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Must dominant reserve currency country be a net external debtor?

Comments on Brendan Kelly “Brazil, Russia, India, and China (the BRICs) throw down the gauntlet on monetary system reform”, 28/06/2009, http://www.eastasiaforum.org/2009/06/28/brazil-russia-india-and-china-the-brics-throw-down-the-gauntlet-on-monetary-system-reform/

It is an interesting article. However, I find it difficult to understand the following argument, to quote from the article:

“Such international confidence also requires development of deep and highly liquid markets for short-term Chinese government securities, a condition that leads to a fundamental but often overlooked point – in a fiat currency world (unlike under the gold standard), as the principal reserve asset is a reserve nation’s debt, a dominant reserve currency nation must be a net debtor, or at least accumulate very significant external liabilities. Other countries must run current account surpluses so that they can invest in these debt securities. Such a reality would require dramatic changes to China’s growth model and trade policy.”

Why should that be the case that a dominant reserve currency country must be a net debtor, or at least accumulate very significant external liabilities? Has the US always been a net debtor since the US dollar became the world main reserve currency?

We can’t just simplistically use the current US external debt position and extrapolate that into other would-be reserve currencies.

Perhaps a simple question will make the point clear. Most countries have their own currency, their own default reserve. Are the governments of all those countries have always been net debtor to make their own currency their countries’ default reserve? I bet not.

The Australia government, for example, paid down all its debts and became a net creditor during the later years of the Howard / Costello government era, although that became short lived due to the current economic crisis and government deficits. During that time, Australia still had its own currency.

It is true that a central bank issuing the dominant reserve currency needs to have assets to balance its liability for the circulated currency. But that does not automatically mean that it has to become a net debtor, or does it?

Put it in another way, suppose that the central bank that issues the reserve currency to other countries by buying those countries’ official securities, or providing loans to those countries. The so called reserve currency would be in circulation as part of the international reserve in those countries. But in this scenario, the country that issues the reserve currency does not have to incur foreign debts, or does it?

My logic may be seriously wrong, although I doubt that it is the case. Otherwise, it appears the above argument by Kelly is incorrect.

Would anyone help me clear my mind? If Kelly's argument is correct, it would be a very interesting constraint to the reserve currency country. Maybe that is the price that country has to pay. But I am not sure that is the case.

Australian housing in international context

Comments on Alan Kohler “Goldilocks housing”, 29/06/2009, http://www.businessspectator.com.au/bs.nsf/Article/Goldilocks-housing-pd20090629-TFST8?OpenDocument&src=sph

What is wrong or right with the Australian housing market? It seems to have a different pattern from other major advanced countries.

I remember a study sometimes ago showing that it's ratio of average housing price to average income has been higher than that in the US and the UK. Now that the housing prices in the US and UK have fallen more than that in Australia, the differences in the price to income ratio would be even greater.

If there were housing bubbles in the US, then why weren't there housing bubbles in Australia? Are the differences in the price to income ratio structural or cyclical? What features contributed to those differences? Why are houses in Australia more expensive compared to income than in those in other advanced countries?

Of course, it is always good not to have a crash in housing prices in times of economic recession. However, is Australia facing housing bubbles that will persist for a long time, due to high immigration and capital inflow, as well as government policies?

Leadership and generational characteristics

Comments on Greg Melleuish “Talking about my generation of leaders”, 29/06/2009, http://www.theaustralian.news.com.au/story/0,25197,25703956-5013479,00.html

Melleuish puts Australian prime ministers into an interesting generational context. It is also interesting in that context that Kevin Rudd and Tony Blair who are the baby boomers’ generation, have some similarity in terms of spins.

I have to confess that my understanding of generational characteristics is very limited. However, it is not difficult to understand that there can be statistically significant differences in the aggregate characteristics between different generations, due to differences in their enviornment and the influences of those differences on their thinking. Average can be shown easily.

What I am more intereted, however, is that whether political leaders should be an average of their generation, or they should be true inspirational leaders and stand tall in history, perhaps with a little display of their genrational traits. My real hope is that while Rudd cares about appearance, he should focus much more on substance in governing and leading, rather than in changing direction with the wind.

I hope Rudd will be able to stand the test of history and leaves a true legacy of leadership, rather than being a chamelon. This is especially important at a time of economic crisis.

Another form of unacceptable political favorism

Comments on Glenn Milne “Winners, losers both show ugly sides”, 29/06/2009, http://www.theaustralian.news.com.au/story/0,25197,25703955-33435,00.html

It is very disturbing to hear government retribution on people who have criticised its economic policy, or jounorlsts who used to email opposition contacts are now much more warry.

Australia is proud of its democracy and freedom. Different opinions are a matter of normal life and healthy in any democracy and free country. It is also a useful form of public check over many issues, such as government policies when people can openly question them.

Why did the government presure the chairperson and the CEO of a private company asking the company not to use the services of a commentator who had publiclly questioned the government’s economic policy? Is Australia becoming an authoritarian state, or a police state?

The government can use public agencies to its own advantage. However, is the government action in presuring a private company overreaching? Isn’t those actions the same as political favorism when they use their political positions to persecute people who dare to differ? Did that breach any law or regulation? Should any people from the government invovled in that process take some personal responsibility and be accountable for their acts to affect the commentator’s empployment and future earnings?

There are some serious questions about what behaviour is and / or is not ethical and acceptable in terms those who hold government positions and / or use government power. They need to be asked and answered.


An equally incompetent pair - Australian federal politics

Comments on Alan Kohler “Driven to distraction”, 26/06/2009, http://www.businessspectator.com.au/bs.nsf/Article/Driven-to-distraction-pd20090626-TCSWT?OpenDocument&src=sph

Both the government and the opposition have shown remarkably poor performances over the last 6-8 months.

While fine points may be get easily lost in a political debate, the government cannot be and will not be strong in simply saying that its defence that its stimulus worked.

No one will argue that fiscal stimulus will not have any effects on the economy. The real question is how effective it is.

The government handed out cash to the tune of more than $10 billion in November last year. While large part of that may have been saved by the end of the first quarter this year, some of it had been spent and was counted as part of the consumer expenditure in the GDP.

Yes, that extra expenditure may have helped prevent the GDP went backward. But that does not mean the government's cash handouts were a good and responsible fiscal policy to stimulate the economy and protect jobs.

Just to argue the point, if a government minister gave $1 billion to his or her closest mate and ask him to give half of that back to him or her as kick back and spend a quarter of that to buy anything.

In this hypothetical scenario, $0.25 billion would have been spent in the economy, thus increase expenditure and GDP. Because of that, the stimulus worked, according to the line the government has been using. But would that be a good fiscal policy to stimulate the economy?

Were the government’s cash handouts very different from this hypothetic scenario? Is it that hard for people how weak the government's defence is? By the same token, it is not too difficult either to see how ineffective the opposition has been.

Both sides of politics and top bureaucrats all need to lift their games

Comments on Michael Costa “Mal, lose 'born to rule' style”, 26/06/2009, http://www.theaustralian.news.com.au/story/0,25197,25690445-7583,00.html

Both the government and the opposition have shown remarkable incompetent economic and budget management. Turnbull's unlucky, rush and miscalculation in the Utegate affair has temporally delayed the inevitable fate of Swan to resign as Treasurer. He is incompetent as Treasurer and has been proven to have acted improperly and has misled the parliament. He should resign for either account. The nation just cannot afford to have an incompetent Treasurer at the helm of Treasury to be in charge of the budget and economic management.

Swan’s problems, however, does not appear to be his own alone – it appears to be a more deep problem of the current Labour government involving quite a few ministers. The minister for finance is responsible for federal expenditure. The minister for education is responsible for the expenditure on schools. The minister for communication is responsible for the NBN costs increase to $43 billion. Of course, the Treasurer is directly responsible for the cash handouts, if he could be excused for not directly for others at all. Of course, the prime minister, with his economic essay advocating for government intervention, is responsible for the combination of these expenditures or proposals.

The problems with the opposition have been that they were unable to hold the government to account for its reckless spending. The government, the prime minister and the treasurer, have been talking nonsense like that “the alternative is to do nothing”. The tragedy for the opposition is that it has been so ineffective in its attack on the government and the prime minister and the treasurer when they were talking nonsense. The argument is so weak and illogical. Yet the opposition could not fight that simple battle.

The winter recess of the parliament should be a good opportunity for both sides of federal politics to reflect and rethink their strategies and polices. They have performed extremely poorly and both need to lift their games.

There is also the question of the quality of advices from bureaucrats. The government’s problem in managing the budget and the economy call into question of what advices they got from Treasury and different departments. Were they the cases that the government were given quality advices and ignored them? Or were the advices, or at least some of them, of questionable quality, due to political pressure or incompetent top bureaucrats? The Utegate affair and the revelation of what Treasury officials have done and known appear to suggest the politicisation of public services and the involvement in activities that they should have not done in the ways they were handled.

So top bureaucrats, or government ministers also need to consider how to improve policy advices from bureaucrats to assist the government in managing the nation’s affairs, especially budgetary and economic affairs.


