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Let all views be heard, not suppressed in media


LEADER

Jun 02, 2009           
     
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The mainland is no exception to the information revolution wrought by the internet. What sets it apart though is that the internet increasingly fills a gap created by official curbs on what newspapers, radio and television can publish. Despite a sophisticated online monitoring system, the internet remains difficult to police and netizens have proved bold and resourceful at circulating news and comment.

As a result, controversial issues that might have been contained locally have gone national online. The potential this creates for mass dissent in a year of politically sensitive anniversaries understandably troubles the authorities. But it will continue to trouble them as long as they try to prevent legitimate issues of public interest being openly debated and addressed.

As we report today, the hottest topic in chat room discussions yesterday was an article in the official magazine Outlook Weekly that has sparked fears of a fresh online crackdown. It called for more support for internet monitors and propaganda officials in tackling netizens' ability to mobilise protests and criticism about official corruption, legal and administrative injustice, and disputes between the rich and poor. The article accused local officials of lacking understanding of the power of the internet to create "mass incidents".

Publication of the article follows online and media outrage over a murder charge against a pedicurist in Hubei province after she stabbed an official who demanded sex. The uproar forced the release of the woman and the sacking of two colleagues of the official present at the time. The lesson here is that rather than focusing on how to crack down more effectively on netizens and their rights of freedom of information and expression, the authorities should divert resources to devising a more transparent and accountable system for dealing with grievances and injustices.

The internet would soon cease to be a hotbed of dissent and a platform for organised protest if a wide range of views were allowed to be expressed and debated in the media.


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Building a better nest
The government's financial relief measures need some fine-tuning to make them fairer

Joseph Wong
Jun 03, 2009           
     
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In announcing the HK$16.8 billion relief package last week, Financial Secretary John Tsang Chun-wah reminded us that the relief measures introduced in the past two budgets - plus a one-off measure announced by the chief executive last July - cost the public purse HK$87.6 billion. That represents 5.2 per cent of gross domestic product, compared to the international average of 2.3 per cent that other governments have spent to prop up their economies and help those affected by the financial crisis. Yet, the question is not about the magnitude of the sum, but whether the money will be spent to the greatest effect and in an equitable manner.

There is no dispute that the government should lend the business sector a bigger helping hand. The exemption of business registration fees and the waiving of licence fees for selected sectors, such as tourism, catering and transport, are certainly timely.

Likewise, the government is right to increase its support for the SME Loan Guarantee Scheme, both in raising the government guarantee from 70 per cent to 80 per cent, and in doubling the amount each small and medium-sized enterprise can borrow, from HK$6 million to HK$12 million.

This should ease the credit squeeze that these enterprises are facing. Although some SME organisations still feel that the administration could play a more active role in persuading the banks to meet their borrowing needs, the government has probably reached the limit of its direct support without interfering with normal market operations.

Regarding the measures for individuals, most are justified on their own merits. For example, the HK$1,000 subsidy for students of needy families and the two-year deferment of tertiary student loan payments aim to provide relief where it is needed.

Interestingly, it is the extra month's allowance for Comprehensive Social Security Scheme recipients that attracted adverse public reaction from both middle- and low-income earners. Middle-income earners question whether it is necessary to spend the money, while low-wage workers say the move is unfair to them.

This relief measure is not new. It was first introduced in Mr Tsang's 2008/2009 budget, in the context of sharing Hong Kong's economic prosperity (SEHK: 0803, announcements, news) with the people. Then, in July last year, Chief Executive Donald Tsang Yam-kuen gave CSSA recipients another month's allowance in his HK$11 billion package under a different tag - to alleviate the hardship brought about by high inflation. But, doing it a third time leads people to question the merits of the case.

In announcing the relief measures, the financial secretary underlined the need to observe strict fiscal discipline. Let us apply this principle to the extra month's CSSA allowance. The scheme has built-in adjustments for inflation. For example, recipients received a 4 per cent increase in their allowance in February. Also, the scheme is reviewed from time to time, to ensure that it continues to meet the needs of recipients. At present, a two-adult, two-child CSSA household receives an average monthly allowance close to HK$10,000, a reasonable amount by Hong Kong's living standards. It is therefore arguable whether the extra month's allowance meets the test of fiscal discipline.

By comparison, those on a low income who claim no CSSA and live in partitioned cubicles do not benefit from other forms of relief such as rates rebates for private tenement occupiers and two months' rent waiver for public-housing tenants. When challenged, the financial secretary acknowledged this problem and asked for suggestions. Here is one.

With the introduction of the Mandatory Provident Fund (MPF) scheme, every self-employed person and employee, except foreign domestic helpers, have an MPF account. In the 2008/2009 budget, the financial secretary proposed to inject a one-off sum of HK$6,000 into the MPF accounts of people who each earn not more than HK$10,000 a month, to enhance their longer-term retirement protection. The proposal was later implemented through legislation.

The government could make use of the same device to give low-income people a one-off injection into their MPF accounts. An injection of, say, HK$3,000 - costing about HK$4 billion - would be similar to the cost of a rate rebate for two quarters. If the proposal were primarily aimed to provide short-term relief, the government could draw up a specific bill to allow those receiving the money to withdraw it immediately from their MPF accounts, or within a certain period.

The financial secretary has already signalled he would consider further support measures by the end of the year if circumstances warrant them.

He should take heed of the comments and suggestions he has received on his latest proposals before he puts forward another relief package. Above all, he should ensure that any new package meets the principles of effectiveness, equity and fiscal discipline.

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


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Property rights can eradicate India's slums


Caroline Boin
Jun 04, 2009           
     
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After treading the red carpet at the Oscars in Los Angeles in February, the child stars of Slumdog Millionaire are on the streets: Mumbai authorities have demolished their flimsy shelters only three months after promising them real houses. Azharuddin Mohammed Ismail and Rubina Ali Qureshi are just two of some 60 million inhabitants of India's 52,000 slums.

The film's director, Danny Boyle, has just intervened to help the children but the problem is bad government policies - nothing that his charity or their bulldozers, large wads of cash or grandiose public schemes can solve.

Dharavi, where Slumdog Millionaire was filmed, has a million people in less than 2.5 sq km in the heart of Mumbai. It too is threatened with "slum rehabilitation" by the same authorities that perpetuate the problem.

Campaigners complain constantly about the squalid conditions while governments promise constantly to improve the lives of the 55 per cent of Mumbaians who live in slums. Very little has ever materialised.

But for the inhabitants, slums, unlike equally poor rural areas, offer immediate opportunities for families to lift themselves out of poverty. Dharavi grew from a fishing village as job-seekers flocked to Mumbai. Temporary shelters became permanent homes. Today, its economy generates up to US$1 billion from recycling, tanneries and plenty more -although little more than a few dollars a month stay in workers' pockets.

Of course, Dharavi is a huge embarrassment to the authorities - a reminder of the poverty afflicting just under half of India's population and close to Mumbai's business district and the airport.

Indian authorities have tried ignoring slums or removing them in a cycle of fear, corruption or neglect.

So it isn't hard to understand why their denizens distrust the latest, multibillion-dollar Dharavi Redevelopment Project (DRP). A private developer promises to bulldoze Dharavi and rehouse the inhabitants in 225 sq ft apartments and give workshops a space, too.

But the project has been marred by delays, developers backing out and anger from slum-dwellers. When designed and driven by politicians and bureaucrats, housing plans are often counterproductive.

The root cause of slums is not unexpected population growth or shortage of land: it is a double plague of a lack of property rights and poor planning policies.

When people own their property, they have incentives to improve it and can borrow for those improvements: property rights beget capital, which begets innovation and investment, which beget wealth.

Simply rehousing slum-dwellers in government dwellings will not address these problems. It will only shut down small entrepreneurs and keep the poorest dependent on the state. Before long, a new slum will develop.

Caroline Boin is a project director at the London-based think-tank International Policy Network, working on sustainable development and the environment


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Unions should accept findings of pay study


LEADER

Jun 08, 2009           
     
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In good times, civil servants benefit from the pay-trend survey that forms the basis for their annual adjustments - a safeguard for pay and conditions that are envied by the rest of the community. In bad times, it is reasonable, therefore, to expect them to accept that when private-sector pay is going down - as it has been - their annual adjustment should reflect that, too.

As we report today, however, staff unionists are challenging the latest survey, which indicates that civil service pay should be cut by 0.96 per cent for the lower salary band, 1.98 per cent for the middle band and 5.38 per cent for the upper band. They argue that the inclusion for the first time of a private company with 15,000 employees - only about 8 per cent of the 185,321 in the survey - might have skewed the result. Therefore, there are doubts all civil service unions will endorse it.

The argument is flawed. It amounts to accepting the umpire's decision when it goes their way and disputing it when it does not. Everyone should play by the rules. The government consults the unions on the methodology and procedures of the pay survey - input that private-sector workers do not have when their pay is reviewed.

The survey is an effective mechanism for maintaining fair relativity only if pay can go down as well as up. Criticism of the inclusion for the first time of the large employer concerned is not convincing. There is no evidence that as a result, the survey does not reflect the true situation. It could also be argued that previous surveys were not representative because this company was not included. If private-sector pay had been rising and the same company had been setting the pace, it is not hard to imagine the outcry if the government sought to discount its influence on the survey to cap a pay adjustment.

That said, the government is not bound to follow the survey findings, since it also takes into account its financial situation, the state of the economy and civil service morale. It has dug deep into its reserves to cushion the community against the economic downturn. Now it has to strike a delicate political balance between maintaining morale - at additional cost - and pay cuts that could depress rates in the private sector. A pay cut would need the approval of lawmakers, who would face the same dilemma.

Anticipating the result of the survey, the largest civil service union called for a pay freeze well before it came out. That would be a politically appealing way out for the government. But the case for a freeze is convincing only for the lower-paid tier that can least afford a pay cut, since the adjustment indicated by the survey is very small. It is harder to argue that better-paid civil servants should not share a little of the pain with the rest of the community. Come what may, they still have the ultimate protection of job security.

If the annual pay-trend survey is to have any public credibility in good times or bad, the civil service unions should accept the outcome of a mechanism they have agreed to.


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First rule of law: what the party says, goes


David Eimer
Jun 09, 2009           
     
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In 1982, China enacted a new constitution that put the rule of law at its centre. The legislation was regarded as an effort by Beijing to move closer to the legal systems of other countries.

But 27 years later many citizens struggle to get inside a court to have a civil case heard. And those lucky enough to receive a hearing often walk away wondering if justice has been served.

Lack of access to the legal process and fears about corrupt courts were two of the main concerns raised by netizens in April, after the Supreme People's Court and almost 500 lower courts invited comments on the legal system to be e-mailed to their newly opened mail boxes.

The other notable complaint was the cost of bringing a lawsuit, including both lawyers' fees and other expenses.

None of the above will be news to anyone who has tried to seek a legal remedy on the mainland. Local courts are notorious for their unhelpful ways - for example, often not letting litigants know what evidence they need to present, or requiring them to complete daunting amounts of paperwork. And that's just for non-controversial, standard civil lawsuits.

When it comes to filing a suit against officials or a government body - so-called administrative cases - the man in the street has more chance of winning the lottery than finding a court anywhere in the country that will accept such cases.

Last week, one prominent Beijing lawyer compared an ordinary citizen trying to sue the government or its cadres to an egg hitting a rock. No one knows this better than the parents of the children who died when their schools collapsed like paper houses during the Sichuan earthquake last year. Not one case alleging negligence by the officials in charge of school construction has been accepted by a Sichuan court.

It was a similar story in Hebei and Henan provinces last year, when courts refused to hear cases brought by parents whose children had died or fell ill during the contaminated milk scandal.

At the same time, lawyers attempting to help the Sichuan, Henan and Hebei parents were warned not to assist them. And there lies the problem with the mainland legal system.

For all the talk of the rule of law, it remains strictly under the control of the Communist Party at every level. In particular, lower court officials are part of the local government machine, which makes it easy for their superiors to lean on them when sensitive cases come up.

The recent scandal involving officials in Xishui county, Guizhou province, who had been paying for sex with so-called "backpack girls", or 13-year-old schoolchildren, offers a snapshot of the difficulties involved in bringing a case against cadres.

First, the officials were charged with having sex with under-age prostitutes, rather than the far more serious charge of child rape. Then, when the case came to the local court, it was heard behind closed doors and no verdict was reached. It was only after netizens reacted with outrage that the court moved to review the charges.

But official interference in the legal system doesn't just happen at the local level. For cases as emotive and well-known as the Sichuan schools collapse and the recent food and safety scandals, the orders not to allow people their day in court come from Beijing. Victims of such high-profile cases are bought off with compensation and assurances from central government officials that such lapses will never happen again.

That, though, is no substitute for justice and, almost 30 years on from the introduction of China's new constitution, there really is no excuse for not implementing a genuine rule of law.

In an age of almost daily internet exposes of corrupt officialdom, the failure to do so appears to confirm that the legal system is there to protect the party rather than the people.

David Eimer is a Beijing-based journalist


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Women can lead Asia's march to sustainability


Kim Yoon-ok
Jun 10, 2009           
     
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The international community, including the United Nations, has designated this year as the Year of Climate Change.

The idea is to pool our wisdom and efforts before climate change becomes an even more serious threat to everyone.

Even before the designation, the administration of South Korea had declared an initiative to commit to "green growth", a vision to tackle the issues of climate change, environmental degradation and depletion of energy resources.

Unlike past approaches, this one puts more emphasis on sustainable growth while reducing greenhouse-gas emissions and pollution.

In this day and age, no one is immune to the effects of climate change.

Arable land and marine resources are being drained and polluted. Soil is drying up, and not yielding the same harvests as previously.

People and livestock are more susceptible to disease and crops are being blighted.

All these developments are not caused by one country alone.

Therefore, we must all pull together to tackle these challenges.

Green growth allows us to achieve progress in both environmental preservation and economic growth. It has a direct impact on our health, too. Women, in particular, are known to carry toxins in their body longer than men, due to their higher amount of body fat.

Toxins carried by expectant mothers are passed on to their child. I have seen this in Korea, so many times. Skin rashes, nasal inflammations and asthma are being found more often in children, the elderly and women.

Of course, there cannot be a one-size-fits-all solution. What is important, though, is to start now, with little steps that can be carried out on a daily basis.

Women have a track record of outshining men when it comes to living up to little promises they make to themselves in their daily lives.

Efforts to recycle, reduce plastic waste and purchase more environmentally friendly products have mostly been carried out by women at home.

Moreover, women account for more than 80 per cent of daily consumption, mainly because we are the ones who take the primary role of doing the laundry, the dishes and buying household items.

So, if women were to take the lead as consumers, we could even exercise our power and weed out environmentally damaging products and bring an environmentally friendly economy a step closer.

This is where Asian women and their ability to carry out grand initiatives in workable ways, on a daily basis, come in.

Societies have known for thousands of years that nature is not something to be conquered, but something with which to live in peaceful harmony. And women in Asia account for one-third of the world's population.

Korean women established the G-Korea Women's Council last April, to bring together women's organisations from various fields, including consumer groups and environmental organisations, to ensure that the green revolution in South Korea is integrated into the daily lives of households.

This was, in a sense, a response to the South Korean president's call for a green growth vision.

Many women in Asia play three roles: that of a wife, a mother and a breadwinner.

And now there is the additional task of "saving the Earth".

Indeed, I sometimes find it remarkable that South Korean women can become these "Wonder Women" in daily clothing, so to speak.

I, myself, am doing my best to meet as many Asian women as possible, to share the experiences in bringing this vision into reality.

I look forward to embarking on this new journey with my fellow Asian women.

Kim Yoon-ok is South Korea's first lady


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Silence of the lambs
Taiwan's top minds need to speak out on law reforms to help achieve the best democratic solutions

Jerome A. Cohen
Jun 11, 2009           
     
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Anyone who cares about law and government has to be impressed by visiting Taiwan. Its democratically elected president and legislature, spurred by the interpretations of its independent Constitutional Court, have just ended the power of the police to imprison people without affording them the full protections of the newly revised judicial process.

They have also incorporated the standards of the two major international human rights covenants into Taiwan's domestic law. The government - in open court - is vigorously prosecuting the reportedly massive corruption of the previous administration.

The long moribund Control Yuan, whose function is to ferret out official misconduct, has come to life, and Taiwan's lawyers' associations and civic groups continue to press for further improvements in criminal justice. The island's free and hyperactive media, essential to the development of the rule of law, enjoy a field day reporting all this.

Yet, surprisingly, a recent intense week in Taipei, spent mostly with legal scholars, left me a bit depressed. As usual in a healthy society, I heard many stimulating critiques of the current situation. Some friends claimed: that ex-president Chen Shui-bian, now a criminal defendant, is being unfairly confined to a miserable detention cell for many months, while others under investigation and indictment for corruption remain free; that the Kuomintang administration of President Ma Ying-jeou is zealously bringing corruption charges against politicians of the Democratic Progressive Party while ignoring the many instances of similar misconduct by KMT officials; that the judge who was ultimately put in charge of the trial of Chen and his family has repeatedly ruled arbitrarily against them; that the legislature failed to enact necessary criminal justice reforms; and so on.

These allegations are troubling, of course. Yet, when I asked my academic friends why more of them - there are a few distinguished exceptions - did not speak out, publish essays and document their concerns, all too often I heard: "What good would it do? We can't change anything. They won't listen. Besides, we don't want to be controversial. People will accuse us of `being too Green' or sympathising with corruption." Some seem to be too busy with important research, consulting work or family responsibilities. A few hinted at hopes for government appointments that might be thwarted by controversy.

Such sentiments are understandable, especially in a busy, successful but bitterly divided political environment in which mutual trust and respect are in short supply. Yet Taiwan's evolving democracy confronts multiple challenges and needs the benefit of all the expertise and wisdom that is available.

It will be difficult to achieve optimum solutions to many major law reform issues without the informed, objective contributions of the island's best minds. If many of them hold back, for whatever reason, if they fail to take advantage of their hard-earned freedoms to speak out, they put their society's precious accomplishments at risk.

If Taiwan's law professors, legal scholars, social scientists and others with unique qualifications to promote public understanding keep silent, they actually exercise fewer freedoms than their counterparts on the repressive mainland, some of whom risk their physical safety, their careers and their family's well-being by "speaking truth to power".

As I listened to Taiwan law professors explain their aversion to the public arena, I thought of mainland friends who are paying dearly for having voiced opposition to dictatorial rule. Kidnappings, beatings, imprisonment, disbarment, loss of jobs, exile and harassment of their spouse and children plague activist academics, as well as lawyers. Yet some persist. Should Taiwan's legal scholars sit on their hands and seal their mouths? What price private pursuits?

Jerome A. Cohen is co-director of NYU's US-Asia Law Institute and adjunct senior fellow at the Council on Foreign Relations in New York


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Yam's peg legacy
The retiring HKMA chief's policies have helped provide the basis for the city's economic strength

Tony Latter
Jun 12, 2009           
     
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When I joined the government secretariat in 1982, I was Joseph Yam Chi-kwong's boss. He was already marked as a high-flyer. Years later, he was my boss. In October he will retire, after 28 years in charge of Hong Kong's monetary and banking affairs - first as director of the Office of the Exchange Fund and, since its creation in 1993, as head of Hong Kong's central bank - the Monetary Authority.

He leaves an impressive legacy. Most prominently, his support - both technical and intellectual - for pegging the Hong Kong dollar to the US dollar, at 7.80, has ensured the monetary stability that has, in turn, provided the foundation for the economy to prosper in good times and survive in bad times.

A particular highlight was the intervention in the stock market in 1998, which routed the market manipulators, yielded huge profits for the exchange fund, and later forced many critics to eat humble pie - not least the then saintly US Federal Reserve chairman Alan Greenspan.

Second, Joseph has overseen the evolution of Hong Kong's banking sector under a firm supervisory regime, resisting pressures for a softer touch - as when, for example, there have been calls to relax the 70 per cent loan-to-value rule for mortgages. It is no coincidence that Hong Kong's banks have been able, by and large, to weather the global crises of the past year better than most.

Third, he led the way among financial centres in introducing important advances in the efficiency and security of the financial infrastructure, such as real-time gross settlement, clearing arrangements for foreign currencies, and automated delivery versus payment for securities transactions.

