallies that eventually fizzled to new lows.

The stock market's latest "dead cat bounce" may last a while longer, but three factors will lead it to turn south again. First, macroeconomic indicators will be worse than expected, with growth failing to recover as fast as the consensus expects.

Second, the profits and earnings of corporations and financial institutions will not rebound as fast as the consensus predicts, as weak economic growth, deflationary pressures, and surging defaults on corporate bonds will keep profit margins low.

Third, financial shocks will be worse than expected. At some point, investors will realise bank losses are massive, and that some banks are insolvent. Deleveraging by highly leveraged firms - such as hedge funds - will lead them to sell illiquid assets in illiquid markets. Some emerging market economies - despite massive IMF support - will suffer a severe financial crisis with contagious effects on other economies.

So, while this latest bear-market rally may continue for a bit longer, renewed downward pressure on stocks and other risky assets is inevitable.

Aggressive policy action (massive and unconventional monetary easing, larger fiscal-stimulus packages, bailouts of financial firms, individual mortgage-debt relief, and increased financial support for troubled emerging markets) in many countries in the last few months has cut the risk of a depression. That outcome had seemed highly likely six months ago, when markets nearly collapsed.

Still, this global recession will continue for a longer period than the consensus suggests. There may be light at the end of the tunnel - no depression and financial meltdown. But economic recovery everywhere will be weaker and will take longer than expected. The same is true for a sustained recovery of financial markets.

Nouriel Roubini is professor of economics at the Stern School of Business, New York University, and chairman of RGE Monitor ([url]www.rgemonitor.com[/url]) Copyright: Project Syndicate


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Miracle of the world's largest democracy


Shashi Tharoor
Apr 16, 2009           
     
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Beginning this month, the largest exercise of the democratic franchise in history will take place, as Indian voters head to the polls to elect a new national parliament. They have done this 14 times since India gained independence. Each time India has voted, it has been the world's largest exercise in electoral democracy. India's growing population keeps breaking its own record.

This time, the electorate includes 714 million voters, an increase of 43 million over the previous general election in 2004. Votes will be cast in 828,804 polling stations scattered throughout the country for more than 5,000 candidates from seven national political parties and several state and other parties. The process involves 4 million electoral officials and 6.1 million police and civilians.

The numbers involved are so huge that the elections will be staggered over five phases, ending only on May 13. Despite the phased voting, counting will take place nationwide immediately after the last phase, and the results of the elections everywhere will be announced on May 16. A new parliament will be convened on June 2 to elect a national government to succeed the administration of Prime Minister Manmohan Singh.

India's elections, conducted by the autonomous (and all-powerful) Election Commission of India, are an extraordinary event, and not just because of their sheer scale. It takes the felling of a sizeable forest to furnish enough paper for 714 million ballots, and every election has at least one story of officers battling through snow or jungle, or travelling by elephant and camel, to ensure the democratic wishes of remote constituents are duly recorded.

Nor is any Indian election complete without the media publishing at least one picture of a female voter whose enthusiasm for the suffrage is undimmed by the fact that she is old, blind, crippled, toothless, purdah-clad, or any combination of the above.

The exotica do not end there. Because so many voters are illiterate, India invented the party symbol, so voters who cannot read the name of their candidate can vote for him or her anyway by recognising their campaign symbol.

India was also the first country to use an indelible stain on the voter's fingernail to signify he has already cast his ballot. At every election, someone "discovers" a new chemical that will remove the stain and permit one to vote twice, though this is unlikely to make a great difference in India's enormous constituencies, where each MP represents more than 2 million people. In any case, India's elections have a reputation for honesty. The elections have also been increasingly free of violence.

Elections are an enduring spectacle in the world's largest democracy. There are few developing countries where this is true, and fewer still where poverty and illiteracy are both rife. That may be the real miracle of what will occur in India over the next few weeks.

Shashi Tharoor, a former UN undersecretary general, is the Congress Party candidate for Parliament from Thiruvananthapuram, in India's southwestern state of Kerala. Copyright: Project Syndicate


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Beijing consensus
Washington's new pragmatism has much in common with mainland economic policy

Jonathan Holslag
Apr 17, 2009           
     
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US President Barack Obama's first appearances outside North America - in London, Strasbourg, Prague and Istanbul - galvanised world attention. But what that trip singularly failed to do was paper over a startling fact: the "Washington Consensus" about how the global economy should be run is now a thing of the past. But what is likely to replace it?

Although China is often said to lack "soft power", many of its ideas on economics and governance are coming to the fore. Indeed, in pursuit of national economic stability, the US is clearly moving towards the kind of government intervention that China has been promoting over the past two decades.

In this model, the government, while continuing to benefit from the international market, retains power over the economy's "commanding heights" through strict control over the financial sector, restrictive government procurement policies, guidance for research and development in the energy sector, and selective curbs on imports of goods and services. All these factors are not only part of China's economic rescue package, but of Mr Obama's stimulus plan, as well.

China is clearly pleased to see that the US is now also placing cool calculation of its national interests at the forefront of its foreign policy. "In delivering a better life for people on the ground, one should be more concerned with substance than with form," Mr Obama stated in an interview just before his inauguration. Rather than obsessing about elections, the US now seeks to build pragmatic alliances to buttress its economic needs. This requires, first of all, cosying up with China and the autocratic Gulf states - the main lenders to the US Treasury - as well as working with Iran and Russia to limit the costs of the wars in Afghanistan and Iraq.

As the US backtracks on its liberal standards, it is flirting with what can be called the "Beijing Consensus", which makes economic development a country's paramount goal and prescribes that states should actively steer growth in a way that suits national stability. What matters in this world view is not the nature of any country's political system, but the extent to which it improves its people's well-being. At the diplomatic level, this implies that national interests, not universal norms, should drive co-operation.

This diplomatic and economic realism is more than a reversal of the neoconservative muscle-flexing of the George W. Bush years. It is an attempt by a declining power to use its restrained capabilities in a more economical way.

For example, in times of crisis, it is no shame for a government to be mercantilist but, by behaving in this way, the US has lost the moral high ground as a champion of free trade.

America's new pragmatism is also the consequence of a process of "reverse socialisation". Over the past two decades, the US and its European allies believed they could inculcate the rest of the world with their economic and political principles. Countries like China became enmeshed in a web of multilateral organisations and subjugated to conditional engagement strategies. Nowadays, the west does not have the leverage to enforce these conditions. Moreover, most developing countries now actively embrace multilateral bodies as part of their development strategies.

As we move from a unipolar, international order to one with multiple regional powers, realism should allow them to vie for influence while keeping the costs as low as possible. The result will be a new concert of powers, tied together by their fixation with national economic growth and discouraging others from causing instability that risks intervention.

Instead of entrusting America with the arduous task of safeguarding international stability on its own, the Bric economies (Brazil, Russia, India, and China) will assume a more prominent role in policing their own backyards. Russia can have its Caucasus, and if the generals in Myanmar should go mad, it would become China's and India's problem to sort out.

America's policy shift will inevitably erode the western liberal axis. America has the flexibility, capacity and leadership to adapt to the new rules for pursuing diplomacy, but Europe does not. Its strategic relevance, even in the transatlantic partnership, will weaken.

Realism will give the US more leeway in the short term, but it will have to sacrifice some of its soft power to achieve this. Whether America can strengthen its global influence in the future will depend not so much on its moral esteem, but the extent to which it succeeds in revamping its economy and forging new alliances. The same will apply for other powers.

But this rising "Beijing Consensus" offers no guarantee of stability. A concert of powers is only as strong as its weakest pillar, and requires a great deal of self-discipline and restraint. It remains to be seen how the American public will respond to its national U-turn. If one main player slides back into economic turmoil, nationalism will reduce the scope for pragmatic bargaining. If China emerges from the crisis as the big winner and continues to boost its power, zero-sum thinking will replace win-win co-operation.

Jonathan Holslag is head of research of the Brussels Institute of Contemporary China Studies. Copyright: Project Syndicate


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Secondary schools could pay off for Hong Kong


LEADER

Apr 20, 2009           
     
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The weakness of Hong Kong's economic structure has been exposed by the global financial crisis. We have been served well by being a regional hub for financial services, but it is now apparent how dangerous it is not to diversify into other sectors. It is therefore good that the government has targeted education as a potential growth industry.

As we report today, the government is looking at opening the door to private schools and universities. The head of the Central Policy Unit, Lau Siu-kai, has suggested that a more flexible approach to providing land for the setting up of campuses could be adopted. World-class universities could open branches or provide programmes; new secondary schools could attract mainland students. These are ideas well worth exploring. Throughout the consultation process, though, the authorities must not be blinded by the realities of Hong Kong's situation.

Standards at our publicly funded universities are high, but that is because there is adequate funding from government and just 18 per cent of Hong Kong students get accepted into our universities. More universities setting up here would seem to be welcome. But it must also be kept in mind that when it comes to an English-language education, a good number of Hong Kong parents prefer their children to get a university education in Australia, Britain, Canada and the US. These countries have long geared their higher education systems to foreign students. Their education industries are well developed. Teething troubles were long ago ironed out. Hong Kong has to find a way of competing in a free-market environment.

Ours is a high-cost society, and international-standard education does not come cheap. The fees our public universities charge foreign students are comparable to those charged by their counterparts overseas. Any foreign university trying to set up a new campus here with no government funding would probably have to charge even higher fees. But why should families with the means to send their children to overseas universities want to opt for local colleges instead? In a globalised market, why would foreign and mainland students want to come here?

Private secondary schools may have a better chance of success. Over the years, our expanding middle class, which is dissatisfied with public schools but reluctant to send its children to boarding schools abroad when they are young, has provided solid support to a small but growing number of independent schools. The so-called direct subsidy schools, which are allowed to charge fees despite receiving government subsidies, are also virtually operating as private schools that respond to market forces. They are well poised to serve a developing "export" market by admitting foreign students.

With appropriate policy support, private secondary schools with boarding facilities could appeal to mainland families, particularly those from southern China, who want the best education for their children. Like most parents, they do not want to send their sons and daughters to unfamiliar places overseas while they are young. Hong Kong, as a Chinese society close to home and a provider of bilingual education, could prove an attractive alternative.

Hong Kong has a history of reinventing itself. There is no harm in the government looking into our city becoming an education centre. But the searching questions must first be thoroughly explored and answered, and no favouritism must be allowed in the process. Whatever is decided upon must be allowed to develop by keeping true to our free-market principles.


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The great transition
China's rise to replace the US as the global superpower has shifted into high gear

Martin Jacques
Apr 21, 2009           
     
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We have entered one of those rare historical periods that is characterised by a shift in global hegemony from one great power to another. The last was between 1931 and 1945, and marked the end of Britain's financial ascendancy and its replacement by that of the United States.

This new period is marked by the rise of China and the decline of the US. Arguably the process started around a decade ago but, at that stage, it was barely noticed, such was the west's preoccupation with  9/11 and its after-effects.

It is more appropriate, however, to date the beginning of the new era from 2008. First, the election of Barack Obama signalled a recognition by the US of the limitations of its own power and the need for it to co-operate with other nations. Second, China has reached a point where it is now clearly prepared, on the basis of the advances of the last three decades, to assume a more active global role. And third, the onset of the global financial crisis provides the context for the decline of American economic power and illustrates the extent to which it has become dependent on China for the continuation of its global financial hegemony.

Such transitions are profoundly unstable, deeply uncertain and fraught with danger. The world is fortunate - for the time being, at least - that it has a US president in Mr Obama who is prepared to take a conciliatory and concessive attitude towards America's decline and that it has a Chinese leadership which has been extremely cautious about expressing an opinion, let alone flexing its muscles.

The picture, however, is changing rapidly; indeed, this year has already witnessed a marked change in Chinese attitudes. A succession of statements and initiatives suggest that Chinese policy has now entered a new phase.

Premier Wen Jiabo expressed a strong confidence at the Boao Forum in Hainan on Saturday that China was successfully weathering the effects of the global economic crisis. During his visit to Europe for the Davos meeting, he made it clear that reckless western economic policy, especially by the US, was responsible for the crisis. He also declared that China would not give funds to the International Monetary Fund unless the latter was subject to major reform.

Later he expressed strong concern about US financial policy and its impact on the dollar, seeking reassurance that the value of China's US Treasury bonds would not be prejudiced. In a carefully staged run-up to the Group of 20 summit, Vice-Premier Wang Qishan set out a vision of a new monetary order while, most dramatically of all, the central bank governor, Zhou Xiaochuan, called for a new global currency based on using the IMF's special drawing rights.