Swan's selective use of IMF report

Comments on the report “Swan welcomes IMF assessment”, 25/06/2009, http://www.businessspectator.com.au/bs.nsf/Article/Swan-welcomes-IMF-assessment-pd20090625-TBTTF?OpenDocument

This is another poor and desperate show by a desperate man the Treasurer.

Swan selected what was good for him while avoid what was bad for conveniently. For example, the following sentence is quoted from the IMF report: "Output will likely remain below potential for a number of years, reducing core inflation."

What does that statement by IMF suggest of his budget projection of above trend growth of 4.5% from 2011-12? The Treasury growth forecast has been questioned and criticised by some economists and commentators in Australia. Why didn’t Swan mention that IMF indicates his growth projection is unrealistic?

An interesting and awkward selective performance by an incompetent and politically seriously wounded Treasurer who should resign over the OzCar affairs, but stubbornly refused to do so helped by a mistake by the opposition leader in his tactics.

While it was lucky for Swan for now, it is bad for the nation and the country. The taxpayers will suffer more from his incompetence in managing the economy and the government budget. It remains the case that the earlier this incompetent Treasurer resigns, the better for him, the government, Labour, taxpayers, the nation and the country.


Accountability important to governance - parliament debates not a waste

Comments on David Penberthy “Memo MPs: the public has had a gutful of Utegate”, 24/06/2009, http://www.thepunch.com.au/articles/memo-mps-public-has-had-a-gutful-of-utegate/

It is regrettable things like these happened in Federal politics. But it is important for both sides of politics to hold the other side accountable for what they do. This is an important check and balance in our democracy and governance.

If any blames are to be made, the receivers should be the government and its ministers. They created the whole thing in the first place.

The government also used the public services and the police improperly to gain party advantages at the expense of justice and the opposition. Both public services and the police also acted poorly and improperly. Treasury did not act as independently and impartial and non-political as it should. Neither did the police in its inquiry.

The imprudent tactics by Turnbull just unfortunately created an opportunity for the government and the Prime Minister to seize to cover their own mess in the Utegate affairs. There is a lesson for Turnbull and its close ministers in terms of political skills.

The whole drama indicates there should be a royal commission inquiry into this matter, including the roles of politicians and public services and the police. Further there should be a judiciary body, like NSW State ICAC, to handle and investigate potential impropriety of federal politicians, as well as bureaucrats. Leave matters like the Utegate fiasco to government is unfair to the public.

Exchange rate and Treasury forecast

Comments on the report “Treasury chief says rise in $A could hurt exports”, 3/06/2009, http://www.businessspectator.com.au/bs.nsf/Article/Rise-in-Aussie-dollar-could-hurt-exports---Treasur-SN5EQ?OpenDocument

This is an example why Treasury forecast of above trend growth the economy used to underpin the Rudd/Swan budget 2009 was problematic and too optimistic.

They assumed Australia will benefit from China's growth, but at the same time did not make plausible assumption about the impact of China's growth on the $A. The remarkable feature of this is that it has not been long since that forecast for the $A to shoot up.

Yes, currency will fluctuate all the time, but there are some important underlying factors that should be taken into account when forecasting the Australian economy.

It was not the best course for Treasury to take to be optimistic without carefully considering the important and likely downsides. More importantly, the Treasury forecast suffered another serious drawback of the issue that was the Locus’ critique, as I argued elsewhere earlier.

Changed external environment and Treasury forecast again

Comments on report “Treasury defends eco growth estimates, puzzled by IMF forecasts”, 3/06/2009, http://www.businessspectator.com.au/bs.nsf/Article/Treasury-defends-eco-growth-estimates-puzzled-by-I-pd20090603-SN2K3?OpenDocument

Henry was again defending the indefensible of the Treasury forecast, although he had few other choices.

It was reported that Dr Henry said "When economies are experiencing weak periods of growth, it is usually the case that those weak periods of growth are followed by strong periods of growth".

But the important question is: is this a usual case? The answer is more likely to be no.

There is a synchronised global recession, or a great recession, following a severe financial crisis that almost brought the world banking system down and nearly plunge the world into depression. This is unusual rather than usual. The recession in some of the advanced economies, such as the US, UK, is a so called balance sheet recession. The Japanese experience of a lost decade in growth in the 1990s was a balance sheet recession. That may provide some food for thought for the current one in world largest economy now.

We also have another unusual situation, that is, of significant imbalance between savings and consumption in the US at least. This had not been taken seriously before the economic crisis and is taken much more seriously now and for the next few years if not the decade. There will be some adjustment of savings and consumption in the US that means likely slower than usual growth for a period due to falling share of consumption in GDP.

So by important measures, this is not a usual time or case or situation or circumstance. Treasury should have realised that. But apparent it did not, whatever its reasons. It should and in my view will be a lesson for Treasury and its top brass in economic forecast. They should heed to Lucas critique and should analyse the broad environment much more carefully. The business as usual approach does not always work.

Climate change sciences - short versus long term?

Comments on Michael Asten “Climate ball up in the air”, 24/06/2009, http://www.theaustralian.news.com.au/story/0,25197,25680666-5015664,00.html

I tried very hard to understand this article and am still not sure I have done it. I feel Michael Asten is not convinced the argument of human induced global warming. If so, then say so and say it loudly.

While it presents some useful information, it is unclear what people would feel more or less informed after reading this.

We need scientists to be more straightforward and forthright, tell what they think and the main reasons, in a scientific way.

It may be possible that most of the science used in the debate, although seemingly convincing based on limited data for very short period, is questionable.

If that is the case, then it needs to be proven with more reliable science, if any scientists can do it. They should do it in an equally convincing manner. They need to work hard and fast to demonstrate they are credible or otherwise.

I am at present open minded on climate change, although I tend to go with the current majority for now, as probably the majority of people who are not a scientist on climate change.

Although climate change sceptics are clearly minority at the moment, that does not necessarily and automatically mean they are wrong. There may be some similarity between Newton’s physical laws, Einstein’s relativity theory and quantum theories. Differences in scales either in terms of size or time may be relevant.

Parties act together to achieve common goals

Comments on Peter Van Ness “Stick to the Six Party Talks on North Korea”, 23/06/2009, http://www.eastasiaforum.org/2009/06/23/stick-to-the-six-party-talks-on-north-korea/

Peter Van Ness's article is excellent. The six party approach, supported by the UNSC, is the only practical way to deal with the challenges posed by the North Korea reckless regime.

The five party members must act together as a united front with a common aim: the denuclearisation of the Korea peninsular, peace, security and stability of the Northeast Asia region.

There are no other more effective and practical ways than the six party approach. It is in every member's interest to work to achieve the common objectives.

Royal commission for Utegate, OzCargate and Emailgate affairs

Comments on Paul Kelly “Liberal leader's overkill backfires”, 24/06/2009, http://www.theaustralian.news.com.au/story/0,25197,25680668-7583,00.html

The play out of the Utegate, OzCar affair, the found fake email and the police leaking information in the middle of its inquiry, the involvement of Treasury officials indicate there is an urgent need for a royal commission inquiry into the whole affairs. Both sides of politics need to be scrutinised more closely. So do some top bureaucrats.

The information or evidence so far suggests that not only some politicians may have acted unethically, but also some of the top bureaucrats, such as supervisors of Mr Grech and Treasury head, since they knew some of the emails sent to Swan regarding the Grant affairs.

It is not enough to just investigate the fake email and potentially leaked information from Treasury or PMC. What have bureaucrats done and what supervisors and top bureaucratic heads had known regarding the Utegate and OzCar affairs. It appears to scandalous both politically and in terms of public services.

We need ethic politicians as well as independent and ethic bureaucrats as public servants to advise the government on policy matters.


Questions for Harry Clarke on national interest

These are some questions that I posed to Harry Clarke as comments to his article / blog "More on Rio, BHP-Billiton & Chinalco’s rejected love", or reply to his questions for me, 9/06/2009, http://www.harryrclarke.com/2009/06/09/more-on-rio-bhp-billiton-chinalcos-rejected-love/

I have commented on this article before. But Harry asked me to demonstrate my argument agaist his argument that the use of the Cournot Nash model is right in this case. Here are my questions.

hc, some quick points to discuss with you. First how do you define national interest clearly so that whoever is reviewing foreign investments can apply it consistently across the board?

Second, is your argument of monopoly power by Australia correct or informed as it should be? Both Rio and BHP say they would market their shares of iron ore production separately that seems to contradict your argument.

Third, is either Rio or BHP wholly owned by Australians, so Australia has the monopoly power? If they are not, why an increase in Chinalco's share in Rio would reduce any monopoly power that Australia has?

In terms of models, why is the Cournot-Nash story right in this case? Isn't the case that that model assumes perfect competition on the demand side? If that is the case, is that consistent with your argument of monopsony power demand? If you have monoply powers on both the supply and demand side, why is that model applicable?

Questions on taxes and transfer and the proposed business sales tax

Some questions on taxes and transfer – Comments on Harry Clarke “Taxes & Transfer Policy Conference”, 17/06/2009, http://www.harryrclarke.com/2009/06/17/taxes-transfer-policy-conference/

What is the insight for Australians' taxes and transfer system from the meeting?

I heard that Henry had floated a sales tax to replace company income tax sometime ago. Was that true and was the idea discussed at the meeting?

