Archive for the ‘Economics’ Category

Choose your poison – but not Italian poison

April 30, 2016

Good news for the Eurozone in data released today. The area grew 0.6 percent in the first quarter, faster than either the US or UK, and finally surpassed the level of GDP achieved before the global financial crisis (the US and UK did this 2-3 years ago).

Perhaps the most striking performance came from France, whose national data show quarterly year-on-year growth of 0.5 percent. This made me think. France may have sclerotic labour laws and a self-serving bureaucratic elite. But it is still a relatively grown-up country. France’s productivity record is way better than the UK’s. Its people at least live on the same planet as the Utopian economic dream by which they live. Unemployment remains grotesquely high, but growth has returned and Hollande can hold his head higher as he drives around Paris on his union-built scooter.

In Spain, too, growth has returned, despite even more grotesque unemployment following the country’s presumably acid-induced foray into the Anglo-Saxon never-never land of post-industrial, debt-fuelled, realestate driven, marginalist economic voodoo.

In sensible Germany, of course, with its revised labour laws, continued commitment to equitable growth, and its serious leader, life inevitably goes on in the sort of steady-state fashion that Anglo-Saxon economists fantasise about. Largely, I suppose, because they don’t have any Anglo-Saxon economists.

One can quite reasonably choose between any of these poisons. However, one poison is to be avoided. The Italian one. Not Anglo-Saxon-Spanish. Not Utopian French. Not sensible German. Instead, directionless decay. This, I suspect, is the price to be paid for not believing in principles. Or indeed, anything.

Here are current GDP levels of the different countries rebased to 100 in  Q1 of 2008.

United States: 111

United Kingdom: 107

Germany: 106

France: 103

Spain: 97

Italy: 92

 

The Thin Controller

March 21, 2016

Osborne weight loss

George Osborne, who I used to call The Fat Controller, has become the Thin Controller after eating less and running more. But he is still Sir Topham Hat, insensitive nemesis of poor Thomas the Tank Engine (and all other members of the working classes).

In case you missed the Thin Controller’s latest, last week he decided to reduce taxes for the rich and the middle classes at the same time as chopping a further £4.4 billion over five years from the budget to support disabled people. The Institute for Fiscal Studies estimated that 370,000 people with a disability would lose an average of £3,500 a year. This comes on the back of an already-implemented big squeeze on various direct and indirect forms of welfare support for the disabled.

Most of the groundswell of anger at the Thin Controller — he has already abandoned the disability benefit cut in a standard ‘oh my god, what have I done this time?’ volte-face  — focused on his increase to the level at which higher earners begin to pay the 40 percent income tax rate. However this change has at least the merit of rewarding middle class work.

What gob-smacked me in the Thin Controller’s budget was the decision to make big cuts to already ridiculously low rates (compared to income tax rates on work) of Capital Gains Tax (CGT). Britain is fast becoming a rentier society, but the Thin Controller’s determination to turn us into some proto-feudal squirearchy seems to know no bounds. He cut the lower band of CGT from 18 percent to 10 percent, and the higher rate from 28 percent to 20 percent.

The old rates do remain in force for profits on one’s second, third, fourth and fifth, etc homes (i.e. for non-primary real estate). However the adjustment is a huge bung to the share- and bond-owning leisure class, of which I regard myself as an aspiring member. Thinking today about whether I should not perhaps take the next three months off and go on safari, I decided to check the HM Revenue and Customs web site and learn more about the Thin Controller’s commendable policy to encourage my indolence. Here is what I found:

<Policy objective>

<The government wants to create a strong enterprise and investment culture. Cutting the rates of CGT for most assets is intended to support companies to access the capital they need to expand and create jobs. Retaining the 28% and 18% rates for residential property is intended to provide an incentive for individuals to invest in companies over property.>

This statement has three great qualities. First, it is pure gibberish. Companies (the supposed subject of the second sentence) do not pay CGT, they pay Corporation Tax. Second, it is dishonest. Following from 1., what the Thin Controller really means is that he wants to support the stock-owning rentier class, who don’t need to work because tax rates on passive capital invested in shares and bonds were already low, and are now even lower. Annoyingly, he can’t actually say this, but we know who we are. Third, the statement is misguided. This is because no British rentier with half a brain is going to invest much of their unearned capital in British companies when the Thin Controller has created such an anaemic growth environment. One gives one’s capital to American companies like Apple, Amazon, Skyworks, Gilead, Amtrust Financial Services, American Express, American Tower, Verisk Analytics, and so on. (Disclaimer: oh yes, I own them all.) And then one pays sod all tax to the Thin Controller on the profits. Of course, in the final analysis this doesn’t matter because the Thin Controller doesn’t need the tax because he’s dismantling the welfare state.

Got it?

 

Joined-up economics

August 17, 2015

Here is a rare thing. A dynamic theory from an economist — whereby the solution to today’s problem may not be the solution to tomorrow’s problem. It’s David Dollar, former World Bank country chief for China talking about the role of institutions in development…

 

What institutions do Asian countries need to keep growing?