Meanwhile, a meeting of the finance ministers and central bank chiefs from China, India, Russia and Brazil that preceded the G20 summit called for greater voting rights for developing countries in international financial organisations.

It is now abundantly clear that China is prepared to take an active and interventionist role in international financial affairs. It will be a central player in whatever new architecture emerges from the present crisis.

The rise of China and the decline of the US will, at least during this period, be enacted overwhelmingly on the financial and economic stage. And China has now demonstrated that it intends to be a full-hearted participant in this process. It is not difficult to predict some likely consequences: the G20 will replace the G8, while the IMF and the World Bank will be subject to reform, with the developing countries acquiring a greater say.

The most audacious proposal that has so far emanated from Beijing, almost completely unforeseen, is the suggestion for a new global currency that might, in time, replace the role of the US dollar as the world's reserve currency.

Whether such a proposal would ever see the light of day, or indeed work, given that reserve currencies have always depended on a powerful sovereign state, it nonetheless provides us with an insight into the strategic financial thinking that now informs the Chinese government's approach. Clearly they recognise that the days of the dollar as the dominant global currency are numbered. This would also, incidentally, signal the end of New York as the global financial centre.

But this is only one side of the picture. On the other side is the growing role of the yuan, which has so far attracted little attention. Although the yuan remains non-convertible, it is evident that Beijing is seeking to progressively internationalise its role. The US dollar's strength over the past couple of years remains something of an anomaly. It would be a brave person who bet on the dollar's strength continuing; it is much more likely, in fact, that at some point its value will plummet.

Should that happen, then the dollar's global position could rapidly be undermined and the need for more fundamental global financial reforms made more urgent. All of this would only serve to accelerate the decline of the US and the rise of China.

Martin Jacques is the author of When China Rules the World: the Rise of the Middle Kingdom and the End of the Western World. Copyright: The Guardian


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In excess
China's massive, lending-led stimulus programme threatens 30 years of economic reform

James Dorn
Apr 22, 2009           
     
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China's massive stimulus programme is being fuelled by an unprecedented increase in bank lending. More credit has been extended in the first quarter of 2009 than for all of 2007, and bank lending is growing by nearly 30 per cent on an annual basis compared to about 15 per cent in October 2008. That lending spree reflects an ultra-easy monetary policy with both the monetary base (currency plus bank reserves) and broad money (M2) growing at more than 25 per cent a year.

The excessive growth of money and credit relative to real gross domestic product growth of slightly more than 6 per cent poses a significant inflationary risk if the People's Bank of China (PBOC) does not put on the brakes later this year. Once the inflationary genie is out of the bottle, it will be difficult to put him back in.

More significant, most of the new loans are flowing from state-owned banks to state-owned enterprises. Those loans and investments are heavily influenced by political decisions rather than by sound cost-benefit analysis based on market prices. Consequently, China's stimulus plan is affecting the structure of its economy, with state-led development gaining ground and the dynamic private sector losing ground. If that trend were to continue, there would be a negative impact on China's highly successful marketisation process and an increase in the power of government over economic life.

It is ironic that, after celebrating 30 years of China's economic liberalisation and opening to the outside world, Beijing is now reverting to the old model of state-led development. Stimulating the economy through monetary expansion may work in the short term, but the risks to long-term price stability, prosperity (SEHK: 0803, announcements, news) and freedom are significant. Monetary mischief and artificially low interest rates could lead to a large misallocation of credit and an increase in non-performing loans. The PBOC's easy money policy risks repeating the same boom-bust cycles of 1985, 1988 and 1993-95, when the central bank allowed the money supply to far outpace real economic growth.

At present, China is experiencing deflation, not inflation. But no country - including China - has ever escaped inflation when its central bank persists in creating an excess supply of money. In a careful study of China's monetary policy, Gregory Chow of Princeton University found that when the central bank has controlled the growth of the monetary base, inflation has been tamed, as when then-premier Zhu Rongji brought inflation down from 22 per cent in 1994 to less than 1 per cent in 1997.

Today, the PBOC is putting less emphasis on controlling inflation and more on stimulating the economy. But there are limits to monetary policy: printing money cannot take the place of institutional changes that promote economic freedom and prosperity. Zimbabwe was once a rich country but is now impoverished because it destroyed sound money, imposed price controls, undermined private property rights and abandoned the rule of law. Rather than stimulating the economy, excessive money creation erodes the value of the currency, distorts market prices, slows economic growth, and reduces both economic and personal liberties.

Governments gain power when money is mismanaged. Inflation is a tax on real cash balances and, if inflation is suppressed by wage and price controls, governments resort to rationing and administrative means to determine the allocation of goods and services. The result is widespread shortages, corruption and an underground economy.

In August 1971, then US president Richard Nixon introduced wage and price controls when US inflation was less than 5 per cent. But the Federal Reserve continued to create excess money. When the controls were removed, inflation soared to double-digit rates until Paul Volcker's Fed sharply tightened money growth, and the US suffered a recession.

If a democratic country like the US imposed price controls when inflation was relatively low, it is conceivable that China could revert to wage-price controls if inflation were to re-emerge.

China already controls interest rates, does not allow full convertibility of its currency, pegs its exchange rate at an artificially low level (as revealed in its accumulation of nearly US$2 trillion of foreign exchange reserves), and prohibits the private ownership of land. Those forms of "financial repression", which limit the choices open to people, along with strict constraints on the free flow of information, mean that China's quest to become a world-class financial centre will not be realised until those restrictions are relaxed.

With the demise of investment banking in the US, China has a golden opportunity to gain market share by further liberalising its capital markets. Moreover, if China were to allow more flexibility in the yuan exchange rate, the PBOC could focus on maintaining long-term price stability, and China could move more quickly towards a fully convertible currency. The yuan might then evolve as the anchor for a strong regional currency bloc. Finally, state-owned banks should be privatised and market-determined interest rates should be used to guide credit allocation.

Market socialism and easy money are what got the US financial system into trouble. Fannie Mae and Freddie Mac were government-sponsored, not private, enterprises, and the Fed kept interest rates too low for too long. China should learn from those mistakes and recognise that future success will depend on increasing economic freedom and maintaining sound money, not on enshrining market socialism.

James A. Dorn is a China specialist at the Cato Institute in Washington and editor of The Future of Money in the Information Age


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Appeal court made right decision in PCCW case


LEADER

Apr 23, 2009           
     
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Our city has been gripped by the court drama over PCCW (SEHK: 0008)'s HK$15.93 billion attempt at privatisation. It reached a climax yesterday when the Court of Appeal ruled in favour of the Securities and Futures Commission's bid to block the deal. Many people will take satisfaction from the court's decision - not just the minority shareholders who opposed the buyout plan.

Once a corporate icon, the telecom giant has become a byword for the destruction of shareholder value. Chairman Richard Li Tzar-kai and his trusted lieutenants have done well for themselves, but the company they have run for a decade has wiped out the stock value of many longtime shareholders. The latest buyout bid, if it proceeded, would complete the process of wealth destruction for many investors. However, there are indications that Mr Li will accept the court's latest ruling and allow the deal's financing to lapse. That would be a wise course to take - and fairer to minority shareholders. If this happens, there is nothing to stop Mr Li from offering another buyout - one that should offer better value to small shareholders and, hopefully, be clear of vote-rigging allegations. Such a deal would gain more legitimacy in the eyes of the public. This should be the lesson learned from the costly round of legal battles.

The court yesterday did not have time to write up the reasoning behind its judgment - this will be released later. However, Mr Justice Anthony Rogers' comments during the last few days of the hearing have been highly critical of the proposed deal; it is reasonable to assume they generally reflect the court's views. The three judges had wide latitude to decide whether the privatisation plan was fair and just; evidently, all three concluded it was neither. The appeal court took a very different stance from the one adopted by Madam Justice Susan Kwan Shuk-hing of the Court of First Instance when she sanctioned the buyout plan to proceed. It was right to do so.

Even leaving aside the allegations of vote-rigging, it was clear Mr Justice Rogers spoke for many people who have been observing the sorry corporate saga of PCCW, not only concerning the latest buyout deal, but since it was taken over by Mr Li at the height of the dotcom bubble. The judge described the privatisation scheme as an "outrageous" attempt to squeeze out small shareholders and the HK$4.50 per share offer price as being too low. He questioned why majority shareholders - Mr Li's Pacific Century Regional Developments and China Unicom (SEHK: 0762, announcements, news) Group - should get a US$2 billion dividend after the deal. Some minority shareholders have argued - with good reason - that they should be entitled to a share of the dividend payout based on company profits. Instead, it is being used effectively to subsidise the buyout.

PCCW has pointed out that it has done nothing illegal and that it was unaware of any vote-splitting activity to rig the votes on the buyout plan. That may be so. The company's position was buttressed by Madam Justice Kwan's judgment early this month. She observed that vote-splitting is, in any case, not illegal in Hong Kong. But her ruling took an excessively legalistic stance and left many people uncomfortable. The appeal court has rightly reversed it.

With the latest court judgment, more minority shareholders may find emotional closure, but the financial losses they have incurred can never be recovered. Mr Li should now show goodwill and offer them a better deal.


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In hot water
Man-made climate change is scientific fact, and time is short if we are to lessen its impact

John Theodore Houghton
Apr 24, 2009           
     
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Many people ask how sure we are about the science of climate change. The most definitive examination of the scientific evidence is to be found in the work of the Intergovernmental Panel on Climate Change (IPCC) and its last major report published in 2007. It was my privilege to be chairman or co-chairman of the panel's scientific assessments from 1988 to 2002.

Many hundreds of scientists from different countries were involved as contributors and reviewers for these reports, which are probably the most comprehensive and thorough international assessments on any scientific subject ever carried out. In June 1995, just before the Group of Eight summit in Scotland, the academies of science of the world's 11 largest economies (the G8 plus India, China and Brazil) issued a statement endorsing the IPCC's conclusions and urging world governments to take urgent action to address climate change. The world's top scientists could not have spoken more strongly.

Unfortunately, strong vested interests have spent millions of dollars on spreading misinformation about climate change. First, they tried to deny the existence of any scientific evidence for global warming. More recently, they have largely accepted the fact of anthropogenic (man-made) climate change but argue that its impacts will not be great, that we can "wait and see", and that in any case we can always fix the problem if it turns out to be substantial.

The scientific evidence does not support such arguments. Urgent action is needed both to adapt to the climate change that is inevitable and to reduce emissions of greenhouse gases, especially carbon dioxide, to prevent further damage.

At the Earth Summit in Rio de Janeiro in 1992, the world's nations signed up to the Framework Convention on Climate Change, the objective of which is "to stabilise the concentration of greenhouse gases in the atmosphere at a level that does not cause dangerous interference with the climate system ... that allows ecosystems to adapt naturally to climate change, that ensures food production is not threatened, and that enables economic development to proceed in a sustainable manner". Such stabilisation would also eventually stop further climate change.

It is now recognised that widespread damage due, for instance, to sea level rise and more frequent and intense heatwaves, floods and droughts, will occur even for small rises in global average temperature. Therefore, very strong efforts must be made to hold the average global temperature rise below 2 degrees Celsius relative to its pre-industrial level.

If we are to have a good chance of achieving that target, the concentration of carbon dioxide must not exceed 450 parts per million (it is now nearly 390 ppm).

This implies that, before 2050, global carbon dioxide emissions must be reduced to below 50 per cent of the 1990 level (they are currently 15 per cent above that level), and that average emissions in developed countries must be reduced by at least 80 per cent of the 1990 level.

Britain has already committed itself to a binding target to reduce emissions by that amount, and US President Barack Obama has expressed an intention that the United States should also set that target.

One clear requirement is that tropical deforestation, which is responsible for 20 per cent of greenhouse gas emissions, be halted within the next decade or two. Regarding emissions from the burning of fossil fuels, the International Energy Agency (IEA) in its "Energy Technology Perspectives" has set out in detail the technologies and actions that are needed in different countries and sectors to meet these targets.

For the short term, the IEA points out that very strong and determined action will be necessary to ensure that global carbon dioxide emissions stop rising (the current increase is more than 3 per cent per year), reach a peak by about 2015, and then decline steadily towards the 2050 target. The IEA also points out that the targets can be achieved without unacceptable economic damage. In fact, the IEA lists many benefits that will be realised if its recommendations are followed.