Why was sales tax for business a good idea, or a better idea than a profit tax?

The Utegate affairs - a conspiracy of some sort?

Comments on Harry Clark “Swan should go & maybe but probably not Rudd”, 21/06/2009, http://www.harryrclarke.com/2009/06/21/swan-should-go-maybe-rudd/

The email is proven to be fake and was reportedly concocted within Treasury.

Swan has another reason to resign, because he is the Treasurer and the email was from his department that generated the recent Utegate political drama. By the way, the drama did reveal Swan misled the parliament and he should go definitely without any doubt left.

Besides, was there a conspiracy of some sort here? There are a few questions. First, why and how was the fake email sent to Grech who appeared in the Senate estimates and distressed and said he remembered an email of this sort but said could not find it?

Second, why was the email purported to be from Rudd's office?

Third, why didn't other more senior Treasury officials who received other emails sent to Swan's home or office, indicating some sort of special treatment of Grant, point out to Grech that that action or behaviour is inappropriate?

Fourth, why and how was such a fake email leaked, first to the opposition and then to the media?

Fifth, why did all these happen to Grech who also worked for Hockey briefly in the past?

Six, why the first internal IT search within PMC and Treasury did not find any fake email, but the police say that fake email was from Treasury?

It seems there is a need for Royal Commission inquiry of the whole thing. There should be not only heads roll from politicians, but also from senior bureaucrats such as the Treasury head as John Stone implied, given the role they played in the Utegate affairs.

Rudd's APC is a trans-regional concept

Comments on Carlyle A. Thayer “Kevin Rudd’s multi-layered Asia Pacific Community initiative”, 22/06/2009, http://www.eastasiaforum.org/2009/06/22/kevin-rudds-multi-layered-asia-pacific-community-initiative/

By describing none of the existing regional institutions were capable of engaging ‘in the full spectrum of dialogue, cooperation and action on economic and political matters and future challenges to security’, and proposing for a new institution, Rudd has had a different idea than the development or evolution of any of the existing institutions. So it seems that there is a fundamental difference between the Rudd proposal and any of the existing regional institutions. In this sense, it is incorrect to avoid this important point. As a result, it is questionable that attempts to bridge the two different things after the Rudd proposal ran into difficulties will inject any new insights into the Rudd proposal.

Despite that, Rudd's proposal may still be viable in its own right in a broad context of a combination of regional and trans-regional arrangements. But it is likely to proceed at a slower pace than Rudd probably has had in mind.

There is a clear need for an Asian regional organisation that represents Asia as a distinct region, just as Europe, Africa and America and / or North America and Latin America. This is especially important given the dynamics of the Asian region, especially the East Asia region over the past decades and the next few decades. It economic weight is increasing rapidly. This regional arrangement is likely to evolve from some sort of the existing institutions or loose organisations or forums, such as EAF and gradually expand to a broad and more inclusive Asian organisation. In such a regional institution, countries from other regions than Asia are unlikely to be members.

Rudd's proposal does not necessarily conflict with this Asian regional institutional development, because it represents a trans-regional institution. This trans-regional institution is based on both the inherent links between the Asia and Pacific regions but more importantly the existing reality of current security arrangement, as well as the likely shift in both the economic, political as well as military powers within Asia and the Pacific regions.

So, it may be more helpful if important and unavoidable distinctions are made rather than being hidden. Perhaps Rudd himself should make it clear whether his proposal is for an Asian regional or a trans-regional institution. To mud the two does not help to advance his proposal.

Growth in China benefits Australia

Comments on Alan Kohler “Has China gone too far?” 22/06/2009, http://www.businessspectator.com.au/bs.nsf/Article/Has-China-gone-too-far-pd20090622-T8S9U?OpenDocument&src=mp

I think Australia is still well placed to benefit from China's continued growth, irrespective how its exports will perform in the next decade or two.

Given the international imbalance in savings and consumption, we are likely to see a period of slower consumption growth in the US for two main reasons. The first is the adjustment between savings and consumption - the saving ratio will increase and the consumption share declines. The second is the wealth factor, due to the destruction of wealth by the financial and economic crisis and the burst of assets bubbles.

The implications for China's exports are that they will be growing at a slower pace than they used to be in the past decade. An additional factor is that as the size of the major developing economies including China and India's grow more rapidly, the impact of their exports becomes larger. The capacity of the US and other advanced economies to absorb their exports does not grow as fast. so it becomes a constraint.

But China and other developing economies can still grow. What they need to do is to channel their savings to own domestic investment. This in theory can balance their internal savings and investment. But the adjustment may take time.

If China does pursue a high growth through increased share of investment to accumulate capital, then it will be good for Australia. Since investment in capitals requires more metals and more resources - that is Australia's comparative advantages.

I am hopeful that Australia will benefit from China's continued high growth and a closer economic integration between the two economies.

Institutions needed to uphold government probity

Comments on Michael Stutchbury “Probity imperilled by spending spree”, 23/06/2009, http://blogs.theaustralian.news.com.au/currentaccount/index.php/theaustralian/comments/probity_imperilled_by_spending_spre/

It seems there are some implications from the revelation of this article.

First, from Charlton's work in these areas, one has to wonder how much he contributed to the Rudd economic essay. How Rudd changed from a pre-election economic conservative to a government interventionist, and a social democratic in a short year?

Second, given the Rudd government's blunders in managing the budget and government spending so far or just in a few months, who or which bureaucratic agencies are responsible for advising the government on economic policies and government budget and spending? Why has the influence of one advisor been so influential? What did Treasury and Finance do in the process over the past few months, starting from last September or October?

Third, should a statutory body be established to publicly examine or audit government spending or expenditures, their effectiveness and efficiency, their costs to have the government accountable for its policies? The nation can’t afford reckless government spending and political favourism and corruption.

Institutions needed to uphold government probity

Comments on Michael Stutchbury “Probity imperilled by spending spree”, 23/06/2009, http://blogs.theaustralian.news.com.au/currentaccount/index.php/theaustralian/comments/probity_imperilled_by_spending_spre/

It seems there are some implications from the revelation of this article.

First, from Charlton's work in these areas, one has to wonder how much he contributed to the Rudd economic essay. How Rudd changed from a pre-election economic conservative to a government interventionist, and a social democratic in a short year?

Second, given the Rudd government's blunders in managing the budget and government spending so far or just in a few months, who or which bureaucratic agencies are responsible for advising the government on economic policies and government budget and spending? Why has the influence of one advisor been so influential? What did Treasury and Finance do in the process over the past few months, starting from last September or October?

Third, should a statutory body be established to publicly examine or audit government spending or expenditures, their effectiveness and efficiency, their costs to have the government accountable for its policies? The nation can’t afford reckless government spending and political favourism and corruption.

Swan misled the parliament and has to go

Comments on Lenore Taylor “New Swan messages 'special treatment'”, 23/06/2009, http://www.theaustralian.news.com.au/story/0,25197,25674948-5017906,00.html

In addition to the conclusion that the new email evidence does not disprove the allegation that Swan and his office gave Grant special treatment, the more important question is whether Swan has misled the parliament. The evidence so far indicates he has.

So given this offence, Swan has no place to hide but to go.

The origin of the fake email is very important, so is what role Mr Grech played in that process. From the appearance, Mr Grech did not seem to know the email was a fake. But that is a matter for the police to investigate and determine.

Rudd's ministerial code of conduct - Swan must go

Comments on Dennis Shanahan “Coalition deals itself mortal wound”, 23/06/2009, http://www.theaustralian.news.com.au/story/0,25197,25674946-17301,00.html

Malcolm Turnbull has acted too hastily and too early. There is no question of that.

But no matter what is going to happen to the opposition and Malcolm Turnbull, Mr Swan should and must go. He has to go, given the indisputable and damning evidence against him for misleading the parliament.

If Rudd is to uphold his ministerial code of conduct, he should ask Mr Swan to resign, or sack him if he doesn't do so. Otherwise, his code of conduct would be shown having no value and reputation, the few better traits left as Prime Minister, would be seriously damaged.

Swan should also realise this and should act in Rudd's interest, in Labour's interest, and in the government's interest. He has been seriously and fatally wounded. He will be a lame duck politician and Treasurer, in addition to his incompetent economic and budget management skills.

Swan should, must and has to go. Turnbull’s problems are no excuse for Swan to hang on as Treasurer.


The poor Treasurer and Treasury head should go together

Comments on Dennis Shanahan “Trio's fate now out of their hands”, 22/06/2009, http://www.theaustralian.news.com.au/story/0,25197,25669052-17301,00.html

It has been reported by the ABC that the email has been found, but it was a fake email and reportedly it was concocted within Treasury.

So, it seems that Swan should definitely be packing and going from Treasurer, not only he misled the parliament, but also the fact that the email came from within his own department.

There is also a question about senior Treasury figures, such as Treasury head and Mr Godwin Grech's supervisor. Why didn't they see the improperness of those emails sent to them and Swan's home? They are supposed to be working in the public interest both independently and not affected by political favors. There should be some heads rolling from top bureaucrats.