31 May 2015

Author: David Dollar, Brookings Institution

The notion of a ‘middle-income trap’ has entered the lexicon of policymakers in emerging markets in Asia and elsewhere. Many leaders of countries that have experienced fast growth — such as Chinese Premier Li Keqiang — worry that economic growth will come off the boil as their countries reach middle-income status.

Chinese workers construct residential buildings of a government-funded housing project in Tiemenguan city, China, 2 May 2015. (Photo: AAP).

Growth for virtually all advanced economies was slower in the 2000s than in the 1990s; meanwhile growth rates in poor and middle-income countries accelerated. But there is a lot of variation in these broad trends, especially for the middle-income countries. Some of the latter have seen very impressive growth spurts, while others have stagnated.

What explains why some countries grow fast and others languish? There is a strong empirical relationship between the quality of institutions (as measured by the World Governance Indicators’ Rule of Law index) and economic growth. But institutional quality does not change very much from year to year or sometimes even from decade to decade, which makes it hard to explain why countries have periods of high growth followed by low growth (or vice versa).

Institutions which are well-suited to one phase of economic development may be ill-suited to another. One way to resolve the paradox of persistence of institutions and non-persistence of growth rates is to focus on the quality of institutions relative to the level of development. It turns out this can help explain why China and Vietnam, for instance, have seen such high growth in recent times: they have relatively low institutional quality in an absolute sense, but they have above-average quality institutions given their stage of development, which might, for instance, help to attract foreign investment to China or Vietnam rather than other Asian countries with similarly low wage levels but weaker institutions.

Another question is whether authoritarian institutions are better for economic growth than democratic ones. It may depend on the stage of a country’s development. When we look at the historical experience, in countries that have a per capita income below US$8,000, authoritarian institutions seem more conducive to growth. But at higher levels of income, democratic countries are likely to see higher growth than authoritarian ones. Why might this be so?

One explanation might be that at low levels of income, the economic priority of government should be to establish basic law and order and an environment in which private investment, including foreign investment, can operate. This is a catch-up stage, in which innovation is not yet particularly relevant. But the usual economic strategy for authoritarian governments relies on capital accumulation, which becomes less effective as countries get richer. When an economy reaches the point where acquiring more and more capital is no longer sufficient for rapid growth, the need for political and economic institutions that promote competition, innovation and productivity growth becomes paramount.

Interestingly, it is about at the US$8,000 per capita GDP mark that two of East Asia’s great developmental success stories, Taiwan and South Korea, were also becoming free and open polities. By the early 1980s for Taiwan and the mid-1980s for South Korea, a move had been made away from authoritarian institutions, which continued until both reached fully democratic status as measured by Freedom House’s civil liberties metric.

Of the countries that have witnessed rapid growth in Asia recently, Vietnam has shown some steps towards political liberalisation, with its civil liberties score moving to five, which is slightly better than either South Korea or Taiwan at the same stage of development. But Vietnam is entering the stage of development where the line of thinking presented above implies a need for further political reform. Greater freedom will be necessary to strengthen property rights and the rule of law in order to bring about an environment for innovation and productivity growth.

China, on the other hand, has largely eschewed political reform. Although he has placed a lot of emphasis on the idea of implementing the ‘rule of law’ in China, President Xi Jinping has made it abundantly clear that he wants to pursue economic reform without political liberalisation; some observers even point to backsliding in recent years on the question of freedom of ideas and debate. The historical evidence would suggest that this will weigh on the growth of the Chinese economy in the future. At the stage of development at which China now finds itself, South Korea and Taiwan were on the way to becoming more or less free societies.

Of course, just because no authoritarian country (apart from oil producers and, depending on how you classify it, Singapore) has reached more than 35 per cent of US GDP per capita does not mean that it will be impossible for China to do so. But the historical evidence should caution Chinese policymakers against thinking that the kind of political institutions that have facilitated China’s astonishing growth up to now will be sufficient or optimal for the next stage of its development.

David Dollar is Senior Fellow, John L. Thornton China Center, Brookings Institution. He was the former World Bank Country Director for China and Mongolia in the East Asia and Pacific Region.

This article summarises a paper prepared for the Pacific Trade and Development Conference in Singapore this week.

Latest thoughts on the Chinese economy / the ‘new normal’

December 16, 2014

China held its Central Economic Work Conference last week, chaired by president Xi Jinping, so here are a few thoughts on the current state of the Chinese economy and a few links to an article I have written, and talks I have given, recently about the Chinese economy.

First up, the slogan du jour is definitely ‘new normal’ (新常态). Xi Jinping has been using this for about six months, but now he is really using it. Xinhua’s short, official report on the conference has ‘new normal’ in the headline and ‘new normal’ six times in the text. See here for the English version.