What is required now is recognition that anthropogenic climate change will severely affect our children, grandchildren, the world's ecosystems and the world's poorer communities, and that the severity of the impact can be substantially alleviated by taking action now.

John Theodore Houghton, a former professor of atmospheric physics at the University of Oxford, was the co-chair of the IPCC's scientific assessment working group and lead editor of its first three reports. Copyright: Project Syndicate


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The food chains
Across the Asia-Pacific region, nearly 600 million people are facing a persistent crisis

Noeleen Heyzer
Apr 27, 2009           
     
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For 583 million people across Asia and the Pacific, the financial crisis has become a food crisis. While food prices have fallen from last year's spike, they remain high. Rising unemployment and falling incomes are putting additional pressure on poor and vulnerable groups. More worrying still is that, once the global economy recovers, the pressures that drove up food prices last year will return.

The United Nations Economic and Social Commission for Asia and the Pacific (Escap) will launch a publication, "Sustainable Agriculture and Food Security in Asia and the Pacific", when delegates from around the world gather at the 65th Commission session this week in Bangkok to discuss this persistent crisis.

Despite the region's enormous capacity to produce food, Asia and the Pacific are home to 64 per cent of the world's people living with food insecurity. Poverty is the primary cause in the region. It manifests itself in three ways: inadequate income makes it difficult for the poor to buy food; lack of clean water and poor sanitation cause infections that reduce the body's ability to absorb nutrients; and lack of land means that poor people cannot grow their own food.

The Escap report identifies 25 countries as hot spots in the region, with the worst problems existing in South and Southwest Asia, as well as Southeast Asia.

Even in countries that are seemingly doing well, national averages can mask disparities at the sub-national level. For example, the percentage of underweight children is higher in rural areas than in cities. This situation is particularly severe in East Asia and the Pacific, where rural children are twice as likely to be underweight.

Ironically, a second major cause of food insecurity comes from agriculture itself. Destructive farming practices have degraded land and contaminated waterways with pesticides and herbicides. Deforestation to open more farmland threatens watershed areas, disrupts fisheries, and reduces natural processes like pollination.

Two other threats to regional food security identified in the report include climate change and energy security. Changing weather patterns will significantly alter growing conditions for crops over the next decade. High fuel prices have the potential to adversely affect the agricultural sector in many ways.

The eradication of poverty and hunger is at the top of the agenda for the United Nations. The most immediate challenge is to improve access. For the poor, this translates into having enough income to buy food.

Governments will need to develop social protection programmes that include a minimum wage, unemployment insurance and agricultural insurance.

During times of disaster, emergency measures include setting up regional food banks, food subsidies and "food-for-work" programmes. Marginalised groups like women-headed households, nomads and those living with HIV/Aids require special attention. Providing health insurance and improvements to water and sanitation services help beneficiaries avoid illnesses that prevent the proper digestion of food.

Over the short term, improving availability of food at the national level will require looking at trade policies. Protectionist trade practices exacerbate food insecurity by driving up prices. As a result, more open trade policies will be at the heart of any response to food security issues in the region.

Over the medium term, the promotion of sustainable agriculture will take priority. With demand growing faster than supply, there is an urgent need to ensure future production levels will meet our growing population needs. We will need substantial investment in agricultural research and development that will ensure increases in food production, combined with protection of the environment and an ability to adapt to and reduce the impact of climate change.

Over the long term, adapting to and mitigating impacts from climate change will be a top priority for all countries in the region. At the national level, governments will need to improve scientific assessment, forecasting and information sharing. National and local capacities will have to be set up to improve ecological literacy, sustainable farming practices and risk management.

The Asia-Pacific region needs to identify policies that reconnect people with food. Regional co-operation can play an essential role through the mapping of food-insecurity hot spots, promoting the sharing of information among organisations and stakeholders, and building a consensus for action.

Noeleen Heyzer is UN undersecretary general and executive secretary of Escap


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Policies, not speculation, fuel food price inflation


Douglas Southgate
Apr 28, 2009           
     
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Agriculture ministers from the Group of Eight and major developing nations claimed last week they were ready to fight food insecurity by cracking down on speculation. This might make politicians feel good but evidence shows that alleged speculation had nothing to do with the food crisis: the real culprit was bad policy.

Since their peak in 2007 and 2008, cereal prices have fallen and, in some cases, halved. But for many people, especially in developing countries, prices are still above pre-crisis levels. The World Bank estimates that the food crisis pushed around 150 million people back into absolute poverty over the past two years. Worse, it predicts prices will stay high until 2015.

The agriculture ministers' summit in Treviso, northern Italy, promised to study "factors potentially affecting commodity markets, including speculation" but Italian Agriculture Minister Luca Zaia went much further, saying: "One of the main aims is to prepare efficient tools to fight financial speculation." French Agricultural Minister Michel Barnier conjured up "speculators preying on primary foodstuffs, which is scandalous", echoed by Oxfam, Save The Children and other pressure groups.

Given the current financial turmoil, traders are easy scapegoats. In reality, futures markets are complex and poorly understood - and benefit both producers and consumers. Speculators do gamble on which way markets will move in the future but, if they want to win, their bets must be highly informed, predicting future supply and demand. Futures markets thus indicate how prices will move, providing strong incentives for suppliers to adjust production to meet future demand.

As to speculation in the latest food crisis, there is absolutely no evidence that any person, group, or firm started trying to corner the market in food crops 12 to 18 months beforehand. Given the sheer size of the global food economy, it is virtually impossible.

Investors are not the only people who bought commodities in anticipation of higher prices: many Asian households hoarded rice, while importers accelerated grain purchases. This pushed prices up; futures markets are driven by the same forces as any other markets - supply and demand. There is nothing sinister about this, nor is there any sane measure that could prevent it.

Imposing regulations or setting up stockpiles of essential foodstuffs - as suggested at the summit - will do little to ease world hunger or avoid future price rises. When a massive shortage of onions caused their price to rise back in 1958, US politicians decided to ban onion trading on futures markets: this ban still remains but their price has shot up an astounding 420 per cent since 2000.

So what caused food prices to rise so rapidly two years ago? The World Bank says "the prevailing consensus among market analysts is that fundamentals and policy decisions are the key drivers of food price rises, rather than speculative activity". Biofuels, for example, diverted a quarter or more of US crops and led to higher corn and other commodity prices while costing the US taxpayer  US$7 billion every year.

Other bad policies have been around longer than biofuels. The final summit declaration says that "we need to sustain the benefits of globalisation and open markets, highlighting the crucial importance of rejecting protectionism" - yet 28 countries still maintain export bans on agricultural goods and many more have subsidies, quotas or tariffs on food, fertiliser and other farming commodities, the World Bank says.

Lack of property rights also repress crop yields. Without ownership, farmers can't raise investment loans by using land as collateral.

Politicians must resist attacking straw men and aim instead at their own damaging policies. If they want to ease food prices, they must open their markets and free their farmers.

Douglas Southgate is professor of agricultural, environmental and development economics at Ohio State University and author of Feed the World, a new International Policy Network report


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On another planet


FRANK CHING

Apr 29, 2009           
     
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No sooner had the UN Security Council issued a presidential statement on April 13 reprimanding North Korea for its rocket launch earlier this month than Pyongyang retaliated by ordering international monitors out of the country, announced that it was restarting its Yongbyon nuclear facility and declared its withdrawal from the six-party talks.

The United States and Japan had wanted the Security Council to issue a new resolution condemning North Korea, but China and Russia succeeded in getting them to agree to a less-binding presidential statement instead. Evidently, however, even this was too much for Pyongyang to accept.

North Korea insisted that on April 5 it did not test a long-range ballistic missile but had launched a peaceful satellite into space. China and Russia have upheld North Korea's right to launch a satellite. But, despite Pyongyang's claim that it had successfully launched a satellite, no country has been able to detect it.

The official North Korean news agency reported that, on Friday, leader Kim Jong-il met "the scientists, technicians, workers and officials who contributed to the successful launch of the satellite Kwangmyongsong-2 and posed for a photograph with them".

Since the North Korean "satellite" is fanciful - or sank into the depths of the ocean - the conclusion is inevitably that what is being celebrated is not the success of a satellite launch but, rather, the test of a ballistic missile. Indeed, analysts say that the missile flew further than previously believed and used more advanced flight controls than the North's earlier rockets. That alone is probably reason enough for Pyongyang to celebrate.

Ironically, North Korea, by calling the launch a success, indirectly confirmed charges that it did not launch a satellite but had conducted a missile test, which is expressly forbidden by Security Council Resolution 1718 of 2006, adopted unanimously after the country conducted a nuclear weapons test.

On Saturday, North Korea again defied world opinion by announcing it had resumed extracting plutonium from spent fuel rods in its nuclear facility. However, despite its declaration that the six-party talks are at an end, none of the other powers involved - China, the US, Japan, Russia and South Korea - seem to accept the demise of the talks.

In fact, all of them have expressed hopes that the negotiations on ridding the Korean Peninsula of nuclear weapons will resume at some point. That is because North Korea has such a history of saying one thing, only to do another, that there is little inclination to take it at its word.

Clearly, a resumption of the six-party talks is not in sight at this point. The talks produced an encouraging agreement in 2007 on the shutting down of the Yongbyon nuclear facility in return for economic aid from the five other parties. But, the talks broke down last year over failure to agree on how to verify claims after North Korea provided more than 18,000 pages of documents.

North Korea has, evidently, decided to strengthen its hand before it will return to negotiations.

It is likely that it will conduct further missile tests and even, possibly, conduct another nuclear test before it feels it can enter negotiations again. After all, there is general agreement that the test in 2006 was virtually a failure.

Meanwhile, the other countries can do little but bide their time and make it as difficult as possible for North Korea to develop its nuclear weapons technology by tightening export controls to that country. But there should be no talk of possible military action.

In the end, North Korea will have little choice but to return to the talks. After all, a nuclear weapons arsenal will do the country little good other than be used as a bargaining chip.

Meanwhile, Pyongyang's negotiating partners will have to decide whether they will be satisfied with the total, irreversible dismantling of the existing North Korean nuclear weapons programme or whether they also insist on a completely verified historical accounting of what the country did in the past.

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


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Science came first but democracy must follow


LEADER

May 04, 2009           
     
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Today's 90th anniversary of the May 4 Movement precedes the 60th anniversary of the founding of the People's Republic on October 1, an event with which it has historical links. Celebrations, though, are relatively routine, rather in keeping with the way idealism has been supplanted by materialism among the nation's students. Indeed, President Hu Jintao marked the occasion by reminding students of their duty to serve society as well as their own interests.

From a student protest against the settlement terms after the first world war and efforts to re-establish imperial rule, the movement grew into a debate about modernising China that became a catalyst for nationalist sentiment and led indirectly to the founding of the Communist Party. Its themes were the development of science and democracy. For decades afterwards, the movement continued to inspire political debate and protests, most recently the student-led June 4 pro-democracy movement in 1989.

Nowadays, China's economic growth and prosperity (SEHK: 0803, announcements, news) have bred students who see idealism and politics as luxuries they cannot afford if they are to acquire the qualifications for a good career in a competitive job market. While political dissent has become less tolerated since 1989, this also shows that the current student generation is not as interested in public affairs because China has become a more normal society. It is not good, however, for young people to become too materialistic. Economic progress has spawned a new set of problems, such as a wealth gap, environmental damage and unequal access to social services such as health and education. The nation stands to benefit if bright young people are encouraged to take a lively interest in public affairs.

The slogans of the May 4 Movement calling for the development of science and democracy remain relevant today. While China has made much progress in advancing science, it is still an authoritarian state. Greater democracy, including a free media and public debate, the rule of law and an independent judiciary, are key to addressing many of the problems that have emerged as a result of economic growth. Hopefully, when the centenary of the May 4 Movement comes around, the occasion will be marked by orderly progress towards democracy, rather than demands by radical students.


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Falling wage syndrome
When employers across the economy cut salaries at the same time, the result is higher unemployment

Paul Krugman
May 05, 2009           
     
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Wages are falling all across America. Some of the wage cuts, like the givebacks by Chrysler workers, are the price of federal aid. Others, like the tentative agreement on a salary cut at The New York Times, are the result of discussions between employers and their union employees. Still others reflect the brute fact of a weak labour market: workers don't dare protest when their wages are cut, because they don't think they can find other jobs.

Whatever the specifics, however, falling wages are a symptom of a sick economy. And they're a symptom that can make the economy even sicker.

