Time to think urgently and creatively on the Greek issue

Comments on Wesley Widmaier "Eurozone’s shared identity the final tragedy of the Greek crisis", 1/07/2015

There is a need to balance the macro and micro economic policies for the troubled countries and the potential moral hazard issues. The argument for debt forgiveness, while may have some attractiveness, but if not handled with great care, may create a moral hazard issue on the debtor's side.

The Greek tragedy, if it is to become one, reflects a weakness of the single currency of the euro, at least the shortcomings in its design, that is, the lack of consideration of a mechanism for a country or a number of countries to exit from it when the circumstances have become so necessary that such exit actions would be better than for that country or countries to stay inside the euro zone.

That shortcoming in the design of the euro reflects the erroneous approach of those involved in the euro process, that is to say, the simple minded and linear approach to economic/currency integration.

That shortcoming may have also created a moral hazard problem for some countries. In good times, some countries within the euro zone may have spent too much beyond their means, caused by some imperfection in the integration process that have over valued their economies. On the other hand, those countries may experience economic problems so severe that it is difficult to deal with within the single currency framework, because they lack the means to adjust without the need to force severe cuts to their nominal income/wages, as compared to the case where the country had its own currency and can devalue as a means of adjustment to its reduced international competitiveness.

Given the current irreconcilable stance between the debtor, that is Greece, and its major creditors, the so called Troika, there is an urgent need for a rethink of the euro approach. The rethink needs to design an exit strategy for a member country. An orderly exit of a member should be good for both that member and the rest of the euro zone members. There is no point to blame each other on the failure of the negotiations to claim a higher moral ground, whether it is Greece or any other parties. What is needed is cool head, creative thinking and quick actions. Failing to do that may cause unnecessarily greater damages than it needs to be.

The new economic agreement between China and Taiwan

Comments on Stuart Harris “Taiwan and its new economic agreement with China”, 9/07/2010, http://www.eastasiaforum.org/2010/07/09/taiwan-and-its-new-economic-agreement-with-china/
The majority of Taiwanese are likely to weigh up the agreement with alternatives and see whether the agreement is in their interests.

As the shift of world economic weight towards Asia continues and China’s economic size becomes bigger and bigger and further integrated with regional economies, such agreement is likely to be more and more important for Taiwan.

As Harris mentioned, this agreement can not only diminish the potential disadvantage to Taiwan in an expanding Asian market by the regional economic integration underway through the expansion of preferential trade arrangements from which Taiwan would be excluded, but also bring further significant economic benefits to Taiwan to the tune of 4.5% of GDP.

A cooperative economic relationship will be better for both sides.

From political point of view, I think China is likely to adopt a very generous attitude toward Taiwan as long as the two sides maintain a reasonable relationship and no serious separation is contemplated.

China has enough internal ethnic issues, problems and tensions to attend and the resolutions to those internal ethnic issues are likely to contribute to a better relation with Taiwan.

Given that some options to allow Taiwan have its own troops and system were floated by high level Chinese leaders in the past, it is likely that some sort of federation might be possible.

Maybe a first step is to have a peace agreement between the two sides. Then they could discuss a new constitution for a new federation.

What should be ahead for G20?

Comments on Paul Kelly, “Shift to G20 was matter of time”, 28/09/2009, http://www.theaustralian.news.com.au/story/0,25197,26133473-7583,00.html

Australia deserves a seat at the top table, because of its dominant position in the Pacific region.

However, as Kelly acknowledged that "the sceptics are right to warn of the risks: that the G20 will be too big, too divided and unable to deliver genuine outcomes by consensus."

So there should be a consolidation of the G economic grouping to make it both representative and workable. It should be smaller in size and also has a workable and efficient and effective governance structure.

In this regard, an article "Deciding who decides at the G20 summit" on http://www.eastasiaforum.org/ has shed some light and is worth reading. I have provided some comments that further complement that article’s ideas.

G grouping of world economic affairs

Comment on Nina Hachigian “Deciding who decides at the G20 summit”, 26/09/2009, http://www.eastasiaforum.org/2009/09/26/deciding-who-decides-at-the-g-20-summit/

This is an important issue that is evolving and should be decided by a core of the current G20 members, the sooner the better.