Fourth, his tireless efforts to win nascent yuan business for Hong Kong have reaped considerable rewards.

That is not to say that he should get top marks all the way down the report card. For much of the 1990s, the Monetary Authority concerned itself too much with bank liquidity and interest rates, rather than allowing the currency peg mechanism to determine them. Even today, the authority is making unnecessary gestures of such concern, with its additional issues of exchange fund bills in the face of speculative inflows.

Another misjudgment was that, over the years, the Monetary Authority wasted huge sums maintaining dealing facilities in London and New York, to cover remote eventualities that could have been dealt with by a shift-working dealer in Hong Kong - if not by a computer. And some of its infrastructural initiatives, such as bond market links to New Zealand or South Korea, have been flops.

Moreover, the authority's present pump-priming of the Hong Kong dollar bond market, abetted by the financial secretary, is likely to prove fruitless - unless soaring statistics are seen as an end in themselves. Also on the statistical front, the authority's composite interest rate calculation, much hyped at inception, appears to serve little purpose.

Meanwhile, the Mortgage Corporation, which is a subsidiary of the Monetary Authority, has been permitted to range too far into activities which should be left to the private sector. Finally, although the jury may still be out on the recent minibond saga, the events are suggestive of a failure of the Monetary Authority and the Securities and Futures Commission to ensure, between them, that all bases were covered; that this type of problem is not uncommon, when supervisory responsibilities are divided, would not be an acceptable excuse.

Joseph has not harboured ambition beyond central banking. The international reputation which he quickly acquired has so much exceeded that of successive financial secretaries that he has been able to be entirely his own man. He has not had to cosy up to anyone. He has always taken pride in his work, and has been meticulous in providing both intellectual and pragmatic justifications for his actions - so much so that his closely argued speeches and papers demand considerable stamina from the reader. As a result, however, even if one disagreed with his policy, one could always trace how he arrived at it. And he would be a fearsome defender of what he thought right. His independence and keen intellect will be hard to replace.

It is a decade since Joseph started his weekly Viewpoint articles on the Monetary Authority's website - often excruciatingly patronising, but popular enough. Of late, he seems to have been running out of new things to say. Come October, at least he won't have to worry about that. He has earned his place in history. May he enjoy whatever comes next.

Tony Latter was deputy secretary for monetary affairs from 1982 to 1985 and deputy chief executive of the monetary authority from 1999 to 2003


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Socialism for the rich
Bailout capitalism, in which losses are socialised and profits privatised, has gone too far

Joseph Stiglitz
Jun 15, 2009           
     
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With all the talk of green shoots of economic recovery, America's banks are pushing back on efforts to regulate them. While politicians talk about their commitment to regulatory reform to prevent a recurrence of the crisis, this is one area where the devil really is in the details - and the banks will muster what muscle they have left to ensure they have ample room to continue as they have in the past.

The old system worked well for the bankers (if not for their shareholders), so why should they embrace change? Indeed, the efforts to rescue them devoted so little thought to the kind of post-crisis financial system we want that we will end up with a banking system that is less competitive, with the large banks that were too big to fail even larger.

It has long been recognised that those American banks that are too big to fail are also too big to be managed. That is one reason that the performance of several has been so dismal. Because the government provides deposit insurance, it plays a large role in restructuring.

Normally, when a bank fails, the government engineers a financial restructuring; if it has to put in money, it, of course, gains a stake in the future. Officials know that if they wait too long, zombie or near-zombie banks - with little or no net worth, but treated as if they were viable institutions - are likely to "gamble on resurrection".

In a financial restructuring, shareholders typically get wiped out, and bondholders become the new shareholders. Sometimes, the government must provide additional funds; sometimes it looks for a new investor.

The Obama administration has, however, introduced a new concept: too big to be financially restructured. It argues that all hell would break loose if we tried to play by the usual rules with these big banks. Markets would panic.

So, not only can't we touch the bondholders, we can't even touch the shareholders - even if most of the shares' existing value merely reflects a bet on a government bailout.

This judgment is wrong. The Obama administration has succumbed to political pressure and scaremongering by the big banks. As a result, it has confused bailing out the bankers and their shareholders with bailing out the banks.

Restructuring gives banks a chance for a new start: new potential investors will have more confidence, other banks will be more willing to lend to them, and they will be more willing to lend to others. The bondholders will gain from an orderly restructuring and, if the value of the assets is truly greater than the market (and outside analysts) believe, they will eventually reap the gains.

But what is clear is that the Obama strategy's current and future costs are very high - and so far, it has not achieved its limited objective of restarting lending. The taxpayer has had to pony up billions, and has provided billions more in guarantees - bills that are likely to become due in the future. Rewriting the rules of the market economy - in a way that has benefited those that have caused so much pain - is worse than financially costly. Most Americans view it as grossly unjust. Tearing up the social contract is something that should not be done lightly.

But this new form of ersatz capitalism, in which losses are socialised and profits privatised, is doomed to failure.

Incentives are distorted. There is no market discipline. The too-big-to-be-restructured banks know they can gamble with impunity - and, with the Federal Reserve making funds available at near-zero interest rates, there are ample funds to do so.

Some have called this new economic regime "socialism with American characteristics". But socialism is concerned about ordinary people. By contrast, the US has provided little help for the millions of Americans who are losing their homes and their jobs.

America has expanded its corporate safety net in unprecedented ways, from commercial banks to investment banks, then to insurance, and now to carmakers, with no end in sight. In truth, this is not socialism, but an extension of long-standing corporate welfarism. The rich and powerful turn to the government to help them whenever they can, while needy individuals get little social protection.

We need to break up the too-big-to-fail banks; there is no evidence that these behemoths deliver societal benefits that are commensurate with the costs they have imposed on others. And, if we don't break them up, then we have to severely limit what they do.

This raises another problem with America's too-big-to-fail, too-big-to-be-restructured banks: they are too politically powerful. Their lobbying efforts have worked well. Their hope is that they will work again to keep them free to do as they please, regardless of the risks for taxpayers and the economy. We cannot afford to let that happen.

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



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Bric bats for the US


LAURENCE BRAHM

Jun 16, 2009           
     
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When visiting Beijing earlier this month, US Treasury Secretary Timothy Geithner addressed a group of Chinese students at Peking University, assuring them that their country's assets were "very safe in Washington". He was met with laughter. It was a clear sign of changing times. Mr Geithner seemed more like an investment banker on a road show to raise capital than the finance minister of the world's largest economy. Only a year ago, the US treasury chief was wagging his finger at China and calling for financial reform, an opening of capital markets and foreign exchange liberalisation. China's leadership now consider themselves lucky not to have taken any of this unsolicited advice.

For decades, the Washington Consensus - a view that promotes one model of development and "structural re-adjustment" for transitional economies - has called for many shock therapies. These include opening capital markets, freeing foreign exchange controls, privatising state assets and removing subsidies, especially on edible oils and grains. These policies trashed the post-Soviet economies of central Asia and Eastern Europe, and later destabilised Indonesia and Thailand during the 1997 Asian financial crisis. Those countries which refused to buy into Washington's formula - including China, Vietnam and Malaysia - have fared well, with developed, sustainable economies. So, is it now Washington's turn to adopt "structural re-adjustment", given Mr Geithner's comments to his student audience that "in the US, we are putting in place the foundations for restoring fiscal sustainability".

The Washington Consensus, through institutions such as the International Monetary Fund and the World Bank, backs the globalisation of one economic model and development formula, known as neo-liberal economics or, sometimes, voodoo economics. At its core is Adam Smith's "invisible hand" - that greed motivates all. It fails to consider other human motivational factors, such as spirituality or compassion.

Today a new paradigm, emerging as the Himalayan Consensus, has declared that the Washington Consensus is dead. The tectonic plates of our global financial system are shifting. There is no new Bretton Woods and instead a replacement, through regional alternatives, is needed. Developing nations, which are rapidly becoming developed, are setting a new agenda for themselves, one that Washington may have to follow, whether it likes it or not.

There is more to come. Tomorrow, foreign ministers from Brazil, Russia, India and China, the so-called Bric nations, will meet in Yekaterinburg, Russia. Their discussions will focus on one key issue - the future role of the US dollar in the global financial system. The Bric leaders are dissatisfied with the lack of US leadership in the financial crisis and feel that rescuing failed institutions responsible for the crisis and expanding money supply at an unprecedented rate to stimulate more consumption is both irresponsible and inappropriate. "The tendency among the Brics is to insist on having an approach to the crisis that focuses primarily not on finance but on the real economy," said Brazil's minister of strategic affairs, Roberto Mangabeira Unger.

Bric leaders seek alternative solutions to the economic crisis and are willing to be pioneers. For instance, Russian President Dmitry Medvedev has suggested that Russia and China should consider switching to domestic currencies in bilateral trade instead of using the US dollar. China already has similar agreements with Brazil and Belarus. The leaders want to address trade imbalances between the Bric countries and the developed world, establish a link between economic recovery and income redistribution, while reassessing the role of financial markets.

To solve the problem through a massive package to stimulate consumption will only perpetuate the problem. On a planet of diminishing resources, overconsumption is the main problem.

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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Money matters and harsh words
Parents in Britain object to tax-demand-style letters from schools for 'voluntary' contributions

BRITAIN
Jessica Shepherd
Jun 17, 2009           
     
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It read like a letter from a debt-collector. "Our accounts indicate you have not made a contribution," it stated. "Our records indicate you have not contacted us." In fact, it was a letter from a state primary school. And it was asking for "voluntary" contributions of £40 (HK$500) from parents to its annual fund. "I recognise that you may feel unable to pay the full amount," the chair of governors went on. "We always invite parents to write to us to explain their circumstances and propose an alternative."
Susan (not her real name), who received the letter from her son's school last year, resolved to "do nothing of the sort".

"The letter comes across as arrogant, unnecessarily officious, heavy-handed and like a tax demand, with its compulsory overtones," she said. "I feel utterly offended that the school feels it has the right to demand that I write in and explain myself or my financial circumstances. People's financial situations are entirely private. They didn't even offer us a choice of paying a lower amount."

Susan, a mother of three who earns £17,000 a year, was even angrier when, a few months later, her son's state secondary school wrote to him to ask for a £15 voluntary contribution for its centre for 17- and 18-year-olds. "If you try to evade paying, then your centre privileges will be removed," it stated.

And when he did not pay, they were. He was barred from the common room until he paid up - with his £15 birthday money. The sum was on top of the £60 the school expects annually in voluntary contributions from parents.

"I have never been against the schools asking for contributions per se," Susan said. "I understand it wholeheartedly, but I do not agree with the increasing mercenary tactics used, the way in which the letters are worded and the lack of monitoring of how much money parents are being asked for at any one time."

By the end of the school year, Susan, a council worker, had handed over £1,011 for voluntary contributions, school trips and clubs. She paid, she said, because she was afraid of the consequences if she did not. She did not want to scupper her chances of her third child getting a place at the school.

"I do not want my children to miss out and would not dream of refusing to pay for trips and equipment," she said. "However, what I would like to see put in place is some kind of monitoring system, which enables the school to get themselves to a position whereby they control the timing of requests for monies, taking into account likely times of high expenditure, such as the start of the new school term, Christmas and half-term.

"We are being hit for monies from all angles, and it feels like my children are at private school."

Susan offered to monitor when, how much and how many contributions parents were asked for, but the school declined.

Jane (not her real name) is a single parent with a son on free school meals.

"I am expected to purchase a uniform, school photographs, pay to watch my child's plays, buy other mothers' lousy cakes and pay a `voluntary contribution' towards the cost of my son's school trips," she said. "The latter irks me somewhat, as not only does the school dictate how much you should contribute, at short notice, but the school chases you and pressurises you into offering an explanation as to why you haven't paid. I feel compelled to contribute what I haven't got as I don't want my autistic son to be excluded from activities.

"Given the current climate, I am sure working parents also find these costs difficult ... Unfortunately, making these regular payments leaves my household funds in deficit. I told the school about my predicament, but then I received a letter from the teaching assistant, acknowledging my problems but still begging for the money. Now I have refused to pay and stated my reasons rather angrily."

At the moment, parents who receive tax-demand-style letters asking for voluntary contributions, or who feel pressured into contributing beyond their means, can either complain to the UK's Department for Children, Schools and Families, the school itself or their local authority.

This is not enough, argues Citizens Advice, which represents more than 400 Citizens Advice Bureaus in Britain. It is lobbying the department to set up a regulatory body to handle parents' complaints about school costs.

It follows a spate of similar letters sent from schools to parents. Adrian Galvin, social policy campaigns officer at Citizens Advice, said that with letters like these, "it is often the tone that parents object to".

The "whole area of school costs is unregulated," he says. "Schools need to be effectively monitored by an appropriate body ... If parents want to advance a grievance, what happens if the head teacher or school governors don't listen to them? There isn't an effective body they can turn to. Many parents struggle to get their views across and there is deep frustration."

A study in January by Citizens Advice found that parents in Britain spent an average of £683.79 a year in school-related costs for a child at a state primary, and £1,195.47 for a child at a state secondary.

A report by the department on the cost of schooling last year found that three in 10 parents were asked to make voluntary contributions. Secondary schools tended to ask for £44 a year, while primaries asked for £27. Nine per cent of the 1,500 parents surveyed said they were asked to contribute £100 or more to the annual school fund.

The survey asked 208 schools what the consequences were if parents said they were unable to make voluntary contributions. Two-fifths said there were none; 17 per cent said activities might have to be cancelled; 12 per cent said the school would make up the shortfall and 10 per cent simply said the contributions were voluntary. Almost half the schools sent parents reminder letters if they had not paid the voluntary contribution and 14 per cent said parents had to provide a reason if they did not pay up. Clarissa Williams, president of the National Association of Head Teachers and former head teacher of Tolworth Girls' school in southwest London, said voluntary contributions enabled schools to buy things without tapping into government funds.

"We used to run the school minibus, buy wheelie bins and kit out the library with the money," she says. "It is very useful, but I disapprove of strongly worded letters. Those schools are in danger of alienating parents. Schools should tell parents they value their contribution, but without pressurising them."

The department said it had listened and was planning a new, independent review service for parents' complaints, hosted by the local government ombudsman. This will be part of legislation in the apprenticeships, skills, children and learning bill, which is progressing through the House of Lords and may gain royal assent by November.

But a spokesman for the local government ombudsman said it seemed unlikely the new service would have regulatory powers, as Citizens Advice wishes.

It is clearly stated in the government's admissions code that schools are not allowed to demand a commitment from parents to give voluntary contributions as part of their admissions or selection process. Last year, Ed Balls, the schools secretary, shamed six schools for doing so.

But what if a school demands contributions once a child is a pupil?

"Schools can ask parents for voluntary contributions towards school funds, provided this is not part of the admissions process," a department spokesman said. "However, voluntary contributions are just that, voluntary, and no parent should feel compelled to pay.

"The government takes breaches of the charging provisions very seriously. We investigate complaints when they are brought to our attention and the secretary of state has the power to direct schools to comply if necessary."

But what happens to schools that breach the rules? Nothing, says Mr Galvin. In the meantime, schools that employ some tact when asking for voluntary contributions might find they are the ones with the most swollen coffers.

A parent whose children attend a state secondary school in Devon, southwest England, says: "One teacher wrote a wonderful letter regarding a trip. It was very clear and, early on, said `We are asking for a voluntary contribution of £10 from those who feel they can afford it. However, please understand that regardless of payment, all children who wish to come are entitled to a place'. This actually made me more inclined to pay and I made a point of thanking him for the way he had put it, which I felt was very inclusive - as it should be."

The Guardian


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Beware, it bites
While guaranteeing deposits may calm investors, risks to the banking system also rise

Jake van der Kamp
Jun 18, 2009           
     
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You couldn't possibly doubt the appeal of the idea on seeing the government's recent full page advert - four beaming, happy people stepping up to the microphone to express their great joy that their bank deposits may now be guaranteed to a maximum of HK$500,000, up from HK$100,000. Let us all cheer the Hong Kong Deposit Protection Board.

But you do have to wonder why this should engender quite so much joy. In the first place, there is little reason to leave HK$500,000 in a bank deposit when interest rates are so low that you need a microscope to see them.

As the old saw has it, why are HSBC (SEHK: 0005, announcements, news) shares traditionally among the best investments in Hong Kong? Answer: because HSBC deposits are traditionally among the worst. Figure it out.

And it is hardly as if our commercial banks are wobbling at the moment. We had trouble that way in the mid-1980s when Southeast Asian interests raided several banks they owned here in order to prop up disastrous investments at home. But in the only serious case since that time, the failure of the Bank of Credit and Commerce International in 1991, receivers quickly ring-fenced the assets of the Hong Kong subsidiary and depositors got all their money back.

In fact, it is instructive that the Bank of East Asia (SEHK: 0023) stayed open right through a bank run in September and paid out all frightened depositors who demanded their money. The panic soon dissipated. Anywhere else in the world at the time, the Bank of East Asia would have had to surrender itself to government in a matter of just hours.

We have a fortress banking system in Hong Kong, probably the soundest in Asia. The only real mark of non-confidence in it recently came from Financial Secretary John Tsang Chun-wah, when he decided last year to provide a temporary guarantee of all bank deposits. He would have done better just to fold his arms and demonstrate to the whole world that he wasn't needed.

But our banks can still become a good deal less safe and one cast-iron prescription for making them so is to remove all risk from deposits, as the deposit protection scheme aims to do.

It's simple. Give me a government-backed guarantee that my bank deposit is safe and the first thing I do is look for the bank that pays me the highest interest rate. It no longer concerns me that this bank may go bust. That is now someone else's problem. I know that I will get my money back.

Bankers will have to adapt to this. They must offer higher deposit rates or they will not get deposits and the only way they can offer higher deposit rates, and still make money, is to charge higher interest rates on their loans, which they can only do to borrowers who constitute a greater risk. They will do it, knowing also that they will not need to feel quite so bad any longer if it all goes wrong. The deposits are guaranteed by a government agency.

There is a name for this phenomenon. It is called moral hazard and there is no escaping it. To the extent that the fears of depositors are soothed, the risks to the banking system rise.

The Deposit Protection Board admittedly makes mention of moral hazard in its consultation paper on the HK$500,000 limit, but then pretends that moral hazard is something it can measure, as in a spreadsheet formula, and restrain to a "manageable level".

This is nonsense. Whether still just a cuddly pup or already the ravening fanged leader of the pack, moral hazard is a wolf and not to be tamed or quantified by investment maths. It grows when you feed it and eventually it feeds on you.

Risk can never be eliminated from an investment. It can be reduced, as it is with bank deposits, but an element of it must always be there, even with deposits, to keep your banker on his toes when he uses your money. He is kept prudent by knowing that you can take your money away from him if you lose confidence in him.

You, meanwhile, are restrained from asking him for too much by knowing he could lose your money if you do. It is a very moderate balance of fear and greed compared with what prevails in derivatives investments but, slight as it may be, it is still essential to healthy banks. Removing it leads only to eventual nationalisation of the banking system.

If you need have no worries at all about your deposits and your banker no longer has you looking over his shoulder to keep him prudent, than the arbiter of where your money goes inevitably becomes the guarantor of that money.

Hands up now, who really thinks Mr Tsang is cut out for the job?

Jake van der Kamp is a former Post columnist


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Cigar aficionados look forward to end of US-Cuba trade curbs


CUBA
Mark Drajem
Jun 19, 2009           
     
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Cohibas, Partagas and Montecristos from Cuba. For US cigar aficionados, the names spark thoughts of civil disobedience.

As US President Barack Obama moves to ease restrictions on trade with Cuba, cigar lovers are savouring the prospect of legally lighting up a smoke that has long required a black-market connection and a willingness to flout the law.

"There's a mystique about a Cuban," said John Anderson, owner of W. Curtis Draper Tobacconist, a cigar shop in Washington. "Cuban tobacco has become the forbidden fruit."

The possible end to the 47-year-old embargo on Cuba trade has intensified a legal and lobbying fight between cigar makers Swedish Match AB of Stockholm and the Imperial Tobacco Group of Bristol, England. Each wants exclusive rights to sell Cuban-made brands in the US, the world's largest market for premium cigars.

Swedish Match sells cigars in the US made in Honduras and the Dominican Republic under Cuban brand names. It bought the brands from families that fled Cuba after Fidel Castro seized their cigar companies in the 1960s. Imperial distributes Cuban-made cigars under many of the same names to the rest of the world through an agreement with the Cuban government monopoly, Cubatabaco.