First things first: anecdotes about falling wages are proliferating, but how broad is the phenomenon? The answer is, very.

It's true that many workers are still getting pay increases. But there are enough pay cuts out there that, according to the US Bureau of Labour Statistics, the average cost of employing workers in the private sector rose only two-tenths of 1 per cent in the first quarter of this year — the lowest increase on record. Since the job market is still getting worse, it wouldn't be at all surprising if overall wages start falling later this year.

But why is that a bad thing? After all, many workers are accepting pay cuts in order to save jobs. What's wrong with that?

The answer lies in one of those paradoxes that plague our economy right now. We're suffering from the paradox of thrift: saving is a virtue, but when everyone tries to sharply increase saving at the same time, the effect is a depressed economy. We're suffering from the paradox of deleveraging: reducing debt and cleaning up balance sheets is good, but when everyone tries to sell off assets and pay down debt at the same time, the result is a financial crisis.

And soon we may be facing the paradox of wages: workers at any one company can help save their jobs by accepting lower wages, but when employers across the economy cut wages at the same time, the result is higher unemployment.

Here's how the paradox works. Suppose that workers at the XYZ Corporation accept a pay cut. That lets XYZ management cut prices, making its products more competitive. Sales rise, and more workers can keep their jobs. So you might think that wage cuts raise employment - which they do at the level of the individual employer.

But if everyone takes a pay cut, nobody gains a competitive advantage. So there's no benefit to the economy from lower wages. Meanwhile, the fall in wages can worsen the economy's problems on other fronts. In particular, falling wages, and hence falling incomes, worsen the problem of excessive debt: your monthly mortgage payments don't go down with your pay cheque. America came into this crisis with household debt as a percentage of income at its highest level since the 1930s. Families are trying to work that debt down by saving more than they have in a decade - but, as wages fall, they're chasing a moving target. And the rising burden of debt will put downward pressure on consumer spending, keeping the economy depressed.

Things get even worse if businesses and consumers expect wages to fall further in the future. John Maynard Keynes put it clearly, more than 70 years ago: "The effect of an expectation that wages are going to sag by, say, 2 per cent in the coming year will be roughly equivalent to the effect of a rise of 2 per cent in the amount of interest payable for the same period." And a rise in the effective interest rate is the last thing this economy needs.

Concern about falling wages isn't just theory. Japan - where private-sector wages fell an average of more than 1 per cent a year from 1997 to 2003 - is an object lesson in how wage deflation can contribute to economic stagnation.

So what should we conclude from the growing evidence of sagging wages in America? Mainly that stabilising the economy isn't enough: we need a real recovery. There has been a lot of talk lately about green shoots and all that, and there are indeed indications that the economic plunge that began last autumn may be levelling off. The National Bureau of Economic Research might even declare the recession over later this year.

But the unemployment rate is almost certainly still rising. And all signs point to a terrible job market for many months if not years to come - which is a recipe for continuing wage cuts, which will in turn keep the economy weak.

To break that vicious circle, we basically need more: more stimulus, more decisive action on the banks, more job creation.

Credit where credit is due: US President Barack Obama and his economic advisers seem to have steered the economy away from the abyss. But the risk that America will turn into Japan - that we'll face years of deflation and stagnation - seems, if anything, to be rising.

Paul Krugman is a New York Times columnist


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How to kill two black swans with one stone


Joschka Fischer
May 06, 2009           
     
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In today's global financial crisis, the image of a black swan has become a symbol for the seemingly impossible that somehow occurs, turning the world upside down. This year will afford us ample opportunity to examine the black swans that are already among us, and to prepare for the arrival of even more.

November, for example, marks the 20th anniversary of the fall of the Berlin Wall. The night of November 9, 1989, marked the beginning of the end of the Soviet Union and its empire, and thus also of the bipolar world that had, for five decades, divided Germany and Europe. A year before, few people considered this world-shaking event a remote possibility. Yet it happened, and the world changed almost overnight.

After the disappearance of the Soviet Union and the bipolar world order, victorious western capitalism, under the leadership of the only world power, the United States, reigned supreme in global politics, and even more so in the global economy. Nothing and no one, it seemed, could stem the global triumph of the market - that is, until September 15 last year, the fateful date when Lehman Brothers went bust and the meltdown of the global financial system began.

While a distraught world is still trying to fathom this global crash and mitigate its impact, the call of the next black swan can already be heard: global climate disaster.

Although we have seen two unexpected, epic crises within the past 20 years, we indulge in a shocking collective denial of a climate disaster with far more serious - and foreseeable - consequences. But, by linking the answers to the global climate and economic crises, we can find a way out of both. The solutions to the climate crisis are already well known, the money is available, and so is most of the technology. What is lacking is a strategic vision and determined, global action.

As for the economic crisis, bailouts and stimulus packages have been planned or implemented to stem the further slide of the global economy. But, while references to the Great Depression are justified, the lesson of that crisis is that effective programmes can at best cushion the fall. The real economic recovery - and this is the bad news - came only with the second world war and following cold war.

Rather than relying on war as a mega project to end today's recession, the world should bet on fighting climate change, because globalisation will continue to raise threats to the world's climate.

So the black swan of the climate crisis is already preparing to land. To fight the climate crisis effectively demands nothing less than a green revolution of the global economy. But this revolution must be about more than spending money; it must also be about laws and standards.

This year, a new global climate agreement will be negotiated in Copenhagen to replace the Kyoto Protocol. This is the last chance to prevent the next black swan from landing. It is also a big chance to revive the global economy.

Joschka Fischer was Germany's foreign minister and vice-chancellor from 1998 until 2005. Copyright: Project Syndicate/Institute of Human Sciences


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Cleaner's death shows need for change


LEADER

May 07, 2009           
     
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Each tragedy that occurs in a public place on the government's watch is followed by the same response: profuse apologies, hand-wringing and belated action to prevent a repeat. Such is predictably the case after the crushing to death of a cleaner by a faulty security gate at a Social Welfare Department hostel for the intellectually disabled. The problem was noticed five months ago and the gate was to have been replaced this month. This is cold comfort to the dead woman's husband and four children.

The defensive explanations given by officials are not good enough. A 90kg gate hanging dangerously from hinges too weak to support it clearly needs urgent attention. Efforts to rectify the problem should have been redoubled given the vulnerability of the people using it. Leaving the gate in such a state for so long was inviting tragedy.

This is by no means the first of such incidents. There have been a string of them in recent years. Still fresh in minds is the death of a young woman in Stanley last November when the branch of a protected tree fell on her. Leisure and Cultural Services Department inspectors had just days before given the tree a clean bill of health; inquest evidence proved that the incident was no freak of nature and that they had not done their job properly. Chief Secretary Henry Tang Ying-yen has been put in charge of ensuring our city's trees are safe and an overhaul of the system is now in the offing.

Tuesday's accident in Hung Hom has not prompted such a top-level response, but the same soul-searching is under way. Whether it will prevent a repeat is quite another matter, though.

There is no doubt that the detection and repair mechanism for government property needs to be reviewed. The Architectural Services Department is responsible for this, but it has a heavy work schedule. About 300,000 orders are made each year for the 8,000 buildings in the government's portfolio. There would outwardly seem to be a prioritising problem given that a gate that was clearly a hazard to life was so far down the to-do list. Taking orders, prioritising and eventually carrying out the requested work is our civil service's standard method of operation. There is no incentive to go beyond the outlined rules and ensure that certain jobs should be dealt with with greater urgency. What is laid out more often than not goes unquestioned.

The cleaner's death plainly shows that there are flaws. There may need to be a revamping of the system. Giving government agencies a maintenance budget may be one solution. Putting them in charge of their own repairs and allowing them to outsource the work to private contractors could lead to jobs being done more quickly and cost-effectively.

But this does not tackle the issue of the civil service being structured in such a way that employees shy away from taking responsibility for problems. The hostel's chief should have been more proactive in getting the gate repaired or replaced. Danger cannot be allowed to hang so precariously. The status quo cannot be allowed to continue.


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Technology is not going my way this month. My son dropped the camera I bought him as an off-to-university-in-Australia gift and cracked the LCD display; he was told by the service centre in Sydney it would be cheaper to buy a new one. Then my electric shaver refused to recharge and, when I opened it, I found the manufacturer had soldered in the batteries, making them impossible to replace. On Tuesday, my fridge stopped working; the repairman shook his head and said purchasing the latest model would be more cost effective.

This makes me angry. It is not so much that my budget has been torn to shreds - it is that each item was easily repairable. Consumer electronics are made to be used for only so long and then we are expected to throw them out and buy replacements. This way, the companies can keep shareholders happy.

But this is only the tip of the problem in our consumer-driven, society. Firms churn out new products yearly, or even quarterly. We are bombarded by advertising to buy, buy, buy. Everywhere we look, there is a new this or that. The pressure to get the latest model, irrespective of whether we need it or not, is enormous.

Try to get a computer with a Windows 98 operating system serviced. It may still do everything you want it to, but you will be told that it is no longer supported, so you will have to upgrade to Vista. Ask in a shop for cloth nappies for your baby and the staff will look at you as if you have gone mad; what's wrong with disposable ones, they will ask. We have to have not one pair of sports shoes, but a pair for each activity. And so the list goes on.

This rampant consumerism goes against what common sense and science are telling us. The planet is warming up because of the greenhouse gases that are, in large part, being emitted by manufacturing plants. We are supposed to be environmentally conscious and to think of sustainable development. Producing deliberately obsolete goods, that are expensive to repair or are regularly superseded, goes against the grain.

There is a bright spot: the global financial crisis. Economic growth rates have been slashed. Company profits are down as consumers stop buying. There is no better time to question the system and review our lives.

That is what US woman Caroline Savery has been thinking for some time. Last year, she tried to put her thoughts into practice, moving into a small tent in Pittsburgh for three months in an effort to be 100 per cent environmentally sustainable. She rummaged for food in rubbish bins, cycled everywhere and did her best to get by without having to resort to going into a shop. She failed; technology-driven society is such that she was able to live sustainably only five or six days out of the 93. A film school graduate, she videoed her experiences and has three of the planned six episodes posted on her website, [url]www.sust-enable.com.[/url]

Ms Savery remains committed to sustainability. She buys her clothes second-hand, and her flat measures 550 sq ft. She contends that attitudes to rampant consumerism have to be changed. Corporations are her nemesis: she suggests we lobby them relentlessly to put the environment before profits.

It would be easy to write off people like Ms Savery as oddities. She is in a minority, to be sure, but her voice is one of an ever-growing number, some of whom are mainstream. Among them is University of Surrey professor Tim Jackson, the head of economics for Britain's Sustainable Development Commission. In a report issued in March, "Prosperity (SEHK: 0803, announcements, news) Without Growth?", he argued that the pursuit of economic growth was a root cause of the financial turmoil and contributing to a growing environmental crisis.

He said it was time to question the belief held by governments that economic growth must be maintained at all costs.

Such thinking is not popular, but it has to happen if we intend to continue to think of Earth as home. A major mentality shift is needed. I don't intend to move into a tent, but buying sturdier equipment and paying less attention to advertising is top of my priority list. An e-mail every now and then to some of those profit-hungry corporations won't go amiss, either.

Peter Kammerer is a senior writer at the Post. [email]peter.kamm@scmp.com[/email]

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Zombie spring
The finance sector talks of 'green sprouts' of recovery, but we ought to be preparing for another dark winter

Joseph Stiglitz
May 11, 2009           
     
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As spring comes to America, optimists are seeing "green sprouts" of recovery from the financial crisis and recession. The world is far different from what it was last spring, when the Bush administration was once again claiming to see "light at the end of the tunnel". The metaphors and the administrations have changed, but not, it seems, the optimism.

The good news is that we may be at the end of a free fall. The rate of economic decline has slowed. The bottom may be near - perhaps by the end of the year. But that does not mean the global economy is set for a robust recovery any time soon. Hitting bottom is no reason to abandon the strong measures that have been taken to revive the global economy.

This downturn is complex: an economic crisis combined with a financial crisis. Before its onset, America's debt-ridden consumers were the engine of global growth. That model has broken down, and will not be replaced soon. For, even if America's banks were healthy, household wealth has been devastated, and Americans were borrowing and consuming on the assumption that house prices would rise forever.

The collapse of credit made matters worse; and firms, facing high borrowing costs and declining markets, responded quickly, cutting back inventories. Orders dropped abruptly - well out of proportion to the decline in gross domestic product - and those countries that depended on investment goods and durables (expenditures that could be postponed) were particularly hard hit.

