Blame the Economists?


November 7, 2018

Blame the Economists?

by
economists

Ever since the 2008 financial crash and subsequent recession, economists have been pilloried for failing to foresee the crisis, and for not convincing policymakers of what needed to be done to address it. But the upheavals of the past decade were more a product of historical contingency than technocratic failure.

 

BERKELEY – Now that we are witnessing what looks like the historic decline of the West, it is worth asking what role economists might have played in the disasters of the past decade.

Image result for The Great Economists

From the end of World War II until 2007, Western political leaders at least acted as if they were interested in achieving full employment, price stability, an acceptably fair distribution of income and wealth, and an open international order in which all countries would benefit from trade and finance. True, these goals were always in tension, such that we sometimes put growth incentives before income equality, and openness before the interests of specific workers or industries. Nevertheless, the general thrust of policymaking was toward all four objectives.

Then came 2008, when everything changed. The goal of full employment dropped off Western leaders’ radar, even though there was neither a threat of inflation nor additional benefits to be gained from increased openness. Likewise, the goal of creating an international order that serves everyone was summarily abandoned. Both objectives were sacrificed in the interest of restoring the fortunes of the super-rich, perhaps with a distant hope that the wealth would “trickle down” someday.

At the macro level, the story of the post-2008 decade is almost always understood as a failure of economic analysis and communication. We economists supposedly failed to convey to politicians and bureaucrats what needed to be done, because we hadn’t analyzed the situation fully and properly in real time.

Some economists, like Carmen M. Reinhart and Kenneth Rogoff of Harvard University, saw the dangers of the financial crisis, but greatly exaggerated the risks of public spending to boost employment in its aftermath. Others, like me, understood that expansionary monetary policies would not be enough; but, because we had looked at global imbalances the wrong way, we missed the principal source of risk – US financial mis-regulation.

Still others, like then-US Federal Reserve Chairman Ben Bernanke, understood the importance of keeping interest rates low, but overestimated the effectiveness of additional monetary-policy tools such as quantitative easing. The moral of the story is that if only we economists had spoken up sooner, been more convincing on the issues where we were right, and recognized where we were wrong, the situation today would be considerably better.

Image result for Adam Tooze
The fact that Obama failed to take aggressive action, despite having recognized the need for it beforehand, is a testament to Tooze’s central argument. Professional economists could not convince those in power of what needed to be done, because those in power were operating in a context of political breakdown and lost American credibility. With policy making having been subjected to the malign influence of a rising plutocracy, economists calling for “bold persistent experimentation” were swimming against the tide – even though well-founded economic theories justified precisely that course of action.—

Image result for Adam Tooze

The Columbia University historian Adam Tooze has little use for this narrative. In his new history of the post-2007 era, Crashed: How a Decade of Financial Crises Changed the World, he shows that the economic history of the past ten years has been driven more by deep historical currents than by technocrats’ errors of analysis and communication.

Specifically, in the years before the crisis, financial deregulation and tax cuts for the rich had been driving government deficits and debt ever higher, while further increasing inequality. Making matters worse, George W. Bush’s administration decided to wage an ill-advised war against Iraq, effectively squandering America’s credibility to lead the North Atlantic through the crisis years.

It was also during this time that the Republican Party began to suffer a nervous breakdown. As if Bush’s lack of qualifications and former Vice President Dick Cheney’s war-mongering weren’t bad enough, the party doubled down on its cynicism. In 2008, Republicans rallied behind the late Senator John McCain’s running mate, Sarah Palin, a folksy demagogue who was even less suited for office than Bush or Cheney; and in 2010, the party was essentially hijacked by the populist Tea Party.

After the 2008 crash and the so-called Great Recession, years of tepid growth laid the groundwork for a political upheaval in 2016. While Republicans embraced a brutish, race-baiting reality-TV star, many Democrats swooned for a self-declared socialist senator with scarcely any legislative achievements to his name. “This denouement,” Tooze writes, “might have seemed a little cartoonish,” as if life was imitating the art of the HBO series “Veep.”

Of course, we have yet to mention a key figure. Between the financial crisis of 2008 and the political crisis of 2016 came the presidency of Barack Obama. In 2004, when he was still a rising star in the Senate, Obama had warned that failing to build a “purple America” that supports the working and middle classes would lead to nativism and political breakdown.