The Treasury has done a very poor job recently, such as the cash handouts as stimulus, the overly optimistic forecast of above trends economic growth for a number of years used in the government's 2009-10 budget. It has become too political at the expense of being independent public services.

Middle ground on the environment is needed

Comments on Brendan O'Neill “Beware the greenies who think people are parasites”, 22/06/2009, http://www.theaustralian.news.com.au/story/0,25197,25667725-7583,00.html

Human beings are not parasites on the earth. People who have the views to the contrary have their own big logic and mental problems.

Humans can, however, change the earth and have done so in a very significant scale following the industrial revolution, especially since the middle of the last century as world production was ever conituously increasing to an unprecedented and unrestrained scale.

As a result, human beings collectively have a responsibility to make sure that human beings can live on earth and with the nature harmoniously and sustainably, not just for the current generations, but also for future generations to come, and forever.

There are extremes among people in terms of the environment. Some are environmental alarmists who put the environment above human beings. There are also people who don’t care about the sustainability of human activities on earth and its impact on the environment. Both are wrong and should be recognised as such.

There are huge uncertainties about the impact of human activities on the environment. Normal logic, however, suggests that human production, in the form of its past century and its current state, is unlikely to be sustainable. Natural resources are limited. There are not too many unexploited regions on earth. And human activities are affecting the environment, not so much in terms of the environment itself, but in terms of sustaining human beings, their activities and the current species on the earth as we know.

So we don’t need to be environmental alarmists. We don’t need to sacrifice human beings quest for better lives and comfort. But we do need to take actions to make sure human activities don’t jeopardise its own future, broadly defined to including the pleasures human beings derive from the environment and its diversity.

We need a middle ground.

A Royal Commission is needed to investigate the Grant affairs

Comments on Glenn Milne “Ethics overboard in government attacks”, 22/06/2009, http://www.theaustralian.news.com.au/story/0,25197,25667723-7583,00.html

The Rudd government's ethic creditability has been in serious doubt at least and should be openly questioned. The Rudd politically motivated police inquiry is not good enough. There should be a Royal Commission inquiry into the whole OZ Cars and the Grant affairs.

I think John Stone’s view about what the Treasury head should have done should also be included in a Royal Commission inquiry. Why were senior bureaucratic figures like the Treasury head kept silent and done nothing in the process when they were sent emails clearly indicating some impropriety for public servants’ behaviour?

This affair also reminds about Treasury earlier economic forecast underpinning the Rudd / Swan government 2009-10 budget and its projected trajectory for the budget to return to surplus over the next few years. Henry said there was no political interference in the Treasury advice. This car financing affairs seems to suggest otherwise.

There are questions for both the government ministers and senior bureaucratic figures to answer. We need clean government and fearlessly independent public services. We can’t afford to have public services being used politically by the government for its own advantage.

It is important, imperative and urgent for Rudd to call for a Royal Commission inquiry to clear the whole mess. Rudd must do that and do it quickly.

Collective security should be the future

Comments on Hugh White “Australia’s strategic future after the white paper”, 19/06/2009, http://www.eastasiaforum.org/2009/06/19/australias-strategic-future-after-the-white-paper/

There seem two important issues raised in Hugh White’s article for Australia to consider. One is how Australia should position itself strategically for the future and the other is how Australian government and the defence department can improve the effectiveness and efficiency in defence expenditures.

Strategically, and ideally, the best outcome for every country including Australia would be a well designed and implemented collective world and international security system. The current power politics and superpower balance and deterrence have their historical roles. But looking at the long term future, the original idealism of the UN and UN Security Council system should be revived. This is especially important given the end of the cold war, the lessons learnt from the Iraq war and the changing international economic dynamics and the consequential international power structure.

In that light, the UNSC system should be strengthened and reformed to make it an important and effective world collective security institution. As the UNSC system strengthens and become more effective in international security, cold war military systems, organisations and structures should be gradually dismantled. The Australia – US alliance should be viewed in that strategic context.

The efficiency of Australian public expenditures, as those in many countries, is a big public policy issue. The efficiency of Australian defence expenditures is no exception, and perhaps more of an issue than other civilian expenditures, because of its less accountability due to the military nature. Ideally, there should be some parliamentary committee to oversee public spending, including military spending to make them more value for the money.

Government should be much more accountable for its decisions, especially when taxpayers’ money is concerned. Even for military spending where fewer people understand what should be and how they should be done, there should be an appropriate balance between secrecy and accountability.

Population aging, long term interest rates and potential assets bubbles

Comments on Kazumasa Iwata “Bubbles and demographics: Is China following Japan and the US?” 22/06/2009, http://www.eastasiaforum.org/2009/06/22/bubbles-and-demographics-is-china-following-japan-and-the-us/

Kazumasa Iwata's observation of the relationship between population aging and long term interest rates is interesting and its implications far reaching.

If this relationship holds into the future, say being true for China's impending population aging, public policies in china must make sure that the expected lowering long term interest rate and the likely increased savings as a result or response by people be channelled into productive capacities or assets.

This is also the lesson learnt from the US assets bubbles and the role long term interest rates and saving and investment imbalance played in that process, as Chairman Bernanke has admitted. And China's size will mean that there would be likely international implications as well.

Hope new financial regulations to be introduced worldwide will provide policy makers with tools to deal with the future financial challenges and the population aging challenges.

Macroeconomics also needs to play a catch-up game to meet the challenges from economic reality with theories that will be able to be applied to deal with real time financial and economic challenges.


Swan should resign as Treasurer now

Comments on Lenore Taylor “Crisis endangers Swan's career”, 20/06/2009, http://www.theaustralian.news.com.au/story/0,25197,25662847-5017906,00.html

This is a good example why government should not be involved in commercial dealings. Government uses taxpayers’ money and is likely to generate political scandals and corruption.

Whether it is Oz Cars, the Rudd bank, or whatever, it is not advisable to have government directly involved. The Rudd government should reconsider its approaches to commercial matters. It should rely on the private sector. If government has to be involved, it has to be at arm’s length and mainly provides avenues for the private sector to conduct businesses to achieve government policy objectives.

The email evidences are clearly showing that Swan has, whether inadvertently or not, misled the parliament. Given his incompetent ability to handle government budget and economic policies, he should resign from the Treasurer position.

It is in the nation’s, Labour’s and Swan’s own interest. Swan should have the courage to do that any decent person should do. Don’t be a hopeless politician and be pitied forever by everyone. Leave some dignity for yourself please!


An urgent need for government accountability to taxpayers money

Comments on Michael Stutchbury “Projects Keynes would approve”, 19/06/2009, http://blogs.theaustralian.news.com.au/currentaccount/index.php/theaustralian/comments/projects_keynes_would_approve/

Michael, it has to be (d). (note: (d) is one of the choices of answers Michael asked in his article. The choices are: whether (a) cynical politics, (b) questionable education policy, (c) guaranteed to produce stuff-ups and, consequently, cover-ups or (d) all of the above? To provide some context, I include quote from his article as follows:)

HOW ironic that the Rudd government’s “education revolution” has been conscripted into its crash-bang budget stimulus.

The short-sighted priority of Julia Gillard’s Building the Education Revolution program is not to ensure that the next generation of kids get better schooling.

Instead, the explicit $14.7billion priority is to hire brickies, chippies and sparkies to build libraries, halls and gyms rapidly at thousands of primary schools in every federal electorate, ASAP.

It’s the classic policy conflict of Keynesian short-term budget stimulus packages.
The demand to boost the economy now means much of the debt-financed investment will be wasted.

John Maynard Keynes even suggested the unemployed could be paid to dig holes and fill them in again.

It should be the second best prize of simplistic Keynesian after the dig and fill best prize. This is another example that Rudd / Swan Labour government is incapable of managing the economy and budget.

Shouldn't we have an economic court to bring the economic vandalisms to justice? They should include some top bureaucrats, probably. Otherwise, taxpayers money will be continue to be wasted, because there are few constraints to a government to do it. We have prosecutions of business people for fraud. Why don’t we have prosecutions of politicians for such obvious public economic fraud?


Depression unlikely but can't be ruled out completely

Comments on Adam Carr “Depression drivel”, 18/06/2009, http://www.businessspectator.com.au/bs.nsf/Article/SCOREBOARD-Depression-drivel-pd20090618-T4TR3?OpenDocument&src=sph

History will or will not repeat itself is an interesting question, but there are no automatically fixed answers.

Clearly there are very different institutions now as compared to back then in the great depression. It should suggest that we may not repeat the great depression. However, the financial and banking crisis a few months earlier was a stark reminder that history could repeat itself even under quite different circumstances. Also the lost decade in Japan may lend further support to that.

Expectations work in strange ways. Different sorts of expectations, adaptive, rational you name it, may co-exist and work together. If expectations of most people are that we are likely to have a quasi great depression in a different form, then it is likely that we will have one.

The problem is that we don’t know for sure how people form their expectations all the time. We have herd behaviours in the share market, housing market and some other market. We have bubble and bursting of bubbles. There are hardly perfect things in expectations.

So while I am confident that the world authorities should be able to deal with the current economic crisis, I cannot rule out completely the recurrence of another depression. I am not as confident as Carr is on this and I don’t want to be either. History is not necessarily always rational. Neither is the economy, and definitely the equity and housing market!

