Episode 25: Yellow Alert! Is the Opposition drawing the wrong lessons from recent elections?

Is the opposition drawing the wrong lessons from recent elections?

Are they committing the same mistakes now, which could potentially make them obsolete in the future?

What lessons have the opposition taken away from the elections of 2016 & ‘19? Are they the right ones? What lessons could they have drawn, but are refusing to because it would mean admitting some painful truths to themselves? What are the implications for the future?

A plutarchy with populist tendencies

The title of this piece is inspired by Prof. Yuen Yuen Ang’s take on how China escaped the poverty trap. Ang argues that despite one party rule, China was able to forge merit-based mechanisms of accountability that led to its development. She describes it as an “autocracy with democratic characteristics”.

The Beijing Consensus refers to the political economy instituted by the People’s Republic under Deng Xiaoping, after Mao’s death in 1976. It is an alternate path to development, sitting in contrast to the failed Russian Soviet experiment with a command economy and all its inherent inefficiency, unwieldiness and poor incentives.

Under the China model, Beijing sets national economic policy through its five year plans. It then assigns to regional counterparts the task of meeting these targets through a “franchise-like” system. Each local government uses its own connections (“guanxi”) to attract investment to contribute to the the national goal under a process of “directed improvisation”.

Promotion within Communist party is based on performing well against official targets, relative to peers. Individuals rising to the highest policy-making body, the Politburo standing committee, prove themselves in towns and villages first, then at cities and regional levels.

The central government, in giving agency to regional executives, is able to keep its “distance” from local politics and avoid blame when their administration fails, due to ineptitude or corruption. It can overrule or interfere with local affairs, if public outcry reaches the capital. This is what gives the autocratic state some form of democratic accountability.

Beijing adapted local customs to mimic Western institutions that foster open competition within a marketplace of ideas. Instead of inter-party competition, the Chinese have created internal tournaments within the ruling party. They follow through on long-range plans, without disruption from corruptible, short-term election cycles that occur in developing states.

The Philippines has been characterised as a cacique democracy, from its inception in the 1890s with local and national politics dominated by a small set of wealthy, well-connected families. Even with American “tutelage” in democracy, participation in politics was largely confined to those with political pedigree and deep pockets.

A lack of policy consensus after independence from the 1950s to 1970s ensued leading to boom and bust cycles. Since EDSA ‘86, multiparty democracy is seen as chaotic, with limited participation and increasing concentration of power even within the partylist system.

But there has been considerable policy continuity in economic affairs since EDSA. This has led to increased rates of economic growth with greater capacity to handle internal contradictions of a market-based system, namely the disparity by which its spoils are shared.

Developmental spending enables political families to retain legitimacy. They are slowly moving away from direct forms of patronage to programmatic, institutional responses to poverty and other challenges. The evidence? … Free college, universal health care coverage and public school feeding programs, cash transfers to poor families, senior citizen benefits, among others.

Rivalry among political families has created conditions that mimic democratic accountability, stealing the thunder from progressive movements. Chief executives act as family figures making government seem near and personal.

Apo Marcos, Tita Cory, Steady Eddie, Pareng Erap, Ate Glo, PNoy and Tatay Digong were personages meant to instill a sense of filial piety in the nation through pakikisama and bayanihan, the illusion that we are all part of an “imagined community” despite our regional, ethnic differences.

The Philippines may thus be regarded as a plutarchy with populist tendencies. The adoption of democratic forms of governance without the institutions performing their function, has given rise to political dynasties. Through local customs, the Philippines has begun to develop a consensus for economic growth and development under a market-based system.

This has led to increased concentration of economic and political capital. To retain legitimacy, actors voluntarily initiate populist programs that increasingly rely on fiscal space afforded by growth to fund them, sustainably. This constitutes an alternate path to development, which might be dubbed the Manila Consensus. 

Episode 8: Can Duterte avoid the pitfalls of Marcos? Part 4

Is the Philippines about to fall into a debt trap under Duterte the way it did under Marcos? This is the fourth in a series called Can Duterte avoid the pitfalls of Marcos? In this installment we look at Marcos' strategy of promoting growth through debt, while extracting maximum personal benefit for himself from it. Vice president Leni Robredo has cautioned Pres. Duterte against falling into this same trap as he contracts loans from China in a bid to lift infrastructure spending. We examine whether her fears have any basis, and discuss ways Duterte can prevent them from happening.

Get the show notes to this podcast here.

China's Hard Landing: Is it around the bend?

Last June, I speculated that a hard landing in China might be around the bend. That was even before the US downgrade and EU debt crisis unfolded. Now it seems the events of 2007 culminating in the collapse of Lehman the following year and the global stimulus in response to the North Atlantic crisis that followed may have returned to bite the People's Republic.

Reports of China's heavy handed treatment of foreign companies, defaults on loans and a slowing property market are developing into a credible narrative. Doomsayers like Rhoubini and Chanos have spoken. They predict the hard landing is on its way. Meanwhile confidence in China still remains strong with the EU looking east for help in financing its stability fund and Australia still expecting to profit from this Asian economy's thirst for iron ore and other mineral deposits as it did during the last global downturn.