What does it mean? It means that local politicians, state firms, and everybody else should dial back their expectations about credit and growth. The increase in both is slowing and that is the way it is going to be as China undertakes a deleveraging process in the banking and corporate sectors. There is not going to be the kind of collapse in growth that many have predicted. The government has plenty of room to fine tune the slow-down, Chinese exports remain competitive, and the global economic environment, while not great, is not a disaster from the perspective of China’s needs. Look out for reported GDP growth in 2015 between 6-7 percent.

Against this background reforms will continue to increase the extent to which the market prices credit in China’s economy. There has already been a big shift in favour of lending to the private sector since the global financial crisis (see my review of Nicholas Lardy’s new book, below), and this is one aspect of an ongoing financial liberalisation process. To my mind, this explains the recent strong performance of the Chinese stock market much better than claims it is down to an interest rate cut (which wasn’t really a cut at all given falling inflation). Previous run-ups in the Chinese market have coincided with periods of financial sector deregulation. The difference this time I suspect is that the bull market will last longer.

All in all the outlook is a not unattractive one: slower growth, better credit rationing hence higher quality growth, and a rising share for consumption in the economy at the expense of slowing investment. The main risk — as was the case during Zhu Rongji’s long period of ‘structural adjustment’ in the 1990s — is that the central government listens to local politicians who say they cannot maintain ‘social stability’ without more credit and growth. Zhu didn’t listen to such imprecations, and we have to hope Xi won’t either. As the slogan says, China needs and is getting a new normal. Otherwise the books really cannot be balanced and financial system risk will become unmanageable.

Later re. the new normal: Damian Ma has written an excellent piece for the new issue of Foreign Policy around the theme of the ‘new normal’. Well worth a read, with a lot more detail than I can offer here.

 

Links:

Below is a link to download the review of Nick Lardy’s latest book, Markets Over Mao, that I wrote for the latest China Economic Quarterly. The book makes an important contribution to the optimists’ case that China will overcome its current slough of non-performing loans in the banking system.

2014 CEQ Q4 final Markets Over Mao review

 

This next link is to a download of a synopsis of a talk I gave at the Madariaga College of Europe in Brussels (an EU think-tank) a couple of weeks ago. It is about how China’s development model is similar and dissimilar to those of Japan, Korea and Taiwan. The theme will be familiar to anyone who has read How Asia Works, but there are some additional, up-to-date thoughts about China as well as responses to questions raised by the Brussels nomenklatura. The precise topic I was asked to speak on is ‘What can east Asian countries learn from China’s economic policies?’

2014-Dec-01 – Madariaga – CN lessons to East Asia_final

 

The Youtube video below is a speech I gave at the National University of Singapore in October (blog entry about that trip here) on the subject of ‘When will governance matter to China’s growth?’ (governance here meaning institutions like a free and fair and prompt judiciary). Roger Cohen of the New York Times speaks first about the role of the US in east Asia. Then I speak at roughly the 25-minute mark. Then there is a joint Q&A.

 

 

And here is another Youtube video where I spoke separately about How Asia Works at the National University of Singapore. There is quite a long Q&A in which lots of questions about development from a more Singaporean perspective are addressed.

 

 

A little clear thinking

November 18, 2014

I am posting a number of documents by Adair Turner relating to the concept of ‘helicopter money’. The term was coined by Milton Friedman and refers to the idea of simply dropping money into an economy to expand the monetary base without any commitment by a government or central bank to ‘pay’ for the money. Indeed, the point is to increase money supply, possibly permanently, in order to pay for government expenditure.

Printing money to cover a government’s bills is never going to be an easy policy to sell. But Turner has bravely put this option on the table because the place to which the major economies of the world are heading under current policy may actually be worse.

How so? Turner’s point is that the policy of central banks expanding their balance sheets and flooding financial markets with cash to force down interest rates to zero is merely fuelling asset bubbles – in real estate, in stocks, and even now in things like fine art. What the world needs is a return to somewhat higher interest rates to head off another speculative bubble and bust (selling some Apple shares yesterday at 18 times earnings and more than four times what I paid for them reminds me we may already be in bubble territory). The problem, of course, is that higher interest rates cannot come at the expense of another collapse in the demand in the real economy and hence a spiral of 1930s-style deflation. Logically, as Turner argues, the only option may therefore be to expand the monetary base, create a bit of inflation to allow a meaningful rate of interest, and simultaneously use the printed cash pay off some government debt and fund expenditures that maintain real economic growth.

