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From failure, opportunity comes.

datePosted on 17:19, January 24th, 2017 by Pablo

When President Trump signed the executive order withdrawing the US signature from the Trans Pacific Partnership Agreement (TTPA), he signed the death warrant of that multinational trade deal in its present form. The US was the core member of the TPPA and held the dominant negotiating position within it, so the decade-in-the-making, laboriously undertaken and vexing complex compact that was agreed to by the other eleven signatories is now all but null and void.

There are options, however, for the TPPA that may allow it to survive and thrive in light of Trump’s unilateral abrogation.

First, the other eleven member states can put the agreement into hibernation, wait for the 2020 US presidential election and hope that a more trade-oriented president succeeds Trump.

Second, they can hope that the Republican congressional leadership will force Trump to reverse his decision sometime between now and 2020. That would only occur if Trump is weakened by some failure and the GOP sensed that it could re-assert its traditional pro-trade stance at his expense. The Democrats would welcome the move for opportunistic partisan reasons even if some of its leading figures such as Bernie Sanders also oppose the TPPA and applauded Trump’s decision to pull plug on it.

Third, the members could look to themselves and re-draw an agreement that is less US-centric. Many of the provisions insisted on by the US could be reconsidered and even dropped in exchange for increased preferences for the interests of previously junior TPPA partners.

Fourth, the remaining TPPA partners could look to fill the void left by the US with another large market economy. The one that springs immediately to mind is China. That is where things get interesting, and where opportunity may lie.

China is already party to the ASEAN-China Free Trade Agreement (ACFTA) that established a regional free trade area that is the largest in terms of population and third largest in term of trade volume and nominal GDP. Some of the ACFTA signatories are also parties to the TPPA (Brunei, Malaysia, Singapore, Vietnam). This agreement is considered to be a “true” free trade agreement in the Ricardian sense because it reduces tariffs across 7,881 product categories to zero percent, with the result being that tariffs on ASEAN goods sold to China fell to 0.1 percent and those of China sold in ASEAN to 0.1 percent in the year the agreement went into force (2010)

The non-US TPPA members could opt to negotiate an agreement with ACTFA as one course of action. That may be difficult given that the TPPA is not a “genuine” FTA as much as it is an investor guarantee agreement (IGA) in which market regulations are altered to attract foreign investors and these are protected from legal liability in the event of disputes with the host state. What is not included in the TPPA are across-the-board reductions to zero tariff, and in fact many domestic industries remain protected or subsidised throughout the TPPA membership as part of the horse trading undertaken during negotiations over its central tenets. But it may be possible to reconcile the two trade deals in an effort to create a new super trade bloc on neo-Ricardian grounds.

Another option might be to invite China to the table. It has the second largest market in the world and is continues to grow at a sustained and rapid pace in spite of the vicissitudes of the world economy over the last two decades. It is making the transition from export platform to a mixed domestic mass consumption/value-added export model, and it has previously expressed interest in joining the TPPA. The US blocked consideration of China’s membership because it saw the TPPA as the economic equivalent of the military “pivot to Asia” announced by the Obama administration, that is, as a hedge against Chinese economic, diplomatic and military influence in the Western Pacific Rim in what amounts to a new Containment Policy in the Asia-Pacific.

With the US gone, China has an opening and the remaining TPPA members have an opportunity. The TPPA will have to be renegotiated, but it is likely that the non-negotiable provisions insisted by the US will not be supported by the Chinese and can be dropped in the effort to entice their interest. In turn, China might have to accept something less than blanket reductions in uniform tariffs and agree to a tariff reduction regime that is more segmented and scaled in orientation and gradual and incremental in application (i.e. more product or industry specific and phased in over a longer period of time). That is clearly within the realm of possibility, as is Chinese agreement to other TPPA provisions stripped of their US-centric orientation.

China has already signalled its intentions in this regard. President Xi used this year’s Davos Forum to preach the virtues of free trade and global commerce, arguing against protectionism as an impediment to international understanding and exchange. China has proposed the creation of a Regional Comprehensive Economic Partnership (RCEP) along the lines mentioned above with regard to an ACTFA-TPPA merger but with the provision that the US be excluded. There are many details to be ironed out but the groundwork has been laid for that to happen.

What makes the turn to a China-included trade bloc a potentially win-win proposition for remaining TPPA signatories is that the key provisions demanded by the US–changes in market regulations and preferential market entry clauses for US business interests (including changes in patent and copyright protection) and imposition of limited liability clauses in the event US businesses are sued by local governments–were those that were most resisted by domestic audiences in several TPPA member countries. Removing them not only allows the agreement to be free of those constraints but also diffuses a source of domestic opposition in countries where such things matter.

One thing TPPA states should think carefully about, especially small states like New Zealand, is the invitation to negotiate bi-lateral trade deals with the US instead of the TPPA (something just announced by the Trump administration). The historical record shows that large asymmetries in market size favour the larger over the smaller partner in bilateral trade agreements. This is due to economies of scale, market dominance, and economic and geopolitical influence derived from market size advantages. The recent track record of bilateral deals between the US and smaller states reinforces this fact. Australia, South Korea, Chile, Colombia and the Central American nations plus Dominican Republic grouped in the CAFTA scheme all have bilateral FTAs with the US. In all instances the majority benefits accrued to US-based companies and industries and the benefits accrued in the partner states were limited to specific export markets (mostly in primary goods), with little flow-on, trickle down or developmental effects in the broader national economies.