Banking and financial supervision

Comments on Alan Kohler “Fed the wrong advice”, 18/06/2009, http://www.businessspectator.com.au//bs.nsf/Article/Fed-the-wrong-advice-pd20090618-T4SSP?OpenDocument&src=sph

While the Australian system is admirable in the wake of the global financial crisis because it has shown its remarkable success and resilience in the financial storms, it is the essence of the system, not the form of it really matters.

In that light, to either have one body like the Fed or RBA to have the dual roles of monetary policy and financial system supervision, or have two separate bodies like the current Australian system does not really matter. You could have a strengthened Fed that has two broad divisions, one for monetary policy and the other for supervision. I think that may be better than having two separate bodies.

It is regrettable that failed organisations have still been kept going in the Obama announcement. There should be accountability.

What is also important is that the Fed should realise that in its realm of monetary policies, it more needs to be prepared to expand its role in terms of price stability to also include financial system stability, however it is defined. Otherwise, the financial instability will inevitably spill over to economic stability.

There is a need for new economic thinking, new breakthrough in current policy frameworks.

Respect democracy and accept its outcome

Comments on Greg Sheridan “Don't pin hopes on change in Tehran”, 18/06/2009, http://www.theaustralian.news.com.au/story/0,25197,25651979-5013460,00.html

It is sad and tragic to see people being killed in demonstrations, no matter where it is and what regime it is happening under. On that ground one has sympathy to those being hurt or killed.

However, we here in the west say the election was rigged and the results were stolen, do we have credible evidence of that? We can't just assume the results are not what we like and the results are not those demonstrators want, then they must be rigged. I think that is wrong.

What is occurring in Iran could reflect that the results were rigged, or people in Iran are not used to democracy and how that should be practiced. We really don't know what the results are and are on shaky ground in saying the re-election of the Iranian president was not the results of that election. We can't and shouldn't use the demonstrations as evidence that the results were rigged and wrong. We should not be hypocritical on democracy.

Democracy means one person one vote and free voting, whatever the results are, everyone should accept them.

Democracy does not mean nice people will always be elected every time and all time. It will mean an election outcome may be very undesirable to some or many nice people. But that is democracy. Unless you want to blame democracy or deny it, you should accept the outcome under democracy.

Even in the US, they elected GWB for two terms. What GWB did were not necessarily what most Americans wanted or liked. But that was democracy. If you don't like, you vote differently in the next time. But you need a majority.

New thinking and new strategies to denuclearisation the Korea peninsular

Comments on Ken Jimbo “Rejecting high-risk coexistence with North Korea”, 17/06/2009, http://www.eastasiaforum.org/2009/06/17/rejecting-high-risk-coexistence-with-north-korea/comment-page-1/

This is an excellent article and Ken Jimbo has really injected new strategic thinking into considering practical options to deal with the North Korea regime and the denuclearisation in the Korea peninsular.

However, the six-party framework is important and Russia should be included as an important partner in the process, although some matters could be decided among if others if they only concern them.

There is an urgent need for a new approach to the six party talks to achieve denuclearisation in the Korea peninsular. We need practical and pragmatic strategies that really work.

The most important isue is to assure China that the other party members are with it in dealing with any challenges. If China’s is really resolute and the five are a united front, the denuclearisation issue should not be too difficult.


Why has racial and ethnic discrimination been so stubborn in Australia

Alison Booth, Andrew Leigh and Elena Varganova (2009: does racial and ethnic discrimination vary across minority groups? Evidence from three experiments) have found that there were economically and statistically significant differences in obtaining an interview when applying for an entry level job of the same kind between ethnic groups with the same education level but different ethnic names.

The differences vary from less severe discrimination for Italians to more severe for Chinese and Middle Easterners. The former group is a more established migrant group in Australia and the latter groups are more recent arrival ones. These two groups both have to submit at least 50 per cent more applications in order to receive the same number of interview opportunities as people with Anglo names / background.

What is more disturbing is their findings that by comparing with earlier studies and findings, their results did not indicate that ethnic and racial discrimination fell in the past 20 years from 1986 to 2007.

Their findings may suggest a number of possibilities. One is that there might be some real differences in productivity between the different ethnic groups. If employers know there are differences in productivity, then they may want to employ people from more productive groups. But the jobs Booth, Leigh and Varganova selected are entry level jobs and the education level of those applicants do not seem to suggest that there is unlikely to be significant differences in productivity between those groups.

The second is that there might be perceived differences in productivity between those groups due to their cultural and language differences. This could be a plausible hypothesis for further test.

The third is there might be some influences that relate to the lengths of each groups establishments in Australia, especially after the Second World War. This could also be plausible and may be another useful hypothesis to test out.

Another set of hypotheses is related to the assumption of profit maximisation of firms, assuming that most of the employers selected in their survey are for profit organisations. A truly profit-maximising firm should not be discriminative in terms of ethnic groups unless there are productivity differences among them.

Even if a firm is profit maximising, it may still display some discrimination if there is discrimination in the hiring department of that firm. There could be a principal-agent problem between the firm and its personnel department. So the influences of the personnel department may be reflected in their selection of different ethnic groups in their hiring of people.

The findings of Booth, Leigh and Varganova are interesting, especially given that Australia is a multi-cultural country and racial and ethnic discrimination is legally not allowed. Further studies and testing are needed to determine the true causes of the found discrimination and correct it to provide everyone a truly equal opportunity of employment.

Political debates, spins and government policies

Comments on Lenore Taylor “Former treasurer nails debate”, 17/06/2009, http://www.theaustralian.news.com.au/story/0,25197,25648362-5017906,00.html

While it is understandable that there will always be political spins and every political side will try to twist and make arguments in their favour, politicians, especially the government should be sober behind the scene and formulate strategies and make public policies according to the reality and sound reasons, rather than apparent political spins.

In that light, the Rudd government should probably need to acknowledge that it inherited an economy in excellent shape and a fiscal position that few other countries could match at that time. That, in conjunction with Australia’s sound banking system and banking regulations/supervisions, was the solid basis for Australia to weather the current global economic crisis.

What the Rudd government should and must do is to stimulate the economy in the most effective and efficient ways and at the same time to keep government deficits and debts as low as possible. While those are past already, the government should realise that both the cash handouts and the schools stimulus have generated some undesirable effects. They were not done in the most effective and efficient ways. There have been wastes in them, or soem unnecessary government spendings at least. The government could have achieved the same stimulus and education investment effects while using less government / taxpayers’ money.

There are lessons from those, but it is not too late for the government to become more effective and more economically responsible. We have a long way ahead before the global economic crisis is over. Besides every government policy or spending can be a test of economic management.

For example, while the government’s new national broadband network proposal is well intended and has the potential to boost productivity and the efficiency of the economy as well as the welfare of the nation, how the project will be designed and handled by the government and the industry will have a long lasting effect on national welfare.

I think the government should approach the NBN with an open mind and conduct extensive consultations. It should use several independent business and economic cost benefit analyses (not every one of them needs to be very complex) to ensure that the most effective and efficient and economic option or options are adopted and implemented. It is a huge exercise and must be done very carefully. There is a lot of money involved and either the wastes or savings would be huge.

The government should not be captured by particular special interest groups, including Telstra and others in the industry as well. It also needs to resist the urge to revenge Telstra for its confrontation with the government. Particularly, it should ignore the ACCC’s view on competition regarding Telstra's monopoly. The ACCC’s behaviour is of revenging nature and also reflects its failure in successfully managing a monopoly in its regulatory approach. It has outdated views and strategies in regulating industries and firms. The ACCC needs reforms and catching-up with the trends in globalisation and economic integration.

The government, Telstra and other players should work together, recognising each other’s interest. So the government needs to stand above the position as a simple player or competitor. It needs to remove emotions from managing the process. It needs to analyse what is the best way to move forward for the nation as a whole. Further, everyone should avoid falling into the trap of the argument that if the technologies are the best, they must be good economically. You have to take account of cost and benefit and also consider demand and supply.

Treasury and the Communications department need to be effective in their advices and policy formulations. They need to learn from the lessons in the stimulus packages, in the NBN bidder process and its failure and in the new NBN proposals. Bureaucrats must resist the urge to revenge and need to work in the nation’s interest and not driven by personal emotions.

Costello political legacy

Comments on Paul Kelly “The great contender”, 17/06/2009, http://www.theaustralian.news.com.au/story/0,25197,25646978-7583,00.html

I am not a liberal fan by background, but I think Costello has really done a remarkable job as the most successful and longest serving Treasurer. His leadership as Treasurer enhanced the welfare of the nation enormously and gifted the Rudd government with an excellent fiscal position of fiscal surplus and net government assets to weather the global recession.

It was a pity that he failed to become the Prime Minster. He would have been a better PM, given his attitude in a number of important issues, like the apology, climate change and Kyoto, the Republic, and etc. He is a progressive liberal and not as too conservative in the liberal ranks.

Howard overstayed his Prime Ministership that did do good both to himself and Costello - an unhappy ending to both, as well as for the nation probably. That is a historical lesson for many politicians both current and to come. Hope Rudd is the first one to learn from that, although it is still early days of the Rudd government.