We are likely to see a recovery in some of these areas from the bottoms reached at the end of 2008 and the beginning of this year. But examine the fundamentals: in America, property prices continue to fall, millions of homes are underwater with the value of mortgages exceeding the market price, and unemployment is increasing.

The banking system has just been tested to see if it is adequately capitalised - a "stress" test that involved no stress - and some couldn't pass muster. But, rather than welcoming the opportunity to recapitalise, perhaps with government help, the banks seem to prefer a Japanese-style response: we'll muddle through.

"Zombie" banks - dead but still walking among the living - are, in Ed Kane's immortal words, "gambling on resurrection". Repeating the Savings & Loan debacle of the 1980s, the banks are using bad accounting (they were allowed, for example, to keep impaired assets on their books without writing them down, on the fiction that they might be held to maturity and somehow turn healthy). Worse still, they are being allowed to borrow cheaply from the US Federal Reserve, on the basis of poor collateral, and simultaneously to take risky positions.

Some banks did report earnings in the first quarter, mostly based on accounting legerdemain and trading profits (read: speculation). But this won't get the economy going again quickly. And, if the bets don't pay off, the cost to the US taxpayer will be even larger.

The US government, too, is betting on muddling through: the Fed's measures and government guarantees mean that banks have access to low-cost funds, and lending rates are high. If nothing nasty happens - losses on mortgages, commercial property, business loans and credit cards - the banks might just be able to make it through without another crisis. In a few years time, the banks will be recapitalised and the economy will return to normal. This is the rosy scenario.

But experiences around the world suggest that this is a risky outlook. Even if banks were healthy, the deleveraging process and associated loss of wealth means that the economy will, more likely, be weak. And a weak economy means, more likely than not, more bank losses.

The problems are not limited to the US. Other countries have their own property crises. In a globalised world, problems in one part of the system quickly reverberate elsewhere. In earlier crises, as in East Asia a decade ago, recovery was quick because affected countries could export their way to prosperity (SEHK: 0803, announcements, news) . But this is a synchronous global downturn, and America and Europe can't export their way out of their doldrums.

Fixing the financial system is necessary, but not sufficient, for recovery. America's strategy for fixing its financial system is costly and unfair, for it is rewarding the people who caused the economic mess. But there is an alternative that essentially means playing by the rules of a normal market economy: a debt-for-equity swap.

With such a swap, confidence could be restored to the banking system, and lending could be reignited with little or no cost to the taxpayer. Bondholders obviously don't like it - they would rather get a gift from the government. But there are far better uses of the public's money, including another round of stimulus.

Every downturn comes to an end. The question is how long and deep will this one be. In spite of some spring sprouts, we should prepare for another dark winter: it's time for Plan B in bank restructuring and another dose of Keynesian medicine.

Joseph E. Stiglitz, professor of economics at Columbia University, chairs a commission of experts, appointed by the president of the UN General Assembly, on reforms of the international monetary and financial system. Copyright: Project Syndicate


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Flu vaccine dilemmas leave WHO with a headache


Michael Richardson
May 12, 2009           
     
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The World Health Organisation is consulting national officials and drug makers this week on whether the threat from the new Influenza A (H1N1) strain is serious enough for large-scale production of a pandemic vaccine to start. The series of consultations, which conclude on Thursday, will form the basis of a recommendation to vaccine manufacturers from the WHO.

This will not be an easy decision for WHO director-general Margaret Chan Fung Fu-chun. The virus is spreading around the world. But, much remains unknown about the nature of the new bug, how infectious it will prove, the severity of the respiratory illness it will cause and the age groups that are most vulnerable.

The confirmed death toll from H1N1 is now more than 50, mainly in Mexico. Yet, between 250,000 and 500,000 people around the world die from seasonal flu every year.

Of the various ways devised by scientists to defend against seasonal and pandemic flu approved so far by health regulators, vaccination is rated the most effective. But vaccine production takes months.

Most vaccines contain a dead or weakened form of a circulating virus, cultivated in chicken eggs, although a small number of companies have been approved to use cell cultures. Either way, the vaccine works by triggering the body's immune system.

If the WHO recommends that drug makers switch to large-scale output of pandemic vaccine at such an early stage in the evolution of the H1N1 strain, will there be enough production capacity left to meet the annual seasonal flu demand of around 500 million doses? These shots are recommended by doctors to ward off flu, particularly among the elderly, disabled, those with chronic medical conditions, and other groups such as pregnant women and health care workers.

Different types of vaccines cannot be produced simultaneously in the same facility for fear of cross-contamination. For some manufacturers with only one plant, switching to pandemic production would mean stopping seasonal output. Still, this may not be a major problem because the WHO has been told by drug companies that they have substantial extra production capacity. The major ones also have multiple plants.

The WHO says that the seed strains of the novel H1N1 virus are due to be given to manufacturers later this month, enabling them to start producing a pandemic vaccine.

A big question weighing on the minds of those taking part in the talks this week is whether any vaccine would be ready in time and remain effective for the duration of a pandemic if the virus mutates. Cell culture makers might be able to start distribution in three or four months. The rest would take five or six months.

The WHO says that the several dozen pharmaceutical companies that make vaccines could produce at least 1 to 2 billion doses of H1N1 pandemic vaccine per year. The International Federation of Pharmaceutical Manufacturers & Associations gave an assurance in February that, in the past two years, pandemic flu vaccine production capacity had increased by 300 per cent. But even this would fall far short of demand for a global population of 6.7 billion, especially if each person needs two doses.

Japan, Australia, China, India and a growing number of other nations now produce flu vaccines. But more than 90 per cent of global production capacity is in Europe and North America. Some firms have been generous in recent years in providing poor countries with cut-price drugs. One of the aims of the talks organised by the WHO this week is to try to get advance agreement from manufacturers to set aside a significant portion of any H1N1 pandemic vaccine for distribution to the developing world, should it be needed.

The alternative could be an upsurge of rich-poor tensions as wealthy nations hog vaccine supplies and restrict exports in a crisis.

Michael Richardson is a visiting senior research fellow at the Institute of Southeast Asian Studies in Singapore. [email]mriht@pacific.net.sg[/email]


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Putting the 'liberal' part back into democracy


Joseph Nye
May 13, 2009           
     
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Former US president George W. Bush was famous for proclaiming the promotion of democracy as a central focus of American foreign policy. He was not alone in this rhetoric. Most US presidents since Woodrow Wilson have made similar statements.

So it was striking when Secretary of State Hillary Rodham Clinton testified to Congress earlier this year about the "three Ds" of American foreign policy - defence, diplomacy and development. The "D" of democracy was noticeable by its absence, suggesting a change in policy by Barack Obama's administration.

Both Bill Clinton and George W. Bush frequently referred to the beneficial effects of democracy on security. They cited social science studies that show democracies rarely go to war with each other. But, more carefully stated, what scholars show is that liberal democracies almost never go to war with each other, and it may be that a liberal constitutional culture is more important than the mere fact of elections.

While elections are important, liberal democracy is more than "electocracy". Elections in the absence of constitutional and cultural constraints can produce violence, as in Bosnia or the Palestinian Authority. And illiberal democracies have fought each other, as Ecuador and Peru did in the 1990s.

In the eyes of many critics at home and abroad, the Bush administration's excesses tarnished the idea of democracy promotion. The word "democracy" came to be associated with its particular US variant, and took on an imperialist connotation.

Moreover, Mr Bush's exaggerated rhetoric was often at odds with his practice, giving rise to charges of hypocrisy. It was far easier for him to criticise Zimbabwe, Cuba and Myanmar than Saudi Arabia and Pakistan.

There is a danger, however, in overreacting to the failures of the Bush administration's policies. The growth of democracy is not a US imposition, and it can take many forms. The desire for greater participation is widespread as economies develop and people adjust to modernisation. Democracy is not in retreat.

Democracy remains a worthy and widespread goal, but it is important to distinguish the goal from the means used to attain it. There is a difference between assertive promotion and gentle support of democratisation. Avoiding coercion, premature elections and hypocritical rhetoric should not preclude a patient policy that relies on economic assistance, behind-the-scenes diplomacy and multilateral approaches to aid the development of civil society, the rule of law and well-managed elections.

Equally important to the foreign-policy methods used to support democracy abroad is how we practise it at home. When we try to impose democracy, we tarnish it. When we live up to our own best traditions, we can stimulate emulation and create the soft power of attraction.

Another aspect of America's domestic practice of liberal democracy that is currently being debated is how the US deals with the threat of terrorism. In the climate of extreme fear that followed the attacks of September 11, 2001, the Bush administration engaged in tortured legal interpretations of international and domestic law that tarnished American democracy and diminished its soft power.

But the threat remains alive, and we should remember that people in democracies want liberty and security. In times of extreme fear, the pendulum of attitudes swings towards the security end of that spectrum.

Terrorists hope to create a climate of fear and insecurity that will provoke us to harm ourselves by undercutting the quality of our own liberal democracy. Preventing new terrorist attacks while understanding and avoiding the mistakes of the past will be essential if we are to preserve and support liberal democracy both at home and abroad. That is the debate that the Obama administration is leading in the US today.

Joseph S. Nye, a professor at Harvard, was rated by a recent poll as the most influential scholar on American foreign policy. Copyright: Project Syndicate


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Even the US may agree the dollar has had its day


Onno Wijnholds
May 14, 2009           
     
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Zhou Xiaochuan , the governor of the People's Bank of China, recently suggested that replacing the US dollar with the International Monetary Fund's Special Drawing Rights (SDRs) as the dominant reserve currency would bring greater stability to the financial system.

The idea of reforming the system by introducing a supranational reserve currency is also, it appears, supported by Russia and other emerging markets. And a UN advisory committee, chaired by the Nobel laureate Joseph Stiglitz, has argued for a new global reserve currency, possibly one based on the SDR.

Transforming the US dollar standard into an SDR-based system would be a major break with a policy that has lasted more than 60 years. The SDR was introduced 40 years ago to supplement what was then seen as an inadequate level of global reserves, and was subsequently enshrined in the IMF's amended Articles of Agreement as the future principal reserve asset.

But the world soon became awash with dollars. So, instead of becoming the principal reserve asset of the global system, the proportion of SDRs in global reserves shrank to a tiny fraction, rendering the SDR the monetary equivalent of Esperanto.

Although the euro, created in 1999, turned out to be a more serious competitor to the dollar, its share in total global reserves has probably remained below 30 per cent, compared to 65 per cent for the dollar.

There are two ways in which the dollar's role in the international monetary system can be reduced. One possibility is a gradual, market-determined erosion of the dollar as a reserve currency in favour of the euro. But, while the euro's international role has increased since its inception, it is hard to see it overtaking the dollar as the dominant reserve currency in the foreseeable future.

With the dollar's hegemony unlikely to be seriously undermined by market forces, at least in the short and medium term, the only way to bring about a major reduction in its role as a reserve currency is by international agreement. The Chinese proposal falls into this category.

And there is a way for SDRs' importance to grow. Back in 1980, the IMF came close to adopting a so-called SDR substitution account. The idea was to permit countries whose official dollar holdings were larger than they were comfortable with to convert dollars into SDRs. Conversion would occur outside the market, and thus would not put downward pressure on the dollar. Member countries would receive an asset that was more stable than the dollar, as it was based on a basket of currencies, thereby providing better protection against losses.

The plan fell apart when some major IMF shareholders could not accept the burden-sharing arrangements needed in case of losses due to exchange-rate movements.

What are the chances of adopting a scheme of this kind today? Is the US prepared to go along with a reform of the international monetary system that reduces the dollar's role?

Until recently, this would have been unlikely. But the changed international climate could convince the US to go along with a conversion scheme. But even if an SDR substitution account is established, it is unlikely that the dollar's share in international reserves would fall to an insignificant level. It will remain important for many countries as a vehicle for intervention in foreign-exchange markets, as well as for invoicing and for denominating internationally traded securities.

But one can envisage a system in which international reserves are each held in roughly equal shares of dollars, euros and SDRs. While there are currently other priorities, it would be useful for the IMF to study anew an SDR substitution account and similar schemes. If it does not, the debate will take place elsewhere.