While there are merits in each of the proposals mentioned in the article, it seems that economic weight should be the key criterion.

Even using the size of the economy as the key criterion, then there is still a tough question: how to determine or calculate the size of a economy?

There is obvious a calculation based on market exchange rate. But it is well understood that the market exchange rate has some significant shortcomings. For example, it may vary substantially within a short period. Also it generally underestimates the real size of most developing economies due to their lack of international trade and especially export power.

So whether you use a market based or a purchasing-power-parity (PPP) based exchange rate to calculate a country’s economic size? Alternatively is it better to use a combination of the two with an equal weight to reflect both the real economy and its trade impact?

In order to enhance its regional representation, then the top economy in a continent could be included.

So I would propose that the group should comprise the top one economy in each continent, and then the next 15 world largest economy, with the size of the economy based on a combination of both PPP and current exchange rate to be calculated by the United Nations. This group should be updated every 5 years to reflect the new world economic reality to be representative.

There should also be a governing structure of the G grouping. The top 5 of the G group should be the standing members during the off meeting period. Again, they should be decided using the same criteria.

This G economic group should be a new branch of the United Nations, to enhance the multilateral nature of the group and the legitimacy of the United Nations.

Australia needs an independent body of national economic affairs

Comments on Michael Costa “Budget honesty now for the future”, 22/05/2009, http://www.theaustralian.news.com.au/story/0,25197,25518784-5015664,00.html

Irrespective whether it is Malcolm Turnbull’s parliamentary budget office, or it is Michael Costa’s intergenerational budget office, what is needed is a national economic body that is independent from the government of the day and be accountable to all Australians, possibly through federal parliaments. It should be funded with the same degree of security as federal politicians’ wages and salaries. Its key staffing should be appointed either independently, or half by each of the main political parties.

There are several key issues that such a body is needed to look after. Firstly, intergenerational equity should be a consideration of this independent body. This is a long term issue but a very important one, given that population aging is a pressing issue. However, any research needs to take into account that Australia has been an open country with significant immigration that differs from many other industrialised countries as well as some developing countries. This growth pattern and characteristic of the Australian population cannot and will not follow the same assumptions used in other countries in terms of population aging and structure. More realistic assumptions need to be made.

Secondly, such an independent economic body can stand above both Treasury and RBA to bring together fiscal and monetary policies together into consideration, and provide independent advice or at least opinions as to what macroeconomic policies mix is the most appropriate at the time. This issue has been hidden for too long in many countries, although not in economics theories. The theories point out to use both policies to such an extent to produce the most desirable outcomes in terms of interest rate, government spending, taxation, outputs, employment and prices. So this area should be an important task for such an independent overarching national economic body.

Thirdly, the body can provide independent economic forecast periodically and also prior to government budget time. Its forecast can be compared to Treasury’s forecast that is generally used by the government of the day to underpin its key budget assumptions. Either this body’s forecast or Treasury forecast will be necessarily always good, but they provide people with alternative and authoritative benchmarks for analysing key economic assumptions used in the budget.

Fourthly, because the nature and characteristics of Australian intergovernmental financial relations, such a body can and should provide independent advices on government finance, taxation, expenditures and services holistically. Yes, it is incomplete to only focus on the budgetary affairs at the federal level, if it can change its position by either reducing or increasing funding to the state governments, or changing government service obligations between different layers of government.

Of course there can be other key economic and economic governing issues such as government regulations that the independent body can examine and provide its own opinions at the arm’s length from the government of the day, such as the regulations governing the communication sector in Australia. This can provide some sort soft constraints to government behaviors, so they need to consider very carefully before they change/introduce/reduce regulations.

To conclude, there is badly a need for an independent and overarching economic body in Australia to improve government policy making, to look after a number of important economic affairs for the Australian public. The government of the day, irrespective which political persuasion, in conjunction and consultation with all the other main political parties, should take urgent actions to create such a body. The earlier such a body is created and operated, the better the Australians welfares will be.