Chinese SOEs

Comments on Yongsheng Zhang “Does Australia really benefit from the rejection of the Rio-Chinalco deal?” 16/06/2009, http://www.eastasiaforum.org/2009/06/16/does-australia-really-benefit-from-the-rejection-of-the-rio-chinalco-deal/

I am a bit confused after reading the article. It is unclear the so called monopolistic positions of some Chinese SOEs would benefit Rio or not. Chinalco is not a monopoly in the Steel industry. It is not a firm in the steel industry. Further, Zhang has argued that further reforms may further reduce their monopolistic powers.

I thought the potential advantages to Rio if that deal had gone through would be it has a closer strategic partner in China to work in its interest, since Chinalco would benefit more if Rio benefit from increased share of the Chinese market. That would be very important. The Rio board had pointed out this point when it supported the deal.

That aside, I find some arguments in this article confusing.

First, I don't believe that all SOEs are monopolies, like firms in the steel industry where I had some experience, and in the non-ferrous metal industry which Chinalco belongs, if my understanding is correct (if there are any SOEs in the steel industry). Yes, in some sectors, SOEs are monopolies, possibly like in the post and communications sectors. So it is not always the case that SOEs exist due to their monopoly positions. The Chinese government deemed them important to its economy.

Second, I don't think the performances of SOEs were as bad as Zhang described. It is true that some and maybe many of them were subsidised at sometimes before most of them were privatised. But as far as I understood, they were also taxed (including their profits were mostly taken away) very heavily, during the time I was working in the now defunct former ministry of metallurgical industry. Besides, they carried a huge burden of social responsibilities, like housing for employees, providing schools and hospitals, and even urban infrastructures, etc.

There have always been different views regarding how SOEs performed. People wishing to push for changes or reforms would have been painting a picture of very bleak and inefficient SOEs, while on the other extreme people may have been arguing the opposite. I don't believe that any of those extremes have been correct. It is no different from the current debate on the building industry watch body in Australia - you have two extreme views – neither of them is totally right or completely wrong.

Another point that struck me as surprising is the argument that "the motivation of China’s SOEs is actually quite simple: to secure a supply of resources". I am not sure that is always the case. It somehow implies that the SOEs act like one China Inc. That itself is an illusion. The SOEs are separate entities and each of them has its own interest, and that interest differs from one to another. They don't act like a China Inc. Quite the opposite, they act for their own interest.

In the Chinalco - Rio case, for example, Chinalco was unlikely to act to secure the supply of resources. It was acting in its own interest. It is an aluminium firm. Rio's most valued assets in Australia are iron ore. Iron ore is not a resource for Chinalco per se. It was motivated by perceived values of the assets and expected returns from investment. It had the funding capacity and Rio had the need to raise capital and reduce debt at the time the proposal was made. Chinalco was a shareholder of Rio, so it understood the situation. It appeared that it wanted to increase its interest in Rio to maximise its own profit, possibly to 19%. I am not sure 19% holding can secure the supply of resources from Rio.


Rudd's approach to politics commendable

News reports today that Prime Minister Kevin Rudd might appoint Peter Costello to serve for Australia in the future if an opportunity comes. The PM also said that there should be a change in approaches to politics when individual talents are concerned. It is nice to see good politics at the federal level in Australia indeed.

This reflects Kevin Rudd's value of talents, a true remarkable character. It also echoes US president Obama's approach to appointing his administration staff using some people from Republicans.

It is a wonderful development in politics. It maximises outputs for given resources of a nation. It is good to governance, to public affairs and national welfare. Both the president and the Prime Minster should be commended for their non-partisan approaches.

Rudd's approach to Costello is commendable politics

News reports today that Prime Minister Kevin Rudd might appoint Peter Costello to serve for Australia in the future if an opportunity comes. The PM also said that there should be a change in approaches to politics when individual talents are concerned. It is nice to see good politics at the federal level in Australia indeed.

This reflects Kevin Rudd's value of talents, a true remarkable character. It also echoes US president Obama's approach to appointing his administration staff using some people from Republicans.

It is a wonderful development in politics. It maximises outputs for given resources of a nation. It is good to governance, to public affairs and national welfare. Both the president and the Prime Minster should be commended for their non-partisan approaches.

Executive pay should and can be fair with a longer term focus

Comments on Alan Kohler “Unfair and unstoppable”, 16/06/2009, http://www.businessspectator.com.au/bs.nsf/Article/Unfair-and-unstoppable-pd20090616-T2TA2?OpenDocument&src=sph

If it is unfair, it should and can be stopped. We or the government or the regulators just need to be a bit innovative and creative.

There might be a way of balancing the responsibility and incentives in terms of executive pay.

An executive should be paid a base pay, whatever times of average earnings associated with some sort of the total payrolls of a company. The larger a company is, the higher the base pay for its chief executive.

There might be a need to measure relative performance as well as absolute performance indicators. The relative performance measure can remove some luck factors, that is, if the period is good for everyone or the majority of firms, then the absolute performance measure should be discounted. This will make the executive pay fairer over time as well.

In additional to the base pay, incentive pays should be withhold until sometime later when the full performance for a year or a period can be judged.

In this way, by combining base pay, the size of a company and the longer term view of executive performances, an appropriate balance could be struck, to encourage good performance and avoid short term rent seeking behaviour.

Great Asian economic transformation and restoration

Comments on Kaliappa Kalirajan “Now for an Indian ‘miracle’”, 13/06/2009, http://www.eastasiaforum.org/2009/06/13/now-for-an-indian-miracle/

If we take a long historical view of human beings’ history and see the dynamic economic growth and transformation in Asia over the past decades in that light, starting with Japan, then followed by the four NIEs, the other East Asia tigers, China and India now, it is likely that over the next few decades we will see an Asian economic restoration. Asia is finally catching up with Europe and North America, following the latter’s remarkable economic advances since the industry revolution.

Let's hope that Asians will consolidate their economic progress over the past decades and continue to advance their economic fairs in the coming decades.

While in the past exports from Asia to other regions have played an important role in assisting Asia's transformation, the future is likely to see more reliance on intra-regional trade and domestic absorption, as the size of the Asian economies continue to grow. This is particularly so, given that the US will need to live within its means, that means to save more and consume less as a proportion of income.

Kalirajan's observation of the structural change in India's economy is especially interesting in light of this.

A closer economic integration of Asian economies especially those more advanced and those more dynamic ones, will provide further scope for growth and benefit not only Asian economies, but also economies in other regions. Intellectual thinking and policy frameworks within the region should more ahead and provide guidance to Asia’s economic transformation at such a scale. Institutional development might be beneficial to the process of transformation.

What can Japan expect from rebalancing?

Comments on Tobias Harris “Is Japan balancing?” 16/06/2009, http://www.eastasiaforum.org/2009/06/16/is-japan-balancing/

This is another point that why there is a need to have an Asian community that collectively looks after themselves and the region as a whole. No matter what Japan does, it is likely only to represent a futile and wasteful attempt to balance or to fill the waning influences of the US in North East Asia. That will cause wasteful military race in the region and beyond.

It has been more than 60 years after the end of the Second World War and nearly 20 years after the collapse of the former USSR, the other only superpower aside the US during the cold war era. What is Japan rebalancing for? Will it effective to its so called objectives?

We need to move on from the cold war geopolitical thinking and strategies. We need a completely new approach. An Asia community or union style with collective and non-discriminative security arrangement for all members will save unnecessarily too much military spending for each of its members.

East Asia or Asia more broadly, should build on the recent momentum of its ascendance in world economic affairs to look for a more-long lasting and more-enduring regional development, stability and security. Through managing well its own regional affairs, Asia can contribute to a better world.

Asia is the third pillar in world economy and needs its own representatives

second Comments on Gary Hawke “The Asia Pacific Community: objectives, not institutions”, 15/06/2009, http://www.eastasiaforum.org/2009/06/15/the-asia-pacific-community-objectives-not-institutions/

I can just add some economic information to the debate. I just have a look at the CIA country information about its estimated purchasing power parity (PPP) data of a number of countries and got the following information (https://www.cia.gov/library/publications/the-world-factbook/).

The PPPs for 2008 were $17.2 trillion for the North America (US, Canada and Mexico), $14.82 trillion for the heavy weights in EU (Germany, UK, Italy, France) and $14.43 trillion for North East Asia (Japan, China, Korea, Hong Kong and Taiwan).

With other dynamic developing economies coming along in Asia, especially noticeable India, and the rapid growth of the Chinese economy, Asia is really becoming the third pillar, together with the US and EU, in the world economy.

What this means is that it would be better if it is possible to have some sort of Asian regional organisations to coordinate their common efforts and represent their interest in the world affairs. After all, Asia has about two thirds of world population, with two countries each having more than a billion population.

A peaceful, stable and more prosperous Asia will contribute to a better world.

No matter it is population, geographical size, or economic weights, Asia is an important continent. it needs its own voices and representatives in the world affairs.

Understanding economic modelling and forecasting - be realistic about it

Comments on Lenore Taylor “Job forecasting a model for success”, 16/06/2009, http://www.theaustralian.news.com.au/story/0,25197,25642571-5017906,00.html

Economic model of forecasting of one type or another is no more than assumptions used in it. Most models are long run general equilibrium model. How many jobs will be lost or gained largely depends on the assumptions of wage flexibility.