So rather than “jump on a plane” to sign a bilateral deal with the US, as one wag put it, smaller states such as New Zealand need to think hard whether the bilateral alternative with the US is more long-term beneficial than a multilateral agreement, especially when it has shown that under a certain type of administration the US is willing to renege on its commitments even if they are multilateral rather than bilateral in nature. With the Trump administration also set to review and replace the tripartite North American Free Trade Agreement with Canada and Mexico (NAFTA), it is clear that honoring commitments and maintaining continuity in trade policy is not, even if just for the short term, on the US agenda.

When one widens the lens on what the Trump administration is doing in terms of its threats to withdraw from various bi-and multinational defense agreements unless the partner states “pay more” for US protection, it becomes clear that the US is not, at least for now, a reliable international partner.

The reason is that the new US attitude to trade is part of a larger phenomenon. The neo-isolationist protectionism embedded in the “America First” approach adopted by the Trump administration has ended, however temporarily, over 50 years of bipartisan consensus in the US political elite on the merits of international engagement. Be it in trade, foreign aid or collective defense, the US policy elite, both public and private, have embraced globalisation as a means of projecting US power, influence and values world-wide. That era has come to end for the time being, and so long as Trump is successful in pursing his “America First” strategy it will continue to be so.

That may or may not make America Great Again but it could well have a negative impact on those who seek mutual benefit by engaging with it. They will be asked to do more, pay more and offer more concessions in order to be granted US favour.

In the absence of an alternative, that is an unenviable position to be in. But if alternatives are available, then the current moment in US politics provides a window of opportunity to countries that have found themselves marginalised by Trump’s policy directives. The re-orientation of TPPA is one such opportunity because, if for no other reason, a US return to the TPPA fold in the post-Trump era will see it with much less leverage than it had up until now. Add to that the possibility of increased benefits via a renegotiated deal with the remaining and possibly new partners, and the downside of the US withdrawal seems acceptable.

From a smaller nation perspective, that is a good thing.

Tick, tick, tick…

datePosted on 12:19, September 6th, 2016 by E.A.

http://www.stuff.co.nz/business/83951548/qv-stats-confirm-1m-average-for-auckland-but-growth-may-be-slowing

Sooner or later.

There are a rage of arguments and scenarios for how this will play out but sooner or later.

The problem is that it might not come with any major drop in house prices, as the article notes slowing growth not any stop in growth, if any, but it might come in the form of something else.

I wonder what that will be?

Also to add to the mood is the comment I herd last week that there has never been any significant or known drop in house prices in NZ history. Not confirmed at this time but even just in recent memory I cant see any downwards shift.

Readers are encourages to suggest their own scenarios for how this will go in the comments section.

After previously examining the big four of NZ politics we now turn our eye to the first of the lesser denizens of the swamp called parliament and look at one species of creature soon to be extinct. Also apologies for the length, I swear I try and keep them short.

If there was a time when ACT was a genuine political party, those days are past. In the late 90s and early 2000s ACT could indeed claim to be a such a thing as it polled respectably and had yet to be tainted by the scandals, squabbling and power struggles which have now left it dead in the polls and relevant only because the Auckland electorate of Epsom has developed a rather strange fetish for it.

The fact that the party has visibly withered in the last decade is almost entirely down to its own deceitful actions and the fact that it’s championing of the neo-liberal agenda and as a mouthpiece for the ultra-rich and corporate entities has gone from distasteful to downright loathsome.

The question that always interested me was in trying to figure out if ACT really believed the gibberish it was spouting or if they were just happy being mouthpieces for one of the most vile ideologies of our time; that of a happy return to feudalism under corporate masters rather than blue bloods.

In the 90s the party happily spouted Business Roundtable platitudes while supporting the National government but it also could claim some degree of moral ground under “perk buster” Rodney Hide (who was later busted for abusing the very same system of parliamentary perks and privilege that he had hypocritically been railing against) and having some theoretical pedigree by claiming it was championing individual rights and freedoms.

Today it polls about as popular as a party of pedophiles and its theoretical and political base is worm ridden and compromised (in fact given it currently polls around the 1% mark I see no irony in recognizing the fact that it is has always represented the interests of the 1%). But between 1996 and 2002 it rode high in the polls as part of those heady days of early MMP with a respectable 7%.

The fact that that most of that 7% could be ascribed to the more right wing elements of the National party fleeing in the wake of Nationals dismal results in 1999 and 2002 may have escaped ACT’s attention but despite these high poll results it was never a part of the Labour Government under Helen Clark between 1999 and 2008 (I wonder why?).

But at its simplest ACT was built and commissioned as a vehicle for those who wanted to continue to advance the free market ideology of the 80s into the 90s and beyond.

If my previous analysis of the big four political parties had looked at the failures of each party under the headings of: the party itself (Labour); its individual members (National); personal political advancement (NZ First) and selling out its core values (the Greens: no they haven’t done this yet but that’s what my post about them was warning against) then my analysis of ACT is a combination of all of the above.

The grim state of the party is a warning to all others in the NZ political sandbox of what happens to those who abandon all morality for greed by peddling themselves to clearly self-serving ideologies that reject even the basic tenants of community and commons.

More technically ACT is clear evidence of what happens when a political party is clearly serving a vested interest and staffed with a rouges gallery of goons and goombahs in the best traditions of the SA.