Onno de Beaufort Wijnholds is a former executive director of the IMF and a former permanent representative of the European Central Bank in the US. Copyright: Project Syndicate


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HK$33b slips away without even a 'thanks'


Philip Bowring
May 15, 2009           
     
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Politicians, media, academics - please wake up to the continuing erosion of Hong Kong's supposed autonomy. All of you appear to have been asleep at the wheel when it was announced on May 3 that Hong Kong would contribute HK$32.76 billion (US$4.2 billion) to something called the Chiang Mai Initiative Multilateralisation.

The announcement came not from the Hong Kong government or Monetary Authority but at a press conference of finance ministers of the Asean plus three grouping - the 10 members of the Association of Southeast Asian Nations, plus China, Japan and South Korea.

It was made in Bali at the time of the annual meeting of the Asian Development Bank, of which Hong Kong is a member in its own right. Yet no one from the Hong Kong government was on hand to explain this commitment of public funds.

Indeed, it now appears likely that local officials were simply told by Beijing what Hong Kong's contribution would be, even though Hong Kong is not a member of the Chiang Mai Initiative (CMI). Its US$4.2 billion is part of China's US$38.4 billion contribution. Though it is separately identified, and Hong Kong will be able to borrow up to 2.5 times its contribution, it has no representation on the fund's decision-making body.

No wonder, then, that Chief Executive Donald Tsang Yam-kuen and Monetary Authority chief Joseph Yam Chi-kwong, both given to crowing about government efforts to develop Hong Kong as a financial centre, kept quiet. I can find no mention of it on the government website or that of the Monetary Authority, and no hint of a need to inform legislators or the public about the commitment.

The press, too, largely failed to notice it. This newspaper carried a Reuters report on the creation of the Chiang Mai Initiative Multilateralisation, with no mention of Hong Kong.

The Chiang Mai Initiative Multilateralisation is an excellent idea and should help maintain currency stability in East Asia at a time when the International Monetary Fund, which is supposed to do the job globally, has insufficient resources.

But what is the point of Hong Kong pretending to be autonomous in economic and financial affairs, or of having its own currency, if its resources are to be used as a pawn by the mainland without a hint of consultation or joint decision-making?

Although the CMI is a grouping of sovereign states, it is closely associated with the ADB, which will take the lead in providing an economic surveillance mechanism. The CMI group will also establish a guarantee fund administered by the ADB to encourage the issuance of local currency corporate bonds and try to develop cross-border trading. In other words, there was every opportunity for Hong Kong to leverage its contribution to the Chiang Mai Initiative Multilateralisation to get a seat at the table and promote the city as the global centre for issuing and trading local-currency Asian bonds.

But a leadership obsessed with Beijing, and ignorant of events elsewhere in Asia, is failing to exploit membership of international organisations to develop its regional role. No wonder that the IMF's representative here, Olaf Unteroberdoerster, is quietly moving to Beijing.

The Hong Kong market already hosts a key element in the ADB's efforts to develop regional bond markets - the listed Asian Bond Fund Pan-Asia Index Fund. But, instead of thinking regionally about how to provide a market for non-US dollar Asian issues, the government is issuing Hong Kong dollar bonds, which it does not need. These are make-work jobs for investment banks and add to Monetary Authority empire building. Yes, Hong Kong wants to be a yuan and Hong Kong dollar bond trading centre. But what about being one for won, rupiah or baht issues?

Hong Kong is getting nothing from its HK$32 billion commitment. No wonder the government has kept so quiet about it. And shame on the media for failing to notice it.

Philip Bowring is a Hong Kong-based journalist and commentator


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Clear results in election mean all Indians won


LEADER

May 18, 2009           
     
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India's people are to be applauded for achieving what would outwardly not seem possible: electing, in an orderly and peaceful manner, a government with a mandate to rule. The nation is, after all, economically, ethnically, socially and ideologically diverse. Its recent governments have been unwieldy coalitions that have had limited success in implementing policies. The congratulatory messages from political groups that were resoundingly defeated by the ruling Congress party are a tribute to the nation's democracy.

Elections are the most important part of a democratic process. Ensuring that they are as trouble-free as possible is essential for the winner to have legitimacy to govern. Corruption, violence, a complex balloting system or slow vote count erode that validity. Developed nations can find the mechanism challenging; in a developing one such as India, with more voters than any other country living in the most extreme of circumstances, it is daunting.

Yet, the 714 million registered voters, 40 million of them casting ballots for the first time, and 1,055 political parties easily accomplished this. Over five rounds of balloting in a month at 800,000 polling stations equipped with 1.3 million electronic voting machines, there was a minimum of complaints. There were allegations of vote-buying and a few dozen people died in violence, but generally, all went smoothly. Three days after voting ended, the results were announced, losing parties conceded defeat and the winners thanked supporters. The Congress party, needing a dozen or so allies to garner the number of seats to form a coalition, will have little difficulty meeting the June 2 deadline.

Congress' last term was hampered by its communist coalition partners blocking economic reforms. With returning the nation to  8 to 9 per cent growth to reverse the effects of the global financial crisis essential, it is now in a position to ensure that key banking and pension fund laws can be passed. Spending on education, employment and health programmes can be intensified.

The election was held amid fears of terrorism prompted by last year's attack in Mumbai. Many of India's neighbours are plagued by political instability, civil war and rising extremism. That all went smoothly regardless proves the strength of its democracy. Prime Minister Manmohan Singh has been given a clear mandate to rule; he and his Congress party won, but all Indians are winners.


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Asia's answer to IMF


LAURENCE BRAHM

May 19, 2009           
     
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On May 3, Asean plus three - the 10-member Association of Southeast Asian Nations, together with China, Japan and South Korea - announced that a US$120 billion regional foreign exchange reserve fund would be launched by the end of the year. China and Japan will support the fund, each coming up with 22 per cent of the necessary funds and Korea 16 per cent, with the remaining amount from Asean. It will be called the Asian stabilisation fund, and possibly later renamed the Asian Monetary Fund.

Is this a regional answer to the International Monetary Fund, which is now largely discredited in the developing world? Predictably, the IMF opposes the idea on the grounds that it only duplicates that fund's function.

Actually, the idea for a regional fund emerged during the 1997 Asian financial crisis, when IMF policies only exacerbated economic and political problems in many nations. A joint currency stabilisation fund for the region was again floated last autumn, during the onset of the global financial crisis. It identified that smaller export-based economies such as Vietnam and Thailand could not withstand international financial turbulence now that their economies were intertwined in the globalisation matrix. The intention - based on 1997 Asian financial crisis experience with the IMF- is to develop a regional fund to stabilise currencies, contrary to the standard IMF practice of devaluations.

Moreover, support to keep currencies stable will be provided without conditions often viewed as political. The intention is to address regional issues with local knowledge and common sense. The threat to IMF cookie-cutter thinking looms large, as such regional solutions could be applied to a global problem.

While the purpose of the regional fund is to achieve Asian financial stability, it also represents calls for a new emerging-market economic regime, and a broader voice for developing nations. They cannot challenge globalisation itself so, instead, they will create an alternative framework. In a way, this could evolve into a new Bretton Woods without heads of state having to sit down and create it. China is also calculating how this will alter the standards of global finance - listening less to the US and the IMF, and having a regional vehicle of its own.

Logically, in the wake of the still-unfolding global financial crisis, regional solutions will evolve organically, as people in one area tend to know more about what they need, rather than succumbing to outsiders' theories. To a large extent, this is part of the problem that has brought us to where we are. So the regional approach will be largely a counter-response to the forced globalisation of the past two decades. New international financial market standards will emerge from new regional rules to address pragmatic local problems.

Nowhere have the lessons been so sharp as in Asia, where the 1997 crisis struck after unregulated hedge funds wiped out decades of savings, opening a Pandora's box of political crises in Southeast Asia. As capital fled from solid export-oriented industries and property to the US market, an artificial boom was created during the Clinton presidency, based on the "new economy" assumptions of an artificial market - the dotcom business.

Soaking up the success of an entirely artificially leveraged stock market boom that would last more than a decade and half, the Asian economic model was condemned by mainstream western economists, and a new era of Washington-knows-best globalisation permeated the media and politicians. Little did anyone in Washington realise that they were laying the foundations of the global economic meltdown we face today.

While many are now calling for the creation of new institutions, such as a global monetary authority and a single global currency, locally co-ordinated initiatives could be the prelude to a new era of localisation rather than globalisation, and of multilateralism instead of unilateralism.

Laurence Brahm is a global activist, international mediator, political columnist and author. For more information see [url]www.laurencebrahm.com[/url]

[email]shambhalahouse@yahoo.com[/email]


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Real green shoots
Creating ecological jobs is Asia's best hope for dealing with climate change and rising unemployment

Janet Pau
May 20, 2009           
     
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Asia faces the twin crises of climate change and job losses. Unemployed workers are a challenge to every government, especially now. The ranks of Asia's jobless are likely to rise. This year, more than 7 million college graduates are seeking jobs, including 1 million who graduated last year but are still jobless. India's Ministry of Labour reported more than half a million job losses between October 2008 and January 2009.

But the need to create jobs will be a political imperative long after the current crisis subsides. That's partly for good reason. As Asia gets richer, and as its industries become more productive, companies need fewer workers for the same output.

For its part, climate change is a long-term problem that will require an international response. The post-Kyoto-Protocol agreement to reduce greenhouse gases that emerges after the Copenhagen climate change conference this December is likely to make future economic growth dependent on less carbon-intensive industries.

Managed correctly, these twin challenges are an enormous opportunity for Asia to provide good jobs that will build the low-carbon economy of the future. But the obstacles are daunting. Over the next three to five years, at least, Asian exporters will face continuing headwinds. The unwinding of government debt issued to fund stimulus packages and muted demand from US consumers will depress demand in the west. That will limit any expansion in export-oriented factory jobs, especially affecting China's migrant population.

Due to large productivity gains, manufacturing employment growth has already declined. Despite the growing number of workers, manufacturing jobs have been lost in Asia as factories have become more efficient. Capital- and carbon-intensive industries have seen steady employment declines. In China, a 3 per cent economic growth rate in the 1980s meant a 1 per cent increase in jobs. By the 1990s, a growth rate of almost 8 per cent was needed to get the same 1 per cent increase in employment. In the first half of this decade, a 10 per cent growth rate was needed. Although leaps in productivity lead to income and wealth gains, these vastly more efficient societies need to find new jobs for their workforces.

The longer-term picture is even more challenging. By 2025, Asia will be home to 300 million more working-age people, mostly in South and Southeast Asia. Economies facing ageing populations, including China, will need to employ workers in higher value-added jobs to limit the effect of a stable or shrinking workforce.

New growth needs to stimulate domestic consumption, generate decent jobs for the future workforce and provide higher value-added work to raise incomes.

Green jobs have the potential to yield these benefits. Jobs can be created in industries directly related to carbon reduction and in traditional industries that change their production processes to meet higher environmental standards. But to what extent are Asian economies creating the right conditions for green job growth? New research by the Asia Business Council provides a preliminary assessment through the creation of a "green jobs index", which measures current green job openings, the market potential of various green industry segments, availability of science and engineering, environmental, and managerial talent, and government commitments to green job policies in 13 Asian economies.

Results suggest that China possesses the most favourable conditions overall for total green job creation, followed by Japan and India. In the cases of China and India, the sheer size of many green industry sectors - such as renewables (notably wind for India and solar for China) and potential for trading carbon credits, as well as the number of university-educated talent - provide market opportunities and human capital that can enable green development. Japan's high rank in areas including university environmental programmes and national environmental performance reflects the economy's long-standing focus on developing green expertise and policies.

The last battle in the global war for talent, which started in the 1990s and was at its fiercest during the recent offshoring industry boom, has created employment opportunities for university-trained, English-speaking graduates in Asia, notably in India and the Philippines.

Today, the emerging green economy has the potential to employ workers with an even wider range of skills and experiences, in agriculture, manufacturing and services industries, whose work contributes to a sustainable, low-carbon economy.

Asian nations should address deficiencies that hinder green job development by supporting businesses' attempts to find opportunities, extending training for existing workers, attracting more green-industry-ready talent from around the world, and implementing coherent and concerted government policies to foster green job growth.

Janet Pau is the Asia Business Council's programme director


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Thanks you!!

All consumed out
An economic future based on high consumption is neither desirable nor possible for Asia

Chandran Nair
May 21, 2009           
     
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Ever since the world has been plunged into financial crisis, developing Asia has only heard one mantra from developed-country economists: boost consumption to restart the world's economic engine. To follow their advice would set the stage for a far greater crisis that no amount of stimulus would be able to contain. On the contrary, this is an opportunity for Asian leaders to call a halt to consumption-driven economic models and show the path of escape from environmental catastrophe that the model would ensure.
If the calls of some of the western economists are taken to heart, and Asia comes even half way to approaching western consumption rates, all efforts to counter climate change and tackle the world's other pressing environmental and social challenges are doomed.