"Before serious commerce resumes, this is going to have to be resolved," said Robert Muse, a Washington lawyer who advises clients on Cuba-related issues.

Opening the US market to Cuban cigars may jeopardise the jobs of the 147 workers at the US headquarters of Swedish Match's General Cigar subsidiary in Richmond, Virginia, according to Gerry Roerty, the unit's general counsel.

"The market is going to be turned upside down," Mr Roerty said. After waiting for almost five decades, Americans "will buy a Donald Duck cigar if it's a Cuban".

Mr Obama lifted prohibitions on Cuban-Americans travelling to the island in April and eased restrictions on shipping clothing, seeds and other gifts to Cuban residents.

Before the US takes further steps, Mr Obama says Cuba needs to free political prisoners and allow freedom of speech and religion. The US House of Representatives Ways and Means Committee chairman Charles Rangel predicted on May 5 that all travel and trade prohibitions, imposed by John Kennedy in 1962, would be lifted by the end of 2010.

Cuban cigars, hand-rolled from the tobacco of the Vuelta Abajo growing region, hold a cachet in popular culture that dates back to the island's days as a playground for gamblers, novelists and mobsters. The day before Kennedy imposed the embargo, he dispatched press secretary Pierre Salinger to buy 1,000 Cuban-made Petit Upmanns, according to an account Salinger wrote in 2002.

"A Cuban embodies so much more than smoke," said James Suckling, who has written articles on Cuba for Cigar Aficionado magazine. He estimates Americans consume about 20 million Cuban cigars a year, enjoying them while travelling to Mexico or the Caribbean or stowing them in luggage on the way home.

The forbidden fruit carries a premium: a box of 25 Cohiba Robustos costs US$304 on the Hong Kong-based Cigars of Habanos website, where shoppers are offered the option of shipping to the US without regard to the government's ban. A Dominican-made version sold online by Holt's Cigar, of Philadelphia, sells for US$175.

Because of the low acidity in the soil and a temperate climate, Cuban cigars have an earthy aroma and a "full taste" that make the best of them the finest cigars in the world, said Benjamin Menendez, a Cuban who fled the country in 1960 after Castro confiscated his family's cigar company, Menendez y Garcia.

Not all Cuban cigars meet those standards, he said. "People are told they have a Cuban and they immediately assume they are good," said Mr Menendez, who has blended tobacco around the world and at the age of 73 hosts 150 cigar tastings a year for General Cigar. Once Americans can buy Cuban cigars at their local tobacco shop, "a lot of people are going to be disappointed".

Swedish Match and Imperial Tobacco both sell Dominican-made cigars in the US and together account for almost half of the sales in a US market for premium cigars that the Swedish company estimates at US$850 million annually.

After cigar makers fled Cuba, Cubatabaco began exporting cigars under brands such as the Menendez family's Montecristo and H Upmann, and developed new brands such as Cohibas.

Because of the embargo and US court decisions, Cubatabaco couldn't keep the trademarks in the US, and General Cigar bought brands from the refugees. Through an acquisition, Imperial owns a subsidiary that took the same tack, buying brands such as Montecristo from exiled families. That created the divided cigar market, in which one company owns a brand such as Partagas in the US and another does so around the world.

Cuba lost the US rights to Cohibas when General Cigar registered the brand in the 1970s. General Cigar has so far fended off a 1997 lawsuit brought by Cubatabaco to reclaim that name. A new ruling may come within months.

The fate of the Cuban trade embargo is more than an idle topic for discussion among the lobbyists, lawyers and politicians who frequent Shelly's Back Room in Washington. Regulars at the cigar parlour located between the White House and the Capitol share the dream of getting their hands on a legal Cuban cigar.

"Cuban cigars are legendary," said owner Bob Materazzi. "Anybody who is a cigar geek is interested."

Bloomberg


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Iranians have right to shape their own destiny


LEADER

Jun 22, 2009           
     
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Iranian opposition leader Mir Hossein Mousavi has agonising decisions to make. A sense of injustice is driving thousands of Iranians on to the streets against supreme leader Ayatollah Ali Khamenei. The order from the top has been delivered loud and clear: demonstrations against the June 12 presidential election result will no longer be tolerated. Security forces are using increasing violence against protests, which are taking place with ever-greater defiance. A critical stage has been reached.

The demonstrations have taken on a life of their own. Like it or not, Mr Mousavi has become the leader of the protest movement. His claim that the polls that returned President Mahmoud Ahmadinejad were fraudulent and should be rerun are among a multitude of grievances being voiced against the regime. The opposition leader has to act with caution in formulating and rolling out his strategy so that further bloodshed can be prevented.

There have already been a number of deaths - exactly how many is unknown because of the curbs on domestic and foreign media. Dozens of protesters, opposition figures and journalists have been arrested or detained. Ayatollah Khamenei contends that he is the legitimate, unquestioned leader of Iran. But there are splits in the top legislative body, the Guardians Council, and a power struggle is under way.

Despots rarely compromise when under pressure and the ayatollah is no different; the hardline Revolutionary Guard and militias have joined police in using brutal force to fulfil his orders. Demonstrations by students in 1999 were crushed in a similar manner. But the protests this time are the biggest since the Islamic revolution that overthrew the late shah three decades ago. Mr Mousavi's presence has given them a focus; his declared readiness to become a martyr has added impetus and appears to have swollen the ranks of those willing to take to the streets.

Iranians have a constitutional right to freedom of expression. Their protests have been largely peaceful. The nation is bound by the International Covenant on Civil and Political Rights, which it ratified in 1975. Iran is required, under the UN-administered law, to recognise and protect key human rights, including peaceful assembly and freedom of association.

The government must allow citizens to voice their concerns openly. It must stop arresting protesters and opponents and free those already detained. The violence being carried out in its name must be halted and the perpetrators prosecuted. To ensure openness and transparency, journalists have to be able to do their work unhindered.

Iranians deserve a better regime than the one they currently have. They have the right and must be allowed to shape their own destiny. Demonstrations are only an element of attaining such a goal. As Mr Mousavi steers the process forward, he must ensure the rules as laid out in the constitution and under international law are strictly adhered to.



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Double-dip danger
The anticipated 'V'-shaped economic recovery is at risk of becoming a 'W'-shaped recession

Nouriel Roubini
Jun 23, 2009           
     
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In the past three months, global asset prices have rebounded sharply: stock prices have increased by more than 30 per cent in advanced economies, and by much more in most emerging markets. Prices of commodities - oil, energy and minerals - have soared; corporate credit spreads (the difference between the yield of corporate and government bonds) have narrowed dramatically, as government-bond yields have increased sharply; volatility (the "fear gauge") has fallen; and the US dollar has weakened, as demand for safe dollar assets has abated.

But is the recovery of asset prices driven by economic fundamentals? Is it sustainable? Is the recovery in stock prices another bear-market rally or the beginning of a bullish trend?

While economic data suggests that an improvement in fundamentals has occurred - the risk of a near depression has been reduced, the prospects of the global recession bottoming out by the end of the year are increasing, and risk sentiment is improving - it is equally clear that other, less-sustainable factors are also playing a role. Moreover, the sharp rise in some asset prices threatens the recovery of a global economy that has not yet hit bottom. Indeed, many risks of a downward market correction remain.

First, confidence and risk aversion are fickle, and bouts of renewed volatility may occur if macroeconomic and financial data were to surprise on the downside - as they may if a near-term and robust global recovery (which many people expect) does not materialise.

Second, extremely loose monetary policies (zero interest rates, quantitative easing, new credit facilities, emissions of government bonds, and purchases of illiquid and risky private assets), together with the huge sums spent to stabilise the financial system, may be causing a new liquidity-driven asset bubble in financial and commodity markets. For example, Chinese state-owned enterprises that gained access to huge amounts of easy money and credit are buying equities and stockpiling commodities well beyond their productive needs.

The risk of a correction in the face of disappointing macroeconomic fundamentals is clear. Indeed, recent data from the US and other advanced economies suggests that the recession may last through the end of the year. Worse, the recovery is likely to be anaemic and sub-par - well below potential for a couple of years, if not longer - as the burden of debts and leverage of the private sector combine with rising public-sector debts to limit the ability of households, financial firms and corporations to lend, borrow, spend, consume and invest.

This more challenging scenario of anaemic recovery undermines hopes for a V-shaped recovery, as low growth and deflationary pressures constrain earnings and profit margins, and as unemployment rates above 10 per cent in most advanced economies cause financial shocks to re-emerge, owing to mounting losses for banks' and financial institutions' portfolios of loans and toxic assets. At the same time, financial crises in a number of emerging markets could prove contagious, placing additional stress on global financial markets.

The increase in some asset prices may, moreover, lead to a W-shaped, double-dip recession. In particular, thanks to massive liquidity, energy prices are now rising too high, too soon. The role that high oil prices played in the summer of 2008 in tipping the global economy into recession should not be underestimated.

Oil above US$140 a barrel was the last straw - coming on top of the housing busts and financial shocks - for the global economy, as it represented a massive supply shock for the US, Europe, Japan, China and other net importers of oil.

Meanwhile, rising fiscal deficits in most economies are now pushing up the yields of long-term government bonds. Some of the rise in long rates is a necessary correction, as investors are now pricing a global recovery.

But some of this increase is driven by more worrisome factors: the effects of large budget deficits and debt on sovereign risk, and thus on real interest rates; and concerns that the incentive to monetise these large deficits will lead to high inflation after the global economy recovers in 2010-11 and deflationary forces abate. The crowding out of private demand, owing to higher government-bond yields - and the ensuing increase in mortgage rates and other private yields - could, in turn, endanger the recovery. As a result, one cannot rule out that, by late 2010 or 2011, a perfect storm of oil above US$100 a barrel, rising government-bond yields and tax increases (as governments seek to avoid debt-refinancing risks) may lead to a renewed growth slowdown, if not an outright double-dip recession.

The recent recovery of asset prices from their March lows is, in part, justified by fundamentals, as the risks of global financial meltdown and depression have fallen and confidence has improved.

But much of the rise is not justified, as it is driven by excessively optimistic expectations of a rapid recovery of growth towards its potential level, and by a liquidity bubble that is raising oil prices and equities too fast, too soon. A negative oil shock, together with rising government-bond yields - could clip the recovery's wings and lead to a significant downturn in asset prices and in the real economy.

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


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Dengist whateverism

FRANK CHING

Jun 24, 2009           
     
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There is much to fascinate the reader in Prisoner of the State, the memoir of former Chinese party leader Zhao Ziyang . Secretly recorded before his death in 2005, the tapes were painstakingly gathered together by his friends and have now been published with great fanfare in both Chinese and English.

The book provides an authoritative account of what went on within the Communist Party and government 20 years ago as students mounted a massive protest in Tiananmen Square, which culminated in the bloody events of June 3 and June 4, 1989. It confirms that Deng Xiaoping made all key decisions, including the one to call in the tanks to crush the student protest.

Deng was a complicated character. On one hand, he saw the problems created by Mao Zedong , especially during the Cultural Revolution, when China was in chaos and Deng himself was denounced as a "capitalist roader" and removed from office. He had years in which to think about China's plight and, after Mao's death, Deng decided that the country had to change course.

Now, Maoist China has been eclipsed by Dengist China. Both men are dead but, even though Mao's body still rests in his mausoleum in Tiananmen Square, it is Deng's thoughts and values that guide China's leaders today.

While the outside world saw Deng as a reformer - and he was an economic reformer - within China, he had long been recognised as a hardliner. In fact, when I was based in Beijing in the early 1980s and asked someone in the military how Deng was viewed, the answer was simple: "He is a rod."

After the nightmare of the Mao years, Deng was seen by many as a saviour. He oversaw the political rehabilitation of many thousands of cadres, many posthumously, and created the conditions that allowed the deliverance of hundreds of millions from poverty. But, in some ways, Deng was similar to Mao. Both men understood and wielded power. And Deng, like Mao, ended up getting rid of one designated successor after another. The first to go was Hu Yaobang , who was too liberal for Deng's taste, followed by Zhao, who refused to crack down on the students.

Beijing, of course, is studiously ignoring the disclosures in Zhao's memoirs, taking the position that the issue is closed. But it needs to be reopened. It is understandable that Deng should be put on a pedestal. After the turmoil of the Mao years, Deng restored normality to China and focused the country's energies on construction rather than destruction. That alone means his contribution to China will never be forgotten.

But Deng was not just someone who put China on a different course. He was also someone who wanted to perpetuate Communist Party rule. And, to him, this meant there could never be a multiparty political system or separation of powers, or even a judiciary truly independent of the party.

China's leaders today should do what they think is best for the country and not be afraid of doing anything contrary to what Deng may once have said. Unless they have the courage to do this, they will return the country to the position it was in when Hua Guofeng succeeded Mao as party chairman. At that time, there were people, later labelled supporters of "whateverism", whose position was that whatever instructions Mao issued during his lifetime should be carried out and whatever Mao opposed should never be done.

Deng criticised the proponents of "whateverism". After all, China cannot be ruled by a dead man. That is as true today as it was then. Mao was evaluated by the party after his death and it was concluded that his contributions were greater than his errors, grievous though they were.

China and the party have changed. It may not be necessary to make a formal political assessment of Deng. But he would be the first to admit that he was not perfect, that he had made mistakes. The party does not need to act as though everything Deng said or did cannot be questioned. It is time to end this taboo.

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


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People's justice
The term 'court of public opinion' is being taken literally in some parts of the mainland

Jerome A. Cohen
Jun 25, 2009           
     
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A discreet struggle is taking place in mainland China over justice, law and governance. A rising, confident country is asking itself what kind of legal system best suits its "national circumstances". A "socialist rule of law with Chinese characteristics" is an attractive political slogan, but troubling to many Chinese legal specialists. What should it mean in practice?

One fundamental question is: what is a "court"? In recent years, all over the mainland, local governments, at great expense, have built imposing, modern courthouses. What should happen inside? And to what extent should judges function outside?

In China, as elsewhere, courts settle legal disputes. But not all legal disputes. As the Sichuan earthquake tragedy demonstrated, some lawsuits, especially those involving numerous plaintiffs, are not accepted and are required to be handled administratively. Many others, in some times and places, are also excluded from judicial purview as "too sensitive". Tainted milk claims, environmental complaints, land transfers and HIV/Aids discrimination are examples. Mainland judges are too few and overburdened. Last year, they dealt with almost 11 million disputes, and caseloads are expanding.

What policies and methods are appropriate for contemporary mainland courts, not only in the increasingly complex cities but also in the countryside, where most people still live? Since the Communist Party's 17th congress in late 2007, a new party line preoccupied with fostering "social stability" and a new party leadership of the courts have emphasised settling disputes through informal mediation in preference to formal trials. Mediation is said to be more "democratic", and more congenial to ordinary people and China's traditions, than adjudication.

This new "mass line", which requires judges to learn from, and be responsive to, the people, and which is the most recent revival of what had been the party's judicial policy for the large rural areas that it controlled for almost two decades before its 1949 civil war victory, is even making inroads into adjudication.

Although China's lowest-level courts have long used a system whereby two "people's assessors" often sit with a career judge to form a trial panel for relatively minor cases, the assessors, instead of independently asserting their views, generally follow the judge's lead. Now, much more radical experiments with "democratisation" are under way, exemplified by the activist president of the High Court of Henan province , Zhang Liyong, a former party and government official recently assigned to the courts.

Mr Zhang has developed a practice, applicable to all cases, whereby, after a court hearing is completed, the judges consult a group of spectators seated in the courtroom about how the case should be disposed of. No detailed rules have yet emerged about how these "citizen representatives" or "juries" are chosen and consulted or what weight is to be attached to their views. But reported examples indicate that a group of eight or more may be selected from local legislators, officials, advisers and political activists.

This new practice is a vehicle for implementing the party's recent instruction that courts, in making decisions, should consider popular feelings and social conditions as well as the law and, above all, the cause of the party. The situation remains murky, despite reports that the system has been used in large numbers of civil, administrative and criminal cases, even in the provincial High Court itself and in death penalty cases! The Henan experiment is spreading to other provinces, including neighbouring  Shaanxi .

Of course, in the countryside, informal consultation of the masses has long been a hallmark of judicial justice outside the county courthouse. A single judge is often based in a township that rules many villages. Together with perhaps a local policeman, a government legal official and a people's mediator, the judge will usually hear the views of not only the parties and witnesses but also community members who know the background and circumstances of civil disputes. Although those consulted may not be categorised as "witnesses", "assessors" or "jurors", their input is often crucial. A similar process prevails where, instead of permanently posting a judge to a township, the county court sends one to "ride circuit" among townships and villages.

Recent emphasis on community participation inside the courtroom has created consternation among many judges at all levels. In the Chinese political context, they see "democratisation" as a cloak for arbitrary rule and the enemy of "professionalism", a euphemism for judicial independence and procedural fairness. Their professional lives are already distorted by the need to clear judgments with superiors within their own court and an oppressive system for evaluating their performance.

Moreover, intrusions from local legislators, prosecutors, administrators and party officials, as well as the pressures of corruption and social networks, present daily challenges. Many are dragging their feet in implementing the new policy while seeking support from influential scholars and public figures, some of whom have boldly opposed it as inconsistent with effective protection of individual rights.

No wonder that many graduates of China's burgeoning law schools shun judicial careers and proposals have surfaced for reverting to the earlier communist practice of filling judicial vacancies with retired military personnel, at least for the central and western regions. One sign of how the struggle is going will be whether judges will be required to abandon their recently donned western-style judicial robes in order to become closer to the masses.

Jerome A. Cohen is co-director of NYU's US-Asia Law Institute and adjunct senior fellow at the Council on Foreign Relations in New York


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Police made their point without taking to streets


LEADER

Jun 29, 2009           
     
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The police have succeeded in making their point without having to take to the streets. The 2,300 officers who attended a mass meeting yesterday with their bosses probably exceeded the number who would have joined a planned protest march on a damp day. The decision to bow to government pressure to drop the march has turned out well for both sides. Police have aired their pay grievances very publicly without harming the force's law-and-order image, and the government has headed off a demonstration that risked the public perception that it is not firmly in control during a time of economic woes.

But this outcome has come at a price. In return for police staff unions calling off the march, Police Commissioner Tang King-shing promised to champion their pay campaign. Officers' expressions of confidence in Mr Tang's pledge shows they will try to hold him to it. Not surprisingly, representatives of other disciplined services are also seeking such support in the face of pay freezes and cuts.

The staff unions, meanwhile, have reason to hope that public sentiment about their campaign is softening. People were understandably upset that the police seemed to be resisting pay restraint and thus trying to avoid sharing the pain with many others in the community, including the civil service. The planned protest march did nothing to counter this impression. But now that the unions have called it off and explained their case more clearly, there are signs that they have won some sympathy.

Both sides, however, must tread carefully. The pay issue is a little technical and not easily explained to members of the public who have endured pay cuts. If not handled well, it has the potential to create trouble for the government with officers in other disciplined services, such as customs, immigration, correctional services and fire services, not as constrained as police from taking industrial action.

The dispute arises from a grade structure review released in November that recommended revising the pay scale, which would have amounted to a moderate pay rise for most officers. The government put off implementing it until the economy improved. Instead, the row got worse as a pay trend study released last month led to a civil-service pay cut for senior ranks and a freeze for others.

Politically and economically, now is not the time to be holding a pay-rise demonstration. The police have done well to obtain the commissioner's public support and a commitment that the Executive Council will make a decision on the recommendations of the grade structure review by September. They have a well-deserved reputation for preserving Hong Kong's image as a safe, law-abiding city and enjoy broad public support. It is good that instead of marching, they chose yesterday's meeting to air their grievances. They should now pursue their case with restraint and not risk provoking a public backlash. The government should be mindful of the importance of pay relativities and that other disciplined services will be watching closely. It needs to be seen to be even-handed because of the potential for flow-on and negative public perceptions.