Yes that’s right (no pun intended), ACT were to be the brown shirts of right-wing NZ revolution (an odious tradition continued today by bloggers like Cameron Slater over on the Whale Oil), a vanguard of the free market and like the SA are self-destructing in a queasy orgy of criminal and corrupt behavior (although no night of the long knives for ACT, yet).

It’s worth examining some of the histories of the specters that have made up the party to get a better picture of what exactly went wrong and why the party is no longer a viable entity.

First things first there was Rodger Douglas. In being a key figure in forming a political party the message was crystal clear of what ACT stood for. If you liked the regulatory and free market revolution that his reforms had created for NZ then this was the party for you. Most of the electorate was not a fan but a sizable minority (6%) did vote for the party in 1996 and in part that was on the perceived value of the firm economic policy that ACT seemed to be advocating and the supposed benefits it brought.

In 1996 Douglas was no longer in charge of the economy but with his disciple Ruth Richardson (a known member of the Mont Perlin Society: The John Birch society for accountants) still keeping the ovens going (under a continuation of Rogernomics now termed “Ruthanasia”) his reforms continued and helped to make 1990s NZ a grim and bleak place to live.

With Labour back in government in 1999 it was clear that ACT was not going to be getting a seat at the table and Douglas, never keen on Hides leadership stepped away from the party in 2004 as ACT languished in opposition for most of the decade.

Then in 2008 Douglas, along with Heather Roy, staged a failed coup attempt on Rodney Hide, who survived due to the timely intervention of John Key. Douglas started to fade after this time as several bills he tried to introduce into parliament failed in the house and in 2011 he called it quits.

His legacy as the architect of so much pain and misery is reflected in things like the growing wealth and inequality gaps, the scandal of poor and hungry children in NZ and a merchant banker (John Key) as PM.

Douglas is the reason why the argument that ACT sold its soul to sing for the devil is false. ACT (and Douglas) never had any soul to begin with; they were catamites from the start and an open vehicle for the free-market agenda that has been exploited by a grubby few to almost everyone’s disadvantage.

But Douglas is the just the first of many who would make the party look like the criminal rabble it was rapidly turning into and leave it as the soulless husk it is today.

Stalwart party members like John Banks (accused of submitting false electoral returns, shilling for Kim Dotcom and a dangerous level of religious zealotry among his numerous misdeeds); Donna Awatere Huata (tried, sentenced and jailed for fraud); David Garret (stealing the identity of a dead child in an attempt to get a false passport); Rodney Hide (caught abusing the very perks he had built his reputation on); Heather Roy and Ken Shirley (shilling for big pharma); Deborah Coddington (anti-Asian Immigration) and Hillary Calvert (who makes the list for her delightful quote “we care about people ahead of silly little chickens”) have been the storm troopers of right wing ideology and policy, who have helped turn ACT into the ship of fools that it is but also a refuge for misfits, rejects and political mercenaries of all stripes (Don Brash).

If it was just its cast of ugly criminal characters alone then ACT would be no worse than National with its similar scum pool of human misdemeanors but ACT also fails on the Policy front, ala Labour, but much much worse.

On casual perusal, ACT’s policy portfolio seems to have some merit with its claims of freedom and lower taxes for all but as with all policy the devil is in the details and with further reading, as well as knowing ACT’s pedigree and track record, it’s easy to locate the keywords and decipher their actual meaning.

ACT adheres to the political equivalent of creationism, that of small government; low taxes and private provision of public services (charter schools, Serco run prisons, asset sales and letting the kind and benevolent market take care of things).

ACT’s definition of “core functions” of government ignores the reality that is the highly complex society that we live in and imagines that market functions would be able to contain the anarchy that the market itself has been shown to create (booms, busts, bubbles, cartels, tax havens, corruption, nepotism, market manipulation, offshore trusts and growing wealth and inequality).

At its center ACT’s intellectual pedigree, albeit diluted and watered down, is no worse than the intellectual foundations on which other parties sit, but unlike National and Labour, which have simply let their policy bases fade away in favor of craven appeals to the policy melting pot of “the middle ground”, ACT’s is, and has always been, in the service of those who seek appealing theoretical foundations on which to base their dubious actions.

ACT’s foundations lie in Friedrich Hayek and the Mont Perlin society and more directly the NZ Business Roundtable (now dubbed the New Zealand Initiative). Hayek’s arguments against collectivization were an intense part of my undergrad study in political theory and his was, like many other thinkers, a clear and conscious reaction to the tumult of the first half of the 20th century by attempting to provide solutions to those times problems.

As a political theory this is fine (although I tended to favor the position taken by Polanyi) but its use as a smokescreen for actions by others with agendas which do not really align with the theory they are trumpeting is nothing more than intellectual window dressing for the traveling snake oil show that has been neo-liberalism and its use by global elites to dismantle any organisation or structure which hampers their pursuit of profit and power.

Reading through chunks of policy statements give the impression that ACT is obsessed with saving “the children”, really hates big government and that lower taxes are the answer to many issues but one also can find references to “ACTs advisers”; a distaste for beneficiaries, the treaty of Waitangi, the RMA; and a host of neo-liberal buzzwords like “signalling”, “choice” and “potential”.

The sum of all of this is that the parties’ policy prescriptions sound wonderfully empowering and harmless until you realize that these prescriptions have already been enacted around the world and we have been living in the “utopia” promised to us by the smooth talking acolytes of small government and less taxes.

