Friday, November 27, 2009

Malcolm in the Middle

In the debate over the proposed emissions trading scheme (ETS), beleaguered Federal Opposition leader Malcolm Turnbull seems to be between a rock and a hard place. Two camps seem to be putting the squeeze on him. Each one holding to a specific set of beliefs.

One the one hand, market reformists point to the phenomena known as global warming and climate change as indicative of the need to reform capitalism as we know it. On the other hand, market fundamentalists see the ETS as an intrusion by government into the affairs of the private sector which come with unnecessary distortions and costs to the Australian public. They allege no benefits will accrue unless a global deal is reached in Copenhagen by world leaders.

Proponents on the one hand see the need to internalise the undesirable side effects of productive activity as a way to improve the price signals to production and consumption that currently regard what nature endows as free. The political reality as pointed out by Mr Turnbull is that any attempt to spurn this publicly supported proposal will be met with scorn at the polls.

Opponents from within Malcolm's party see it as a "tax" or as onerous regulation. (It actually has elements of both in the form of a cap which sets limits on emissions--the regulatory part--and a trading scheme for emissions permits which will set a price for carbon--the tax part). They also want additional concessions for emitters although doing so would create additional distortions to the ETS. This amounts to a "free lunch" for emitters according to the Greens who oppose the legislation outright. Without their support, the Federal Opposition finds itself in a bind.

Rejecting the legislation could trigger an early election on the issue of climate change. By arguing in favour of passing the ETS legislation now, Mr Turnbull wants to position the Coalition that he heads safely into the next election as far as this issue is concerned. This has earned him the ire of his partymates who see delaying it as the only viable option.

On the other hand, he is receiving no help from the government which wants to play the symbollic game at the Copenhagen summit or perhaps make do with the self-destruction of the Opposition. Apparently, the middle ground seems to be melting beneath his feet. This "inconvenient truth" seems to be dawning on Malcolm and his supporters.

Sunday, November 22, 2009

The Big Swindle

The collapse of the Berlin wall in 1989 attested to the untenability of socialism as a way of organising productive forces in society. In the West, a similar decline in Keynesian economics had been taking place. The emergent paradigm came to be known as the Washington Consensus (WC), a term coined by John Williamson referring to the ten universal principles for encouraging growth and prosperity.

These principles were anchored on a faith in unfettered markets and a reduced role for government through liberalisation, privatisation and macro-stability. While they were intended to form the lowest common denominator for policy prescriptions, as Williamson later observed, they became a panacea, sufficient in and of themselves to cause economic transformation.

As it later became evident from the experiences of Russia, Sub-Saharan Africa and Latin America which had experimented with "market fundamentalism" or neoliberalism in the 1990s, the link between these reforms and economic growth seemed to be weak or untenable at best.

Meanwhile, economies like China and India which had used a hybrid approach involving private joint ventures with town and village enterprises (in the case of the former) or had engaged in selective deregulation (in the case of the latter) did extremely well. Decades earlier, Japan, Korea and Taiwan had engaged in industrial policy and currency devaluation, clearly distorting product and money markets, and saw their populations rise out of poverty within a generation.

What is worse, capital market liberalisation, an important WC tenet, apparently made Southeast Asian economies vulnerable to speculative attacks as demonstrated in 1997 with the Asian financial meltdown. In order to rescue the reputation of the economic doctrine, a renewed focus was placed on the role of governance, institutions and corruption something that the WC had hitherto ignored.

Ten additional principles covering these areas rounded out what was termed the Washington Consensus Plus. Never mind that an earlier financial crisis had erupted in Scandinavia where countries have an unrivalled reputation for transparency in government or that bureaucratic corruption had not prevented Korea or China from developing quite rapidly.