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New tree regime has room to grow


LEADER

Jun 30, 2009           
     
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One of the threats to Hong Kong's remaining old trees is a plague of bureaucracy. They can fall within the jurisdiction of any of about 10 authorities, each with different priorities, depending on the circumstances and where they are. Too often the confusion of authority over trees has proved a recipe for the loss of precious natural heritage to development or neglect. There is an argument that trees need to be protected by stronger laws administered by an authority with the power to enforce them. The reforms announced yesterday by Chief Secretary Henry Tang Ying-yen fall short of that, but they could be a step towards a more effective conservation and greening strategy.

The city is to get a new tree regime in the Development Bureau with more resources, staff and expertise. A tree management office will co-ordinate tree issues, while departments will continue to maintain trees under their jurisdiction. A greening and landscaping office will focus on centralised issues, mainly in large estates.

The proposal arises from the verdict of a coroner's jury that looked into the death of a young woman when an old tree fell on her in the main street at Stanley. The jury found that the tragedy could have been prevented by better risk assessment. Mr Tang admitted the present system is flawed by fragmentation of responsibilities between departments. Calls to the government hotline about trees will be directed to the new offices. Hopefully, this will curb the buck-passing that now goes on between different authorities.

Mr Tang claims the new measures will be more cost-effective than setting up a centralised authority handling all tree matters in connection with at least seven departments. That may be right in the short term. But the two new offices represent a new layer of bureaucracy that will cost an estimated HK$19 million a year in recurrent spending. In the longer term the government should be looking for economic synergies by rationalising the continuing fragmentation of responsibility. The two offices should also adopt as one of their goals making our urban areas more leafy.

The task force's rejection of a tree protection law has disappointed some lawmakers and experts. Mr Tang rightly pointed out that a law covering trees on private land involved sensitive questions of private property rights. But he has not ruled it out in the light of experience with the new administrative measures.

That said, the government has accepted the critical verdict of the coroner's jury in the right spirit, particularly its call for more staff training and recruiting of specialists. Public safety remains paramount. It is good that a stronger management system has been put in place and that it will be co-ordinated with a greening strategy for the city. Government policy to reverse the greying caused by early development that left us with little urban open space has wide community support. Our remaining valuable old trees are part of our precious natural heritage. But urban development can make it hard for them to thrive and they can become a threat to life and limb.


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Best footprint forward
It stinks. It's pathetic. But the new US cap-and-trade energy bill can help change the world

Thomas Friedman
Jul 02, 2009           
     
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There is much in the US House of Representatives cap-and-trade energy bill that just passed that I absolutely hate. It is too weak in key areas and way too complicated in others. A simple, straightforward carbon tax would have made much more sense. It is pathetic that we couldn't do better. It is appalling that so much had to be given away to polluters. It stinks. It's a mess. I detest it.

Now let's get it passed in the Senate and make it law. Why? Because, for all its flaws, this bill is the first comprehensive attempt by America to mitigate climate change by putting a price on carbon emissions. Rejecting this bill would have been read in the world as America voting against the reality and urgency of climate change and would have undermined clean-energy initiatives everywhere.

More important, my gut tells me that, if the US government puts a price on carbon, even a weak one, it will usher in a new mindset among consumers, investors, farmers, innovators and entrepreneurs that, in time, will make a big difference - much like the first warnings that cigarettes could cause cancer. The morning after that warning, no one ever looked at smoking the same again.

Ditto if this bill passes. Henceforth, every investment decision made in America - about how homes are built, products manufactured or electricity generated - will look for the least-cost, low-carbon option. And weaving carbon emissions into every business decision will drive innovation and deployment of clean technologies to a new level and make energy efficiency more affordable.

Now that the bill is heading for the Senate, though, we must, ideally, try to improve it, but, at a minimum, guard against diluting it any further. To do that, we need the help of the three parties most responsible for how weak the bill already is: the Republican Party, President Barack Obama and We the People.

This bill is not weak because its framers, Henry Waxman and Ed Markey, wanted it this way. "They had to make the compromises they did," said Dan Becker, director of the Safe Climate Campaign, "because almost every House Republican voted against the bill and did nothing to try to improve it. So, to get it passed, they needed every coal-state Democrat, and that meant they had to water it down to bring them on board."

What are Republicans thinking? It is not as if they put forward a different strategy, like a carbon tax. Does the party want to be the party of sex scandals and polluters or a partner in helping America dominate the next great global industry: ET - energy technology? How could Republicans become so anti-environment, just when the country is going green?

Historically speaking, "Republicans can claim as much credit for America's environmental leadership as Democrats", noted Glenn Prickett, senior vice-president at Conservation International. "The two greatest environmental presidents in American history were Teddy Roosevelt, who created our national park system, and Richard Nixon, whose administration gave us the Clean Air Act and the Environmental Protection Agency." The elder George Bush signed the 1993 Rio Treaty, to preserve biodiversity.

Yes, this bill's goal of reducing US carbon emissions to 17 per cent below 2005 levels by 2020 is nowhere near what science tells us we need to mitigate climate change. But it also contains significant provisions to prevent new buildings from becoming energy hogs, to make American appliances the most energy efficient in the world and to help preserve forests in places like the Amazon. We need Republicans who believe in fiscal conservatism and conservation joining this legislation in the Senate. We want a bill that transforms the whole country, not one that just threads a political needle. I hope they start listening to green Republicans like Dick Lugar, George Shultz and Arnold Schwarzenegger.

I also hope we will hear more from Mr Obama. Something feels very calculating in how he has approached this bill, as if he doesn't quite want to get his hands dirty, as if he is ready to twist arms in private, but not so much that if the bill goes down he will get tarnished. That is no way to fight this war. He is going to have to mobilise the whole country to pressure the Senate - by educating Americans, with speech after speech, about the opportunities and necessities of a serious climate/energy bill. If he is not ready to risk failure by going all out, failure will be the most likely result.

And then there is We the People. Attention all young Americans: your climate future is being decided right now in the cloakrooms of the Capitol, where the coal lobby holds huge sway. You want to make a difference? Then get out of Facebook and into somebody's face. Get a million people on the Washington Mall calling for a price on carbon. That will get the Senate's attention. Play hardball or don't play at all.

Thomas Friedman is a New York Times columnist


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The crises connection
Today's financial and foreign-affairs disasters are closely linked, and the solutions should be too

Graciana del Castillo
Jul 03, 2009           
     
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Policymakers, academics and journalists usually discuss the global financial crisis and the wars in Afghanistan and Iraq as if they somehow exist on parallel tracks. But today's financial and foreign-affairs crises are in fact closely linked. Indeed, the way the world has sought to resolve the financial crisis offers interesting insights about how the foreign-affairs crisis should be approached.

Today's foreign-affairs crisis goes well beyond Afghanistan and Iraq. The record of countries that move from conflict to a fragile peace through military intervention or negotiated settlements is dismal: roughly half of them revert to conflict, leading to more human tragedy and large numbers of refugees. Moreover, failed states are an incubator for terrorism, trafficking of drugs and people, piracy and other illicit activities. Of the half that remains at peace, the large majority end up highly dependent on foreign aid - hardly a sustainable model in the context of the global financial crisis.

The two crises have created immense human suffering worldwide: thousands of families have lost loved ones in wars, and the financial crisis has taken people's jobs, livelihoods, assets, pensions and dreams, as well as worsening fiscal and debt conditions in most industrial countries. As a result, taxpayers in donor countries are demanding more transparency and accountability in how their money is spent both domestically and abroad.

There are notable links between the two crises. The war in Iraq contributed in part to the increase in oil prices from US$35 per barrel in 2003 to US$140 in 2007. This increase put pressure on businesses and consumers, and was a major factor in the increase in world food prices. As prices rose and recessionary pressures increased, many homeowners failed to pay their mortgages. The subprime sector in the United States was hit, and the financial crisis spread from there.

Both crises require policymaking that departs from "business as usual". Short-term emergency policies are needed to deal with high unemployment, home foreclosures, business bankruptcies, and often with hunger, disease and a number of other ills. Emergency or humanitarian policies may improve basic consumption in the short term, but they may also discourage investment, boost inflation and lower prospects for economic recovery in the long run. As a result, such policies should be discontinued as soon as possible.

Recovering from both crises will require effective economic reconstruction to create jobs. As well as restructuring the financial sector, recovery programmes in the US, Britain and other industrial countries hardest hit by the financial crisis must include relief for home and business owners, and job creation through infrastructure projects, clean-energy technology, and improvements in health care and education.

In Afghanistan and Iraq, reconstruction must include not only the rehabilitation of services and infrastructure, but - more challenging - the creation of a macroeconomic, legal and regulatory framework for effective policymaking. To avoid a continuation of conflict and aid-dependency, the main focus of the international aid commitment should be to reactivate small enterprises and promote start-up companies in various sectors to create viable economies that enable people to earn a legal and decent living.

Despite their commonality, there has been a stark contrast in approaches to resolving these two crises. While programmes in industrial and emerging economies aimed at addressing the financial crisis have been broadly debated at the national and international level, the debate about Afghanistan and Iraq has been narrowly focused on military and security issues, undermining the need for a major effort at effective reconstruction.

Interestingly, whereas most Americans are well aware of the US$700 billion price tag for restructuring banks and the US$787 billion stimulus package, far less attention has been paid to the almost US$1 trillion spent on the Afghanistan and Iraq wars. Many assume that the cost is so high because reconstruction is expensive. But only 6 per cent of this amount was allocated for reconstruction and other aid programmes. The rest was allocated to the US Department of Defence as a supplement to its annual budget, which has been between US$500 billion and US$650 billion in recent years.

World leaders should recognise that a larger investment in reconstruction, together with a comprehensive and well-balanced strategy to ensure accountability, and appropriate policies for lawful employment, could have prevented these vast military expenditures, both in Iraq since 2006 and in Afghanistan since the Taleban government was ousted in 2001.

Just as world leaders have led the global discussion on policies to resolve the financial crisis, they should start a broad-based debate on the international community's future involvement in Afghanistan, Iraq and other war-torn countries, where better living conditions are needed to give the local population a stake in the peace process.

The international community should recognise that military, security and peacekeeping operations are costly and will not succeed in the absence of new, innovative and integrated strategies for economic reconstruction.

Graciana del Castillo is research scholar at the Centre on Capitalism and Society at Columbia University and the author of Rebuilding War-Torn States. Copyright: Project Syndicate


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The jobless threat
Rising unemployment is affecting economies and markets, yet there is little room for further policy stimulus

Nouriel Roubini
Jul 20, 2009           
     
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Recent data suggests that job market conditions are not improving in the United States and other advanced economies. In the US, the unemployment rate, currently at 9.5 per cent, is poised to rise above 10 per cent by autumn. It should peak at 11 per cent some time in 2010 and remain well above 10 per cent for a long time. The unemployment rate will peak above 10 per cent in most other advanced economies, too.

These raw figures on job losses, bad as they are, actually understate the weakness in world labour markets. If you include partially employed workers and discouraged workers who left the US labour force, for example, the unemployment rate is already 16.5 per cent. Monetary and fiscal stimulus in most countries has done little to slow the rate of job losses. As a result, total labour income - the product of jobs times hours worked, times average hourly wages - has fallen dramatically.

Moreover, many employers, seeking to share the pain of recession and slow down layoffs, are now asking workers to accept cuts in both hours and hourly wages. British Airways, for example, has asked workers to work for an entire month without pay. Thus, the total effect of the recession on labour income of jobs, hours and wage reductions is much larger.

A sharp contraction in jobs and labour income has many negative consequences for the economy and financial markets. First, falling labour income implies falling consumption for households, which have already been hard hit by a massive loss of wealth (as the value of equities and homes has fallen) and soaring debt ratios.

With consumption accounting for 70 per cent of US gross domestic product, and a similarly high percent in other advanced economies, this implies that the recession will last longer, and that economic recovery next year will be anaemic (less than 1 per cent growth in the US and even lower growth rates in Europe and Japan).

Second, job losses will lead to a more protracted and severe housing recession, as joblessness and falling income are key factors in determining delinquencies on mortgages and foreclosure. By the end of this year, about 8.4 million US individuals with mortgages will be unemployed and unable to service their mortgages.

Third, if you plug an unemployment rate of 10 per cent to 11 per cent into any model of loan defaults, you get ugly figures not just for residential mortgages (both prime and subprime), but also for commercial property, credit cards, student loans, car loans, and the like. Thus, banks' losses on their toxic assets and their capital needs will be much larger than recently estimated, which will worsen the credit crunch.

Fourth, rising job losses lead to greater demands for protectionist measures, as governments are pressured to save domestic jobs. This threatens to aggravate the damaging contraction of global trade.

Fifth, the higher the unemployment rate goes, the wider budget deficits will become, as automatic stabilisers reduce revenue and increase spending (for example, on unemployment benefits). Thus, an already unsustainable US fiscal path, with budget deficits above 10 per cent of GDP and public debt expected to double as a share of GDP by 2014, becomes even worse.

This leads to a policy dilemma: rising unemployment rates are forcing politicians in the US and other countries to consider additional fiscal stimulus programmes to boost sagging demand and falling employment. But, despite persistent deflationary pressure through 2010, rising budget deficits, high financial-sector bailout costs, continued monetisation of deficits and eventually unsustainable levels of public debt will ultimately lead to higher expected inflation - and thus to higher interest rates, which would stifle the recovery of private demand.

So, while further fiscal stimulus seems necessary to avoid a more protracted recession, governments around the world can ill afford it: they are damned if they do and damned if they don't. If, like Japan in the late 1990s and the US in 1937, they take the threat of large deficits seriously and raise taxes and cut spending too much too soon, their economies could fall back into recession. But recession could also result if deficits are allowed to fester, or are increased with additional stimulus to boost jobs and growth, because bond-market vigilantes might push borrowing costs higher. Thus, even as mounting job losses undermine consumption, housing prices, banks' balance sheets, support for free trade and public finances, the room for further policy stimulus is becoming narrower.

Indeed, not only are governments running out of fiscal bullets as debt surges, monetary policy is also having little short-term traction in economies suffering insolvency - not just liquidity - problems. Worse still, in the medium turn, the monetary overhang may lead to significant inflationary risks.

Little wonder, then, that we are now witnessing a significant correction in equity, credit and commodities markets.

The irrational exuberance that drove a three-month bear-market rally in the spring is now giving way to a sober realisation among investors that the worldwide recession will not be over until the end of the year, that the recovery will be weak and well below trend, and that the risks of a double-dip, W-shaped recession are rising.

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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Gap between US stimulus rhetoric and reality


Robert Samuelson
Jul 21, 2009           
     
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It's not surprising that the much-ballyhooed American "economic stimulus" hasn't done much stimulating. US President Barack Obama and his aides argue that it's too early to expect startling results. They have a point. A US$14 trillion economy won't revive in a nanosecond. But the defects of the US$787 billion package go deeper and won't be cured by time. The programme crafted by Mr Obama and the Democratic Congress wasn't engineered to maximise its economic impact. It was mostly a political exercise, designed to claim credit for any recovery, shower benefits on favoured constituencies and support fashionable causes.

As a result, much of the stimulus' potential benefit has been squandered. Spending increases and tax cuts are sprinkled in too many places and, all too often, are too delayed to do much good now. Nor do they concentrate on reviving the US economy's most depressed sectors: state and local governments; the housing and car industries. None of this means that the stimulus won't help or precludes a recovery, but the help will be weaker than necessary.

How much is hard to determine. By the end of 2010, the package will result in 2.5 million jobs, Mark Zandi of Moody's Economy.com predicts. But, as he notes, all estimates are crude. When the Congressional Budget Office (CBO) made job estimates, it presented a range of 1.2 million to 3.6 million by the end of 2010. Whatever the actual figures, they won't mean an increase in overall employment soon. They will merely limit job losses. Since late 2007, those have totalled 6.5 million, and there are probably more to come.

On humanitarian grounds, hardly anyone should object to parts of the stimulus package: longer and (slightly) higher unemployment benefits; subsidies for job losers to extend their health insurance; expanded food stamps. Mr Obama was politically obligated to enact a campaign proposal providing tax cuts to most workers. But, beyond these basics, the stimulus plan became an orgy of politically appealing spending increases and tax breaks.

More than 50 million retirees and veterans got US$250 cheques (cost: US$14 billion). Businesses received liberalised depreciation allowances (US$5 billion). Health care information technology was promoted (US$19 billion). High-speed rail was encouraged (US$8 billion). Whatever the virtues of these programmes, many spend out slowly. The CBO estimates 30 per cent of the economic effects would occur after 2010.

Ignored was any concerted effort to improve consumer and business confidence by resuscitating distressed economic sectors. Vehicle sales are running 35 per cent behind year-earlier levels; frightened consumers recoil from big-ticket purchases. Falling house prices deter  homebuying. States suffer from steep drops in tax revenues and face legal requirements to balance their budgets. This means raising taxes or cutting spending - precisely the wrong steps in a severe slump. To promote car sales and homebuying, Congress could have provided temporary, but generous, tax breaks. It didn't.

There are growing demands for another "stimulus" on the grounds that the first was too small. Wrong. The problem with the first stimulus was more its composition than its size. With budget deficits for 2009 and 2010 estimated by the CBO at US$1.8 trillion and US$1.4 trillion (respectively, 13 per cent and 9.9 per cent of gross domestic product), it's hard to argue they're too tiny. Mr Obama and congressional Democrats sacrificed real economic stimulus to promote parochial interests. Any new "stimulus" should be financed by culling some of the old.

Here, there's a gap between Mr Obama's high-minded rhetoric and his performance. In February, he denounced "politics as usual" in constructing the stimulus. But that's what we got. Interviewed recently, he was asked if he would change anything. "There's nothing we would have done differently," he said.

Robert Samuelson is a Washington Post columnist


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Here we go again
Asset bubbles all begin with a story - this one has yet to play out to its inevitable conclusion on the mainland

Andy Xie
Jul 22, 2009           
     
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Asset bubbles come and go. Each begins with a story: Japan as No 1, the East Asian miracle, dotcom mania, and how financial innovations eliminate risk - just to mention the last four. Each begins with a plausible bullish story, which is magnified by the financial markets, manufacturing an inevitable bubble.
Back in the 1980s, Japan produced world-conquering, seemingly invincible, companies like Sony and Toyota. The competitiveness gains justified the re-rating of Japan's asset prices. The issue was by how much? That is where imagination ran riot. Next, the East Asian miracle was a story of gross domestic product.

The Asian Tiger economies and Southeast Asia generated high GDP growth rates even when the US economy was depressed. Financial markets caught on to that, extrapolated the trend ad infinitum, and repriced their assets accordingly.

At the end of the 1990s, the dotcom phenomenon conjured up the possibility of making unlimited amounts of money in a new economy. Financial markets ignored the role of competition in limiting profitability, while irrational exuberance led to overinvestment and the collapse of profitability. More recently, financial innovations were peddled on a tale of decreased risk through financial engineering. Lower risks should lead to the re-rating of risk assets like property or stock. It turned out that this, too, was just a story. Decreasing risk was a mathematical illusion. As more and more people believed the story, prices of risk assets moved higher, which validated the expectation of lower risk - for the time being.

The current bubble is unique. It began with a horror story: paper money will evaporate in value and, hence, you should buy something - anything - with it. At a recent lecture I gave in Hangzhou , one wealthy member of the audience said: "Property may be 100 per cent overvalued. But I will still get half when it comes down. Paper money will be worth zero." The allure of this latest story is that the economy doesn't matter. If the world is in recession, so what? If stock and property markets collapse, so what? We just run away from paper money, right? Better, borrow to buy assets. This is where bank lending policies come in to play. But, the more willing the banks are to lend, the hotter the asset markets become.

Mainland banks experienced a banking crisis a decade ago. They lent with abandon for land speculation in the early 1990s. That led to rampant inflation and triggered monetary tightening. Land prices began to fall in the mid-1990s. They sank further in the Asian financial crisis of 1997, due to falling exports. Forty per cent of all bank loans were non-performing.

To rescue the banks, the government stripped out their bad assets, mandated wide lending margins for them to earn their way back, and floated them in Hong Kong for recapitalisation. These helpful measures were accompanied by a lending boom after 2004. Now they are ranked first, second and third worldwide in terms of market capitalisation.

However, banks' good fortunes don't usually last. A lending boom is inevitably followed by a crisis. This has yet to play out on the mainland.

Right now, banks are force-feeding the economy with liquidity. The purpose of the so-called "quantitative easing" was to generate domestic demand while exports slumped. But the liquidity has flowed into property and stock markets instead (and has partly become government fiscal revenue).