I could go on forever here in pointing out the flaws in these overly elaborate theories which have never been, and never will, be honestly enacted but the point is clear. The message being preached has failed, it’s been tried and it failed, the desperate cries of “more of the same”, by ACT and National, to solve the problems previously created by “more of the same” now sound like doom cultists chanting.

But what about the current leadership, what about ACT’s philosopher-king David Seymour and his role as free-market mouthpiece?

At first Seymour seems to be a new face for the party but once you dig into his background his links to conservative think tanks, including one which helped shape Stephen Harper’s right wing paradise in Canada (before the inevitable backlash kicked in), it becomes clear and you figure out that someone (read what painfully passes for ACTs brain trust) has been seeking to emulate the safe, white, suit and tie, clean shaven, middle aged male look (ala Key, Cameron, Bush Jnr, Blair et al) but not quite managed to get the facial features right on the identikit robot they ordered from conservatives’R’us.

And with the ACT party webpage now resembling a personal blog (with what appear to be self-written press releases by Seymour about Seymour all over the main page) and his face repeatedly staring back at you with each new post I find myself wondering. His opinions, while few and far between in the press, have given no indication that he has deviated from the party line but perhaps, just perhaps, he realizes its a dead ship he is now captaining and has plans to try and steer it into a safe port for rest and refit.

The odds of that happening rest entirely on Epsom deciding to retain any party candidate as their representative in parliament. Personally If I was Labours campaign manager I would be marshaling forces to get Seymour and Act out of Epsom at all costs even (this could also apply to Peter Dunne in Ohariu) to the point of getting voters to vote National (something that happened in the last election anyway when tactical voting chopped ACTs lead to 6% over National).

Seymour has none of the appeal of Key, personality of Winston or moral integrity of the Greens. It’s almost like he has no soul (a double possibility given his intellectual and political backgrounds) and I will be watching Epsom 2017 with great interest as if ACT loose their seat then its dead and buried and all the grubby refuse that is the party will be swept away.

ACT, unlike Labour and National, does not have a historical background to fall back on when its actions in the present taint it; nor does it have the charisma and appeal of someone like Winston to work their mojo for the crowds; also it does not have any moral stance to support its positions and arguments (ala the Greens) and protect it from criticism.

ACT has been around just over 20 years and its life is almost over. Truly the flame that burnt as half as long was twice as dull.

 

I was invited by the nice folk at sustainnews.co.nz to contribute a short essay related to sustainable economics from my perspective as a geopolitical and strategic analysis consultant. The essay wound up  making the connection between political risk and sustainable enterprise, and more importantly, the relationship between sustainable enterprise and democracy. You are welcome to view it here.

Too Clever.

datePosted on 15:59, February 11th, 2016 by Pablo

The TPPA signing came and went, as did the nation-wide protests against it. I did not think that the government was going to be swayed from publicly commemorating what it considers to be the crown jewel of its trade-dominated foreign policy, but I had hoped that the numbers turning out to protest would add up to more than 100,000. At least that way the government could be put on notice that a sizeable portion of the electorate were unhappy about the surrender of sovereignty to corporate interests enshrined in the 6000 page text. Alas, the numbers assembled came nowhere close.

One interesting sidebar was the decision to stage a parallel protest at the Sky City complex  rather than join with the larger protest march down Queen Street. The specific objective of the Sky City protest was ostensibly to use so-called non-violent direct action (NVDA) and other acts of civil disobedience to block the streets surrounding the gambling complex. In the build up to signing (and protest) day the leaders of the two rival demonstrations publicly debated and largely disagreed on the merits of each. The Queen Street march organisers were concerned that any pushing and shoving at Sky City would feed into the government’s narrative that the matter was a law and order issue (following reports that the police had conducted riot control refresher training and door knocked activists warning them about the consequences of unruly acts). The leaders of the Sky City blockade argued that peaceful marches were simply ineffectual and were ignored by policy-makers. As it turns out, both were right.

The Sky City protesters, some of whom showed up in helmets and assorted face coverings, were forcibly prevented by the Police from effectively shutting down access to and from the venue and surrounding areas. The activists responded by engaging in a series of rolling blockades of major intersections, including the Cook Street on-ramp leading to the Harbour Bridge and Northern Motorway. This continued well after the signing ceremony was over and while the Queen Street march was still in progress. That had the effect of causing gridlock in the Auckland CBD.

Coincidentally or not, there was a bus strike that day. Although Auckland Council allowed its employees to work from home, many other entities did not. That meant that people who normally used buses to get to work had to use alternative transportation, including cars. That added to the number of cars on Auckland inner city roads at the time of the rolling blockades. Needless to say, motorists were not happy with the seemingly random temporary road closures in and around the CBD.

That is why things got too clever. As a tactical response to the police thwarting of the initial action, the move to rolling blockades was ingenious. But that bit of tactical ingenuity superseded the strategic objective, which was to draw attention to the extent of TPPA opposition. In fact, it appeared that the Sky City activists were trying to outdo each other in their attempts to make a point, but in doing so lost sight of the original point they were trying to make. After all, blocking people from leaving the city after the signing ceremony was over was not going to win over hearts and minds when it comes to opposing the TPPA. Plus, it displayed a callous disregard for the motorists affected. What if someone was rushing to a hospital to be with their badly injured child or terminally ill parent? What about those who needed to get to work on time so as to not be docked pay? What about cabbies and delivery people who earn their livings from their vehicles? None of this seems to have factored into the blockader’s minds. Instead, they seemed intent on proving to each other how committed they were to causing disruption regardless of consequence to others.