If the thesis had previously hinged on "getting the price right", it now depended on "getting institutions right" to deal with "noise" in the form of non-productive transactions costs that prevent markets from functioning properly. Institutional determinants (property rights, contract law, juducial capacity) were given the same level of concern that political considerations had earlier occupied (democracy v authoritarianism). It was observed however that no matter what developing countries did, the list of reforms and explanations for why they did not subsequently grow just kept getting longer and longer*.

The one democratic country that had comprehensively applied the principles of the Washington Consensus Plus and had developed from it was Australia. Since the 1980s, successive governments instituted reforms in the economy and governance. When the dot com crash of 2001 and global financial crisis of 2008 hit, local banks were innoculated from it through prudential regulation and supervision. By adapting the book title of one famous Peruvian author, this episode could be called, "Why the Washington Consensus works in Australia and fails everywhere else" for even America had resisted the need for transparency in exotic derivatives markets or prudential regulation over its banks.

When the bubble that was the US realty-derivative market burst, weaknesses were exposed in its political economy. As Simon Johnson noted (Johnson being part of the trio including Acemoglu and Robinson or "AJR" that first highlighted the importance of institutional determinants), Washington had become captive to Wall Street in a manner that was characteristic of many developing countries. This would suggest that the US ought not grow as fast into the future, something that recent developments seem to confirm.

It is interesting to note that from Australia, the jurisdiction that provides the ultimate case for the successful and bi-partisan application of neoliberalism its leader should have screamed the loudest for an alternative social democratic paradigm with protestations that "the Emperor has no clothes". In practice it has meant adopting a kind of Millenium Challenge approach through its domestic social and labour market policies enforced through a "cooperative Federalism".

One could challenge this approach as an alternative to the Washington Consensus, but the problem is what else would one then substitute it with? Development economists are in a state of confusion about the way forward. There are it would seem many paths to prosperity, not just one. But for countries already on that road, a key question is how to build on it.

An important study that illuminates this question was performed by Gustav Ranis in 2000. He showed that countries pursuing economic growth as their paramount objective may wind up in a development rut, but for those countries that pursued human capital development, a virtuous cycle that involved both growth and improved human well-being ultimately occurred.

Although it would seem straight-forward and self-evident to take the conclusions of the study and recommend investing a greater share of GDP to human services as what Jeffrey Sachs and the UN Millenium Challenge Project would prefer, the same old questions crop up. Namely, would not improvements in governance be more helpful? How would local institutions, cultural and social norms interact with the resulting programs? Should governments or private markets take the lead?

Just as the "death" of god led to his resurrection in the form of "structure", the decline of neoliberalism is bringing about its rebirth in other deterministic forms.

* Perhaps instituting structural reforms is not the answer if it eventually weakens the legitimacy and capacity of governments to function especially if local conditions prevent reforms from producing material differences in outcomes.

Friday, November 20, 2009

The Rising Tide

If the global recession was the gift that kept giving, then the asylum seekers represent the problem that just won't go away for PM Kevin Rudd and his government. Having staunchly defended Australia's reputation as a tolerant society in India against the perception there that violent assualts on overseas students from that country were race related, he had to defend his government's policy with respect to asylum seekers back home in Parliament.

The heated debate over asylum seekers is an ongoing saga that has played out this year and one where the hapless Opposition has been able to gain some traction in the opinion polls. The policy being the removal of the temporary protection visas being issued to asylum seekers which was the Howard governments solution to the so-called "boatpeople" phenomenon. The allegation is that the reversal of this policy has resulted in a rising tide of asylum seekers being channelled into Australia by "people smugglers".

We can see from the chart below produced using data compiled by the OECD what the flow of asylum seekers into Australia has been through the years. It clearly shows that the flow during the past few years is no where near the highs that were recorded in 1990-91 and 2000-01 both in absolute terms or as a proportion of the overall intake of OECD countries.