The inflation-fear bubble will burst in due course. Paper money loses value over time at the rate of the difference between inflation and interest rates. If the inflation rate is 6 per cent and the bank deposit rate is 2 per cent, paper money loses 4 per cent per annum or 0.33 per cent per month. Stocks and properties in China may be 100 per cent overvalued. Only two decades of relatively high inflation can justify their prices. However, persistently high inflation leads to currency devaluation, which triggers capital flight and, eventually, an asset market collapse. This story simply won't hold together for long.

A case in point is the US Savings and Loans crisis of the late 1980s and early 1990s. The US Federal Reserve kept monetary policy loose to help the banking system. The dollar went into a prolonged bear market. During the descent, Asian economies that pegged their currencies to the dollar could increase money supply and lending without worrying about devaluation. The money couldn't leave home due to the dollar's poor outlook so it went into asset markets.

When the dollar began to rebound, in 1996, Asian economies came under tightening pressure that burst their asset bubbles.

The collapsing asset prices triggered capital outflows that reinforced asset deflation. Asset deflation destroyed their banking systems. In short, the US banking crisis created the environment for a credit boom in Asia. When US banks recovered, Asian banks collapsed.

Is China heading down the same path? There are many anecdotes to support the comparison. Property prices in Southeast Asia became higher than those in the US. But "experts" and government officials had stories to explain it, even though their per capita income was one-tenth that of the US. Their banks commanded huge market capitalisations, as financial markets extended their growth ad infinitum. The same thing is happening in China today.

When something seems too good to be true, it is. World trade - the engine of global growth - has collapsed. Employment is still contracting throughout the world. There are no realistic scenarios for the global economy to regain high and sustainable growth.

China is an export-driven economy. Bank lending can support the economy for a short time. However, stocks are as expensive as during the heydays of the last bubble. Like all previous bubbles, this one, too, will burst.

Andy Xie is an independent economist


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Functionless seats
Anachronistic functional constituencies must be overhauled to pave the way for universal suffrage  

Stephen Vines
Jul 24, 2009           
     
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Functional constituency representatives in the Legislative Council have the worst voting record, the poorest attendance record and the public rate them as the least popular members of the legislature. Yet they occupy half the seats, have power to block resolutions raised by members who enjoy a popular mandate and, at the last election, almost half were returned to office in uncontested constituencies.

In theory, the purpose of functional constituency representatives is to provide more balanced representation in the legislature and to supply specialist input which, it is argued, would not be achieved by simply allowing the public to vote for all its members. In practice, the functional constituencies have become a home for those who participate least in the council's affairs and cannot even be bothered to engage in the minimal task of casting their votes. Time and again, Timothy Fok Tsun-ting, who supposedly represents the sports, performing arts, culture and media industries, is revealed to be the council's most absent member.

Yet he need not worry about being re-elected because there are no individual voters in his constituency, only representatives of organisations drawn from the kind of list that ensures the seat is not even contested.

David Li Kwok-po, who represents the finance industry, is also fortunate in not having had to fight an election among the small circle qualified to vote in his constituency. A survey by this newspaper revealed that Mr Li failed to participate in nine out of 10 votes in Legco.

His explanation for this is probably more revealing than intended as he said that he would definitely vote when it came to finance or banking matters but not on other subjects such as education or the environment. In other words, Mr Li views his role as a semi-detached member of the legislature, declining to take part in its general activities but prepared to be there for the special interests of the small circle who are allowed to vote for him. Chim Pui-chung, another council member relieved of having to face election, is more blatant in explaining his lack of participation. He said that "I am only accountable to my voters ... there is no point in being involved" in matters that do not directly concern them. Mr Chim clearly did not listen to the pledge he gave to serve the people of Hong Kong, a pledge all legislators make before taking office.

Like turkeys who are hardly likely to vote for Christmas, functional constituency representatives are unlikely to vote for their own abolition. So it will be very hard to secure reform through Legco unless the government is genuinely committed to the introduction of universal franchise. But steps can be taken in this direction.

First, the administration needs to clearly affirm that "one person, one vote" in Legco elections will be implemented within the next decade. Further delay will be a hard pill for democrats to swallow but a commitment to provide a fixed target for universal suffrage should help the pill go down. In the meantime, there is no excuse for perpetuating the split-voting system in Legco which allows functional constituency members to veto motions raised by their popularly elected counterparts. In theory, this works both ways but functional constituency members rarely propose any motions - they simply support the government.

Third, there is an urgent need to abolish the most rotten of the rotten boroughs that make up the functional constituency block. Seats reserved for the practically non-existent agricultural and fisheries sector, the all-powerful real estate and construction sector and the never-contested Heung Yee Kuk seat are prime examples of constituencies that need to go.

Fourth, there is a way of making the other constituencies more representative which, for example, involves giving the vote to the people who actually take part in the commercial world as opposed to current arrangements that confine voting to members of two organisations. And why not give everyone in the sports and media world a vote and allow everyone in the catering industry, not just catering company bosses, to vote?

These ideas are not original but the time has come for compromise, however uncomfortable, if universal suffrage is to be achieved.

Stephen Vines is a Hong Kong-based journalist and entrepreneur


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Energy security requires a technological revolution


Fatih Birol
Jul 27, 2009           
     
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Humanity's future, to say nothing of its prosperity (SEHK: 0803, announcements, news) , will depend on how the world tackles two central energy challenges: securing reliable supplies of affordable energy and switching to efficient low-carbon energy.

The Reference Scenario - in which no new policies are introduced - in the International Energy Agency's "2008 World Energy Outlook" sees annual global primary energy demand growing by 1.6 per cent on average up to 2030, from 11,730 million tonnes of oil equivalent to just over 17,010 - an increase of 45 per cent in just over 20 years.

China and India account for half of this increase, with Middle East countries contributing a further 11 per cent. Non-OECD countries account for 87 per cent of the increase, so their share of world primary energy demand will rise from 51 per cent to 62 per cent. Most oil production increases are expected to come from just a few countries - mainly in the Middle East, but also Canada with its vast oil-sands reserves, the Caspian region and Brazil. Gas production in the Middle East will triple, and more than double in Africa.

The trend by which consuming countries grow steadily more reliant on energy from a small number of producing countries threatens to exacerbate energy-security worries.

Increasing import dependence does not necessarily mean less energy security, any more than self-sufficiency guarantees uninterrupted supply. Yet greater short-term insecurity seems inevitable as the diversity of supply is reduced and reliance on vulnerable supply routes grows.

Longer-term energy-security risks are also set to grow. As a small group of countries increasingly accounts for the world's remaining oil reserves, their market dominance may threaten the pace of investment. The greater the demand for oil and gas from these regions, the more likely these regions are to seek higher prices, by deferring investment and limiting production.

Unfettered growth in energy demand will clearly have serious consequences for the climate. Under the Reference Scenario, which represents "business as usual", carbon dioxide emissions are projected to rise 45 per cent by 2030, with other greenhouse gases contributing to an eventual average temperature increase of up to 6 degrees Celsius.

Three-quarters of the extra carbon dioxide will come from China, India and the Middle East, and up to 97 per cent from non-Organisation for Economic Co-operation and Development countries as a whole -  although non-OECD per capita emissions will still be far lower on average than in the OECD. Bucking the global trend, only the European Union and Japan will see lower emissions in 2030 than today.

Two IEA climate-policy scenarios show how we could stabilise the concentration of greenhouse gases at 550 or 450 parts per million (ppm) of carbon dioxide equivalent. The 550ppm scenario equates to an increase in global temperature of about 3 degrees, while the 450ppm scenario implies an increase of around 2 degrees.

In the 550ppm scenario, energy demand up to 2030 rises by about 32 per cent, with the share of fossil fuels falling markedly, and average demand up 1.2 per cent yearly, compared to 1.6 per cent in the Reference Scenario. Energy-related carbon dioxide emissions would peak in 2025 and decline slightly by 2030.

The 450ppm scenario presents an immense challenge. The 2030 emissions level for the entire world would be less than the emissions projected for non-OECD countries alone in the Reference Scenario. In other words, even if OECD countries reduce their emissions to zero, they alone could not put the world onto the 450ppm trajectory. To do so would require an unprecedented technology shift.

Fortunately, we already know many of the policies and technologies that can deliver such savings in energy consumption and emissions. But those decisions must be made and implemented now.

Fatih Birol is the chief economist of the Paris-based International Energy Agency. Copyright: Project Syndicate


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Sum of the parts
The growing complexity of the Sino-US relationship signals a new level of maturity

Shen Dingli
Jul 28, 2009           
     
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Seven months after the election of a new US president, China and the US are launching their first Strategic and Economic Dialogue. Tough words spoken about China's "currency manipulation" and predatory trading during, and in the aftermath of, the election are now a distant memory. The reality of the global economic crisis and the emerging issue of global climate change have added new impetus to closer co-operation between the world's two leading countries.

During the George W. Bush era, Beijing and Washington initiated two high-level talks - a Senior Dialogue (also called Strategic Dialogue) and another Strategic Economic Dialogue. They played an important role in addressing timely security and economic issues at national, regional and global levels, and co-ordinated their positions through adjusting their respective policies.

Some two months after being sworn in, US President Barack Obama agreed with President Hu Jintao to combine the aforementioned two talks and lift them to a higher level - to further their relations through the Strategic and Economic Dialogue platform.

Indeed, it is impressive that the two countries have set the tone of their relationship so soon under the new US president. It is more important to note, however, that the two countries will address security and economic issues - either pressing or long-range matters - at such a crucial time.

This is a critical time when the US has a new leadership with great challenges and new priorities. The financial crisis has wreaked one of the gravest economic recessions on the US since the end of the second world war. With unemployment near 10 per cent, the downturn is affecting many aspects of American life and much of society. It is likely that Mr Obama would list this as the most pressing national security threat if the White House were to draft a new National Security Strategy Report.

In a highly interdependent world, no one can be immune to such a global challenge. China has been affected already: gross domestic product growth in the fourth quarter of 2008 fell by nearly half from the prior year, although in the second quarter this year it grew 7.9 per cent. Tens of millions of Chinese migrant workers have felt the threat of America's lost interest and ability to consume. China's competitiveness in exports, for decades, has suddenly become a vulnerability, making its currency appreciation more difficult.

As China and the US are highly dependent on each other, they have to address this crisis collaboratively. Both need to stimulate their respective economies while creating opportunities for each other.

Given Mr Obama's progressive policy on international co-operation on global issues, China and the US are seeing increasing chances to co-operate, as well as to collide. On co-operation, Beijing and Washington are now more inclined to consult each other at international forums before making major decisions.

The incidents at sea involving US reconnaissance and survey ships and Chinese vessels in China's economic zone in March, however, have underlined the growing tension over the control of waters and seabed resources.

The Bush administration was deaf to global efforts to stem global warming and withdrew from the Kyoto Protocol. But Mr Obama is committed to reducing carbon emissions and has thus presented a challenge to Beijing. China and the US could develop a type of new confrontation - the need to commit to the reduction of greenhouse gases, with specific time-bound obligations. As a signatory to Kyoto, China has been supporting this regime, taking voluntary measures to reduce the increase of carbon dioxide, without being under a quota compulsion to do so. However, with the Obama administration recommitting America to climate change - which is certainly commendable - China feels unfair pressure to follow suit.

These issues - fixing the economic recession and climate change - will be tackled at the Strategic and Economic Dialogue. Remedies for both issues, by nature, involve co-operation and competition. It is obvious that China-US relations are increasingly more mature and complex: while those areas of collaboration are ever expanding, the focus of their competition, based more on interests than ideology, is also shifting. Apparently, those "traditional" areas of tension - Taiwan, human rights, non-proliferation and trade imbalances - have not disappeared, but newly emerging issues - a fair economic and trade relationship, currency conversion, carbon emissions and the like - are defining how the two countries will nurture their partnership.

Again, China and the US are going to handle their relations through talks and negotiation. They already know that they share stakes too vast to risk with serious confrontation. Also, they are experts in conducting negotiations to balance respective interests. At such a vital time, the Strategic and Economic Dialogue should serve not only to exchange strategic perspectives and test strategic intentions, but also to settle emerging disputes and strengthen co-operation.

China and the US are both experiencing a significant transformation. America is at a crossroads between further decline and transcendence. China could emerge as the world's second-biggest economy, and expects to assume more responsibilities commensurate with its added capacity. While a G2 between the two is quite out of the picture, their closer partnership is surely both a necessity and a reality.

Shen Dingli is a professor and director of the Centre for American Studies and executive dean of the Institute of International Studies at Fudan University in Shanghai. Reprinted with permission from YaleGlobal Online. [url]http://yaleglobal.yale.edu[/url]


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The correct way to use government intervention


J. Bradford DeLong
Jul 30, 2009           
     
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At this stage in the worldwide fight against depression, it is useful to stop and consider just how conservative the policies implemented by the world's central banks, treasuries and government budget offices have been. Almost everything they have done has followed a policy path that is nearly 200 years old, dating back to the earliest days of the Industrial Revolution, and thus to the first stirrings of the business cycle.

The place to start is 1825, when panicked investors wanted their money in safe cash rather than risky enterprises. Robert Banks Jenkinson, second earl of Liverpool and first lord of the Treasury for King George IV, begged Cornelius Buller, governor of the Bank of England, to act to prevent financial-asset prices from collapsing. "We believe in a market economy," Lord Liverpool's reasoning went, "but not when the prices a market economy produces lead to mass unemployment on the streets of  London, Bristol, Liverpool and Manchester."

The Bank of England acted: it intervened in the market and bought bonds for cash, pushing up the prices of financial assets and expanding the money supply. It loaned on little collateral to shaky banks. It announced its intention to stabilise the market - and that speculators should beware.

Ever since, whenever governments largely stepped back and let financial markets work their way out of a panic by themselves - 1873 and 1929 in the US come to mind - things turned out badly. But whenever government stepped in or deputised a private investment bank to support the market, things appear to have gone far less badly. For example, the US government essentially authorised J.P. Morgan to act as the country's central bank in the aftermath of the 1893 and 1907 panics, created the Resolution Trust Corporation at the start of the 1990s, and, together with the International Monetary Fund, intervened to support Mexico in 1995 and the East Asian economies in 1997-98.

At the very least, few modern governments are now willing to let financial markets heal themselves. To do so would be truly radical. The Obama administration and other central banks around the globe are, in a sense, acting very conservatively, even as they embrace deficit-spending programmes, boost the volume of government bonds, guarantee risky private debt and buy carmakers. I understand what they are trying to do, and am reluctant to second-guess them. They are all doing their best.

Nevertheless, I do have one big question. The US government especially, but other governments too, have got themselves deeply involved in industrial and financial policy during this crisis. They have done this without constructing technocratic institutions like the Reconstruction Finance Corporation of the 1930s and the Resolution Trust Corporation, which played major roles in allowing earlier episodes of extraordinary government intervention into the industrial and financial guts of the economy to turn out relatively well, without an overwhelming degree of corruption and rent seeking.

The discretionary power of executives, in past crises, was curbed by new interventionist institutions constructed on the fly. That is how America's founders envisioned that things would work. They were suspicious of executive power, and thought that the president should have rather less discretionary power than the various King Georges of the time. Yet, today's crisis has led to the establishment of such financial institutions.

So, why didn't the US Congress follow the Reconstruction Finance Corporation and Resolution Trust Corporation model when authorising George W. Bush's and Barack Obama's industrial and financial policies? Why haven't the technocratic institutions been given a broader role in this crisis? And what can we do to rebuild international financial-management institutions on the fly to make them the best possible?

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


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Socialist-market virus threatens US and China


James Dorn
Jul 31, 2009           
     
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The Sino-US Strategic and Economic Dialogue sought to find areas of mutual interest so that both countries could co-operate on economic, security, environmental and foreign-policy issues. Nothing of substance came out of the meeting, but a "Memorandum of Understanding" was signed to further consider environmental and energy policy, and participants discussed steps needed to rebalance the two economies in the interest of global prosperity (SEHK: 0803, announcements, news) and to avoid destructive protectionism.

Economic policy issues dominated, especially China's concern over the impact of US fiscal deficits and the Federal Reserve's ballooning balance sheet on the future value of the US dollar as the world's key reserve currency. One of China's biggest fears is that the massive increase in US debt obligations over the next decade, and accommodative Fed policy, will undermine the dollar as an international reserve currency.

As the largest holder of US debt, China would suffer large losses if the Fed engineered a policy of inflation to reduce the real value of US debt. Although there is no immediate threat, China is already talking about a new "super-sovereign" reserve currency to replace the dollar.

While leaders of both nations discussed conventional issues, they did not acknowledge the significant policy mistakes on both sides that helped bring about the most serious recession since the 1930s.

Rather than allowing market forces to rebalance their respective economies, both Beijing and Washington are engaging in the very politicisation of investment decisions that is the hallmark of a socialist economy. Unfortunately, little mention was made of that fact during the dialogue. No one seemed concerned about the drift from market principles toward state planning - with the consequent socialisation of risk.

Vice-Premier Wang Qishan did lecture US officials on the need to reduce the growth of government debt and to "balance and properly handle the impact of the dollar's supply" - that is, to avoid inflation. Both sides agreed that any move towards protectionism would severely damage the global economy and should be avoided, and both agreed to work to restore global balances: the US by increasing saving and China by increasing consumption.

The irony is that China's own policies - pegging the yuan to the dollar at an artificially low rate, spurring exports and accumulating large foreign exchange reserves - have allowed the US to live beyond its means and fuelled US federal spending, thus spreading the socialist-market virus.

China's own stimulus programme is creating asset bubbles in the stock and housing markets. Current money and credit growth are not sustainable and could well increase inflationary expectations. The People's Bank of China, like the Fed, needs an "exit" strategy.

Beijing's overriding desire to maintain growth at any cost could end up spoiling the Communist Party's 60th anniversary. There are considerable distortions in China's financial markets. The government-led stimulus programme may lead to short-term growth, but only at the expense of further distorting capital markets and slowing down real reform. The danger is that the dynamic non-state sector will recede while the state sector gains ground.

Non-performing loans at state-owned banks could mushroom, corruption associated with the political allocation of capital could worsen, and inflation could lead to wage and price controls that impede economic and personal freedom. Such setbacks would shift the balance of power further in favour of the party, just as it has shifted to Washington during the current financial crisis.

Indeed, the legacy of the global financial crisis, which was due in large part to government failure, may be the permanent increase in the size and scope of government - both in China and the US.

James A. Dorn is vice-president for academic affairs and a China specialist at the Cato Institute in Washington


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An opportunity to get creative on Iran policy


David Ignatius
Aug 03, 2009           
     
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Thinking about Iran policy these days can make you dizzy, so let's try a simple analogy: the neighbourhood troublemaker has driven his car off the road and is stuck in a ditch. He is gunning his engine but just spinning his wheels. How should we respond?

Personally, I would wait for the dust to settle. I would want that cocky driver to ask for help before throwing him a rescue line. If he needs a tow, he should offer an attractive deal - starting with a promise that he will stop terrorising the neighbourhood.

There's noise from inside the stranded car, too, suggesting a quarrel: maybe someone else - a less reckless driver - will take the wheel. Maybe the cocky driver's friends will abandon him. It's hard to predict what will happen, so the police should be on call, just in case.

What I'm arguing for is an Iran policy of "creative opportunism". The United States should take advantage of the fact that our biggest adversary in the Middle East has just had a political breakdown. President Mahmoud Ahmadinejad's vote-rigging putsch has backfired. Supreme leader Ayatollah Ali Khamenei's attempt to squash protest has only revealed his weakness. In the turmoil, even Mr Ahmadinejad and Ayatollah Khamenei have been squabbling.

If this crisis of legitimacy encourages Iranian leaders to start serious negotiations on curbing their nuclear programme, fine. Ahlan wa sahlan, as the Arabs say: you are most welcome and make us an offer, please. But if, as is more likely, they are too preoccupied for serious bargaining, then we should watch and wait - and, where possible, take advantage. How can the US use this moment of opportunity? Well, let's start with Iran's joyriding passengers, Syria and Hamas. Neither has any natural, abiding affinity with Tehran. Syria is a secular Arab regime whose alliance with the Shiite clerics is a matter of mutual convenience. Hamas' leaders are fundamentalist Sunnis who regard the Iranian mullahs as apostates.