I have seen this before in other places, most recently in Greece, where anarchists and Trotskyites (in particular but not exclusively) infiltrate peaceful protests and engage in acts of violence in order to provoke what are known as “police riots” (a situation where isolated assaults on individual police officers eventually causes them to collectively lash out indiscriminately at protesters). Fortunately, NZ does not have the type of violent activist whose interest is in causing a police riot. Unfortunately, it has activists who seemingly are more interested in establishing and maintaining their street credentials as “radicals” or “militants” than using protest and civil disobedience as an effective counter-hegemonic tool. So what ended up happening was that the Sky City protestors were portrayed by the corporate media and authorities as anti-social misfits with no regard for others while the Queen Street march was briefly acknowledged, then forgotten.

On a more positive note, Jane Kelsey has to be congratulated for almost single-handedly re-defnining the terms of the debate about TPPA and keeping it in the public eye. As someone who walks the walk as well as talk the talk, she was one of the leaders of the Queen Street march and has comported herself with grace and dignity in the face of vicious smears by government officials and right wing pundits lacking half the integrity she has. I disagree about the concerns she and others have raised about secrecy during the negotiations, in part because I know from my reading and practical experience while working for the US government that all diplomatic negotiations, especially those that are complex and multi-state in nature, are conducted privately and only revealed (if at all) to the public upon completion of negotiations (if and when they are).

For example, the NZ public did not get to see the terms of the Wellington and Washington Agreements restoring NZ as a first-tier security partner of the US until after they were signed, and even today most of their content has been ignored by the press and no protests have occurred over the fact that such sensitive binding security arrangements were decided without public consultation. More specifically with regards to the TPPA, no public consultations were held in any of the 12 signatory states, and in the non-democratic regimes governing some of those states the full details have still not been released. Even so, I do think that it was a good opposition ploy to harp about “secrecy” as it simply does not smell right to those not versed in inter-state negotiations. In any event, what Ms. Kelsey did was exactly what public intellectuals should be doing more often–informing and influencing public opinion for the common good rather than in pursuit of financial or political favour.

I would suggest that opponents of the TPPA focus their attention on the Maori Party and its MPs. The Green Party’s opposition to TPPA is principled, NZ First’s opposition is in line with its economic nationalism and the Labour Party’s opposition is clearly tactical and opportunistic (at least among some of its leaders). So the question is how to wrestle votes away from the government side of the aisle when it comes to ratification. Peter Dunne and David Seymour are not going to be swayed to change sides, but the Maori Party are in a bit of an electoral predicament if they chose to once again side with the economic neo-colonialists in the National government.

For all the sitting down in the middle of public roadways, it may turn out that old fashioned hardball politicking may be the key to successfully stymying ratification of the TPPA in its present form.

Now THAT would be clever.

 

Loansharking Greece and odious debt.

datePosted on 10:57, July 7th, 2015 by Pablo

I do not purport to be an economist nor would I ever want to be. Theirs is a world of implicit assumptions and pseudoscience that only a brave few have challenged from within. However, theirs is also a discipline that in theory and practice can shape the fate of millions, which is why I pay more than casual attention to them. Thus it is that I came to ponder the financial situation in Greece, a place that I lived in in 2010 at the start of its downward slope towards the current moment (my wife has researched and written on matters of Greek political economy and I have an interest in Greek civil-military relations, so our stay was mutually beneficial). Here is my non-expert view of things.

When lenders charge interest on principal loaned, they prefer to have the interest paid rather than the principal. This loan repayment rationale, which is true for states, firms and individuals, keeps the debtor beholden to the lender so long as the principal remains unpaid. Over time, the interest accrued can well exceed the amount lent, which is perfectly fine from the lenders point of view but keeps the debtor permanently saddled in a cycle of interest payment unless the debtor earns additional income (revenue) that can be directed towards paying down the principal. Short of a lottery win, a pay raise or new sources of revenue, debtors on relatively fixed incomes are locked into the cycle of debt.

Greece is in that situation. Until 2008 it was servicing the interest payments on its debt to international lenders (mostly the European Central Bank, various national banks and private investors). Then the international financial crisis of 2008-09 hit, which had nothing to do with Greece per se but which drove up interest rates. With a stagnant economy and flat tax revenues, Greece quickly found itself unable to make interest payments and, in a dramatic revelation, announced in 2010 that it had been systematically underestimating its fiscal deficit in order to maintain interest payments on its debt at a sustainable rate. At that point many private investors dumped their Greek debt holdings and the IMF assumed a significant portion of them as well as some of that accrued by European public banks.

The Greeks were subsequently offered two “bailout” loans that allowed them to continue to pay the interest on their debt, which together with the principal now amounts to nearly 250 billion Euros. With interest set at approximately 4 percent annually, the figure is set to reach the half trillion euro mark in a few years. Even if interest rates were capped at zero, it is estimated that it would take Greece 81 years to repay the amount currently owed.