Such a policy would (probably) put the fiscal boot on the other foot compared with the past six years. Almost all UK and US policy since 2008 has favoured those with assets – real estate, stocks and bonds — as asset values have been restored by the near-zero interest rate policy. If rates rise, those who hold assets under leverage will pay more debt service and asset prices will come under pressure. On the other hand, a positive real interest rate gives those with only a bit of cash (the young, the poor) some return on their money in the bank, while money creation can pay for lower taxes on work and investment in things like infrastructure. In other words, such a policy tilts the table away from those with assets and towards those without assets but with a willingness to work for a living. You begin to see quite how outrageous this proposal is…

The proposition is indeed shocking. However it is a measure of the times in which we live that you really should read what Turner is saying. He is not a red, and nor are the economists (like Milton Friedman and Irving Fisher) whom he cites in support. Turner is pretty much an Establishment figure…

The lightest iteration of what Turner is saying is an FT opinion piece from last week. I have not done this before, but I am reproducing it in the hope the FT won’t pursue me for breach of copyright. (Having only been paid £250 for my recent opinion piece for them, perhaps they will decide they owe me a bonus; one notes that deflation is already haunting the Pink’Un.)

November 10, 2014

Printing money to fund deficit is the fastest way to raise rates

By Adair Turner

No technical reasons exist for rejecting this, only the fear of breaking a taboo, writes Adair Turner

What is the right course for monetary policy? The International Monetary Fund seems to answer with forked tongue. Its latest World Economic Outlook urges that monetary policy should stay loose to stimulate growth. Yet its Global Financial Stability Review warns that loose monetary policy risks creating financial instability, which could crimp growth. In fact the best policy is to print money and raise interest rates. That sounds contradictory, but it is not.

The global economy is suffering the hangover from many decades of excessive private sector credit growth. In 1950 private credit in advanced economies was 50 per cent of gross domestic product; by 2007 it was 170 per cent.

After the 2008 crisis, households and companies began trying to pay back what they owed. This depressed consumption and investment, generating large fiscal deficits as tax revenues fell and social expenditure rose. It then seemed essential to balance public sector accounts, which has depressed growth further and made deleveraging harder.

Debt owed by the public and private sectors has actually increased as a proportion of GDP, from 170 per cent five years ago to 200 per cent today. Weak demand has led to below-target inflation in all major economies.

Economists agree that this is how we got into the current mess, but they disagree about how to get out of it. Some, such as Paul Krugman and Lawrence Summers, argue for more relaxed fiscal policies. Cutting taxes or increasing public expenditure is the most certain way to stimulate demand. In Milton Friedman’s words it is an injection directly “into the income stream”. But this route out of recession would increase public debt even further. It seems blocked.

Instead, most countries have opted to combine fiscal tightening with ultra-loose monetary policy, setting short-term interest rates close to zero and using quantitative easing to reduce long-term rates and boost asset prices.

There are no technical reasons to reject such measures, only the fear of breaking a taboo.

But there are dangers. Sustained low interest rates create incentives for highly leveraged financial engineering. They make it easier for uncompetitive companies to survive, which could stymie productivity growth. And they work by restarting growth in private credit – which is what led to our current predicament. The Bank for International Settlements therefore argues that monetary policy should be tightened as well as fiscal, but that would depress demand yet further.

We should indeed seek a swift return to higher interest rates, to remove the dangerous subsidy to high leverage. But paradoxically, the best way to do that, particularly in Japan and the eurozone, would be to deploy a variant of Friedman’s idea of dropping money from a helicopter. Government deficits should temporarily increase, and they should be financed with new money created by the central bank and added permanently to the money supply.

Money-financed deficits would increase demand without creating debts that have to be serviced. This would lift either real output or inflation and allow interest rates to return to normal more quickly. True, banks might amplify the stimulus by creating additional private credit, but they can be restrained with higher reserve requirements.

There are no technical reasons to reject this option, only the fear that once we break the taboo, money-financed deficits will be used on too large a scale.

Despite that fear, de facto monetisation is inevitable in some countries, even if policy makers deny it.

Japan’s official policy involves using sales tax increases to make government debts sustainable, while massive monetary stimulus spurs inflation and growth. In fact there is no believable scenario in which Japan will generate fiscal surpluses sufficient to pay back its debts, nor one in which the Bank of Japan will sell all its holdings of government debt back to the market.

All the same, the pretence undermines the effectiveness of the policy. Japan should either delay the next sales tax increase, or announce a temporary fiscal stimulus financed with new money. It should make clear that the debt the government owes the central bank will never need to be repaid, dispelling fears of a massive future fiscal tightening.

Orthodox theory sees helicopter money as risky. But current quantitative easing policies are at least as risky, and have produced adverse side effects. In the UK the Bank of England has bought £375bn of government bonds to try to stimulate the economy through swollen asset prices and rock-bottom interest rates. It could instead have created new money to finance a smaller one-off increase in the fiscal deficit. If it had done so, a return to normal interest rate disciplines would now be nearer.

 

More. Turner for grown-ups:

Turner’s original CASS business school speech on this subject (2013)

And the slides that go with the CASS speech. (Lots of them, but many worth having if you live in the UK and are about to have people knocking on your door in the run-up to the May national elections asking you to vote for them. ‘Come in,’ you can say. ‘Have a seat and let’s look at the slides together!’)