Syria and Hamas have certainly profited from Iran's largesse. But Tehran's reliability as a patron is now open to question, and its friends may want to hedge their bets. It's an ideal time for the US to explore alternatives - through a diplomatic opening with Syria and secret contacts (using Saudi, Egyptian and Syrian channels) with Hamas. Even Hezbollah may be ripe for quiet contact. We are at one of those hinge moments, such as after the 1973 Arab-Israeli war, when bold diplomacy can pay big dividends.

What other opportunities might the West seize? Surely, the best way to weaken Tehran's hardliners would be a breakthrough on a Palestinian state, depriving them of their ideological trump card. And there's the oil card: if the Saudis would agree to increase production and push down prices, Iran would face an economic squeeze that might force political change. Our allies should be creative opportunists, too.

US President Barack Obama has said that if Iran is serious about negotiations, it should respond by the end of September to his overtures for talks. That's fine, but he shouldn't go further. If the Iranians want talks, let them chase the West this time.

There's a lot of talk these days about ticking clocks. But the truth is that, for a change, time is working against the Iranian regime. Every day, its internal political contradictions become more acute.

Ayatollah Khamenei's attempts to put the pieces back together haven't succeeded. Jostling for influence in the Iranian cockpit are Mir Hossein Mousavi, the former prime minister and opposition leader; Ali Akbar Hashemi Rafsanjani, the former president and would-be unifier; and Mohammad Baqer Ghalibaf, the charismatic mayor of Tehran. All have signalled unhappiness with Mr Ahmadinejad and the crackdown.

Iran remains in tumultuous transition - to what, we can't yet say. Meddling on behalf of the opposition would be a mistake, but it would be a worse error, surely, to throw the Iranian regime a lifeline before it has agreed to behave more responsibly.

David Ignatius is a Washington Post columnist


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Fertile present
The world avoided starvation and embraced obesity, thanks to two German scientists

Thomas Hager
Aug 04, 2009           
     
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The recent news that two-thirds of US adults are overweight or obese - and the number continues to grow - brings to mind a question that has bothered me since the 1970s: why aren't we all starving?

It was not that long ago that experts were predicting that our skyrocketing human population would outstrip its food supply, leading directly to mass famine. By now, millions were supposed to be perishing from hunger every year. It was the old doom-and-gloom mathematics of Thomas Malthus at work: population shoots up geometrically while food production lags behind. It makes eminent sense. I grew up with Malthus' ideas, brought up-to-date in apocalyptic books like Paul Ehrlich's The Population Bomb.

But someone appears to have defused the bomb. Instead of mass starvation, we seem to be awash in food. And it's not just the US. Obesity is on the increase in Mexico. Fat-related diabetes is becoming epidemic in India. One in four people in China is overweight, more than 60 million are obese, and the rate of overweight children has increased thirtyfold since 1985. Everywhere you look, from Buffalo to Beijing, you can see ballooning bellies.

Instead of going hungry, humans around the world, on a per capita basis, are eating more calories than ever before.

If you're looking for reasons behind today's obesity epidemic, don't stop with the usual suspects being trotted out by the press: fast food, trans fat, high sugar, low exercise, computer games, strange intestinal bacteria, weird molecules in your blood. They are only bits of the puzzle.

The underlying answer is this: There's a lot of cheap food around. Yes, walk into your local mega-grocery-emporium or just about any food-selling area anywhere in the world and stare the problem in the face. There's inexpensive, high-calorie food piled all over the place.

Somehow we outsmarted Malthus. Food production has not only kept up with population growth but has managed somehow to outstrip it. There are ups and downs from year to year because of the weather, and there are pockets of starvation around the world (due not to a global lack of food, but to a lack of ways to transport it where it's needed). In general, silos are bursting. Tonnes of food gets plowed under the ground because there's so much of it farmers can't get the prices they want. Lots of food means lots of overweight people.

If you like the idea of avoiding mass starvation - and I certainly do - you owe thanks to two groups of scientists: one that gave us the Green Revolution back around the 1980s via strains of hardy, high-yielding grains, and another that figured out how to make bread out of air.

If you're looking for someone to blame for today's era of plenty, look to a couple of German scientists who lived a century ago. They understood that the problem was not a lack of food per se, but a lack of fertiliser - then they figured out how to make endless amounts of fertiliser.

The first component of any fertiliser is nitrogen, and the first of the two German researchers, Fritz Haber, discovered how to work the dangerous, complex chemistry needed to pull nitrogen out of the atmosphere - where it is abundant but useless for fertiliser - and turn it into a substance that can grow plants.

A first demonstration was made 100 years ago. Carl Bosch, a young genius working for a chemical company, quickly ramped up Haber's process to industrial levels. They both won Nobel Prizes.

It ranks among the great ironies of history that these two brilliant men, credited with saving millions from starvation, are also infamous for other work done later: Haber, a German Jew, was a central force in developing poison gas in the first world war (and also performed research that led to the Zyklon B poison gas later used in concentration camps); Bosch, an ardent anti-Nazi, founded the giant chemical company I.G. Farben, which Hitler took over and used to make supplies for the second world war.

Today, huge Haber-Bosch plants around the world pump out hundreds of thousands of tonnes of fertilisers that enrich fields that grow the crops that become the sugars and oils and cattle that are cooked into the noodles and chips, pizza, burritos, snacks and cakes that make us fat.

If you don't think this work important, consider that half the nitrogen in your body is synthetic, a product of a Haber-Bosch factory. Or that without the added food made possible by their discovery, the earth could only support about 4 billion people - at least 2 billion less than today.

Even with a world population that continues to add tens of millions of new mouths every year, given continuing growth in Haber-Bosch fertiliser and a surprising trend towards a worldwide decline in birth rates (if you live about 50 years longer, according to the best estimates, you'll see humanity reach zero population growth), it might be within our grasp to avoid mass starvation forever.

Thomas Hager is author of The Alchemy of Air, a history of the Haber-Bosch discovery. Copyright: Project Syndicate

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Credibility of China's statistics is crucial


LEADER

Aug 06, 2009           
     
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A planned economy can make a truism of the expression "lies, damn lies and statistics". National growth targets tend to become local commands. Ambitious officials are tempted to tweak the figures to make themselves look good. Higher-ups may want to adjust them to arrive at a national figure that reflects a desired rate of growth. Add all these changes together, and the result is national statistics for China that are more a guide to the ebb and flow of economic activity, but not necessarily an accurate snapshot of the facts on the ground.

To be sure, all national statistics include an element of guesswork. China's statisticians would be hard-pressed to keep up with sustained expansion in a complex economy of 1.3 billion people. And economists and analysts who study China have long learned to live with differences between provincial and municipal growth figures and the national gross domestic product. A bit of homework on local mismatches between power inputs and production outputs, and incomes and revenues can throw some light on it.

Arguably, it is not a serious flaw that has detracted from belief in China's phenomenal growth story. But statistics do matter more now in the wake of the global financial meltdown. The world is looking to China's seemingly unstoppable growth momentum to lead economic recovery. As a result, its GDP figures are watched more closely than before, because they have the power to move markets and shape expectations of a global recovery. The credibility of its figures has therefore become very important. This accounts for concern about the wide discrepancy between local government figures showing economic output for the first half of the year of 15.38 trillion yuan (HK$17.45 trillion), and the National Statistics Bureau figure of 13.99 trillion. Flaws in data collection alone are an unlikely explanation and economists do not doubt there has been faking.

This raises a 4 trillion yuan question - how much bang for the yuan is China really getting from a massive stimulus package aimed at reversing its economic slowdown? Is it being spent judiciously and productively to create genuine demand and jobs, given that much of it has been lavished on inefficient state enterprises? The Guangdong party chief is worried that local governments are making repetitive, inefficient fixed-asset investments to artificially inflate GDP. Has the stimulus spending been audited to see that none finds its way into speculation in equities and properties? Reports that educational institutions have had to fake graduate job figures to meet targets do not inspire confidence in positive GDP statistics.

This matters most of all to China itself. The country is in transition from growth for growth's sake, as evidenced by greater emphasis on sustainable development that respects the environment and conserves resources. This makes greater demands on economic management, of which reliable statistics are a vital tool. Even good statistics do not always tell the whole story, or need interpretation. But without them, policymakers are more likely to make flawed assumptions and wrong calls. That is not good either for China's stable economic progress, or for a world in which it now ranks as the third-biggest economy. It is time that Beijing gave the statistics bureau the resources and political support it needs to erase doubts over the credibility of key economic figures.


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Wishful thinking
A year after the Lehman Brothers collapse, policymakers appear still to be in denial

Kenneth Rogoff
Aug 07, 2009           
     
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Next month marks the one year anniversary of the collapse of the venerable American investment bank Lehman Brothers. The fall of Lehman marked the onset of a global recession and financial crisis the likes of which the world has not seen since the Great Depression of the 1930s. After one year, trillions of dollars in public funds, and much soul searching in the world's policy community, have we learned the right lessons? I fear not.

The overwhelming consensus in the policy community is that if only the US government had bailed out Lehman, the whole thing would have been a hiccup and not a heart attack. Famous investors and leading policymakers alike have opined that in our ultra-interconnected global economy, a big financial institution like Lehman can never be allowed to fail. No matter how badly it mismanages its business - Lehman essentially became a real estate holding company totally dependent on a continuing US housing bubble - the creditors of a big financial institution should always be repaid. Otherwise, confidence in the system will collapse, and chaos will follow.

Having reached the epiphany that financial restructuring must be avoided at all costs, the governments of the world have in turn cast a huge safety net over banks (and whole countries in Eastern Europe), woven from taxpayer dollars.

But, the conventional post-mortem on Lehman is wishful thinking. It basically says that no matter how huge the housing bubble, how deep a credit hole the United States (and many other countries) had dug, and how convoluted the global financial system, we could have just grown our way out of trouble. Patch up Lehman, move on, keep drafting off of China's energy, and nothing bad ever need have happened.

The fact is global imbalances in debt and asset prices had been building up to a crescendo for years, and had reached the point where there was no easy way out. The US was showing all the warning signs of a deep financial crisis long in advance of Lehman, as Carmen Reinhart and I document in our forthcoming book This Time is Different: Eight Centuries of Financial Folly.

Housing prices had doubled in a short period, spurring American consumers to drop any thought of saving money. Policymakers had simply let the growth party go on for too long. Drunk with profits, the banking and insurance industry had leveraged itself to the sky. Investment banks had transformed their business in ways their managers and boards clearly did not understand.

It was not just Lehman Brothers. The entire financial system was totally unprepared to deal with the inevitable collapse of the housing and credit bubbles. The system had reached a point where it had to be bailed out and restructured. And there is no realistic political or legal scenario where such a bailout could have been executed without some blood on the streets. Hence, the fall of a large bank or investment bank was inevitable as a catalyst to action.

The problem with letting Lehman go under was not the concept but the execution. The US government should have moved in aggressively to cushion the workout of Lehman's complex derivative book, even if this meant creative legal interpretations or pushing through new laws governing the financial system.

So what is the game plan now? There is talk of regulating the financial sector, but governments fear shaking confidence. There is recognition that the housing bubble collapse has to be absorbed, but no stomach for accepting the years of slow growth in consumption that this will imply.

There is acknowledgement that the US-China trade relationship needs to be rebalanced, but little imagination on how to proceed. Our leaders and policymakers have convinced themselves that for all its flaws, the old system was better than anything we are going to think of, and that simply restoring confidence will fix it all. The right lesson from Lehman should be that the global financial system needs major changes in regulation and governance. The current safety net approach may work in the short term but will ultimately lead to ballooning and unsustainable government debts, particularly in the US and Europe.

Asia may be willing to sponsor the West for now, but not in perpetuity. Eventually Asia will find alternatives, in part by deepening its own debt markets.

Within a few years, Western governments will have to sharply raise taxes, inflate, partially default, or some combination of all three. As painful as it may seem, it would be far better to start bringing fundamentals in line now. Restoring confidence has been helpful and important. But ultimately we need a system of global financial regulation and governance that merits our faith.

Kenneth Rogoff is professor of economics and public policy at Harvard University, and was formerly chief economist at the IMF. Copyright: Project Syndicate


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Water bomb
China controls the source of most major rivers in water-scarce Asia

Brahma Chellaney
Aug 10, 2009           
     
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As China and India gain economic heft, they are drawing ever more international attention at the time of an ongoing global shift of power to Asia. Their underlying strategic dissonance and rivalry, however, usually attracts less notice.

As its power grows, China seems determined to choke off Asian competitors, a tendency reflected in its hardening stance towards India. This includes aggressive patrolling of the disputed Himalayan frontier by the People's Liberation Army, many violations of the line of control separating the two giants, new assertiveness concerning India's northeastern Arunachal Pradesh state - which China claims as its own - and vituperative attacks on India in the state-controlled Chinese media.

The issues that divide India and China, however, extend beyond territorial disputes. Water is becoming a key security issue in Sino-Indian relations and a potential source of enduring discord.

China and India already are water-stressed economies. The spread of irrigated farming and water-intensive industries, together with the demands of a rising middle class, have led to a severe struggle for more water. Indeed, both countries have entered an era of perennial water scarcity, which before long is likely to equal, in terms of per capita availability, the water shortages found in the Middle East.

Rapid economic growth could slow in the face of acute scarcity if demand for water continues to grow at its current frantic pace, turning China and India - both food-exporting countries - into major importers, a development that would accentuate the global food crisis.

Even though India has more arable land than China - 160.5 million hectares compared to 137.1 million hectares - Tibet is the source of most major Indian rivers. The Tibetan plateau's vast glaciers, huge underground springs and high altitude make Tibet the world's largest freshwater repository after the polar icecaps. Indeed, all of Asia's major rivers, except the Ganges, originate in the Tibetan plateau. Even the Ganges' two main tributaries flow in from Tibet.

But China is now pursuing major inter-basin and inter-river water transfer projects on the Tibetan plateau that threaten to reduce international river flows into India and other co-riparian states. Before such projects sow the seeds of water conflict, China ought to build institutionalised, co-operative river-basin arrangements with downstream states.

Upstream dams and irrigation systems help turn water into a political weapon that can be wielded overtly in a war, or subtly in peacetime to show dissatisfaction in with a co-riparian state. Even denial of hydrological data in a critically important season amounts to using water as a political tool.

India's government has been pressing China for transparency, greater hydrological data-sharing, and a commitment not to redirect the natural flow of any river or diminish cross-border water flows. But even a joint expert-level mechanism - set up in 2007 merely for "interaction and co-operation" on hydrological data - has proven of little value.

The most dangerous idea China is contemplating is the northward rerouting of the Brahmaputra river, known as Yarlung Tsangpo to Tibetans, but which China has renamed Yaluzangbu. It is the world's highest river, and also one of the fastest-flowing. Diversion of the Brahmaputra's water to the parched Yellow River is an idea that China does not discuss in public, because the project implies environmental devastation of India's northeastern plains and eastern Bangladesh, and would be akin to a declaration of water war on India and Bangladesh.

Nevertheless, an officially sanctioned book published in 2005, Tibet's Waters Will Save China, championed the northward rerouting of the Brahmaputra. Moreover, the Chinese desire to divert the Brahmaputra by employing "peaceful nuclear explosions" to build an underground tunnel through the Himalayas found expression in the international negotiations in Geneva in the mid-1990s on the Comprehensive Test-Ban Treaty (CTBT). China sought unsuccessfully to exempt peaceful nuclear explosions from the treaty.

The issue now is not whether China will reroute the Brahmaputra, but when. Once authorities complete their feasibility studies and the diversion scheme begins, the project will be presented as a fait accompli. China has identified the bend where the Brahmaputra forms the world's longest and deepest canyon - just before entering India - as the diversion point.

China's ambitions to channel Tibetan waters northward have been whetted by two factors: the completion of the Three Gorges Dam, which, despite the project's glaring environmental pitfalls, China trumpets as the greatest engineering feat since the construction of the Great Wall; and the power of President Hu Jintao , whose background fuses two key elements - water and Tibet. Hu, a hydrologist by training, owes his swift rise in the Communist Party hierarchy to the brutal martial-law crackdown he carried out in Tibet in 1989.

China's hydro-engineering projects and plans are a reminder that Tibet is at the heart of the India-China divide. Although Tibet ceased to be a political buffer when China annexed it nearly six decades ago, it can still become a political bridge between the two nations.

But first, water has to be a source of co-operation, not conflict.

Brahma Chellaney is professor of strategic studies at the Centre for Policy Research in New Delhi. Copyright: Project Syndicate


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How world averted Great Depression II


Paul Krugman
Aug 11, 2009           
     
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So it seems that we aren't going to have a second Great Depression after all. What saved us? The answer, basically, is Big Government.

Just to be clear: The economic situation remains terrible, indeed worse than almost anyone thought possible not long ago. The nation has lost 6.7 million jobs since the recession began. Once you take into account the need to find jobs for a growing working-age population, we're probably around 9 million jobs short of where we should be.

And the job market still hasn't turned around - that slight dip in the measured unemployment rate last month was probably a statistical fluke. We haven't yet reached the point at which things are actually improving; for now, all we have to celebrate are indications that things are getting worse more slowly.

But for all that, the latest flurry of economic reports suggests that the economy has backed up several paces from the edge of the abyss.

A few months ago the possibility of falling into the abyss seemed all too real. The financial panic of late last year was as severe, in some ways, as the banking panic of the early 1930s, and for a while key economic indicators - world trade, world industrial production, even stock prices - were falling as fast as or faster than they did in 1929-30.

But in the 1930s the trend lines just kept heading down. This time, the plunge appears to be ending after just one terrible year.

So what saved us from a full replay of the Great Depression? The answer, almost surely, lies in the very different role played by government. Probably the most important aspect of its role in this crisis isn't what it has done, but what it hasn't done: unlike the private sector, the federal government has not cut spending as income fell.

All of this has helped support the economy in its time of need, in a way that didn't happen back in 1930. As well as having this "automatic" stabilising effect, the government stepped in to rescue the financial sector. You can argue (and I would) that the bailouts of financial firms could and should have been handled better, that taxpayers have paid too much and received too little. Yet it's possible to be unhappy, even angry, about the way the financial bailouts have worked while acknowledging that without them, things would have been far worse.

The point is that this time, unlike in the 1930s, the government didn't take a hands-off attitude while much of the banking system collapsed. And that's another reason we're not living through Great Depression II.

Last and probably least, but by no means trivial, have been the deliberate efforts of the government to pump up the economy. Still, reasonable estimates suggest that around a million more Americans are working now than would have been employed without that plan - a number that will grow over time - and that the stimulus has played a significant role in pulling the economy out of its free fall.

I still worry about the economy. Unemployment could remain high for a very long time. But utter catastrophe no longer seems likely. Big Government, run by people who know its virtues, is the reason why.

Paul Krugman is a New York Times columnist


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An opportunity missed for real economic reform


Larry Elliott
Aug 13, 2009           
     
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House prices are rising. The stock market is bullish. Bonuses are back. An investment vehicle domiciled in the Channel Islands for tax purposes has agreed to take over Friends Provident. Two years to the week since the dawn of the worst slump in 80 years, there is talk of imminent recovery. It was all just a bad dream, and we can now hand the country back to the real estate agents and investment banks because - apart from a million more people unemployed and a further decimation of a shrivelled industrial base - nothing has changed. Normal service can be resumed.

Forgive me, but the euphoria seems a touch premature. Evidence of a return to growth is patchy and tentative. Transactions in the housing market are running at half their normal levels, even after the pick-up of recent months. The Bank of England said last week that it will pump a further £50 billion (HK$638.4 billion) into the economy over the coming months to help persuade banks to raise lending. Companies reporting better-than-expected earnings are only doing so by cutting wage costs; good news for the individual firm, bad news for the economy.

Bank of England governor Mervyn King certainly seems to be taking talk of green shoots with a pinch of salt, which was why the bank topped up its quantitative easing (QE) programme last week. Make no mistake, this is a big gamble by the bank since QE is only effective if an increase in the money supply feeds through into real activity in the economy - through companies staying in business or consumers bringing forward spending. If it doesn't manage that, all QE does is create inflation. The speculative rally in oil and other commodities is a clear warning of what could happen to prices more generally should QE go wrong.