There are several questions arising from the Greek debt. Why, since the interest paid is now more than the principal borrowed, does not the ECB and IMF put a cap on the debt? Why did investors continue to offer loans to Greece when it turned out that the Greeks were fiddling the books, and that neither the principal or the repayment loans ever trickled down to the general public in terms of public goods and services? Why does it expect the Greek population to pay via austerity for the risky borrowing of Greek elites and the even riskier lending of European banks?

Asking the Greek people to shoulder the burden of austerity–in a country with 30 percent general unemployment and 50 percent unemployment for those under 30, with a massive brain drain of educated professionals, porous borders and deep cuts to public sector salaries, pensions and basic services–is akin to forcing the children of crack addicts to starve and swab floors in order to pay for the rehab treatment of their parents. And the outcome is just as uncertain.

Let’s look at it this way. Capitalism is about assuming risk for higher reward. In the financial world, the riskier the investment the higher the interest paid on it. And just like quick finance and pawn shops are located in poor rather than rich neighbourhoods, high interest bonds are issued on “risky” countries with poor credit ratings and histories of financial instability. For “courageous” investors riding the line between high interest and junk bonds, the rewards for so-called bailouts are great. But the downside of a default is that they will have to wear losses, just as many ill-advised investors have to.

Greece is one such high risk place and those who lent to it knew this from the beginning.

With that in mind is is easy to see that the behaviour of the “troika” (the European Commission, European Central Bank and IMF) can be (and has been) likened to loansharking and needs to be treated as such. When people seek debt relief from loansharks, banks or credit card providers, they arrange to repay a capped sum and a payment schedule is established. The alternative is bankruptcy, which leaves the creditor with nothing. Although suboptimal from the lender’s point of view, the capped payment alternative is better than nothing.

When it comes to states, the decision to cap debt is a political decision, not a financial one. That is because the stability of states is more important than the returns on risky investment, especially when ample returns have already been received, many creditors are no longer at risk and demands for future returns put state stability at peril. In the case of Greece there is a twist, in that the referendum on whether to accept austerity was the first political iteration in a multi-step process. Now that the Greeks have refused more austerity, it is the turn of the EC to make a political decision of its own.

Let’s be clear: this is not a Greek crisis; it is a crisis of European finance capital. The demand for more Greek austerity is not about servicing the debt but about humiliation, punishment and deterrence of others who might dare to do the same.

The people who should seek answers are those who invested in the agencies that undertook the high risk lending strategies that have brought us to this moment. The people who are responsible for the crisis are not average Greeks but suits sitting in fancy offices in Athens, Brussels, Frankfurt and London. They are the ones who took the risk on Greece and they are the ones who need to be held to account.

This does not absolve Greeks from their own mistakes. Certainly the culture of entitlement and the pervasive corruption in Greek society needs to be addressed. But here again, this was well known to foreign creditors at the time they lent money to Greece, and for all the everyday petty corruption in Greece involving phantom war veterans and people faking disabilities, it is the Greek political-economic elite who elevated institutional corruption to an art form. Syriza proposes to confront them as well as the lower-level scams but in order to do so it must show that it can negotiate a debt payment agreement that puts the interests of average Greeks first.

There is a way out of the imbroglio that can leave Greece in the EU without undergoing more austerity punishment. In international law there is a concept known as “odious debt.” Odious debts are those that are incurred by governments that do not go to their stated purposes or are ill-gotten from the onset. Under international law, odious debts are the responsibility of the incurring parties and are not the responsibility of their successors. As such, they do not have to be serviced by others if the responsible parties cannot be made to pay.

One can argue that the debt incurred by pre-Syriza governments from 1999-2008 fall into the odious debt category and should be forgiven as such. If anything the political parties in government during the time the debts were incurred can be sued for repayment (these being the Panhellenic Socialist Party (PASOK) and New Democracy (ND)). Whatever happens, it is clear that Greece has not seen the purported benefits of the loans incurred by previous governments (to include the now abandoned or derelict Olympic facilities) but it has paid more than its fair share of interest on them. By any reasonable measure the remaining debt is now odious.

In the end this is a cautionary tale with minor and major sub-plots. The minor plot is about sustainable debt and the limits of debt relief. The major plot is about the perils of political union. The EU needs to understand that how it addresses the minor plot will determine the conclusion of the major one.

Bonus read: Although I do not agree with some of his observations, Brian Easton has a nice short piece on the Greek situation here.

 

Evaluating export growth.

datePosted on 09:55, February 3rd, 2014 by Pablo

Much has been made of the fact that since the entrance into effect of the bilateral Free Trade Agreement (FTA) with China in 2008, New Zealand exports to China totaled NZ$33.7 billion in the six years since then compared to NZ$9.9 billion in the period 2002-08. In 2007/08 before the FTA went into effect exports to China totaled NZ$2.5 billion, and in 2012/12 they were worth NZ$7.7 billion. That is more than 200 percent growth in six years, or more than 45 percent per year (Hat Tip: Kiwiblog)

Needless to say, pro-trade cheer leaders think that this is a great thing. And perhaps it is. But before we get too excited and proclaim the absolute benefits of this bilateral, a few questions need answering.

First, what is the volume and worth of imports from China during the same period? In other words, what is the state of the bilateral trade balance?

Second, has the FTA led to export commodity diversification or concentration?

Third, has the increase in bilateral exports led to an increase in employment in the export sectors affected?

Fourth, has there been a trickle down effect evident in the expansion of auxiliary industries and tax revenues derived from them and the export sectors involved?

Then there are subsidiary questions:

Has overall NZ GDP per capita and income distribution increased as a result?

