Appeal court made right decision in PCCW case


LEADER

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Noeleen Heyzer is UN undersecretary general and executive secretary of Escap


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Policies, not speculation, fuel food price inflation


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

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

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

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

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

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

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

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

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

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

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

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


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On another planet


FRANK CHING

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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Science came first but democracy must follow


LEADER

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Paul Krugman is a New York Times columnist


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How to kill two black swans with one stone


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

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

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

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

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

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

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

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

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

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


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Cleaner's death shows need for change


LEADER

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

Peter Kammerer is a senior writer at the Post. peter.kamm@scmp.com

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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Flu vaccine dilemmas leave WHO with a headache


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

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

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

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

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

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

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

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

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

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

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

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

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


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Putting the 'liberal' part back into democracy


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

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

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

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

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

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

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

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

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

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

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

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

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


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Even the US may agree the dollar has had its day


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

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

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

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

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

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

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

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

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

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

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

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

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


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


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

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

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

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

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

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

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

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

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

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

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

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

Philip Bowring is a Hong Kong-based journalist and commentator


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Clear results in election mean all Indians won


LEADER

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

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

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

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

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


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Asia's answer to IMF


LAURENCE BRAHM

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

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

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

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

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

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

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

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

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

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

shambhalahouse@yahoo.com


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

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

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

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

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

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

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

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

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

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

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

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

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

Janet Pau is the Asia Business Council's programme director


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Thanks you!!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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Cloak and dagger, but mostly swagger, on Iran


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

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

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

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

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

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

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

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

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

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

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

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

David Ignatius is a Washington Post columnist


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Migrant labour, the most effective foreign aid of all


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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Andy Xie is an independent economist


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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