A bit of Q&A with Turner and Michael Woodford from the Institute For New Economic Thinking blog.

Finally, on Thursday 20 November, the UK parliament will hold a backbench debate on the topic of ‘money creation and society’. It will be the first time that the issue has been addressed in a full debate in the House since the 19th century. You can watch here on Parliament TV and discover just how ill-equipped our politicians are to deal with the aftermath of the global financial crisis.

 

 

Targeted consumer boycotts

October 8, 2014

Here is a very interesting article from Foreign Policy about possible future strategies in the Hong Kong protests. It is written by academic researchers of successful non-violent protest movements around the world.

Following my FT oped, the idea of targeted consumer boycotts is what jumps out…

In addition… there were lots of comments on the FT article. As with this blog, I don’t think that comments which do not add substance, or challenge substance, in what is being said are useful. But several people did say things on the FT site that seem to me interesting enough to re-post. I was struck by the comparison with Singapore. Is it possible the Harry and the PAP are more responsive on the question of social equity and competition than the Hong Kong government? I think the full answer would be more nuanced than the commenter suggests, but it is an interesting idea.

Great article.  So true.  We Chinese generally don’t take to the streets unless our bellies are empty.  Usually too busy working and making money!

Singapore has a supermarket chain run by the National Trade Union Congress, which was put in place to keep prices competitive.  Its produce is often superior to the so-called upmarket chains.  I remember as a child the beginning of this chain and how it put the lid on the supermarket chains left behind by the British.  In fact, one of those chains, Fitzpatrick ended up going out of business!

As for food, there are many hawker centres where hawker stalls are rented out at ridiculously low rents to stallholders who “inherited” these stalls from their parents or other relatives.  As a result, you get delicious food (from secret recipes passed down generation to generation) at super-low prices.  I just had a “home-cooked” type meal of rice and dishes (1 veg, 1 meat and 1 toufu) for a total of S$3, in the Central Business District.  And it gets cheaper in the “heartlands”.

At the last General Elections, the PAP lost seven seats to the opposition.  It is now implementing even more social transfers in response to popular sentiment.

I think that’s what ordinary Hongkongers want.  Someone to listen to their woes and take action.

I came across the following stats at Bloomberg to quantify the hurt inflicted on so many living in HK as a result of money and power being in the hands of so few.

Hong Kong’s Gini coefficient, a measure of income inequality, rose to 0.537 in 2011 from 0.525 in 2001, the government said last June. The score, a high for the city since records began in 1971, is above the 0.4 level used by analysts as a gauge of the potential for social unrest.

The average gross household income of the poorest 10 percent of the population fell 16 percent to HK$2,170 a month in 2011, from 10 years earlier, according to a government report. The comparable income for the richest 10 percent jumped to HK$137,480 a month, a 12 percent increase.

Not good for creating social harmony.

Studwell’s refocus on economic questions is correct, and would be very good for Hong Kong, but it would never receive the kind of universal support that the Western press has given the democracy movement. In fact, the West is proposing the opposite of Studwell’s economic fairness: to break the current Chinese social structure and open the gates for multinational business, a kind of Yeltsin years for China. Every Western journalist knows that democracy without campaign finance will lead to the election of money – i.e., the election of a tycoon or someone backed by one (CY Leung was an anti-tycoon candidate compared to Henry Tang, and look where he is now).  Studwell seems concerned with actually improving Hong Kong, but that is not what the press coverage of the democracy movement is about, otherwise they would have used real facts rather than cinderella stories. Nevertheless, the FT should be commended for printing this piece, as well as for keeping comment board open.

There is no questions that HK is run by monopolies, duopoly and oligopolies and things are more expensive than it could have been.

However, the author who learn much by looking in the back yards, especially the VAT inclusive prices here..  For example, one can run a price comparision between watsons.com.hk and boots.com, Johnson baby shampoo 500ml cost £3.35/£0.67 per 100ml at boots and cost HKD56.9/£4.60 for the 800ml version -> £0.575 per 100ml.

Toyrus HK : Nerf CS18 : HKD399.9 / £32.07,  ToysrUS UK : £39.99
HK Electricty prices : Max HKD186.4 or £0.1495 per kwh
http://www.hkelectric.com/web/DomesticServices/BillingPaymentAndElectricityTariff/TariffTable/Index_en.htm

UK Electricity prices: British gas £0.1535 per kwh.

Looks like we all have our own ‘monopolies’ problem to deal with (for us, including the one at Brussels).