What happens next depends on the ability of China's authorities to handle the current softening of global demand for its exports. Back in 2008, it engaged in a massive fiscal stimulus program. The unwinding of that stimulus is what gives the impression to many that it was headed for a soft landing. It can very easily turn the tap back on if the situation deteriorates. Their effectiveness at reading the situation will determine whether it has a soft or hard landing.

China Before the Fall?

There is somethings seriously wrong with this picture:

China's dependence on investment (accounting for almost half of its economy in 2009) means that any slowdown in investment will lead to something akin to a "hard landing" in the West (an abrupt correction of monetary and fiscal policy leading to a contraction). Having experienced double digit growth since the 1980s, a hard landing in China would mean less than stellar growth of 7-8% triggering higher unemployment. Nouriel Roubini who warned investors against US sub-prime mortgages has predicted with "meaningful probability" that this slowdown of investments will occur in 2013.

Back in 2008/09, China got a foretaste of what is to happen when it grew by a mere 6.6% in the first quarter and consequently saw 20 million migrant workers in urban centers losing their jobs. The stimulus measures put in place to boost domestic consumption and investment might be coming back to bite the economy with much of this spent on redundant infrastructure (as Nouriel Roubini noticed when he took the hi-speed train from Shanghai recently) or lent to local governments and state owned companies leading to a property and debt bubble.

One phenomenon that has come out of this are the so-called ghost towns built by local governments with stimulus lending. Andie Xie, former chief Asia economist for Morgan Stanley has called China's stocks a big ponzi scheme and warns of either a US or Chinese crash in 2011.



Indeed investors have begun to question the sound governance of Chinese companies. Another leading indicator is inflation. With Premier Wen Jiabao now hinting that it cannot be contained within the government target of 4 percent, meaning that the government is unwilling to lift interest rates in the near term fearful of the effects that would have on growth, the scene is set for an abrupt correction of policy settings leading to a hard landing.

The Ecological "Arc" of the World Economy

The following entry contains nothing new about carbon emissions that hasn't already been picked up by the media; instead, it seeks to present the facts differently. 

The map below shows the total size of CO-2 emissions over five decades where each bubble represents total emissions by a country. If you hit the play button, you will see the gradual growth of emissions over time. Quite striking is the rise of China over the past decade dislodging the US as the biggest emitter with 6 million kilo tons (kt) of emissions compared to 5.7M for the US. Russia and India follow suit with about 1.5M kt each, and Japan ranks fifth with 1.3M kt.

The next chart plots the CO-2 emissions per capita of each country along the vertical axis with  average incomes (gross national income per capita) on the horizontal axis based on purchasing power parity (or PPP) measuring income in terms of what citizens can afford based on the cost of goods and services relative to wages. The bubbles represent the population size of each country.

One sees clearly an "arc" that gradually slopes upwards such that as countries get richer, each citizen consumes more resources and generates more pollution. From 1980, this arc gradually moves rightwards reflecting technological advances that have made industries more efficient in their use of resources, i.e. it takes less carbon to produce a dollar's worth of goods. In 1980, the point at which emissions per capita started to rise was at $1,000. In 2006, it was close to $4,000.

For the world economy to grow in a sustainable way, rapid technology development is needed to make production less reliant on carbon so that as poorer countries move up the income scale, they do not cause environmental damage at a rate similar to that of rich countries in the past. The arc needs to be flattened and pushed rightwards. It is not viable to prevent the rise of affluence in poorer nations as poverty tends to be correlated with faster population growth.

China with its 1.3 billion people earning $4,700 on average is already on the upward sloping part of the arc. Displacement of industries from rich countries that have stringent environmental policies is largely responsible. Egypt which has about the same level of income per person as China, emits 3-kt per capita compared to China's 5-kt reflecting a different mix of industries. India with an average income of $2,500 per person still lies on the flat portion of the arc and has a relatively low carbon footprint of 1-kt.

For the arc to flatten and shift rightwards, incentives are needed to encourage investments in new technology that will shift production away from carbon intensive methods and into cleaner ones. The rate of technological progress has to be faster than economic progress of poorer nations. The arc has to be bent downwards faster to accommodate the bigger but poorer nations who are "catching up" with the smaller but richer ones. If not, the future well-being of all those who live on the arc could be at-risk. 

For a discussion on the history of the science behind global warming, I found the following source quite illuminating: http://www.aip.org/history/climate/ from the American Institute of Physics.

The Australian Contagion

The past week saw global markets move in response to the announced hike of interest rates by the Reserve Bank of Australia. It was taken as a sign of global recovery, Australia being the first of the G20 (Group of 20) countries to come out of its downturn. The Australian dollar approached levels not seen in over a year (chart below produced from Yahoo!7Finance).

