The hidden hoards of 'small government'


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

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

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

Here is a list of other publicly owned reserve assets:


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

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


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

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

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

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

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

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

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

Philip Bowring is a Hong Kong-based journalist and commentator


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Government should get out of wet markets


LEADER

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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


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Exemption from rules just another top-job perk


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

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

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

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

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

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

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

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

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

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

Stephen Vines is a Hong Kong-based journalist and entrepreneur


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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


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

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

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

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

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

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

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

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

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

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

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


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Cash-help proposals merit serious G20 study


LEADER

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

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

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

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

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

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


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Issuing bonds won't solve MPF problems


LEADER

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

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

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

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

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

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

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

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

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


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Financial 'experts'? A chimp could do as well


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

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

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

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

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

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

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

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

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

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

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

Nicholas D. Kristof is a New York Times columnist


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All hands on deck


REGINA IP

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

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

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

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

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

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

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

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


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Democratic cure


MICHAEL CHUGANI

Mar 31, 2009           
     
  |   

  



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

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

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

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

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

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

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

Michael Chugani is a columnist and broadcaster. mickchug@gmail.com


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Lawyer hits out at probe into PCCW buyout


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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keep up the good work!
thanks!

Crisis offers a chance to rebalance Asia's growth


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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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Rule-breaking weblog puts editorial standards to the test


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

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

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

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

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

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

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

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

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

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

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

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

Ms Huffington accepts that growth presents new challenges.

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

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

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

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

The Guardian


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

Daniel Cloud
Apr 08, 2009           
     
  |   

  



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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HK princesses rattle local hikikomori


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

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

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

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

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

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

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

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

Alex Lo is a senior writer at the Post. alex.lo@scmp.com


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Globalisation is here to stay, but in what form?


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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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Miracle of the world's largest democracy


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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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Secondary schools could pay off for Hong Kong


LEADER

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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


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