The bank's judgment, though, is that the length and depth of the recession has created so much spare capacity in the economy that the risk of deflation is greater than that of inflation. Without the stimulus provided by ultra-low interest rates and QE, the fear is that rising unemployment, the squeeze of earnings and the loss of wealth from falling house prices would intensify recessionary forces.

The banks are hoarding cash and rebuilding profits decimated by ill-judged investments in fancy derivative products by gouging their customers. Over the last two years, the bank rate has come down from 5.25 per cent to 0.5 per cent, but a two-year fixed mortgage has come down by 1.6 percentage points and a five-year fixed home loan by just 0.5 points. Unsecured loans are more expensive than before the crunch.

But there is a deeper issue here. Even assuming the Bank of England gets it right, all that happens is that we return to a fundamentally flawed model. It is evidence of a deluded nation determined to learn nothing and forget everything from the crisis.

The events of the last two years were a godsend for those who considered Britain to be a structurally dysfunctional economy. It was all there: an over-mighty financial sector that was too big to fail; a manufacturing sector in desperate need of some tender loving care; consumers borrowing against the rising value of their homes because their real incomes were growing only modestly.

The failure of the banks created the perfect conditions for fundamental reform. Instead of an arm's length approach to the failed institutions brought under state control, the government should have used its position as majority shareholder to direct investment, utilising cheap money to end the economy's over-reliance on the City of London by rebuilding the industrial base. When the banks were ready for a return to the private sector, they should have been cut to size so they were not too big to fail.

The preconditions are in place for another global crisis, since the failure to reform the British economy has been mirrored in the US and China. Nothing has been done to tackle the imbalances that led to overproduction in Asia and over-consumption in the Anglo-Saxon countries.

Larry Elliott is the Guardian's economics editor


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A right to schooling, but not to education


Swaminathan S. Anklesaria Aiyar
Aug 14, 2009           
     
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India has just enacted a Right to Education Act, guaranteeing every child in the six to 14 age group the right to free, compulsory education. The new law is essentially socialist: it seeks to ensure that, as far as possible, state governments provide free government schooling to all children. But it also obliges private schools to reserve a quarter of their seats for poor and low-caste children. This could, almost by accident, create the biggest school choice programme in the world, covering 30 million children.

The new law has several flaws. Government teachers cannot be fired, one reason why teacher absenteeism in government schools is chronically high. In one survey by a Harvard economist, a quarter of government teachers were absent on any given day, and only half were teaching. The law does not address teacher accountability. Teacher unions are too powerful, so politicians dare not discipline them.

Currently, millions of children complete school without being able to read simple paragraphs or do simple sums. Yet the act talks only of access to schools. It is concerned wholly with educational inputs, not outcomes. It provides a right to schooling, but not to education.

Children from richer families perform better because they get private tuition in the evening, sometimes from the very teacher who was absent at school in the morning. The new law prohibits government teachers from giving private tuition. This is supposed to induce them to take teaching in school more seriously. Alas, teachers will break this rule with impunity.

The law mandates quality standards and official certification for all private schools, but none for government schools. Government teachers are armed with the appropriate degrees, while many private school teachers are not.

Yet, in the absence of motivation or accountability, teaching in government schools is so pathetic that many poor parents in urban slums send their children to fee-charging private schools rather than free government schools. Often these private slum schools are of low quality, yet poor people find government schools worse.

The new law says all private schools must reserve a quarter of their seats from first grade onwards for neighbourhood children from "socially and educationally disadvantaged classes" - lower Hindu castes and poor people, who are well over half the population. For these children, the government will reimburse private schools.

This will not be the standard voucher system found in other countries. Indeed, many politicians hate the very word "voucher", and view the 25 per cent reservation as a way of hammering elite schools rather than empowering students through school choice.

Elite private schools fear the system will impose a huge and unwarranted tax on them because the voucher will not cover their actual costs. They will probably appeal to the courts against the new law's reimbursement provisions, and it remains to be seen what view the courts take.

The author is a research fellow at The Cato Institute's Centre for Global Liberty and Prosperity (SEHK: 0803, announcements, news)

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Nuclear supply crunch bodes ill for cancer fight


Michael Richardson
Aug 17, 2009           
     
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Leading cancer control experts met in Vienna recently to discuss strategies for fighting the growing cancer burden in Asia and the Pacific.

Cancer, once considered to be mainly an affliction of the rich, is fast becoming a major global health problem. Specialists estimate that by 2020 there will be about 15 million new cancer cases a year, the majority of them in developing countries. Asia alone can expect up to 5 million cancer deaths annually by then.

The Vienna meeting was organised by two UN agencies - the International Atomic Energy Agency (which is responsible for all forms of nuclear energy, including its use in medicine) and the World Health Organisation. The aim was to enable cancer experts to share their knowledge with health professionals developing and implementing cancer management strategies in low and middle-income nations in Asia.

Yet even as methods for fighting cancer improve, a global shortage in the supply of the main medical radioisotope is threatening this success, forcing doctors to ration supplies and prioritise patient care by delaying treatment of less urgent cases.

Radioisotopes, tiny radioactive particles that can be injected or ingested, are the backbone of nuclear medicine. More than 100,000 hospitals and specialised cancer clinics worldwide, including those in Hong Kong and other parts of China, routinely use them.

Radiotherapy treats some conditions, especially virulent forms of cancer, using radiation to weaken or destroy targeted cells. But about 90 per cent of nuclear medical procedures involve diagnoses of illnesses such as heart disease and cancer with radioactive tracers that emit gamma rays. These rays can be detected and "photographed" by imaging equipment, providing far more information than X-rays or ultrasound.

The low energy gamma rays easily escape the body, keeping the radiation dose to a safe level. The most common radioisotope used in diagnosis is technetium-99m, with some 30 million procedures per year, or about 80 per cent of the total. The technetium is itself derived from the decay of another isotope, molybdenum-99. The latter is produced most efficiently and cheaply in nuclear research reactors. There are 280 of these reactors around the world. But most are designed to do other things and cannot be easily adapted to make molybdenum.

At present, just four reactors - in Canada, the Netherlands, France and South Africa - produce 95 per cent of the world's molybdenum-99 for technetium generators supplied to hospitals and clinics. All the reactors are more than 40 years old, nearing the end of their lives and vulnerable to unplanned shutdowns. One of the oldest, at Chalk River near Ottawa, closed abruptly for repairs in May. The reactor, the source of 40 per cent of the world's molybdenum-99, is not expected to return to service before the end of the year.

The second biggest source (about 25 per cent) is a research reactor at Petten in the Netherlands. It is also in need of major repair. Shutdowns of reactors producing molybdenum have become all too frequent. Continuous supply is vital since it is impossible to stockpile the molybdenum or technetium isotopes. They have a so-called half-life of only 67 hours, meaning that they lose half their radioactive energy in less than three days - and half of what's left in another 67 hours. As a result, these medical isotopes have to be delivered by express air and land transport.

Early this year, the IAEA met to discuss the fragility in the global technetium supply chain. But high capital costs, low profit margins and exacting licensing processes make it hard to establish new facilities without incentives or subsidies - which many governments are reluctant to approve as they battle recession.

Human ingenuity may find a way around this modern medical conundrum. But no solution is in sight and without it, patient care will suffer.

Michael Richardson is a visiting senior research fellow at the Institute of Southeast Asian Studies


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Failing the nine steps to effective policymaking


Joseph Wong
Aug 19, 2009           
     
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The government has made it clear that the pilot scheme to conduct drug tests on secondary-school students in Tai Po will proceed in December, despite the concerns of various groups. But something must have gone wrong in the policymaking process when those who expressed concern included Bishop John Tong Hon, of the Catholic Church in Hong Kong, which is a large school sponsor, and the privacy commissioner for personal data, Roderick Woo Bun.

As the chief executive has likened the fight against youth drug abuse to an all-out war involving the whole community, this is a timely reminder that the government should get its act together and do a better job. Our government can learn some useful lessons from Britain.

As part of its Modernising Government initiative, launched in 1999, the British government developed a professional policymaking model for officials that features nine key principles. According to the model, a policy under development:


clearly defines outcomes, taking into account the likely effect and impact of the policy in the future five to 10 years and beyond;

takes full account of the national and international situation;

takes a holistic view looking beyond institutional boundaries to the government's strategic objectives;

is flexible and innovative, willing to question established ways of dealing with things and encourage new and creative ideas;

uses the best available evidence from a wide range of sources;

constantly reviews existing policy to ensure it is really dealing with problems it was designed to solve without having unintended detrimental effects elsewhere;

is fair to all people directly or indirectly affected by it and takes account of its impact more generally;

involves all key stakeholders at an early stage and throughout its development; and

learns from experience what works and what doesn't through systematic evaluation.
If we apply the above model to the school drug testing scheme, there are some glaring omissions. For example, has the government clearly defined the outcomes of the pilot scheme? Why did it not involve the privacy commissioner, an important stakeholder, in the early consultation? Some international schools in Hong Kong have been conducting drug tests on students for many years. Why did the government not study their experience more closely and solicit their help?

As the chief executive has said, drug testing is only one aspect of the war against drugs. Other areas include mobilising the whole community, garnering support of various stakeholders in the districts, enforcement against drug traffickers, and rehabilitation of drug takers. The adverse public reaction towards school drug testing will be a blessing in disguise if it helps officials improve and fine-tune the details of the Tai Po scheme.

As a former civil servant and minister, I readily accept that, in policymaking, the government faces many constraints. Hence, the British model remains a reference. But increasing globalisation and civil engagement demand that governments adopt a more systematic and professional approach in policymaking to win public support and achieve the desired results.

Based on overseas experience, our war against youth drug abuse will have to be fought on many fronts with the full support of the community. Innovative ideas, systematic evaluations and continuous improvements should become an integral part of the strategy that may stretch on for years.

When the chief executive delivers his next policy address, in October, he should lay out a comprehensive plan with specific proposals and clearly defined outcomes that have taken into account the views and aspirations of all stakeholders.

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


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Law for the times
Imposing artificial 'stability' at the expense of justice can no longer work for a changing China

Jerome A. Cohen
Aug 20, 2009           
     
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Only enlightened leadership will move China towards a rule of law. Bottom-up cries for justice and independent courts increase daily. Will the top eventually respond with structural reform rather than dictatorial repression? Can China's deeply conservative political elite, so determined to impose artificial "stability" on a dynamic nation, produce leaders with the vision and vigour to press for a legal system in keeping with the country's economic and social progress and its world stature?

The Communist Party's current attack on human rights lawyers and law-reforming non-governmental organisations exemplifies the problem. Lawyers lead the battle to implement the constitutional rights and statutory protections that the party has promulgated in its quest for legitimacy. The battle has become increasingly intense as the party seeks to preserve its monopoly of power against multiple challengers who have been disappointed by their inability to obtain relief from the truncated, authoritarian and inadequate legal system established by Deng Xiaoping after the Cultural Revolution.

Activist lawyers have thus become the battle's first casualties. Yet they are closer to the people than party officials and represent growing popular demands for justice and for a court system that is honest, fair and competent, untainted by corruption, political instructions, local protectionism and personal connections. Party leaders, however, refuse to tolerate the development of an autonomous legal profession and impartial courts. Instead, they have resurrected the "mass line" of the pre-1949 communist "liberated areas" that glorified political justice.

Plainly, the legal institutions and "spirit" of rural, revolutionary China seven decades ago cannot respond to today's demands or those of economic development and international co-operation. China now needs leaders who can take on the huge task of systemic legal reform with the same dynamism that former premier Zhu Rongji devoted to economic modernisation. Is it far-fetched to think such leaders might appear?

Chairman Mao Zedong knew little about law and cared less. Deng understood a legal system's importance to economic development but believed in law under government rather than government under law. Neither faced the sophisticated demands of the 21st century. Vice-President Xi Jinping and Vice-Premier Li Keqiang , slated to assume the nation's helm in 2012, are well-educated and experienced administrators capable of appreciating the benefits that rule of law can confer on a changing China. Might they undertake this historic task?

The recently published memoir of the late premier and party general secretary Zhao Ziyang suggests that, had he not been toppled by the 1989 Tiananmen tragedy, he might have done the job. During the 1986-89 period, there were public hints that Zhao's hopes to separate the party from daily government administration included plans to eliminate party interference with judicial decision-making. Zhao's memoir indicates how far his thinking had evolved.

Zhao came to see that economic reform could not be sustained without political reform. Although he did not then wish to end the party's monopoly on power, he thought that "its method of governing had to change". As he told the then-Soviet president, Mikhail Gorbachev, even socialist countries should be governed not by "rule by men" but by "rule of law". Moreover, he thought that legislation should be enacted to gradually implement the rights enshrined in China's constitution, including media freedom - the handmaiden of the rule of law.

Zhao saw that an independent judiciary was essential. Without it, he wrote, "the courts could not judge a case with a disinterested attitude". Yet Zhao was stunned, even before the June 4 massacre, at the enormous opposition to such reform at every level of party leadership.

After his fall, Zhao's endless, lawless detention radicalised his views. He concluded that, without a multiparty, democratic, parliamentary system that featured an independent judiciary, China could never have a healthy market economy, curb corruption, reduce the gap between rich and poor, and meet popular demands for reform.

Zhao's detention also showed him how arbitrary the administration of justice could be, even for the nation's highest officials. No legal process was ever applied to him, nor did the party elite follow party procedures in punishing him. Their accusations were factually distorted, and they decided his case in secret and without a fair hearing. Formal investigation of the accusations was never completed, and party officials refused to announce their decision and punishment even within party circles. They frequently lied to the public about his situation during the 16 years before his death, denying that he was under house arrest.

Zhao's fate may well deter would-be law reformers among the leadership. But unless someone steps forward, the very instability that present leaders fear is sure to intensify. To paraphrase Mao: "Sailing the seas depends upon the helmsman."

Jerome A. Cohen is co-director of NYU's US-Asia Law Institute and adjunct senior fellow at the Council on Foreign Relations


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Distant shores
Few cities can boast a harbour as beautiful as Hong Kong's, or a government as clueless about developing it

Stephen Vines
Aug 21, 2009           
     
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No right-thinking person develops a habit of saying nice things about the Singapore government. But, when it comes to making the best of limited urban resources, the Singaporeans leave the Hong Kong government trailing to an embarrassing degree.

A recent visit to the Singapore River, in truth little more than a glorified ditch in some places, showed what can be done with imagination and determination.

The banks of the river have been transformed into a truly wonderful area filled with life, riverside cafes and bars, gardens and a broad promenade for walking, exercising or whatever. People flock to this area because it is so darned compelling. I could hardly keep away from the river, appreciating what had been created and, in equal parts, depressed by the massive contrast with Hong Kong's harbourside.

How can it be that one of the world's great port cities with a truly spectacular harbour, from which Hong Kong takes its name, so completely fails to take advantage of this fantastic resource?

The question is hardly original and has been addressed by both pressure groups and an official committee that advises the government on waterfront planning. This committee now wants more power to get things done and to find a way to plough through the inertia of the 12 government and quasi-government bureaucracies that have responsibility for the harbourfront.

To gauge the demand for harbourside activities, you need only visit the dismally tacky waterfront promenade in Tsim Sha Tsui, which is jam-packed with people even though there is barely anywhere to eat or drink in the open air, no more than a few struggling pieces of vegetation and a collection of insultingly awful statues of Chinese performers who surely deserve better.

Yet, for those wanting to be beside the harbour, there are few alternatives. True, there are some patches of development in a number of places, a dog-walking park, a bit of promenade attached to skyscrapers in Hung Hom and, out towards Western, a few bits of road that nestle up to the harbour in an interesting way. (I am loath to mention the latter because no redevelopment has taken place and I fear being held responsible for inciting the bureaucrats to engage in another act of official vandalism).

The activists, who have done so much to highlight the desecration of the harbourside, and have been constructive in offering alternative plans for development, can reel off the list of excuses for inaction with barely a prompt.

They have seen the buck passed from department to department, they have been solemnly assured that the government is every bit as concerned as themselves but hopes that they will understand that progress requires bigger and better roads, bigger and better palaces to house the bureaucrats and that, most unfortunately, all this needs to be done alongside the harbour.

But the public is not fooled, which explains the extraordinary and spontaneous protest that greeted the destruction of the Star Ferry terminal. And it is confirmed by every single opinion poll affirming a yearning for a harbourfront development that stretches along the entire harbour and contains the vibrancy of alfresco dining, gardens and other facilities that would make this a truly special place for the public.

The bureaucrats simply don't get it. They thought that somehow the heritage of the Star Ferry pier could be preserved by shifting the site along the harbour and creating a faux Victorian-style edifice in an inconvenient spot. Predictably, the plan has been a dismal failure.

Five years ago, the Harbourfront Enhancement Committee was established. It has now finished its latest raft of recommendations. Lamentably, only one thing can confidently be predicted and that is further delay in seizing the initiative to start transforming the harbour into a living area truly appreciated by the public.

It is unfair to assert that the bureaucrats, as individuals, are intent on doing their worst. The problem is a system of government which is impervious to the wisdom of the public and unable to connect up its fragmented departments.

Stephen Vines is a Hong Kong-based journalist and entrepreneur


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Boom and burst
Don't be fooled by false signs of economic recovery. It's just the lull before the storm

Andy Xie
Aug 24, 2009           
     
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The A-share market is collapsing again, like many times before. It takes numerous government policies and "expert" opinions to entice ignorant retail investors into the market but just a few days to send them packing. As greed has the upper hand in Chinese society, the same story repeats itself time and again.

A stock market bubble is a negative-sum game. It leads to distortion in resource allocation and, hence, net losses. The redistribution of the remainder, moreover, isn't entirely random. The government, of course, always wins. It pockets stamp duty revenue and the proceeds of initial public offerings of state-owned enterprises in cash. And, the listed companies seldom pay dividends.

The truly random part for the redistribution among speculators is probably 50 cents on the dollar. The odds are quite similar to that from playing the lottery. Every stock market cycle makes Chinese people poorer. The system takes advantage of their opportunism and credulity to collect money for the government and to enrich the few.

I am not sure this bubble that began six months ago is truly over. The trigger for the current selling was the tightening of lending policy. Bank lending grew marginally in July. On the ground, loan sharks are again thriving, indicating that the banks are indeed tightening. Like before, government officials will speak to boost market sentiment. They might influence government-related funds to buy. "Experts" will offer opinions to fool the people again. Their actions might revive the market temporarily next month, but the rebound won't reclaim the high of August 4.

This bubble will truly burst in the fourth quarter when the economy shows signs of slowing again. Land prices will start to decline, which is of more concern than the collapse of the stock market, as local governments depend on land sales for revenue. The present economic "recovery" began in February as inventories were restocked and was pushed up by the spillover from the asset market revival. These two factors cannot be sustained beyond the third quarter. When the market sees the second dip looming, panic will be more intense and thorough.

The US will enter this second dip in the first quarter of next year. Its economic recovery in the second half of this year is being driven by inventory restocking and fiscal stimulus.

However, US households have lost their love for borrow-and-spend for good. American household demand won't pick up when the temporary growth factors run out of steam. By the middle of the second quarter next year, most of the world will have entered the second dip. But, by then, financial markets will have collapsed.

China's A-share market leads all the other markets in this cycle. Even though central banks around the world have kept interest rates low, the financial crisis has kept most banks from lending. Only Chinese banks have lent massively. That liquidity inflated the mainland stock market first, then commodity markets and property market last. Stock markets around the world are now following the A-share market down.

By next spring, another stimulus story, involving even bigger sums, will surface. "Experts" will offer opinions again on its potency. After a month or two, people will be at it again. Such market movements are bear-market bounces. Every bounce will peak lower than the previous one. The reason that such bear-market bounces repeat is the US Federal Reserve's low interest rate.

The final crash will come when the Fed raises the interest rate to 5 per cent or more. Most think that when the Fed does this, the global economy will be strong and, hence, exports would do well and bring in money to keep up asset markets. Unfortunately, this is not how our story will end this time. The growth model of the past two decades - Americans borrow and spend; Chinese lend and export - is broken for good. Policymakers have been busy stimulating, rather than reforming, in desperate attempts to bring growth back. The massive increase in money supplies around the world will spur inflation through commodity-market speculation and inflation expectations in wage setting. We are not in the midst of a new boom. We are at the last stage of the Greenspan bubble. It ends with stagflation.