Yet, after the crash, the Obama administration had little stomach for the medicine that former President Franklin D. Roosevelt had prescribed to address problems of such magnitude. “The country needs…bold persistent experimentation,” Roosevelt said in 1932, at the height of the Great Depression. “It is common sense to take a method and try it; if it fails, admit it frankly and try another. But above all, try something.”

The fact that Obama failed to take aggressive action, despite having recognized the need for it beforehand, is a testament to Tooze’s central argument. Professional economists could not convince those in power of what needed to be done, because those in power were operating in a context of political breakdown and lost American credibility. With policymaking having been subjected to the malign influence of a rising plutocracy, economists calling for “bold persistent experimentation” were swimming against the tide – even though well-founded economic theories justified precisely that course of action.

Still, I do not find Tooze’s arguments to be as strong as he thinks they are. We economists and our theories did make a big difference. With the exception of Greece, advanced economies experienced nothing like a rerun of the Great Depression, which was a very real possibility at the height of the crisis. Had we been smarter, more articulate, and less divided and distracted by red herrings, we might have made a bigger difference. But that doesn’t mean we made no difference at all.

J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.

Daniel Kahneman on The Machinery of the Mind


October 18, 2018

Daniel Kahneman Explains The Machinery of Thought

https://fs.blog/2014/07/daniel-kahneman-the-two-systems/

Daniel Kahneman

Israeli-American psychologist and Nobel Laureate Daniel Kahneman is the founding father of modern behavioral economics. His work has influenced how we see thinking, decisions, risk, and even happiness.

In Thinking, Fast and Slow, his “intellectual memoir,” he shows us in his own words some of his enormous body of work.

Part of that body includes a description of the “machinery of … thought,” which divides the brain into two agents, called System 1 and System 2, which “respectively produce fast and slow thinking.” For our purposes these can also be thought of as intuitive and deliberate thought.

The Two Systems

Psychologists have been intensely interested for several decades in the two modes of thinking evoked by the picture of the angry woman and by the multiplication problem, and have offered many labels for them. I adopt terms originally proposed by the psychologists Keith Stanovich and Richard West, and will refer to two systems in the mind, System 1 and System 2.

  • System 1 operates automatically and quickly, with little or no effort and no sense of voluntary control.
  • System 2 allocates attention to the effortful mental activities that demand it, including complex computations. The operations of System 2 are often associated with the subjective experience of agency, choice, and concentration.

If asked to pick which thinker we are, we pick system 2. However, as Kahneman points out:

The automatic operations of System 1 generate surprisingly complex patterns of ideas, but only the slower System 2 can construct thoughts in an orderly series of steps . I also describe circumstances in which System 2 takes over, overruling the freewheeling impulses and associations of System 1. You will be invited to think of the two systems as agents with their individual abilities, limitations, and functions.

System One

These vary by individual and are often “innate skills that we share with other animals.”

We are born prepared to perceive the world around us, recognize objects, orient attention, avoid losses, and fear spiders. Other mental activities become fast and automatic through prolonged practice. System 1 has learned associations between ideas (the capital of France?); it has also learned skills such as reading and understanding nuances of social situations. Some skills, such as finding strong chess moves, are acquired only by specialized experts. Others are widely shared. Detecting the similarity of a personality sketch to an occupational stereotype requires broad knowledge of the language and the culture, which most of us possess. The knowledge is stored in memory and accessed without intention and without effort.

System Two

This is when we do something that does not come naturally and requires some sort of continuous exertion.

In all these situations you must pay attention, and you will perform less well, or not at all, if you are not ready or if your attention is directed inappropriately.

Paying attention is not really the answer as that is mentally expensive and can make people “effectively blind, even to stimuli that normally attract attention.” This is the point of Christopher Chabris and Daniel Simons in their book The Invisible Gorilla. Not only are we blind to what is plainly obvious when someone points it out but we fail to see that we are blind in the first place.

The Division of Labour

Systems 1 and 2 are both active whenever we are awake. System 1 runs automatically and System 2 is normally in a comfortable low-effort mode, in which only a fraction of its capacity is engaged. System 1 continuously generates suggestions for System 2: impressions, intuitions, intentions, and feelings. If endorsed by System 2, impressions and intuitions turn into beliefs, and impulses turn into voluntary actions. When all goes smoothly, which is most of the time, System 2 adopts the suggestions of System 1 with little or no modification. You generally believe your impressions and act on your desires, and that is fine— usually.