It is encouraging to read an FT an article which says it like it is regarding Hong Kong and much of Asia, perhaps best summarised as ‘Winner takes all, loser hard luck’. Consider the Gini coefficients of wealth inequality and you’ll find Hong Kong and Singapore, two of the ‘wealthiest’ places on the planet with the worst ‘developed nation’ Gini coefficients, these being on a par with some of the poorest African nations. It’s long been apparent that the propertly developers, Government, ‘managed land releases and sales’ operate in a manner beneficial to the few and disenfranchising the majority. Arguments that this is a hang over from the past don’t quite stack up, as the present leaders have all the powers they need to do something about it. One has to ask why not, with the answer perhaps reducing to such tolerance of vast inequalities being an inherent part of the region’s social fabric and culture. Surprising that the majority have tolerated this for so long but then this too, fortitude in the face of injustice, even from within, is a regional trait. Perhaps, with modern dissemination of information, so that it is clearer to all as to what is going on, the majority will start to exercise their influence. Without this, nothing is likely to change.

How to make enemies and alienate people…

October 6, 2014

Here is the FT op-ed I wrote over the weekend. It just went live on their online edition.

Can’t say it is likely to get me many tycoon dinner invites, but I do think it is true:

 

 

October 6, 2014 5:14 pm

Hong Kong should focus its fight on the tycoon economy

The real target is the anti-competitive, anti-consumer economy, writes Joe Studwell
A woman holds a placard at a large pro-democracy protest in Hong Kong on October 1, 2014. Hong Kong has been plunged into the worst political crisis since its 1997 handover as pro-democracy activists take over the streets following China's refusal to grant citizens full universal suffrage. AFP PHOTO / ALEX OGLE (Photo credit should read Alex Ogle/AFP/Getty Images)©AFP

Hong Kong stepped back from the brink on Friday night, when chief executive CY Leung belatedly authorised a senior official to “hold talks” with protesters and those same protesters decided, for now, not to enter government buildings. It was a fortunate outcome. Beijing would characterise the occupation of official property as an attack on the Chinese state.

What Hong Kong needs is not a strategy that backs Xi Jinping, the Chinese president, into a corner, but one that resonates with his own mindset. This is why the protesters should refocus on Hong Kong’s tycoon economy, and the anti-competitive, anti-consumer arrangements that define it. You may think,like the Heritage Foundation, that Hong Kong is a free market. However, except for external trade, it is not. Instead it is what one of the richest men in the city once described to me as “a nice bowl of fish soup”. That soup is fed to the few, making ordinary people poorer, stoking resentment, and indirectly contributing to acute pollution.

Cartels are everywhere in Hong Kong. Supermarkets are a duopoly, one whose pricing power allows the chains to charge higher prices for the same products in some of Hong Kong’s most deprived areas. Drug stores are a duopoly. Buses are a cartel: high-priced, mostly cash-only, running shoddy, dirty diesel vehicles with drivers who earn a pittance. Electricity is provided by two, expensive monopolies that handle everything from generation to distribution, one on Hong Kong island and the other in Kowloon. The container ports are an oligopoly, with the world’s highest handling charges. Yet they will not supply onshore electricity to vessels, which must instead run diesel generators that pollute the city air.

The biggest stitch-up remains the lousy construction standards and sky-high costs in a residential property market dominated by the “Four Families”, which in the 1990s were estimated to be selling property for between two and four times what it cost to develop.

You may think of the territory as a free market but, except for external trade, it is not

Add in the jiggery-pokery of a Boys’ Own stock market with 1970s-style governance, and a taxation system that tycoons circumvent by taking out their money through tax-free dividends, and you begin to get the picture.

Hong Kong has had a Competition Ordinance and a Competition Commission since 2012. But so far nothing has changed. In a striking contrast with mainland China, where the Communist party after 1989 first increased transfer payments to the urban poor, and then increased transfers and cut taxes for the rural poor in the 2000s, the Hong Kong government lets a colonial rentier economy carry merrily on.

Mr Xi launched his new administration with not only a brutal anti-corruption campaign, but also an anti-monopoly drive. Unfortunately he seems unaware that Hong Kong is at least as rigged as the mainland.

So here is a plan. Speak to Mr Xi in terms he understands. Refocus the protests on the cartels. I am no protester, but it is not hard to think of peaceful tactics that would be difficult for the tycoons to ignore as they sweep into their basement car parks and ascend in private elevators to their penthouse offices. Where possible, boycott the cartels.

Would this be the end for the tycoons? Not at all. In my experience they are people of extraordinary entrepreneurial acumen. Like all of us, they enjoy a capacious free lunch. But if that is taken away they will adjust and add more value to the economy by doing so.

It is time for Hong Kong to work for the majority. If the protesters make Mr Xi understand the economic problem, it becomes easier to compromise on the politics – probably with a more open nomination process in 2022. I hold, perhaps wrongly, that Beijing’s intransigence is born of ignorance, not malice.


The writer is author of ‘How Asia Works: success and failure in the world’s most dynamic region’

 

More:

This just went up from Han Donfang. Very much worth a read. The lead explains who he is if you do not know.

And here is a nice piece from The Age about CY Leung trousering US$7m during the sale of his insolvent firm. Now that is leadership.