In the short run, most modellers assume some sort of wage rigidity, so any perturbations like the ETS will cause job losses. In the long run, wage growth will be slower to resume full employment or near full employment. One does not need to be a modeller to know the results of ETS without renewable energies.

With renewable energies, more opportunities are generated to employ more labour. That is for sure, but it says little about the underlying welfare situation. Further, how many jobs will be created will depend on the quantity of those assumed renewable energies and the labour intensity of each of them.

The point is that whether it is short term job losses, or job absorption by renewable, they all depend on assumptions used. And those assumptions are based on the current labour intensities and the assumed future labour intensities. In the long term, there is no job impact, because people/labour will adjust to any future situations.

In some sense, it is meaningless to talk about job losses or gains of one sector or at one time, under one particular scenario. There are always other balancing factors working to offset that. One needs to be realistic about modelling and results from modelling.

Once one understands how models work and how modellers work, it is not too difficult to understand their results. Nevertheless, having models is much better than having no models, and that is why modellers or forecasters are the beneficiaries of any debates involving economic consequences, such as employment and welfare.

Australian tax picture more complex than just company and personal tax rates

Comments on Michael Stutchbury “A capital idea to cut company tax”, 16/06/2009, http://www.theaustralian.news.com.au/story/0,25197,25641251-5017771,00.html

Company tax, like income tax, can be a complex concept. I don't think 30% of company tax rate is a true reflection of company tax burden in Australia. Nor do I think the nominal company tax rates in most other countries are either.

For example, besides the 30% income company tax rate, we have also payroll tax of varying rates at least for large firms in every State, and superannuation guarantee contribution of 9%. They may not all tax on company earnings per se, but some of that belongs to company tax burden and some of that a tax on labour.

So it is overly simplistic to just quote and compare the nominal company tax rates across countries. Any conclusions drawn from that are misleading and will not inform the public on the true burden of tax on capital versus labour.

Further, there is dividend imputation in Australia. It is discriminative against foreign capitals, but has the advantages to encourage domestic investment.

Open regionalism and Asian and Asia Pacific communities

Comments on Gary Hawke “The Asia Pacific Community: objectives, not institutions”, 15/06/2009, http://www.eastasiaforum.org/2009/06/15/the-asia-pacific-community-objectives-not-institutions/

In light of Gary Hawke’s arguments in this article, I would like to make some comments. First, Hawke is correct in saying that some sort of Asia Pacific community has been developing and forming. Hawke mentioned a few and I would also add PECC to that long process. All those reflect the real needs and desire of the region, loosely defined. There is no question about that.

Second, Hawke is also correct that the focus of most of those organisations have been on economics as opposed to politics and security. Partly they have been a pragmatic approach to the diverse situations in the region, as Hawke pointed out.

Thirdly, I agree with Hawke completely on the following, to quote from the above:
“It has been convenient for Asia to try to tie the US into an ‘Asia Pacific’ vision, but the US will insist on a global perspective. The vision of ‘open regionalism’ can be a contribution to world affairs, but Asia Pacific integration has to be compatible with Asian integration just as it will proceed alongside regional arrangements elsewhere.”

What I would like to add is that it is very likely that there will eventually an Asian integration and some organisation or community to represent Asia. An Asia Pacific community is a trans-regional one.

Fourthly, while I agree with most of Hawke’s arguments, I do see the value and need for a regional and trans-regional organisations or communities to explicitly have a broad focus than economics. I think the concept of open regionalism with an enriched content will be able to serve that purpose.

Open regionalism should include:

open trade with the region and beyond
open capital flows and investment
broadly and in the long term, few restrictions on labour movement
common and non-discriminative security and open peace
collective governance and multilateral approach to regional affairs
aspirational community goals but respect diversity and autonomy.

I think with an open mind and a focus on long term prosperity and peace and security, such an Asian community and Asia Pacific community will see the day of light.


Peter Costello - a fine person and excellent Treasurer

Peter Costello, the longest serving former federal Treasurer, is retiring from politics. He will be best remembered for his enormous and unique contributions to managing very successfully the Australian economy and federal budgets during his 12 years as Treasurer.

During their rein, the Howard / Costello government eliminated the federal government's debt of nearly $100 billion they had inherited when they came to power in 1996, and accumulated net assets by the end of the Howard and Costello era.

While there was some luck involved, no one should underestimate Costello’s management of the economy and the budget.

Costello will also be remembered for his lost / foregone opportunities of becoming Prime Minster and the coalition leadership. Judged from his attitude towards a number of issues, such as climate change policies, national reconciliation, republic, Costello seemed to be a fairly moderate conservative and progressive liberal, with sharp intellectuals, though questionable killing political instinct and urge.

The most enduring contributions of the Howard / Costello government to the Australian economy have been the introduction of GST in 2000 that enabled the reduction in personal tax rates and the abolition of a number of State inefficient taxes.

The coalition government also introduced far reaching industrial relations reforms, but they became one of the factors that contributed to the coalition’s election loss in 2007 and the Rudd / Gillard Labour government is dismantling those reforms that are deemed unfair by Labour.

It is nice and pleasing to see that both Rudd and Swan have praised Costello's contributions. When a political figure like Costello is retiring from politics, it is time to put partisan politics aside and give due credit to every politician's contribution to Australian national affairs and welfare. By doing this, they are also doing credit to themselves. I command the Prime Minister and the Treasurer for their acts.

Let’s hope Costello will continue to use his enormous talents and make contributions to whatever he does in his pursuit of a private life and career.

We need a clean slate design for an Asia regional architecture

Comments on Hadi Soesastro “Architectural momentum in Asia and the Pacific”, 14/06/2009, http://www.eastasiaforum.org/2009/06/14/architectural-momentum-in-asia-and-the-pacific/

It appears there are a few different proposals for establishing some sort of a regional forum for Asia, East Asia, and/or Asia Pacific. It is a health development and reflects a strong desire from the regional nations, broader or narrower.

It also appears that there is a need to approach the design of such a or more regional forums from a clean slate, as opposed to be constrained by some existing forums, although it is possible that some of the existing regional forums could be transformed into new forums people are thinking about.

The constraints of existing forums on thinking or designing new regional architecture can be understood, since people tend to think from own experiences. After all, most peoples’ thinking is bounded rationality, framed by the environment in which they work or are familiar with.

The main problem with those constraints is that it is more difficult to consider all feasible options, so results in sub-optimal with long term consequences. We have APEC, ASEAN plus 3, East Asian Summit. We have different proposals, like Rudd’s APC, Korean’s Caucus, etc.

I personally like an Asian Union, an Asian organisation, because there is no such similar organisation in Asia as in other continents. Yes, there is an Asia Development Bank as an Asian regional bank, then why there is no other regional forum to coordinate more broad issues across the Asian region? It is very peculiar indeed.

I look forward to seeing a creative and the most optimal design and thinking for an Asia regional organisation. Other trans-regional forums have their usefulness, but they cannot fulfil the needs of all Asians, or the Asian nations. A clean slate approach to the design is urgently needed.


Rudd/Swan stimulus - wasted opportunities and wasted taxpayers money

Comments on The Australian’s articles on Rudd government’s spending on schools as part of its economic stimulus program, “Schools infrastructure fund under fire” by Justine Ferrari, “Hall costs go through the roof” by Natasha Bita, “Rules bent as 'facelift' funds spent on laptops” by Pia Akerman and Natasha Bita, 13/06/2009

There are 3 articles in The Australian today on the federal government’s spending on schools to build school halls, libraries and so on, as part of Rudd/Swan economic stimulus package. There was also mentioning that The Australian has published a series articles on this topic, including one on Thursday by Professor Peter Newman.

I did not read Newman’s article, but have read the 3 articles today online. The first article reported concerns by several prominent education experts, including Professor Ken Wiltshire whom I happen to know. The other articles mentioned waste out of proportion in building costs and bending of rules for funding purposes.

From what they say I can sense that there is enormous waste. For example, the costs for building some school halls are now 2-3 times of experts’ estimates. Besides, some of them questioned whether the funding is of priority for education in general and those schools in particular.

This is another example that Rudd / Swan government is wasting taxpayers’ money in the guise of stimulating the economy. It is to the best a simplistic approach to stimulus fiscal policy through ignorance and a poor understanding of economics and government policies; and extreme reckless and irresponsible to the worst.

It might be a simplistic approach, because they might just thought if you increase government spending it will be stimulating to the economy. It is a poor understanding of the GDP identity where G is a component of the outputs. It could be due to poor economics, perhaps.

It might be extreme reckless and irresponsible, because that is Rudd’ one of revolutions. He has said a few revolutions, including education revolution. In their mind, if it is a revolution, costs of doing it does not matter any more because it is the right cause and justifiable.

So here they come, the school stimulus, the national broadband network to homes of optical fibber of the order of $43 billions without any prior proper business study, the cash handouts for stimulating the economy.

As a taxpayer, I have become concerned with the Rudd / Swan approach to these things. Today’s articles in the Australian appear to validate my concerns. The question is how Rudd / Swan can be made to change their approaches and start to be responsible.