Have occupational health and safety standards improved in the export sectors associated with the FTA?

These questions are important because they illuminate more precisely who has and has not benefitted from the FTA.

I invite readers to do a little research on these questions, using the government’s own sources as well as academic studies. The findings may come as a surprise, as oftentimes macro-statistics mask the meso- and micro-impacts underneath the “big picture.”

Not all is what it seems.

 

Labour: locking in lose-lose

datePosted on 18:53, March 13th, 2013 by Lew

David Shearer says he won’t rule out buying back shares in state-owned power companies sold by the government. He won’t rule it in, either. Why? Does he need to consult his leader?

There’s so much wrong with this that I scarcely know where to start. This buyback agenda has been set by Winston Peters; it’s now two years since the 2011 election campaign kicked off with a pledge to sell these assets, and it’s like the boffins in Labour haven’t yet had an original idea about it. The problem with old generals is supposed to be that they fight today’s war with the strategies of yesterday’s war, but this is worse — it’s fighting yesterday’s war with the strategies that lost the one before that.

But enough about my thoughts on the referendum. This time the issue is what happens after the SOEs are sold. Chris Trotter has articulated strong political arguments for nationalisation, and I think these serve to demonstrate that nationalisation is not simply untenable for a left-wing political movement.

So while I’m not persuaded the opposition should do it, there’s definitely a right and a wrong way to go about nationalisation. The core principles are similar to those in play with the initial privatisation: that we should have good information about the intentions of the main political decision-makers; and that people should not have property expropriated without due process. This need not be perfect consent — an election result delivering under 50% was sufficient to grant a mandate to privatise half the value of these assets, for example.

Market and electorate signals
Shearer’s “maybe we will, maybe we won’t” is the worst possible position. The markets into which these shares will be floated need signals so as to judge risk, and the electorate needs signals so as to judge the quality and character of the politicians they might vote for in 2014 and beyond.

A clear “we will buy them back” or “we will not buy them back” would do that; it would tell the market and the electorate what to expect and they could act accordingly. Both groups would know we were dealing with politicians of at least some sort of conviction, and more to the point, someone willing to make some big calls, to put something on the line. Today we see before us a Labour leader who has neither the conviction to know what he wants to do, nor any will to do it.

As Chris says, a stance one way or the other would provide Labour with a mandate. If Labour considers nationalisation irresponsible, then as voters we ought to know that; but it is much more crucial to justify an actual nationalisation programme. Given that the current criticism of the government is that they lack a mandate to do something they campaigned for a whole election year on doing, I struggle to see how even the most one-eyed Labour partisan could honestly justify the massive expense of buying back SOE shares unless it was clearly signalled and voted on beforehand.

This need not be unconditional. Graeme Edgeler has suggested a provisional pledge — Labour could say that if, say, two thirds of respondents in the referendum vote to not support the asset sales then an incoming Labour government would seek to nationalise them. David Shearer has many options that are better than “maybe”.

Economics of a sell-off/buyback
If Labour genuinely believes — as it has told us for two years now — that the value of these assets is greater than the cost of borrowing to buy them, it should be easy enough to show that buying them back at fair market value is worthwhile. This will likely have the effect of inflating the price, but it would at least do our international reputation comparatively little harm.

It might be reasonable for Labour to pledge to buy the shares back at cost, but only if the pledge is made credibly and early — certainly no later than the first round of sales. The pledge would be fair warning to investors: if they choose to disregard it, that’s on them.

Because it allows the markets to price in the risk of a Labour-led government coming in and making good on its promise, signalling nationalisation in this way would likely depress the initial sale value of shares. If the threat was sufficiently credible it could, in principle, depress demand for shares to the point that selling them would be uneconomical — thereby preventing the sale, or limiting it to just one or two SOEs. While this would look bad for the government there is also a downside risk that the opposition would be seen to be sabotaging the scheme — but given that Labour seems certain the scheme is unpopular, that should not concern them too much.

Because there is an ideological imperative behind the sale (that is to say, the market already knows the government has to sell in order to retain political credibility) it seems likely the shares will already yield less than what an equivalent float by a less-motivated seller might yield. There are other industry-specific factors which could also depress the price — the fact that hydro generation is not much good in the middle of a historic drought, for example. I have no knowledge of the value of the assets as they stand, but it doesn’t seem totally outrageous that it might not be all that high as it is, and a little more risk might just be enough to turn people away.

Conversely, a nationalisation conducted after the shares have been sold has the opposite effect. An ideological bulk-buyer in a fair market will bid the price up. Even worse is the middle-ground: if there exists sufficient uncertainty before the float the sale price could be depressed; followed by a Labour election win and nationalisation, causing the price to rise. The government would be selling low and buying high.

Venezuela of the South Pacific
The worst of all cases is if Labour does not provide a strong and credible signal of nationalisation ahead of the float, and then proceeds with a “surprise” nationalisation on an at-cost or dictated price — or worse yet, expropriation without compensation, as has been suggested by some of the more wild-eyed idealists. Parliament is sovereign; in principle, an incoming government could do this. But it would be a brutal assault on property rights and repugnant to a modern liberal democracy, especially one so dependent on international trade as we are. It could justifiably lead to New Zealand being treated as a pariah kleptocracy, and since the SOEs are being floated on the ASX and will likely include some institutional investors there, it could also have deep trade, diplomatic and cultural implications. I expect there is also the risk of legal challenge.