PM Kevin Rudd was criticised by the "doyen of Labor economic advisers" Ross Garnaut for his social democrat inspired stimulus package in response to the global financial crisis.

The secretary of the treasury, Ken Henry quickly defended the government response by highlighting the counterfactual scenario of an additional 100,000 unemployed and more prolonged downturn without the spending.

The latest unemployment figures seemed to support this with an unexpected drop in the unemployment rate and a rise in the number of hours worked. This was in stark contrast to the unexpected increase in the number of workers unemployed in the previous month in the United States. The Dow Jones industrial average took it all in stride ending up at new highs for the year.

Latest polling figures show the Labor government having a seemingly supreme advantage over the Liberal opposition, a result that has fuelled speculation over the fate of its leader Malcolm Turnbull.

Turnbull having staked his leadership on climate change policy was castigated by former Treasurer Peter Costello as he announced his early retirement from Parliament.

With the current government riding high on a wave of both local and international respect, the early election scenario now seems a distant possibility as Treasurer Wayne Swan predicted a better than expected result for the budget prior to the release of the Mid-Year Economic and Fiscal Outlook.

Having coupled itself to the Chinese and emerging Asian economies which have exhibited resilience against the global financial crisis and having relatively little exposure to the sub prime markets, Australia finds itself in the best of all possible worlds with the growing demand for its mineral exports triggering a huge investment project off the Western Australian coast.

The challenge for the government now would be to manage both in the near and medium term the steady unwinding of government stimulus. The first part was accomplished with the phasing out of the top-up stimulus to the housing market announced last year. The withdrawal of bank guarantees is being thoroughly studied but is proving difficult. Winding back of monetary stimulus has already begun in earnest.

With monetary and political business cycles not in sync, expect monetary and fiscal policy to be in continued conflict for the next twelve months or until the next election, whichever comes sooner.

China and the Long March to (Global) Recovery

The unfolding bi-polar global economy emerged this week with talk of “green shoots” in the US being mimicked by “bamboo shoots” in China. Several leading indicators from stocks, housing and credit markets had some hoping that these were early signs of recovery. This was then dashed with reports of poorer than expected retail spending in the US and weaker GDP growth in China later in the week. Closer inspection of China's data however show that there were genuine signs of recovery burried in the figures.

The Economist rightly points out that the slowdown in China is a result of purposeful policy back in 2007 when authorities were worried of overheating and restricted the flow of credit. The recent data shows that lending and investments have been restored, and that consumer spending has remained robust (read Jim O'Neill from Goldman Sachs referring to China as the new shopping superpower here). What has been impeding growth overall is the slowdown in exports resulting from weak demand from abroad. Contrary to perception though, employment in the tradable sectors accounts for only 10% of the labour force and much of the content of their exports is imported from abroad (only about 18% is locally value added, which translates to 7.2% of GDP).

Andrew Peaple of Dow Jones writes in the Wall Street Journal that:

the debate among economists is becoming more alphabetical. Is this recovery V-shaped, with China set to return quickly to the high-level growth of recent years? Or is it more W-shaped, as a government spending-led recovery this year peters out and China's longer term structural issues resurface?

Manoj Pradhan of Morgan Stanley forecasts that:

(G)lobal output will probably start growing in 3Q09 (3rd quarter of 2009), with G10 output growth turning positive in 4Q (4th quarter). However, growth for 2009 as a whole will stay firmly in negative territory for all regions except AXJ (Asia excluding Japan) ... We expect AXJ’s outperformance to be sustained next year with a 6.4% increase in output, compared to 2.1% for CEEMEA (Central and Eastern Europe and Middle East and Africa), 1.1% for the G10 and 0.3% for Latam (Latin America).

That developing Asia will lead the world to recovery is evident from this forecast as well as by consulting this year-to-date chart of stock market performance around the world assembled by Bespoke Investments. Apparently, there could still be something to the BRICs and decoupling argument after all.

The Impact of China's Stimulus

Markets cheered when the leaders of the G20 emerged from their summit in London with little more than an agreement to infuse the IMF with additional capital through issuing SDRs (special drawing rights) intended for distribution among member countries. Dani Rodrik points out the significance of these measures.

To produce greater bang for each buck from a fiscal stimulus plan, countries have to increase their Keynesian multiplier. One of the things that reduces the multiplier effect is the marginal propensity to import. To prevent leakage of such spending on foreign goods (the effect of the marginal propensity to import), it is essential for other countries to "pull their weight" and engage in similar levels of spending. In developing markets, credit and liquidity was drying up, limiting their capacity for fiscal spending .

This is why the Chinese fiscal stimulus which is roughly equivalent to 90% of Australia's entire GDP was significant for advanced economies. Some estimates put the multiplier in China at 1.1, meaning $1 spent by the government leads to $1.1 of additional spending elsewhere. Picture the output of Australia for two years being disbursed in less than a year. Much of this multiplier is due to the public investment nature of the spending on roads and basic infrastructure. For this reason, resource rich countries like Australia will have much to cheer about in the coming months.