When System 1 runs into difficulty, it calls on System 2 to support more detailed and specific processing that may solve the problem of the moment. System 2 is mobilized when a question arises for which System 1 does not offer an answer, as probably happened to you when you encountered the multiplication problem 17 × 24. You can also feel a surge of conscious attention whenever you are surprised. System 2 is activated when an event is detected that violates the model of the world that System 1 maintains. In that world, lamps do not jump, cats do not bark, and gorillas do not cross basketball courts. The gorilla experiment demonstrates that some attention is needed for the surprising stimulus to be detected. Surprise then activates and orients your attention: you will stare, and you will search your memory for a story that makes sense of the surprising event. System 2 is also credited with the continuous monitoring of your own behavior—the control that keeps you polite when you are angry, and alert when you are driving at night. System 2 is mobilized to increased effort when it detects an error about to be made. Remember a time when you almost blurted out an offensive remark and note how hard you worked to restore control. In summary, most of what you (your System 2) think and do originates in your System 1, but System 2 takes over when things get difficult, and it normally has the last word.

The division of labor between System 1 and System 2 is highly efficient: it minimizes effort and optimizes performance. The arrangement works well most of the time because System 1 is generally very good at what it does: its models of familiar situations are accurate, its short-term predictions are usually accurate as well, and its initial reactions to challenges are swift and generally appropriate. System 1 has biases, however, systematic errors that it is prone to make in specified circumstances. As we shall see, it sometimes answers easier questions than the one it was asked, and it has little understanding of logic and statistics. One further limitation of System 1 is that it cannot be turned off.

[…]

Conflict between an automatic reaction and an intention to control it is common in our lives. We are all familiar with the experience of trying not to stare at the oddly dressed couple at the neighboring table in a restaurant. We also know what it is like to force our attention on a boring book, when we constantly find ourselves returning to the point at which the reading lost its meaning. Where winters are hard, many drivers have memories of their car skidding out of control on the ice and of the struggle to follow well-rehearsed instructions that negate what they would naturally do: “Steer into the skid, and whatever you do, do not touch the brakes!” And every human being has had the experience of not telling someone to go to hell. One of the tasks of System 2 is to overcome the impulses of System 1. In other words, System 2 is in charge of self-control.

[…]

The question that is most often asked about cognitive illusions is whether they can be overcome. The message of these examples is not encouraging. Because System 1 operates automatically and cannot be turned off at will, errors of intuitive thought are often difficult to prevent. Biases cannot always be avoided, because System 2 may have no clue to the error. Even when cues to likely errors are available, errors can be prevented only by the enhanced monitoring and effortful activity of System 2. As a way to live your life, however, continuous vigilance is not necessarily good, and it is certainly impractical. Constantly questioning our own thinking would be impossibly tedious, and System 2 is much too slow and inefficient to serve as a substitute for System 1 in making routine decisions.

The best we can do is a compromise: learn to recognize situations in which mistakes are likely and try harder to avoid significant mistakes when the stakes are high. The premise of this book is that it is easier to recognize other people’s mistakes than our own.

Image result for daniel kahneman

Still Curious? Thinking, Fast and Slow is a tour-de-force when it comes to thinking.

 

Why Nobel Prize Winner Daniel Kahneman Gave Up on Happiness


October 6, 2018

Why Nobel Prize Winner Daniel Kahneman Gave Up on Happiness

The cognitive psychologist spent years studying happiness, yet now he considers satisfaction and life satisfaction of greater importance to people.

What did I consider more important about my meeting with Nobel Prize laureate Daniel Kahneman? My enjoyment of the meeting, which was fascinating and inspirational – or the photo that shows me talking with one of the world’s most brilliant men? According to Kahneman, this is a complex question that has caused confusion in happiness studies for many years.

He came to the study of happiness through a circuitous route, as an outgrowth of research in which he sought to understand the connection between what we experience in real time – that is, the life we lead – and what we remember of these experiences (i.e., the narrative we carry with us and tell about our lives).

A Tel Aviv native and Professor Emeritus at Princeton, Kahneman, 84, is a cognitive psychologist who won the Nobel Prize in Economics in 2002 for research conducted jointly with Amos Tversky (who died in 1996). The two modeled a systematic, inbuilt set of cognitive biases and logical failures in our method of thinking that influences contexts, conclusions and decision-making. They then demonstrated how, as a result, we make decisions on the basis of erroneous assessments and intuitions that are inconsistent with either statistics or common sense.

