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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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Flu vaccine dilemmas leave WHO with a headache


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

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

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

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

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

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

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

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

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

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

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

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

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


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Putting the 'liberal' part back into democracy


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

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

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

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

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

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

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

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

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

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

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

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

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


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Even the US may agree the dollar has had its day


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

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

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

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

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

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

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

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

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

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

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

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

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


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


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

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

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

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

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

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

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

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

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

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

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

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

Philip Bowring is a Hong Kong-based journalist and commentator


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Clear results in election mean all Indians won


LEADER

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

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

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

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

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


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Asia's answer to IMF


LAURENCE BRAHM

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

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

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

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

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

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

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

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

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

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

shambhalahouse@yahoo.com


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

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

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

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

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

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

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

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

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

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

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

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

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

Janet Pau is the Asia Business Council's programme director


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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Cloak and dagger, but mostly swagger, on Iran


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

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

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

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

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

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

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

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

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

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

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

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

David Ignatius is a Washington Post columnist


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Migrant labour, the most effective foreign aid of all


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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Andy Xie is an independent economist


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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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