Let all views be heard, not suppressed in media


LEADER

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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Property rights can eradicate India's slums


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

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

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

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

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

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

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

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

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

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

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

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

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


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Unions should accept findings of pay study


LEADER

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

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

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

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

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

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

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


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First rule of law: what the party says, goes


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

David Eimer is a Beijing-based journalist


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Women can lead Asia's march to sustainability


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

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

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

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

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

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

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

All these developments are not caused by one country alone.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Kim Yoon-ok is South Korea's first lady


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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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Bric bats for the US


LAURENCE BRAHM

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

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

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

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

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

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

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

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

shambhalahouse@yahoo.com


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Guardian


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Jake van der Kamp is a former Post columnist


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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bloomberg


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Iranians have right to shape their own destiny


LEADER

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

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

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

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

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

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

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



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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Dengist whateverism

FRANK CHING

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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


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Police made their point without taking to streets


LEADER

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

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

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

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

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

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


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New tree regime has room to grow


LEADER

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

Thomas Friedman is a New York Times columnist


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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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Gap between US stimulus rhetoric and reality


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

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

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

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

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

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

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

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

Robert Samuelson is a Washington Post columnist


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Andy Xie is an independent economist


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

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

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

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

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

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

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

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

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

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

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

Stephen Vines is a Hong Kong-based journalist and entrepreneur


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