Actually Dave, you are still rubbish

October 1, 2014

This feels cruel. But I have read Cameron’s ‘greatest ever’ speech to today’s party conference, and it is not very good.

Here is a late-night attempt to parse it and to translate it into plain English (pace Boris, who I don’t much like either).

 

Cameron puffycameron on housing estatecameron hague osborne

 

 

The full text is here.

1. ‘William Hague…greatest living Yorkshireman.’ Obviously not true. I plump lazily for David Hockney. Does he vote Tory?

2. ‘I am not a complicated man.’ This is the problem, Dave.

3. ‘I believe in some simple things.’ You mean simplistic things. File under ‘Farage’.

4. ‘It’s pretty simple really.’ No it is not. See above.

5. ‘The highest employment rate of any major economy.’ Try: the lowest productivity gains of any major economy.

6. ‘£25 billion is actually just 3% of what government spends each year.’ He is talking about proposed new welfare savings. The truth: yes, but you have already backloaded the cuts you promised in this parliament into the next parliament so you would need cut at least double what you are saying. It is undoable short of civil war.

7. We have a new new policy called ‘Starter Homes’. Dave, you are already providing this subsidy. It is growth by asset inflation. It is not sustainable in the absence of productivity gains. Ask George, at least he took a 101 economics course.

8. Some stuff about ‘My 3 young kids go to prole school, we are all in it together.’ Yes, Dave, but not for long. You will move them out of the National Education System at 13 and do your bit in undermining the Big Society you claim to represent.

9. The £41,900 tax-free plus lower-rate threshold will rise to £50,000. Already dealt with in today’s earlier blog post. As I said in the update it is somewhat devious/sloppy accounting. But the main point is that it is undeliverable in combination with a rise in the tax-free rate to £12,500 and all the other stuff that you and George have promised/are promising. George has already reneged on his deficit cutting plan so many times I cannot count and is now running the original Alastair Darling plan. It begins to seem as if all you care about is power, Dave, not honesty.

10. Ed Balls is… ‘a mistake’. This is in fact true.

11. Tristram Hunt, the shadow education secretary, went to a private school but does not agree with the existence of private schools in an optimal education system. That makes him — here is the key term — a ‘hypocrite’. No it doesn’t, Dave. It makes you either a retard or a liar. At least George has the dignity to send his kids to private school the whole way through and publicly not give a fuck.

12. ‘I’ll tell you who we represent.’ No, I will. The ignorant, the angry, the greedy, and people who are having a nice time and don’t notice the world around them.

13. ‘From the country that unravelled DNA…’ DNA was unravelled in Cambridge, not Oxford, Dave, and nobody here votes Tory.

14. ‘It’s about getting people fit to work.’ Exercise for poor, fat cleaners, Dave. Exercise for poor, fat cleaners.

15. ‘Our crime-busting Home Secretary, Theresa May.’ Imagine any Tory Home Secretary as your next-door neighbour. I fucking dare you.

16. ‘I know you want this sorted out so I will go to Brussels.’ Why not just say it: ‘I can’t speak a foreign language — bit like Farage — and I don’t understand history. Even if I like holidays in Italy, they are still wogs.’

17. ‘Our parliament… the British parliament.’ It was created to curtail the antics of inbreds like you. Best not mentioned.

18. ‘If you want those things, vote for me.’ You are going to lose, Dave. You will then spend the next 10 years wishing you had had bigger balls, and ideally a bigger brain too. George will visit you.

19. ‘Our exports to China are doubling.’ Dave, I am losing the will to live. Look at the baseline.

20. ‘I don’t claim to be a perfect leader.’ Ok, all is forgiven. Emigrate.

 

Amazing that it should be 20 things.

I am going to bed and not reading this through, so apologies for typos.

 

Later:

A pretty funny video of Brave Dave following his speech has been posted to Youtube. Here it is. 1.2 million hits already. It contains profanity.

Brave Dave gets his mojo back

October 1, 2014

Cameron 1014

 

Dave Cameroon just gave his Tory party speech. After his imperial weights moment, he is back on form. Cometh the hour, cometh the Etonian.

* £12,500 zero income tax threshold (up from £10,000 in fiscal year 2014-15).

* £50,000 40% income tax threshold (up from £31,866 plus £10,000 tax-free in fiscal year 2014-15). [See update on this.]

Both ‘in the next parliament’.

Just one problem.

It is totally and utterly unaffordable by any rational analysis of the numbers. If you are vaguely economically literate, work your way through these slides from the Office of Budgetary Responsibility. Note that this was a personal presentation by Chairman Chote, and does not reflect any OBR ‘line’. But the numbers and the trend lines are the hardest ones we have. I guess that Brave Dave hasn’t seen them.

Off the top of my head, Brave Dave’s election-pitch cocktail would require GDP growth over 4%, no increase in the cost of borrowing, and further massive cuts to welfare in order to meet the Fat Controller’s debt load targets.

Now breathe in and savour the moment.