Hong Kong's asset markets are most sensitive to the Fed's policy due to the currency peg to the US dollar. But, in every cycle, stories abound about mysterious mainlanders arriving with bags of cash. Today, Hong Kong's property agents are known to spirit mainland-looking men, with small leather bags tucked under their arms, to West Kowloon to view flats. Such stories in the past of mainlanders paying ridiculous prices for Hong Kong flats usually involved buyers from the northeast. In this round, Hunan people have surfaced as the highest bidders. The reason is, I think, that Hunan people sound even more mysterious. But, despite all this talk, the driving force for Hong Kong's property market is the Fed's interest rate policy.

Punters in Hong Kong view the short-term interest rate as the cost of capital. It is currently close to zero. When the cost of capital is zero, asset prices are infinite in theory. At least in this environment, asset prices are about story-telling. This is why, even though Hong Kong's economy has contracted substantially, its property prices have surged. Of course, the short-term interest rate isn't the cost of capital; the long-term interest rate is. Its absence turns Hong Kong into a futile ground for speculation, where asset prices increase more on the way up and decrease more on the way down.

When the Fed raises the interest rate, probably next year, Hong Kong's property market will collapse. When the Fed's policy rate reaches 5 per cent, probably in 2011, Hong Kong's property prices will be 50 per cent lower.

Andy Xie is an independent economist


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The mainland may have to get back on its bike


LEADER

Aug 25, 2009           
     
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The mainland has the perfect ingredients for efficient public transport: many large cities with high population densities. Ideally, investing in bus and rail systems should pay off handsomely. Yet authorities are insisting on pouring resources into the already massive car industry, and generous incentives mean that cars are cheap to buy. Consequently, roads are day by day becoming ever more choked by traffic, and the pall of pollution from exhaust fumes is worsening.

Governments are in a bind. Roads cannot be built fast enough to keep up with vehicle numbers. Subways and elevated rail networks take time to plan and build. Outright bans are, in the absence of an alternative, not a solution.

The search for efficient and non-polluting transport that can be quickly put in place has been made a priority. Guangzhou and Shenzhen several years ago determined that motorbikes were too noisy and dirty. A Guangzhou lawmaker has stirred debate by suggesting that people turn to bicycles. It is surely the irony of all ironies that a nation that for three decades has so successfully pushed bicycles off the streets in the name of progress would even consider a return to pedal power.

Conflicting interests are difficult for any government to deal with. In the mainland's case, it involves balancing a policy of using vehicle production to boost industrial growth with ensuring that cities are liveable and function properly. The car industry is the catalyst for a plethora of spin-off industries that boost job creation, meet consumer demand and lay the groundwork for export markets. But cities are where factories, offices and workers are located and they need to be efficient and safe.

Without concerted long-term planning, there will always be an unhappy meeting of the two. Road-pricing schemes, higher fuel emission standards and transport infrastructure are the obvious way forward. But such measures require discussion, planning and time to implement. In the circumstances, with air pollution and traffic woes becoming ever more pressing problems, turning back the clock to the days when the bicycle was king on the mainland may, for now, be the best idea.


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An America more like China, and vice versa


LEADER

Aug 26, 2009           
     
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The Hollywood hit Confessions of a Shopaholic tells the story of a shopping addict who finds love and learns frugality in these economically trying times. It has an uplifting moral for American consumers who suddenly discover the joy and virtue of thrift.

But the comedy may turn out to be a horror show for everyone else. For if Americans have turned their backs on the greatest shopping binge the world has known, where are exporting countries such as Japan, China and Germany going to sell their products?

Economists and policymakers have long recognised the profound imbalances in the world economy, even before the current crisis. The global recession has forced painful readjustments, for example, by forcing Americans to save more and Chinese to boost domestic spending. The current account surpluses of high-saving and export-oriented nations have all been shrinking while America's current account deficit is falling. There is, however, no guarantee this will continue.

The promised land of a sustained recovery around the world is one of rebalanced growth based on private demand, which replaces government stimulus or spending. But to get there, a number of things have to happen, such as continuing the narrowing of the current account gap between the high savers and the reformed big spenders.

One reason why global stock markets, led by Shanghai, fell out of bed at the beginning of last week was because of recurrent doubts about the strength of the economic recovery and the adequacy of government responses around the world. Wall Street took a plunge because the numbers for consumer confidence were not picking up as strongly as predicted. Shanghai was worried that Chinese bank lending would be curbed. Many investors, apparently, were still hoping for a return to the past and for the party to resume.

Later in the week, the bulls regained lost ground. They point to figures showing Japan, France and Germany have returned to growth. China's output grew at a spectacular annualised rate of 16 per cent from April to June. US Federal Reserve chairman Ben Bernanke made his most optimistic assessment on the US economy on Friday, helping to send the Dow Jones index up more than 155 points. But unless the major economies are truly committed to making the changes that are necessary to reorient themselves, the world's recovery rests on fragile ground. The current crop of green shoots needs to be sustained and nourished by more than just government-induced liquidity.

Key policymakers recognise what they need to do, but it is not clear they will succeed. White House economics director Larry Summers recently said the US economy needed to become more export-oriented rather than consumption-based.

Beijing is building social safety nets in education, health care and housing so ordinary households can spend more rather than save for a rainy day. The jury is still out on whether Japan and Germany - or for that matter, China - intend to revamp their export-oriented growth strategies.

In the best economic scenario, America would be more like China and China more like America. Whether or not that will ever come to pass is difficult to predict. Perhaps filmmakers from high savers like Germany and China should jointly produce another comedy, to be titled Confessions of a Workaholic, about a hero who learns to produce less and shop more.


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Health care where people are treated like animals


Nicholas Kristof
Aug 28, 2009           
     
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Opponents suggest that a US "government takeover" of health care will be a milestone on the road to "socialised medicine" and, when he hears those terms, Wendell Potter cringes. He's embarrassed that opponents are using a playbook that he helped devise. "Over the years, I helped craft this messaging and deliver it," he noted.

Mr Potter was an executive in the health insurance industry for nearly 20 years before his conscience got the better of him. He flew in corporate jets to industry meetings to plan how to block health reform, he says. He rode in limousines to confabs to concoct messaging to scare the public about reform. But, in his heart, he began to have doubts as the business model for insurance evolved in recent years from spreading risk to dumping the risky.

Then, in 2007, Mr Potter attended a premiere of Sicko, Michael Moore's excoriating film about the US health care system. Mr Potter was taking notes so that he could prepare a propaganda counterblast - but he found himself agreeing with a great deal of the film.

A month later, he was back home in Tennessee, visiting his parents, and dropped in on a three-day charity programme at a county fairground to provide medical care for patients who could not afford doctors. Long lines of people were waiting in the rain, and patients were being examined and treated in public, in stalls intended for livestock.

"It was a life-changing event to witness that," he remembers. Increasingly, he despised himself for helping block health reforms. Mr Potter loved his job and perks. But, at 56, he left global health service company Cigna last year.

This year, he went public, testifying before a Senate committee investigating the insurance industry.

Mr Potter says he liked his colleagues and bosses in the insurance industry, and respected them. They are not evil. But he adds that they are removed from the consequences of their decisions, as he was, and are obsessed with sustaining the company's stock price - which means paying fewer medical bills.

One way to do that is to deny requests for expensive procedures. A second is "rescission" - seizing upon a technicality to cancel the policy of someone who has been paying premiums and finally gets cancer or some other expensive disease. A congressional investigation found that three insurers used this technique to cancel more than 20,000 policies over five years, saving the companies US$300 million in claims.

Insurers encourage this approach through performance evaluations. One employee earned a perfect evaluation score after dropping thousands of policyholders who faced nearly US$10 million in claims.

Mr Potter notes that a third tactic is for insurers to raise premiums for a small business astronomically after an employee is found to have an illness that is very expensive to treat. The business is forced to drop coverage for all its staff or go elsewhere.

All this is monstrous, and it negates the entire point of insurance, which is to spread risk.

The insurers are open to one kind of reform - universal coverage through mandates and subsidies, to give them more customers and profits. But they don't want the reforms that will most help patients, such as a public insurance option, enforced competition and tighter regulation.

Mr Potter argues that much tougher regulation is essential, and that a robust public option is an essential part of any health reform.

The US is at a turning point. Universal health coverage has been proposed for nearly a century. Yet, each time, it has been defeated in part by fear-mongering industry lobbyists. That may happen this time - unless the Obama administration and Congress defeat these manipulative special interests. What's un-American isn't a greater government role in health care but an existing system in which Americans without insurance get health care in livestock pens.

Nicholas Kristof is a New York Times columnist


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Slumbering US wakes up to a headless Asia


Richard Halloran
Aug 31, 2009           
     
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A recent gathering of Asian and US diplomats, economists and scholars in Honolulu came to the surprising conclusion that no Asian nation was willing or able to assume leadership in Asia despite the economic and political progress of recent decades.

The Asian and American "Asia hands" agreed that China was not ready, Japan was not willing, India was just emerging onto the world stage, and the United States was preoccupied with Afghanistan, the Middle East and the economy.

Moreover, Asian international organisations, such as the Association of Southeast Asian Nations, have so far shown themselves to be mostly talk shops.

Most of those in the conference asserted that peace and prosperity (SEHK: 0803, announcements, news) in Asia would be best served by a balance of power, especially between China and the US.

No one suggested that Beijing and Washington take joint control over Asia, but all agreed that armed conflict between the two would be disastrous.

This consensus is surprising because a widening view among Asian leaders asserts that power is shifting from West to East.

The Asians and Americans in Honolulu met in a senior policy seminar at the East-West Centre, a research and education organisation funded largely by the US Congress. Under the conference rules, speakers and those who took part in the discussion cannot be identified, supposedly to encourage candour.

On China, one Asian said: "China is not oriented towards foreign policy but is obsessed with domestic issues, somewhat like the US."

China's first major venture into international relations, leading the six-party talks to persuade North Korea to give up its nuclear weapons, has gone nowhere in six years. Internal dissension was underscored with uprisings in Tibet last year and in Xinjiang this year.

Japan, still wrapped in the passive cocoon into which it retreated after the devastating defeat of the second world war, has been constrained by its divisive politics.

As a potential leader, India was barely mentioned. "India is in the equation for the first time," said an American, lamenting the lack of attention to India.

A military officer noted that relations between India's military forces and those of the US had expanded. "India," he said, "is getting out and about."

Some Asians and Americans argued that the US was declining in power, with its forces spread thin around the world and a troubled economy at home.

Others disagreed. "Are we seeing the twilight of the US in Asia?" one American asked. "No, we are not withdrawing."

Several speakers contended that the administration of George W. Bush had neglected Asia while US President Barack Obama was seeking to reverse that perception.

"America has been like Rip Van Winkle, sleeping under a tree," an American sceptic said. "Now he's awake but we have to see what he actually does."

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


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Hub hubris
Grand visions for new engines of growth go back a long way. Is Hong Kong ready to get things moving

Joseph Wong
Sep 02, 2009           
     
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Chief Executive Donald Tsang Yam-kuen has started his consultation on this year's policy address and has made it clear that the government aims to develop the six industries recommended by the Task Force on Economic Challenges that would sustain Hong Kong's long-term growth as a knowledge-based economy.

The search for new engines of growth outside the traditional pillar industries of financial services, trade and logistics, tourism and professional services is not new. In his 1998 policy address, former chief executive Tung Chee-hwa referred to the report of the former Commission on Innovation and Technology, chaired by Professor Tien Chang-lin, and laid out his vision for Hong Kong to become a place of many centres: for example, a world centre for design and fashion, health food and Chinese medicine, or a regional centre for multimedia-based information and entertainment, or for professional and technological talent and services.

The government has since set up a permanent Innovation and Technology Commission, invested in Cyberport and set aside billions of dollars in applied research and technology. While we have seen progress in a number of areas, it is fair to say that we have yet to realise the vision set by the former chief executive; and Hong Kong lags behind places like South Korea in turning innovation and technology into new drivers for economic growth.

Ten years later, the government continues to identify innovation and technology as one of the six industries with high potential. The chief executive said he would "actively explore the possibility of new financial or tax incentives to encourage the private sector to increase investment in research and development". Many governments, such as Taiwan's, use fiscal incentives and outright subsidies to support the development of new industries. But the Hong Kong government has always held on to the principle of "small government, big market". Whether this year's policy address will unveil a major shift in the economic policy and mark the beginning of substantial and active government intervention in our economy is something we should all watch and debate.

But that is not denying the importance of government support in nourishing new industries, such as education and medical services. It is true that we have achieved progress in these two areas: we have the largest number of international schools of any city and our top universities are among the best in the region. We have a world-class medical profession and our hygiene and regulatory regime has withstood the most rigorous tests brought about by severe acute respiratory syndrome and, more recently, swine flu.

But both areas have their share of problems. Despite the rapid development of tertiary education, only 18 per cent of our secondary-school leavers can enter university, the lowest percentage among developed economies. Apart from several thousand mainland students, we have only about 200 foreigners studying in our undergraduate programmes, making our universities look more provincial than international. Whether the two earmarked sites will be developed to meet the demand of local students or to attract foreign ones will raise the fundamental issue of balancing the social needs of providing more tertiary places for our students with the economic benefit of exporting our educational services - something Australia has been doing for many years.

For medical services, reserving four sites for the development of private hospitals is a step in the right direction. But we also need to tackle such policy issues as the respective roles of public and private hospitals, the regulation of medical fees and services, and the whole unresolved question of health care financing for our own people.

The government has also outlined the possible development of three other industries: environmental industries, cultural and creative industries, and testing and certification. Only the last one is specific - the government will set up a Council of Testing and Certification in three months' time and the council will draw up a three-year market-oriented development plan within six months after its establishment.

On environmental policy, the government will have to do much more than stopping the purchase of incandescent light bulbs to turn Hong Kong into a green city with economic opportunities. On cultural and creative industries, the CreateHK office that the government set up only a few months ago has yet to produce results.

Our chief executive has announced a grand plan to propel Hong Kong in a new direction of economic growth. He will have to give us the details in his policy address.

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


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Don't repeat the folly of Iraq's war in Iran


LEADER

Sep 03, 2009           
     
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Western nations are increasing the heat on Iran over its nuclear programme. They are threatening tougher sanctions if it does not take up the offer of talks. American and Israeli officials have gone a step further, hinting that military strikes are not out of the question. Given the lesson of Iraq's alleged weapons of mass destruction, now is the time for caution, not hyperbole.

Powerful lobbying groups are driving the discussion. They claim Iran's centrifuge cascades are less about processing uranium for electricity than making weapons. Teheran vehemently denies the allegations. Yet it is not being transparent - restricting the access of inspectors to its nuclear facilities and setting conditions on talks.

Fresh debate has been stirred by the UN's nuclear watchdog, the International Atomic Energy Agency, which has circulated a report outlining Iran's technical progress and compliance with UN resolutions and the nuclear Non-Proliferation Treaty. The UN Security Council's five members and Germany are meeting to weigh options. US President Barack Obama and allied European leaders have given Iran until the end of the month to accept talks on suspending its nuclear work - or face unspecified consequences. Pressure is mounting to put the issue high on the agenda of the upcoming G20 summit in Pittsburgh.

The US-led war on Iraq was originally justified with intelligence on the country's nuclear, chemical and biological weapons, which proved to be unfounded. It was a costly error, financially and in terms of innocent lives lost. An attack on Iran could well lead to the same consequences. As in Iraq, sanctions will harm citizens, not leaders. Outgoing IAEA chief Dr Mohamed ElBaradei said on Tuesday the threat from Iran was "hyped"; there was no evidence that the nation would soon have nuclear weapons. He has been criticised by Tehran's opponents for being "soft". Their judgment is wrong: a cautious approach towards Iran is needed. Talks are the only way forward. Negotiators have to base their position on proven facts, not suppositions and politically motivated claims.


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Much to be done on domestic helpers' rights


LEADER

Sep 04, 2009           
     
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Malaysia is finally giving rights to its foreign domestic workers. Horrific cases of abuse by employers have prompted an agreement with Indonesia to give maids a day off each week, the right to hold passports and a minimum wage. Helpers from other countries are not covered and the high incidence of mistreatment is not tackled, but the decision is a welcome starting point. It is a reminder to other Asian governments that they must do more to improve the conditions of migrant workers.

Hong Kong prides itself on being the region's leader in guaranteeing rights to maids. The rules that Malaysia will be introducing were put in place here more than two decades ago. Authorities said on Wednesday that benefits were being further improved with the raising of the food allowance from HK$300 a month to HK$740. Such requirements still fall far short of those Hong Kong should set for itself as a developed territory.

Too many maids are being underpaid and mistreated. Rules that favour bosses make them fearful of reporting abuse. Unlike other foreign workers, they cannot qualify for residency.

Of greatest concern is the lack of respect some employers have for maids. Dozens of cases of physical, sexual and mental abuse are reported in Hong Kong each year. In Malaysia, the numbers run into the thousands. There have been scores of deaths in Singapore over the past five years, most put down to accidents and suicide.

Canada, in contrast, sets some of the world's most generous standards. Domestic helpers there are assured a minimum wage based on an eight-hour working day, privacy when off duty and citizenship after two years of employment. We are unlikely to see the adoption of similar measures in Asia any time soon. But helpers should not be made to feel like second-class citizens.

Malaysia is trying to change perceptions. It has much work to do before maids are given the rights they deserve. Singapore should follow by giving them regular rest days. Hong Kong and the region as a whole have to do their utmost to treat maids fairly.


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Compromises render drug tests all but useless


Philip Yeung
Sep 07, 2009           
     
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By caving in to discordant voices from the misguided, the government has doomed the drug-testing programme for students to early failure.

The same tiresome buzz words are being dragged into this muddled debate: a "labelling" effect on students who test positive and "respect for privacy". Students on the straight and narrow have nothing to fear, but those who stray will use every known tactic to dodge detection.

Making the test programme entirely voluntary is self-defeating. What drug-abusing students would voluntarily step forward to submit themselves to the risk of detection? What do we do if no student volunteers? While police involvement may not be desirable, compelling addicted students to join an intervention programme should be non- negotiable. Otherwise, all we have is a totally toothless programme.

I don't hear any discussion of the nitty-gritty of the test programme. Don't they know that using hair samples is the best way to go? The presence of drugs is apparently traceable in the human hair for up to 90 days, while it is only detectable in urine samples within three days of taking a drug. Besides, how do you ensure that the samples actually belong to the students, without following them into the toilets? Doesn't this then become a gross violation of their privacy, not to speak of acute embarrassment for all concerned ?

Drug-abusing students will no doubt be taught by their suppliers to take plenty of fluids to dilute their samples, while hair samples are much less susceptible to tampering. It is high time the authorities approached experts on this matter. They can be found at the Hong Kong University of Science and Technology's biology department, where I believe they have been carrying out sophisticated experiments on hair samples from drug addicts for years.

What should have been a fairly straightforward procedure and programme has now taken on unnecessary complications because the government has failed to stand firm on something other privacy-conscious jurisdictions have been doing as a matter of course. Compromise may be the art of politics but, in this case, compromise is the art of a sell-out. The test of leadership is in filtering out the noise that undercuts the soundness of a laudable programme.

While it is true that the threat of expulsion for students who continue to test positive may not be open to public schools obligated to provide 12 years of free education, refusal to enter a drug-treatment programme should constitute grounds for police enforcement action. Without the threat of legal action, the programme is nothing but fluff.

When will the government learn from the experience of schools outside our system? Why are we making much ado about nothing? Privacy should never have been invoked in the case of underage schoolchildren who find themselves in the twilight zone. Privacy does not trump protection of students who are already on the brink of self-destruction. By making the test voluntary, you not only show your weakest hand, and mollycoddle students desperately in need of rescue, you are also only playing into the hands of drug dealers.

Few ever successfully kick their smoking habit voluntarily, much less a drug-taking habit. There is a time to be soft and a time to play hardball. Is our government ever capable of playing hardball in situations where it is convinced of the rightness of its action in a vital public issue?

The latest programme has been watered down to such an extent as to be laughably toothless.

And there is something else, too. On the unlikely assumption that the test programme is a success in identifying the size of the drug-taking student population, do we have a support or treatment programme in place to handle such an eventuality? Detection is one thing, treatment and rehabilitation is something else. A bigger headache for the government may already be in the making.


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


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