The research and behavioral models derived from their studies had a significant effect on the economic sciences, forcing it to change its models – which had previously been based on the fundamental assumption of rational behavior. Kahneman’s insights created the field of behavioral economics: A field that seeks to evaluate the influence of irrational, impulsive human behavior.

In the 1990s, Kahneman studied another form of cognitive bias: That there is a discrepancy between our experiences as we experience them while they’re actually happening, and our memories of those same experiences.

The subject of his initial research was not sexy and quite distant from the happiness debate. The study documented, in real time, patients’ degree of suffering during a colonoscopy (it was a painful procedure at the time, unlike today).

It turned out there was no connection between the length of the procedure and level of pain a patient experienced and described at the time, and the extent of trauma he recalled afterward. The memory was based primarily on whether the pain increased or decreased toward the end of the procedure. The stronger the pain in the final stage of the procedure, the more traumatic it became in the patient’s memory – with no connection to the question of how much pain he actually experienced during it.

Positive experiences are processed similarly. In a 2010 lecture, Kahneman related the story of a man who told him about listening to a symphony he loved, “absolutely glorious music.” But at the end there was a “dreadful screeching sound” that, the man said, ruined the whole experience for him.

But as Kahneman pointed out, it hadn’t actually destroyed the experience, because the man enjoyed the music at the time. Rather, it ruined his memory of the experience, which is something completely different.

“We live and experience many moments, but most of them are not preserved,” Kahneman said. “They are lost forever. Our memory collects certain parts of what happened to us and processes them into a story. We make most of our decisions based on the story told by our memory.

“For example, a vacation – we don’t remember, or experience, the entire time we spent on vacation, but only the impressions preserved in our memory, the photographs and the documentation. Moreover, we usually choose the next vacation not as an experience but as a future memory. If prior to the decision about our next vacation we assume that at the end all the photos will be erased, and we’ll be given a drug that will also erase our memory, it’s quite possible that we’ll choose a different vacation from the one that we actually choose.”

A very vague concept

Kahneman’s studies of “What I experience” versus “What I remember” are what led him to get involved in the study of happiness.

“I put together a group of researchers, including an economist whom I viewed as both a partner in the group and its principal client,” he told me when we met earlier this year. “We wanted to figure out what factors affect happiness and to try to work to change conditions and policies accordingly. Economists have more influence on policy.

“The group developed a model known as DRM, or Day Reconstruction Method – a fairly successful method of reconstructing experiences throughout the day. It gives results similar to those of ‘What I experience’ and is easier to do.”

It turns out there are significant differences between the narrative that we remember and tell, and the feelings of day-to-day happiness we experience at the time – to the point that Kahneman believes the general term “happiness” is too vague and can’t be applied to both.

He views “happiness” as the feeling of enjoyment a person experiences here and now – for instance, two weeks of relaxation on the beach, or an enjoyable conversation with an interesting person. What is described as happiness in the “What I remember” is something Kahneman prefers to call – as he did more than once in his series of studies – “satisfaction” or “life satisfaction.”

 

Amir Mandel speaking with Daniel Kahneman, March 2018. What did I consider more important about our meeting? My enjoyment of the meeting or the photo? Moti Milrod

 

“Life satisfaction is connected to a large degree to social yardsticks – achieving goals, meeting expectations,” he explained. “It’s based on comparisons with other people.

“For instance, with regard to money, life satisfaction rises in direct proportion to how much you have. In contrast, happiness is affected by money only when it’s lacking. Poverty can buy a lot of suffering, but above the level of income that satisfies basic needs, happiness, as I define it, doesn’t increase with wealth. The graph is surprisingly flat.

 

“Economist Angus Deaton, the Nobel Prize laureate for 2015, was also involved in these conclusions. Happiness in this sense depends, to a large extent, on genetics – on a natural ability to be happy. It’s also connected to a genetic disposition to optimism. They are apparently the same genes.

“To the degree that outside factors affect this aspect of happiness,” he continued, “they’re related solely to people: We’re happy in the company of people we like, especially friends – more so than with partners. Children can cause great happiness, at certain moments.”

‘I was miserable’

At about the same time as these studies were being conducted, the Gallup polling company (which has a relationship with Princeton) began surveying various indicators among the global population. Kahneman was appointed as a consultant to the project.