Pure Tory Bullshit.

You have got to love it.

But will you vote for it?

 

CHOTE SLIDES1  (pdf. Should open up)

CHOTE SLIDES2  (powerpoint. Should come to you as a download)

 

Update:

I hadn’t read Cameron’s speech directly, relying on Guardian coverage. After a couple of emails I now realise that part of Cameron’s putative higher rate threshold increase is spin. Unlike HMRC, which states tax bands separately (for good reason because there is no single tax-free band at the bottom, it varies slightly for different groups) Cameron’s promise of a £50,000 threshold for the 40% rate is actually a two-band sandwich — the main tax-free band, plus the up-to-40% band. So it has to be compared with fiscal 2014-15’s £10,000 tax free (the standard exemption) plus the current £31,866 40% threshold.

Still, I am not changing the text above. The cuts are undeliverable without completely fanciful assumptions about growth, interest rates and how much more welfare can be cut without widespread civil unrest. And, yes, that is even if Cameron were to wait until the final year of the next parliament, 2020, to deliver the cuts.

What is truly revolting about the Tories is that you could, just about, begin to get towards reasonable assumptions for these cuts — which millions of people would welcome and benefit from — if you increased the two rates of capital gains tax (currently 18% and 28%), and introduced some level of capital gains tax on sales of first homes. But this government, just like the Blair one, is committed to taxing capital less heavily than work. What kind of message does that send to society?

More:

Well I wrote this on 1 October and on 9 October the FT runs a column saying exactly the same thing, also citing OBR numbers. Here it is, but you will need a sub. Of course, the FT is more polite than me, merely accusing Cameron of ‘arrogance’, ‘deceit’, and ‘cooking the books’.

More on 10 November 2014:

The FT has now run a deeper analysis of the OBR numbers, plus latest Treasury receipts, and concludes that to meet Osborne’s austerity targets welfare cuts will have to be massively increased from 2015. This contrasts with recent comments by Brave Dave Cameron — who is either very stupid or a brazen liar — that the worst of austerity is over. In reality, only half of the cuts promised by Osborne have been made. It is all here in the FT, but you will need a subscription. Cameron and the Fat Controller were also told in July by the International Monetary Fund that the UK has no apparent choice but to raise taxes from 2015. And Cameron and the Fat Controller have more recently been severely criticised by the Institute for Fiscal Studies (FT sub needed) over their constant efforts to diddle the numbers.

Tribute in the bag

August 8, 2014

image

Thailand’s latest junta, the National Council for Peace and Order (aka National Council for Underdevelopment as Usual), has confirmed it is committing to a US$23 billion high-speed rail investment. Beyond this I can find very few concrete details. But the expectation is that much of the construction work, as well as the rolling stock, signalling equipment, and even quite basic industrial inputs will be supplied by China. Late last year, before the junta got rid of Thaksin’s little sister, Chinese premier  Li Keqiang was down in Bangkok doing the hard sell. When the junta boys grabbed the reins of power they made a show of putting the deal that was then shaping up on hold. But a few months later it is back in play, albeit possibly with some cuts to the project specification suggested by this Bangkok Post article (see the references to lower speed services).

Although we know nothing of the Chinese financing terms, it looks like the Celestial Empire has done an effective number on its traditional south-east Asian tribute states. First they leaned on the Laotians, the poorest and most biddable group, to agree to the first leg from Kunming through their territory. Now they have the Thais in the bag. Officially, the Malaysians say high speed rail is too expensive for them. But my guess is that the Malaysian government will fold once construction starts on the Kunming to Bangkok legs and sign a deal. The Chinese an easily twist their arms by threatening to buy their palm oil and gas somewhere else. (When I saw Mahathir late last year in KL he told me that he personally he is already in favour of a Chinese high-speed deal, so Beijing has one still-loud voice singing its song already.)

Who is all this investment good news for? It is good news for China’s rail equipment and rail construction firms, into which Beijing has sunk vast sums in order to master high-speed rail technology. And it is good news for bourgeois types like myself, who want fast, clean travel between their preferred Nanyang beaches and mountain retreats and the panda lairs of south-west China.

But we shouldn’t pretend it is good news for south-east Asian economic development. By the time there is a high-speed link all the way from Kunming to Singapore — which could now easily be completed within 10 years — the projects will have cost at least US$60 billion in today’s money. That expenditure will have done almost nothing to increase south-east Asia’s grasp of manufacturing technology, or even its project management capacity, because all the value-added goes to China. At a time when south-east Asia desperately needs to increase manufacturing employment to provide jobs for countries’ young populations, the China high-speed rail deals instead reveal the developmental bankruptcy of regional politicians. Their only strategy in addition to being a proto-colonial resource base for China, is to become a tourist destination for a new Chinese middle class.

 

More

This from Geoff Wade at the Australian Strategic Policy Institute, though I am not convinced all the numbers quoted are accurate.


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