The worst aspect of holding the “maybe” position Shearer has taken is that the risk of “Venezuela of the South Pacific” scaremongering exists as long as this scenario is not clearly and credibly ruled out. I don’t seriously believe this sort of expropriation would happen under a modern Labour government, but political narratives needn’t be based on reality.

If Labour commits to nationalisation then scaremongering will commence, but at least the party will be able to control the narrative around it, and articulate arguments in principle for it, as Chris has done. If the SOEs are that popular it shouldn’t be too big a risk. If Labour rules out nationalisation then such scaremongering may still eventuate, but will be weak. If they continue to sit on the fence, they get the scaremongering, but not the opportunity to rebut it. Lose-lose.

That Labour would even consider holding the “maybe” position is astonishing, but it is New Zealand First policy after all. It reflects an awareness that New Zealand First is here to stay, will probably hold the balance of power at the 2014 election, and could make nationalisation a condition of its being part of any Labour-led coalition. The deep problem is that Labour, lacking a political agenda of its own, is letting others define it. Until the party leader is prepared to lead, Labour will keep losing.

L

Market-oriented social engineering.

datePosted on 13:13, July 24th, 2012 by Pablo

The political Right regularly accuses the Left of engaging in social engineering. Be it pushing such unnatural constructs as union and civil rights, health awareness and environmental concerns, the Right claims that the Left is out to control how people behave and even think. For freedom-loving individualists, this is anathema.

Consider my surprise, then, when I saw the Prime Minister saying that one of the reasons for the $2000 dollar “kiwi-first” purchase option with loyalty premium for Mighty River Power shares was to “change the investment psychology” of New Zealanders. It seems Kiwis put money into real estate and bonds, but not the stock market. Mr. Key thinks that his countrymen and women should diversify their portfolios into stocks, and the asset sales option is one way of promoting that. After all, it is not really prudent to have too many eggs in one basket.

I can see his logic. As a money trader and speculator, stock manipulation comes natural to Mr. Key. Sell short, hold, think long…he has the field covered. And truth be told, in a market environment such as NZ’s, it may not be unreasonable to urge people to spread their savings around. Higher rates of savings are traditionally linked to higher standards of living and growth, so by market logic such a move is both collectively and individually optimal.

What I find notable is the PM’s admission that the Mighty River Power stock purchase proposal is a deliberate attempt to alter the way Kiwis think about investment. In other words, it is a social engineering project that proposes to transform the psychological disposition of Kiwis when looking at their investment options.

But if that is the intention, how is that different from campaigns to get people to stop smoking, not drink and drive, use public transport, practice safe sex, license and desex their pets or stop littering? Are these not all examples of what the Right claims is undue interference by government on the rights of individuals to freely choose how to live their lives? Even if one admits that the share purchase option is not compulsory and still a matter of free choice (as are some of the examples just mentioned), is not the intention of the National government and Mr. Key to engage in exactly the type of social engineering–to include psychological indoctrination–that the Right accuses the Left of championing for its nefarious totalitarian purposes? Mr. Key has admitted that there is a social engineering intent to the proposal, so how is that good when other social engineering experiments are considered by the political Right to be bad? Or are some types of social engineering more acceptable to freedom-loving market individualists than others?

If the latter is true, than even the Right has to admit that social engineering projects embarked upon by governments are not always contrary to the small-governance/more market/individual choice principles that ideologically underpin Right thought. And if that is the case, then how can social engineering experiments be totalitarian, collectivist and fundamentally anti-democratic at their core?

Pardon me if I see a little contradiction here…

Performing to spec

datePosted on 19:03, May 29th, 2012 by Lew

At the Dim-Post, a searing explanation of how class-size dogma works in the real world, by a teacher. He or she describes The Dumb Class of 15, who struggle with the assistance of their teachers to barely pass; and The Smart Class of 30, who are underresourced and consequently underperform, but pass because they’re, well, smart. And then Treasury looks at the data.

They look at one sheet of results and say “Look here – the class with 30 all got Achieved, and the class with 15 all got Achieved too. That means, statistically, class size doesn’t make a difference. Let’s cram forty of the little firestarters in there next year!”

No word on what happens to The Average Class, who have neither the advantage of adequate teaching resources, nor “smarts”.

But clearly, it’s all the fault of the teachers. They’re messing with the Natural Order Of Things.

By wasting so much resource on The Dumb Kids who are never going to amount to anything anyway, they disadvantage The Smart Kids, preventing them from realising their potential. Those Smart Kids are essentially being forced to subsidise the underclass — in their childhood as it will inevitably be in their adulthood, supporting the unproductive bludgers all around them.

So no sympathy for teachers. If they would just let The Dumb Kids fail, as the laws of nature and the market intended, The Smart Kids would perform to their full ability, soon enough we’d have all the productivity growth we could possibly want, and the government would have plenty of money to afford tax cuts for The Smart Kids’ parents. Since the teachers have sabotaged the education system by trying to tilt the scale in favour of The Dumb Kids, the government really has no choice but to implement a system that reverses that tilt by rewarding excellence, to ensure that the education system performs to operating spec, where The Smart Kids succeed and The Dumb Kids fail.

Just as nature, and the market, intended.

L

Edit to add: Phil Sage has obliged us all by making pretty much this exact argument on the square, in comments on the original thread. Thanks, Phil!

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