Quite simply, in our resource-constrained world, there isn't enough to go round for everyone to aspire to such levels of wealth and consumption. If, say, just half the population of China get rich enough to start eating seafood - hardly an outlandish aspiration - then the oceans will soon be emptied. Neither technology nor money can address this problem though there are those who will try to convince us that even the mighty blue fin tuna can be farmed to sate our appetite for sashimi. But who is to say to the Chinese that they should be denied their swordfish and tuna?

At the same time, if Indians aspire to own cars like westerners (currently less than 10 out of every 1,000 people compared to about 700 out of 1,000 in the west), then the consequences for oil supply and prices, as well as the environment, could be very serious. If Chinese and Indians reach western car-ownership levels over the next 20-30 years, there could be anything from 1.5 billion to 2 billion cars just in these two countries. Some estimates suggest it would take the entire Opec oil supply to fuel them. As for the price of oil, ask the scenario planners at the oil majors. But who is to deprive Indians of their Tata Nano?

And if Asians eat meat like Americans (Chinese today consume about 50kg per capita compared with Americans' 220kg) and own houses like Australians (who have the largest ecological footprint in the world) then the consequences will be catastrophic not just within their borders but for the biosphere, too. Thus it should be clear that Asia, as a latecomer to the model of development that puts a premium on wealth creation at any price, will never be able to attain the standards of living taken for granted by most in the west. Nor should they aspire to it.

Conventional wisdom - of the kind adhered to by mainstream western economic thinking - maintains that technology, trade and smart financial tools, combined with a better pricing of externalities, will somehow both end poverty and save the world. But anyone who thinks technology will solve such problems is deluded. It's just plausible - as British scientist James Lovelock advocates - that the mass construction of nuclear power stations could generate the energy needed, though some major public concerns over safety and proliferation have to be overcome first. What this means is that the decisions that determine the world's fate will take place in Beijing, New Delhi and Jakarta - not Washington, New York or the capitals of Europe.

In the wake of the financial crisis, Asia's leaders must present a different message: that measures to deal with global warming and other ecological concerns - far from being "noble objectives" that can be postponed until the global economy is fixed, as Morgan Stanley Asia chairman Stephen Roach has said - must be the priority.

The good news is that few of these leaders really believe that pursuing the western model of consumption-driven capitalism is the answer to their countries' development needs.

Premier Wen Jiabao articulated this sentiment at Davos when he said the current crisis was rooted in "inappropriate macroeconomic policies"; an "unsustainable model of development characterised by prolonged low savings and high consumption"; and "blind pursuit of profits".

Unfortunately, most Asian leaders are unwilling or unsure how to articulate the dilemma they face, leading to a conspiracy of silence, or at best a hope that solutions can be found later. Even state-run China will be challenged to shape polices that reverse the globally interlocked development path of the last 30 years.

Of course, for Asians, it will be harsh to be told that, as latecomers to the capitalist party, they will never be able to attain the standards of living taken for granted by most in the developed countries.

But it's a message their leaders have to deliver: that a new economic order is needed - one that stresses providing the basics of life; appreciating that there are limits to resource exploitation and growth which, in turn, have security implications; and allowing more to share in the wealth that nations generate. They have to accept that, in today's world, growth is redefined by quality, not quantity. This may call for strong, even draconian, regulations.

But not all consumption is destructive and, in shaping polices, Asian governments should be stimulating their economies and linking it to moving away from export-led growth by investing in education, clean water, sanitation and health care.

Can Asian leaders tell their populations that their aspirations rooted in more material consumption can't be reached? Yes - if they can stand up to economists like Henry Paulson, Dr Roach and others by saying Asians can't be expected to help the developed world regain its economic footing if they can never realise the lifestyles of those they are aiding.

And yes - if they can refuse western entreaties demanding far greater support with environmental technology for their energy and other needs. If they don't, the world will only be storing up bigger trouble for the decades ahead.

Notions that the world's destiny rests with the west must be put aside. The decisions, smart or otherwise, that will decide the future of capitalism and the fate of the Earth's climate will be taking place in Asia. Welcome to the 21st century.

Chandran Nair is founder and CEO of the Global Institute for Tomorrow. Reprinted with permission from YaleGlobal Online. [url]http://yaleglobal.yale.edu[/url]


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The publication of secret, audio-taped memoirs by fallen Communist Party reformer Zhao Ziyang , who sought to "eradicate the malady of China's economic system at its roots" and died under house arrest for his efforts, is reigniting debate over the complex legacy of the Tiananmen Square protests of 1989. Indeed, as China looms ever larger in the world economy, it is worth remembering that, 20 years ago this June, the People's Republic almost fell apart. The protest movement that gathered in Tiananmen that year posed an existential threat to the party state, proclaimed in that very spot 40 years earlier by Mao Zedong.

The threat came from two directions - from within the highest echelons of the party leadership, where ideological differences over reform split the ruling Politburo, and from the urban masses, who, with Beijing's university students at the vanguard, stood in open, peaceful revolt against state authority.

Amazingly, the party emerged from the crisis unified around Deng Xiaoping's vision of a "socialist market economy", and regained legitimacy with the urban population through implementing that vision. The party restored unity on the platform of globally integrated, market-driven growth, to be achieved without the intercession of the students' "Goddess of Democracy", but bringing tangible material benefit to city residents.

Sure enough, urban development, investment and gross domestic product growth accelerated throughout the 1990s, but so did the gap between urban winners and rural losers. The protest energy that briefly electrified Tiananmen Square dissipated out of the cities and spread across the countryside. At the euphoric outset of the 1989 demonstrations, more than 80,000 students marched through the streets of Beijing demanding a more responsive government. By 2005, there were more than 80,000 mass disturbances reported across the country - but mostly not in the booming coastal cities, and certainly not at the elite national universities.

Over the past 20 years, laid-off workers, dispossessed farmers, Falun Gong practitioners and angry Tibetans have organised protests. No student-led, urban protests like those of Tiananmen Square of 1989, however, have occurred.

The economic boom under president Jiang Zemin and his successor, Hu Jintao , which channelled youthful revolt into entrepreneurship and professional success, was possible only because Deng prevented the party leadership from fracturing during the student protests of the late 1980s and the conservative backlash of the early 1990s. As the protests began, Deng's chosen successor, premier Zhao, was tempted to use the mass movement as a lever to push harder for market reform, and possibly political reform. If China was going to have its own Mikhail Gorbachev, it would have been Zhao.

Deng supported Zhao's drive to liberalise the economy, even though it was creating mixed results in 1988 and 1989, with inflation spiking and economic anxiety pervasive. But Deng, scarred from decades of Maoism, particularly the chaos unleashed by the Cultural Revolution, had limited tolerance for political instability. And Zhao's toleration of the demonstrators was dividing the Politburo into factions. So Deng fed Zhao to the party's conservative lions. Hardliners emerged triumphant in the wake of the crackdown. In their eyes, the tumult of 1989 proved that "reform and opening" were leading to chaos and collapse. Deng temporarily withdrew, letting the central planners around party elder Chen Yun slow marketisation and weather China's international isolation in Tiananmen's wake.

But then, with his famous "southern tour" in early 1992, Deng orchestrated the eclipse of the anti-market, conservative faction. In Shenzhen, with television cameras rolling, Deng jabbed his finger in the air, admonishing his party: "If China does not practise socialism, does not carry on with `reform and opening' and economic development, does not improve people's standards of living, then no matter what direction we go, it will be a dead end."

Having begrudgingly purged the reformers in 1989, Deng in 1992 seized the opportunity to sideline the central planners, bringing in China's neo-liberal hero, Zhu Rongji , to re-fire the engines of the economy. Deng judged the mood of the nation shrewdly: the people were ready to be told that "to get rich is glorious".

The new party leadership of the 1990s and 2000s did not waver from Deng's line: steady expansion of market reforms, active involvement in international commerce, massive urbanisation and urban development, and total dedication to party unity. June 4, the day People's Liberation Army troops drove the protesters from Tiananmen Square, is remembered in the west as a tragic example of state violence against unarmed citizens, and a memorial to the suppressed yearnings of the Chinese people for freedom and democracy. But, in the cold eyes of history, the 1989 movement and its aftermath may eventually be seen as the party's "Machiavellian moment", when Deng confronted the mortality of his republic, and saw what it would take to survive: party unity based on urban growth.

By reunifying the party leadership and re-establishing solidarity between the party and the urban population, the crisis consolidated communist rule and accelerated China's momentum down its current path of rapid economic growth. In her classic study On Revolution, Hannah Arendt observed darkly that "whatever brotherhood human beings may be capable of has grown out of fratricide, whatever political organisation men may have achieved has its origin in crime". The bloodstained square on the morning of June 4 was, in this sense, perhaps the birthplace of post-revolutionary China.

John Delury is associate director of the Centre on US-China Relations and director of the China Boom Project at the Asia Society. Copyright: Project Syndicate

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Cloak and dagger, but mostly swagger, on Iran


David Ignatius
May 25, 2009           
     
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When US and Israeli officials say "all options are on the table" for stopping Iran from gaining nuclear weapons, that's usually taken to mean aerial bombardment of Iranian nuclear sites at Natanz and other locations.

But there is another option for impeding the Iranian programme - a covert campaign to disrupt and deceive Iran's nuclear establishment. Despite the secrecy of such efforts, news reports about Israeli and US sabotage efforts have appeared recently, which no doubt have been read with interest in Tehran.

These reports raise an interesting question: do secret sabotage programmes offer a "magic bullet" for dealing with the Iranian nuclear threat - raising the cost to Iran of pursuing its programme, while avoiding the chaotic backlash that would follow a conventional military strike?

The answer is no. It's clear that these covert programmes have been tried, but it's also pretty clear they haven't halted Iran's march towards mastery of the technologies necessary to produce a nuclear weapon.

The rationale for a sabotage programme against Iran is obvious enough. Here's how one former CIA officer lays out the case, in theory: "A nuclear programme is technically complex, requires a lot of precision materials, a steady flow of technical parts, and is inherently dangerous. Accidental fires, mechanical mishaps with equipment, technical failures, etc, slow the programme, and most importantly, at some point will increase counterintelligence concern from within Iran."

The latest story about sabotage appeared on May 16 in The Wall Street Journal, in an article by Israeli journalist Ronen Bergman titled "Israel's secret war with Iran". Bergman reported that, when General Meir Dagan was named director of Israel's intelligence service in 2002, then-prime minister Ariel Sharon told him to build "a Mossad with a knife between its teeth". General Dagan's chief target was Iran, according to Bergman, a reporter for the Israeli daily Yedioth Ahronoth.

"The results have been tremendous," wrote Bergman. "During the last four years, the uranium enrichment project in Iran was delayed by a series of apparent accidents: the disappearance of an Iranian nuclear scientist, the crash of two planes carrying cargo relating to the project, and two labs that burst into flames."

An Israeli source says there has indeed been a disruption effort, in which the Israelis have penetrated the Iranian supply chain in at least three countries and introduced bogus equipment. But this source cautions that Bergman's claims of "tremendous" success are overstated.

My guru on Israeli intelligence is Yossi Melman, a columnist for Haaretz who has written several books on Mossad. He says that General Dagan did, indeed, make a commitment to prevent Iran from obtaining nuclear weapons after he took over Mossad. But Melman thinks that this covert effort has had only limited success, and that Iran has kept moving.

"I don't think Mossad is capable of mobilising a massive sabotage campaign that would halt the Iranian programme," Melman told me.

US sabotage efforts have been chronicled by David Sanger, of The New York Times, in news stories and his recent book, The Inheritance. In a front-page story on January 11, he wrote: "The covert American programme, started in early 2008, includes renewed American efforts to penetrate Iran's supply chain abroad, along with new efforts, some of them experimental, to undermine electrical systems, computer systems and other networks on which Iran relies. It is aimed at delaying the day Iran can produce the weapons-grade fuel and designs it needs to produce a workable nuclear weapon."

But the quiet, deniable covert activities so far haven't stopped the Iranian programme. There is no magic bullet. The best hope of stopping Iran from making a bomb is diplomacy, backed by the threat of tough sanctions, backed by the ultimate threat of overt military power.