Clair Harvey wrote in the Sunday Telegraph back in October:
A total of 4768 "plane people" - more than 96 per cent of applicants for refugee status - arrived by aircraft in 2008 on legitimate tourist, business and other visas compared with 161 who arrived by boat during the same period [...] And plane people are much less likely than boat people to be genuine refugees, with only about 40-60 per cent granted protection visas, compared with 85-90 per cent of boat people who are found to be genuine refugees. In 2007-08, 3987 claims were received and 1930 of these were approved. But whereas boat people are detained on Christmas Island while their claims are processed, plane people live in the community and they are allowed to work under policy changes introduced by the Rudd government.
When taken together with the numbers of foreign-born workers moving to Australia which have doubled in the last five years as shown in the chart below, one gets a sense of how overblown the issue has become. One also gets a sense of the exploitation for political mileage and media ratings the asylum seeker issue has been subjected to.

Friday, November 13, 2009

Preaching to the Choir

This week saw Joe Hockey the Federal Opposition’s treasury spokesman present his views on god and politics before the Sydney Institute. The talk entitled “In Defense of God” was a discussion of religion’s place within a secular society. Mr Hockey argues in favour of a pluralist society that maintains the free and open competition for adherents of different religious faiths (in keeping with the Liberal Party’s own tradition of unfettered markets no doubt).

This was touted in the media as his first outing as an aspiring leader of the Federal Liberal Party. As the clouds of economic crisis began to recede into the distance and with it the dour predictions regarding the Government’s fiscal position, this was seen as the treasury spokesman’s way of canvassing a wider policy arena, and what better way of doing this than to discuss his own personal history as an Australian of mixed ancestry and cultural heritage?

The actual text of the speech is quite lucid and credible, but when asked regarding his motivation for giving it, Joe could not provide a credible response. Neither could he prevent speculation regarding his higher ambitions from occurring, his smiley face betraying his inner most thoughts (as if he got a warm fuzzy feeling from the mere notion that he might wrest the Liberal Party’s helm from its currently unpopular leader Malcom Turnbull).

Had he intended to showcase his command of matters pertaining to his treasury portfolio, he could have offered to speak on a topic made popular by the GFC, that of religion and economics. After all, his party adheres most closely to the orthodoxy of neoliberalism. This tradition has taken the outer trappings of a religion according to one author and advocates for the total separation of Markets and State. It is this belief system that Kevin Rudd’s “heretical” teachings on social democracy seek to overturn.

Given the unpopularity in recent years of this view among voters and policymakers alike, it is not difficult to see why he opted not to be the apologist for it in this occasion. But to see what shape and form a speech on this topic might have looked like, check out the beautifully written essay by a theologian posted this week and found here.

(Image taken from the Sydney Institute podcast)

Saturday, November 7, 2009

Deal or No Deal - Part 3: The Voice of Reason Re-emerges

Back in May this year, I blogged that as the Federal government stared down the barrel of a revenue write down, it had two options: to maintain a steady course of economic conservatism or to throw caution to the wind and engage in heavy borrowing to finance massive countercyclical spending.

It chose the latter of course. This past week, the Treasury revealed through its Mid-Year Economic and Fiscal Outlook, that its cash position would not be as bleak as it had previously thought (in its forward estimates). Two rounds of stimulus later and experience proves that it pays to be a risk-taker at the right moment.

Having dodged a technical recession and with unemployment set to peak at a much more moderate rate of 6.75% (compared to double digits in the US), Australians are now being warned to prepare for the unintended consequences of its debt-driven growth strategy, namely urban congestion, unaffordable housing and higher inflation.

Dual pronouncements by the RBA Governor and Productivity Commission Chair have pointed to these emerging issues. If you are a homeonwer like me who kept your job during the crisis, you would have seen the value of your property go up (according to WestPac chief economist Bill Evans) and interest rates go down to 50 year lows. This has both a wealth effect and an income effect (translation: you see yourself as being more wealthy and having more money to spend).

Granted that many of us used the temporarily low rates to reduce our indebtedness as a hedge against higher interest rates in the future, but the rise in the equity value of our homes is making many of us feel smug at the moment. We might just decide to use that equity in the coming months.