How that question will be answered remains to be seen.


Monopoly and strategic gaming - please be realistic about it

Comments on Harry Clarke “More on Rio, BHP-Billiton & Chinalco’s rejected love”, June 2009, http://www.harryrclarke.com/2009/06/09/more-on-rio-bhp-billiton-chinalcos-rejected-love/

People are talking about the monopoly issue and the Cournot Nash model just like they can be applied anywhere without a need to be modified. It is laughable for such a naivety.

Don’t you think it might be more appropriate to use a strategic model of strategic gaming by monopoly and monoposony (not sure the spelling is correct)? There is a need for a little bit more advanced economics, perhaps. Let’s be more realistic.

China is much bigger than Australia. It is unlikely that Australia will benefit from strategic gaming with China. So it may be in Australia’s interest not to play that game and build trust with the Chinese to benefit both.

Just thinking one side can move and the other side, the bigger one doesn't is misleading to not only other people, but self-cheating as well. Let's be mature, alright?

A lesson from the failed Chinalco Rio deal

Comments on Peter Yuan Cai “Chinese media’s response to the Rio-Chinalco deal”, 12/06/2009, http://www.eastasiaforum.org/2009/06/12/all-quiet-on-the-eastern-front/

While I have been critical to the Australian government's handling the matters regarding to Chinese investments and some commentators and politicians fanning ignorance and hostility towards such investments, I came to realise that the Chinalco - Rio deal was probably made a bit too complex to look attractive to more people.

Some Australian commentators say it was too complex, including more than 600 pages documents and involving complex transactions. In hindsight, maybe a less complex deal would have been much better.

Starting with complexity and failure was not good for confidence building on both sides. Maybe that is a lesson for all involved. Of course, how to manage issues involving the politics and public relations in Australia by Chinese investors remains as important as ever, if not more so.

It is also important investment that Chinese investors need to make. Investing wisely and having good returns to such investment will benefit both sides. It is in both sides' interest to foster such investment.

Fair to all students

Comments on Justine Ferrari “Revolution shapes tale of contrasts”, 12/06/2009, http://www.theaustralian.news.com.au/story/0,25197,25623569-5013480,00.html

We really need a truly fairer system, fair to all, needy or wealthy! But it can mean differential criteria.

I think a dual criteria incorporating both the need and the number of students should be better than either extreme. Maybe the needy should be given a larger weight, say, a student in a needy school is equivalent to 3 or 4, or more students in wealthy schools.

But we should not adopt policy of envy and jealous, or extreme Robin Hood approach. That is too unfair to those who contributed so much to government money as taxpayers.

Essentially, what I mean is a multi criteria, based on mainly needs, but also have wealthy schools included. After all, the government governs for all and the parents and families of wealthy school students contribute to more to government money through tax.

A simple and effective global emission reduction scheme

Comments on Christopher Findlay “Green growth and how to get there”, 10/06/2009, http://www.eastasiaforum.org/2009/06/10/green-growth-is-hot/

I like your second paragraph, Christopher. The best the government can do is to create an environment for the private sector to innovate to bring the best technologies for green growth. Government mandates are not necessarily good. It is no different from some politicians or bureaucrats trying to pick winners, and they seldom can get it right.

The important thing is the price signal. If government can get a creditable pricing of carbon emissions, and have a future path for it, then the private sector will react. The government can provide some incentives to innovation and it can use the revenue from a carbon tax or emission permits.

PC sometimes makes very dry and irrelevant recommendations. But I am with PC On this point – let the market and the private sector work through competition according to price signal and incentives.

I prefer a universal carbon tax and have a schedule for the price to go up over a period. Emissions permits and trading are likely to be less effective and less efficient. They, like the current Australian government proposal, will probably leave transport emissions out.

A universal or uniform carbon tax is the most efficient and effective way to do it, even though it is difficult to get the tax rate right at the beginning to achieve certain reductions. But that can be sorted out fairly soon.

This difficulty of a carbon tax is no different to the use of interest rate to manage the economy. It takes time.

So my approach is a universal carbon tax and certain government incentives for innovation and development of new technologies.

It is better to have a global carbon tax and an international transfer system for high cost countries to pay for low cost countries. Alternatively, an international agreement on reduction targets for countries and then supplementing that agreement with an international emissions trading system.


Same colleagues with quite different approaches to OZ minerals

Comments on Stephen Bartholomeusz “Money or the box for OZ Minerals?” 10/06/2009, http://www.businessspectator.com.au/bs.nsf/Article/OZs-search-for-value-pd20090610-SV5QV?OpenDocument&src=sph

Bartholomeusz's article is more objective and much sensible than that of Gottliebsen's.

There are uncertainties associated with the latest offers. Also, why could those offers have been made earlier? Are there some tricky nasties in those offers? What is the probability or likelihood of failure of the last minute proposal? Those are the issues the board has to work out or make a judgement. You can't just refuse the Minmetals offer without calculating the risk weighted value of the other offer.

Gottliebsen has been acting hysterically with high emotion and no rationality and common sense. Gottliebsen needs to be a fair dinkum and should not be acting as an irresponsible outsider to tell either the board or the shareholders what they should do.

How to tax should be a matter for citizens but not politicians to decide

Comments on Janet Albrechtsen “A nation of paupers”, 10/06/2009, http://blogs.theaustralian.news.com.au/janetalbrechtsen/index.php/theaustralian/comments/a_nation_of_paupers/

As long as taxes and redistribution of income as concerned, it is inevitable that there will be some value judgement involved, the so called normative as opposed to positive issues in economics. Implicitly, people have the concept of fairness, although that concept varies from country to country and from people to people, and even from person to person, and of course from time to time. In that sense, the moral issue of taxation can’t be completely ruled out from consideration, although most people may not talk in that term.

There are a number of main issues here. The first one is the fairness of taxation at the time of consideration. This is the collective standard of the whole nation as a whole. It should not be left to just politicians or parties to decide. It should be dealt with by the nation and by voters. So any significant changes to the taxation system should be put to the voters before an election as a referendum item and let the voter to decide.

The second point is that there is always the issue of the inevitable trade-off between equality in distribution and efficiency / incentives. So the nation and voters should be made clear about that point. If you choose to tax the higher income earners more heavily, it is likely to reduce the total output of the nation for given resources, especially human resources (even these can be variable due to people’s migration from one place to another and from one country to another) . As a result, the total value available for distribution among the nation is smaller.

Thirdly, there is the issue of potential tax evasion or minimisation issue involved. Human beings are intelligent and will react to the environment and the changed environment. If the tax is too heavy for higher income earners, they can employ resources to minimise their tax liabilities, legally and / or possibly illegally. They would lose that income any way due to higher tax, why don’t they spend some of that to attempt to reduce the total tax bill? They have the resources / income to do it.

Fourthly, there is both short term and long term government tax maximisation issues. The government might be able in theory to design the taxes in such a way to maximise its income and redistribute it to the low income people or provide services to benefit the poor more. The shorter run has some implications for the longer run.

Fifthly, there is also a higher order issue of welfare maximisation issue, that is more important to at least some people than the government tax maximisation. Of course, welfare maximisation will be heavily influenced by the society’s norm or standard for fairness. Bear in mind that even the society’s norm and standard will change over time and across countries.

So taxation is both a simple and complex issue. It is important to make this point clear and to leave the power of deciding on which tax to adopt in a nation to the citizens of that nation and not in the hands of a few politicians.

Rio board and shareholders and the failed deal with Chinalco

Comments on Ross Daniel’s comments on “Australia needs to get its act together on China, and fast”, 9/06/2009, http://www.eastasiaforum.org/2009/06/07/australia-needs-to-get-its-act-together-on-china-and-fast/

I have some sympathy to Ross Daniel's point, although I don't think the deal was uncommercial even when it was first promulgated and the Rio board then acted against the shareholders' interest. Although the value of a company is hard to measure because ever changing environment and internal situations, one could get a clue from its share prices. At the time the deal was conceived, what was the total market capitalisation of Rio and what value was the deal value Rio at? I did not calculate that but that should be an easy matter to do. I suspect that that deal valued Rio much higher than the market capitalisation.

One got to remember is the fact that Rio was having very high debt to equity ratio and the market situation during late last year and early this year was so dangerous that some companies were fighting for their own survival. The deal and the Rio board had to take that into account. Yes, it turned out that the world banking and finance crisis almost subsided now, but back then, the whole system was in danger of collapse and many companies, especially those with high debt would have gone under if the banking crisis was not averted by the unprecedented and concerted efforts by the governments of major large countries/economies.

Individual shareholders may or may not have got the whole and true picture as the board in most of time, unless the board is acting strangely but that is relatively rare. On the other hand, shareholders have every right to be concerned and often get emotional.

Even now it is unclear whether the deal with BHP will bring benefit to Rio or not, given that many major countries are voicing their concerns about the monopolistic nature of the deal. They may devise some scheme to counter any savings and pricing monopoly behaviour that would potentially benefit Rio. Don’t worry about WTO rule, if there are many countries that think it is unfair, they will act and design new rules. The matter of fact is that WTO rules are made by its member countries. They can make them and they can change them.