David Ignatius is a Washington Post columnist


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Migrant labour, the most effective foreign aid of all


Par Stenback
May 27, 2009           
     
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One early result of today's global recession is that many donor governments are trimming their foreign aid programmes. Before taking office, US President Barack Obama had promised a doubling of American foreign assistance, from US$25 billion to US$50 billion but, since then, vice-president Joe Biden has warned that this commitment will probably be achieved more slowly.

Here in Finland, our aid decreased by 62 per cent in the early 1990s, a period that Finns still call "The Depression". Japan's overseas aid declined by 44 per cent when that country hit hard times. The current worldwide slump could bring a cut in official development assistance (ODA) of 30 per cent.

It is also easy to predict that donor governments will be looking carefully at the ever-growing expenditure on the United Nations' 14 peacekeeping operations around the world. The total bill for all UN operations in the 12 months to mid-2008 reached US$6.7 billion, about twice the level of 15 years ago. Despite this, operations are still spread thin.

But by far the biggest transfer of assets from rich countries to the developing world takes place through migrant workers' remittances. Few decision-makers seem aware of this. In 2006, about 150 million migrants sent roughly US$300 billion to their families in developing countries.

The number of transactions is huge, estimated at 1.5 billion remittances annually. Most are for sums of only US$100-US$300, and they normally go towards immediate household consumption.

The value of all ODA in 2006 was US$126 billion, less than half the value of private remittances, even though it includes assistance from Organisation for Economic Co-operation and Development nations and non-OECD countries, as well as from China. If the recession costs migrants their jobs in richer host countries, and forces them to return home to their countries of origin, millions of already poor people will be thrown into greater poverty.

The possible impact can be gauged by looking at where the US$300 billion in remittances is distributed. In 2006, poorer European countries received about US$50 billion, Africa got US$38 billion, Latin America and the Caribbean US$68 billion, the Middle East US$24 billion. Asia is the major beneficiary, receiving US$113 billion.

In all, about 10 per cent of the world's population is estimated to benefit from remittances. Some countries are dependent on this income flow. And some of these dependent countries are either in conflict or are fragile states, so a diminishing flow of remittances will aggravate their instability, and perhaps increase the flow of migration to other countries. Governments should therefore consider carefully what other forces will be at work if migrant workers are sent home.

These governments already spend tax revenue on direct foreign aid. They should weigh tax breaks to entice employers to keep migrant workers on the payrolls, as this would probably be a much more efficient way to support these poor countries.

Sending money to some countries is now allowed only through formal banking channels, and this has created virtual monopolies while preventing money from reaching rural areas. Allowing more informal financial institutions to channel foreign payments would ease the money flow to remote regions.

The sheer size of these remittances, and their importance in keeping many millions of people above the poverty line, suggests that rich-country governments should take a careful look at the existing system.

Such a review should see what restrictive practices could be abolished, and ask whether official assistance should be adapted to the needs of this informal yet vital aid network.

Par Stenback is a Finnish former minister of foreign affairs and a former secretary general of the International Federation of Red Cross and Red Crescent Societies. He is an executive board member of the International Crisis Group


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Crashing the party
Ignore the stock market rally, the world is heading for a long stretch of stagflation

Andy Xie
May 29, 2009           
     
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The stock market discounts the future, they say. If so, the rally in the past three months should foretell an economic boom ahead. Don't hold your breath; it isn't coming. Instead, the world is sliding into stagflation. The culprit is the policy response to the global credit crisis. Instead of restructuring, policymakers have been trying to wash away the consequences of the bursting bubble with liquidity. Instead of creating another boom, it will lead to inflation.

In the first quarter of 2009, the US economy contracted by 1.6 per cent, the eurozone's by 2.5 per cent, and Japan's by 4 per cent. The manufacturing export-led economies in the developing world fared worse. The global economy has sunk about 5 per cent and global trade 20 per cent from the peak in the second quarter of 2008. Even though the speed of shrinkage has slowed, the global economy is still likely to be contracting in the second quarter.

A collapse of this magnitude hasn't happened since the 1930s. One would imagine that policymakers and investors would be repenting of their bubble-making behaviour of the past. Yet, attention has shifted from the crisis to the elixir of liquidity. Rather than repent, investors clamour for a new bubble. It seems like Alan Greenspan is still in charge.

The global economy is like a train hanging over a cliff. While the front is in the air, there is enough of it still on the ground to keep the whole thing from falling further. Financial markets are dancing on the roof of the train, and the vibrations could send the train tumbling.

The fuel for the market enthusiasm is liquidity. It has returned to stock markets with a vengeance. The inflow into emerging market funds, according to Morgan Stanley, has totalled US$21 billion in the past 10 weeks, equal to half of the total inflow in giddy 2007. In financial markets, liquidity is akin to a free lunch. It's the tide lifting all the boats. But, this time, the boats are not just stocks but also goods and services. When asset inflation is followed quickly by consumer price index (CPI) inflation, central banks must decrease liquidity. That would crash the asset market party.

Mr Greenspan practised the liquidity sorcery for two decades at the US Federal Reserve without causing inflation. Three special factors brought him this extraordinary luck. First, the IT revolution was making the supply side more efficient. In particular, the labour-intensive service sector that dominates developed economies was retooled, to save labour. This factor kept the wages of white-collar workers down during Mr Greenspan's reign.

Second, the fall of the Berlin Wall unleashed more than 2 billion workers from the developing world into the global trading system. It triggered the rapid relocation of manufacturing activities from high-cost developed economies to low-cost developing ones. As a consequence, global trade grew twice as fast as the global economy, keeping a lid on the prices of tradeable goods and the wages of manufacturing workers in the developed economies.

Third, the collapse of the Soviet block severely contracted the demand for natural resources like energy. The rapid growth of China and India led to rising demand for such resources, but the Soviet contraction offset this inflationary force. This demand and supply dynamic made the commodity market an unattractive place for financial investment. Commodity prices remained low despite a prolonged global economic boom.

Today is quite different. IT has been absorbed into production already. Indeed, as it is increasingly becoming a consumption tool - often for killing time at work - it is slowing, not increasing, productivity. The prices of manufactured goods already reflect wages in developing economies. Global trade no longer shifts prices down like before. And the demand for commodities in the ex-Soviet block is increasing, adding to the rising demand from China and India.

Many argue that inflation couldn't happen in a weak economy. But inflation was a problem in the 1970s during a decade of sluggish growth. The term "stagflation" was coined for that decade. I am afraid the world is entering another decade of stagflation. The only force to keep inflation down is so-called excess capacity in a weak global economy. However, much of the excess capacity, like in the car industry, needs to be eliminated permanently, as future demand will be different from the past. The way out is to restructure both the demand and supply side. But central banks around the world mistakenly see monetary stimulus as the way out.

As they pump more money into the global economy, commodity prices may respond first. The oil price has risen more than stock markets since March, to US$60 per barrel, even though demand is still declining. The driving force is inflation expectations. Financial investment, rather than the demand for current use, is driving the oil price. Hence, monetary growth is becoming inflation through expectation.

The current party is likely to be short-lived. Next year, inflation expectations may become apparent. That would lead to expectations of interest rate rises. While central banks will still be reluctant to raise rates, rising bond yields will force them to do so. But they won't raise rates quickly enough to stem the inflation momentum. Stagflation will probably take hold.

Some argue that inflation should be good for stock and property prices, as it increases sales and profits in nominal terms. History points the other way. In the 1970s, US stocks averaged 1.3 times their book value, versus 1.7 times now.

Stagflation is bad for stock market valuations. Thus, property prices should rise in tandem with inflation. But, the world has gone through a property bubble during a period of inflation. As CPI inflation picks up, wages will take a long time to catch up with past property inflation. Property prices are likely to fall as inflation rises. At some point, the two will meet, as defined by the historical average ratio of wages to prices. Property prices will fall substantially before they rise.

Andy Xie is an independent economist


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Yellow weeds
The 'green shoots' view that the economic crisis will soon bottom out is overly optimistic

Nouriel Roubini
Jun 01, 2009           
     
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Recent data suggests that the rate of contraction in the world economy may be slowing. But hopes that "green shoots" of recovery may be springing up have been dashed by plenty of yellow weeds. Recent data on employment, retail sales, industrial production and housing in the US remains very weak; Europe's first quarter gross domestic product growth data is dismal; Japan's economy is still comatose; and even China - which is recovering - has very weak exports. Thus, the consensus view that the global economy will soon bottom out has proved - once again - to be overly optimistic.

After the collapse of Lehman Brothers in September, the global financial system approached meltdown and the world economy went into free fall. Indeed, the rate of economic contraction in the fourth quarter of 2008 and the first quarter of 2009 reached near-Depression levels.

At that point, global policymakers got religion and started to use most of the weapons in their arsenal: vast fiscal-policy easing; conventional and unconventional monetary expansion; trillions of dollars in liquidity support, recapitalisation, guarantees, and insurance to stem the liquidity and credit crunch; and, finally, massive support to emerging-market economies. In the last two months alone, one can count more than 150 different policy interventions around the world.

This policy equivalent of former US secretary of state Colin Powell's doctrine of "overwhelming force", together with the sharp contraction of output below final demand for goods and services (which drew down inventories of unsold goods), sets the stage for most economies to bottom out early next year.

Even so, the optimists who spoke last year of a soft landing or a mild "V-shaped" eight-month recession were proved wrong, while those who argued that this would be a longer and more severe "U-shaped" 24-month recession - the US downturn is already in its 18th month - were correct. And the recent optimism that economies will bottom out by mid-year has been dashed by the most recent economic data.

The crucial issue, however, is not when the global economy will bottom out, but whether the global recovery - whenever it comes - will be robust or weak over the medium term. One cannot rule out a couple of quarters of sharp GDP growth as the inventory cycle and the massive policy boost lead to a short-term revival. But those tentative green shoots that we hear so much about these days may well be overrun by yellow weeds even in the medium term, heralding a weak global recovery over the next two years.

First, employment is still falling sharply in the US and other economies. The unemployment rate in advanced economies will be above 10 per cent by 2010. This will be bad news for consumption and the size of bank losses.

Second, this is a crisis of solvency, not just liquidity, but true deleveraging has not really started, because private losses and debts of households, financial institutions, and even corporations are not being reduced, but socialised and put on government balance sheets. Lack of deleveraging will limit the ability of banks to lend, households to spend, and firms to invest.

Third, in countries running current-account deficits, consumers need to save much more for many years. Shopped-out, savings-less and debt-burdened consumers have been hit by a wealth shock (falling home prices and stock markets), rising debt-service ratios, and falling incomes and employment.

Fourth, the financial system - despite the policy backstop - is severely damaged. Most of the shadow banking system has disappeared, and traditional commercial banks are saddled with trillions of dollars in expected losses on loans and securities while still being seriously undercapitalised. So the credit crunch will not ease quickly.

Fifth, weak profitability, owing to high debt and default risk, low economic - and thus revenue - growth, and persistent deflationary pressure on companies' margins, will continue to constrain firms' willingness to produce, hire and invest.

Sixth, rising government debt ratios will eventually lead to increases in real interest rates that may crowd out private spending and even lead to sovereign refinancing risk.

Seventh, monetisation of fiscal deficits is not inflationary in the short term, whereas slack product and labour markets imply massive deflationary forces. But, if central banks don't find a clear exit strategy from policies that double or triple the monetary base, eventually goods-price inflation or another dangerous asset and credit bubble (or both) will ensue. Some recent rises in the prices of equities, commodities and other risky assets is clearly liquidity-driven.

Eighth, some emerging-market economies with weaker fundamentals may not be able to avoid a severe financial crisis, despite massive International Monetary Fund support.

Finally, the reduction of global imbalances implies that the current-account deficits of profligate economies (the US and other Anglo-Saxon countries) will narrow the current-account surpluses of over-saving countries (China and other emerging markets, Germany and Japan). But if domestic demand does not grow fast enough in surplus countries, the resulting lack of global demand relative to supply - or, equivalently, the excess of global savings relative to investment spending - will lead to a weaker recovery in global growth, with most economies growing far more slowly than their potential.

So, green shoots of stabilisation may be replaced by yellow weeds of stagnation if medium-term factors constrain the global economy's ability to return to sustained growth. The global economy may grow in 2010-2011, but at an anaemic rate.

Nouriel Roubini is professor of economics at the Stern School of Business, New York University, and chairman of RGE Monitor ([url]www.rgemonitor.com[/url]) . Copyright: Project Syndicate

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