Another unintended consequence is the strong Aussie dollar which is back to its pre-crisis level nearing parity with the US greenback. That is fuelling a lot of online shopping primarily for luxury goods due to the price advantage of buying from American compared to local stores for the same item. As the Financial Review reported this week, e-Bay is experiencing a surge in spending compared to last year (ironically, it copped a massive fine last year for facilitating the sale of fake brands).

It is therefore not surprising that amid all these animated spirits released by Kevin Rudd's rubbing of the stimulatory lamp (a.k.a fair shake of the sauce bottle) that the voice of reason has cautioned the government to revert back to a more prudent approach (which the Treasury seems to be seeking to do although such spending as the school building program can only be "rephased"). In the past 12 months, such a warning might have been regarded as the voice of treason rather than reason, but not this time it seems.

Sunday, November 1, 2009

Aquino on Countering the Calculus of Corruption

At the press conference following his announced bid for the presidency in 2010, Benigno "Noynoy" Aquino III revealed what could be a guiding principle in his approach to good governance.

(Right: Senator Benigno "Noynoy" Aquino III announced back in September his intention to seek the presidency of the Philippines in the election of May 2010.)

When asked about his solution to widespread corruption, he said firstly that he would emulate his mother, former President Corazon Aquino, whose reputation for simple living engendered greater honesty among public servants. Secondly, beyond appeals to a concern for the greater good, he would vigorously uphold an enforcement of the rules which would not only entail swift justice in prosecuting those who break the code, but incentives to those who abide by it. He called this his “carrot and stick” approach.

The test of this hypothesis will come no less from his office should he be elected which now seems very likely given his astronomic lead in the polls. In the past, winning and occupying the highest post in the land has been subject to what economists call an “incentive incompatible” problem, namely, a misalignment of incentives that ensured a reneging on the promise to uphold and defend the constitution and the laws of the land.

Given weaknesses in institutions, it has been all too easy to “take” rather than “make” while in office. The so-called checks on the excesses have been ineffective under the structure of rent-seeking incentives at play.

But now Filipinos could be witnessing the birth of public stewardship motivated by a true sense of noblesse oblige. Self-restraint might be the only effective means to check executive greed. In the past every contender and pretender to higher office has feigned a sense of noble intentions. The purifying trials of the Aquino family under the repressive Marcos regime may provide the most authentic case of altruism at work.

Turning their backs on the honest democratic legacy of their parents would prove too costly for the Aquino children because it would mean nullifying the sacrifices made by their parents all throughout their formative years.

The late Senator Benigno Aquino Jr set off a virtuous cycle of willling self-sacrifice that was “gifted” to the Filipino people. They reciprocated first by expressing public grief and outrage over his assassination, and then by endowing the presidency to his wife, Corazon, who in turn renewed the cycle of giving back by restoring democratic freedoms curtailed under the dictatorial regime of her predecessor.

(Right: The assassination of former Senator Benigno "Ninoy" Aquino, Jr on 21 August 1983 shortly after being escorted by airport security off his plane at the Manila International Airport triggered widespread public outrage against the Marcos regime.)

Now it seems the people in honour of her own personal sacrifice following her untimely demise due to colon cancer are about to reciprocate the Aquinos once over by entrusting the presidency to the only son of the family, Benigno III.

This politics of exchange is not the debased form of transactional politics that is common among the ruling elites and their constituents, a practice that has left the Philippines languishing at the bottom of Transparency International's corruption league table for the Asia Pacific.

Rather, the calculus of exchange that seems to have been initiated by the Aquinos follows the pattern of “gift-giving” in close-knit cultures where the commodities exchanged cannot be valued and where renewing ties by re-investing in social capital is the key.

This new and ongoing dynamic that has sparked a sense of altruistic behaviour among those engaged in the "political game” is set to counter the vicious cycle of corruption and rent-seeking that has been entrenched in the governance arrangements of political institutions operating at the moment.

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