“I suggested including measures of happiness, as I understand it – happiness in real time. To these were added data from Bhutan, a country that measures its citizens’ happiness as an indicator of the government’s success. And gradually, what we know today as Gallup’s World Happiness Report developed. It has also been adopted by the UN and OECD countries, and is published as an annual report on the state of global happiness.

“A third development, which is very important in my view, was a series of lectures I gave at the London School of Economics in which I presented my findings about happiness. The audience included Prof. Richard Layard – a teacher at the school, a British economist and a member of the House of Lords – who was interested in the subject. Eventually, he wrote a book about the factors that influence happiness, which became a hit in Britain,” Kahneman said, referring to “Happiness: Lessons from a New Science.”

“Layard did important work on community issues, on improving mental health services – and his driving motivation was promoting happiness. He instilled the idea of happiness as a factor in the British government’s economic considerations.

“At the same time,” said Kahneman, “a movement has also developed in psychology – positive psychology – that focuses on happiness and attributes great importance to internal questions like meaning. I’m less certain of that.

Tourists in New York posing near a homeless man. “In general, if you want to reduce suffering, mental health is a good place to start,” says Kahneman. Tourists in New York posing near a homeless man. “In general, if you want to reduce suffering, mental health is a good place to start,” says Kahneman.

Tourists in New York posing near a homeless man. “In general, if you want to reduce suffering, mental health is a good place to start,” says Kahneman. Reuters

“The involvement of economists like Layard and Deaton made this issue more respectable,” Kahneman added with a smile. “Psychologists aren’t listened to so much. But when economists get involved, everything becomes more serious, and research on happiness gradually caught the attention of policy-making organizations.

People connect happiness primarily to the company of others. I recall a conversation with Martin Seligman, the founder of positive psychology, in which he tried to convince me I had a meaningful life. I insisted – and I still think this today – that I had an interesting life. ‘Meaningful’ isn’t something I understand. I’m a lucky person and also fairly happy – mainly because, for most of my life, I’ve worked with people whose company I enjoyed.”

Then, referring to his 2011 best-seller “Thinking, Fast and Slow,” he added, “There were four years when I worked alone on a book. That was terrible, and I was miserable.”

 

Despite Kahneman’s reservations, trends in positive psychology have come to dominate the science of happiness. One of the field’s most prominent representatives is Prof. Tal Ben-Shahar, who taught the most popular course in Harvard’s history (in spring 2006), on happiness and leadership.

Following in his footsteps, lecturers at Yale developed a course on happiness that attracted masses of students and overshadowed every other course offered at the prestigious university.

In positive psychology, it seems to me they’re trying to convince people to be happy without making any changes in their situation,” said Kahneman, skeptically. “To learn to be happy. That fits well with political conservatism.”

I pointed out to Kahneman that Buddhism – including Tibetan Buddhism’s spiritual leader, the Dalai Lama, which whom he is in contact – also places great emphasis on changing a person’s inner spiritual state. “That’s true to a large extent,” he agreed, “but in a different way, in my opinion. Buddhism has a different social worldview.

 

“But in any case, I confess that I participated in a meeting with the Dalai Lama at MIT, and some of his people were there – including one of his senior people, who lives in Paris and serves as his contact person and translator in France. I couldn’t tear my eyes away from this man. He radiated. He had such inner peace and such a sense of happiness, and I’m absolutely not cynical enough to overlook it.”

Tending to mental health

Kahneman studied happiness for over two decades, gave rousing lectures and, thanks to his status, contributed to putting the issue on the agenda of both countries and organizations, principally the UN and the OECD. Five years ago, though, he abandoned this line of research.

I gradually became convinced that people don’t want to be happy,” he explained. “They want to be satisfied with their life.”

A bit stunned, I asked him to repeat that statement. “People don’t want to be happy the way I’ve defined the term – what I experience here and now. In my view, it’s much more important for them to be satisfied, to experience life satisfaction, from the perspective of ‘What I remember,’ of the story they tell about their lives. I furthered the development of tools for understanding and advancing an asset that I think is important but most people aren’t interested in.

“Meanwhile, awareness of happiness has progressed in the world, including annual happiness indexes. It seems to me that on this basis, what can confidently be advanced is a reduction of suffering. The question of whether society should intervene so that people will be happier is very controversial, but whether society should strive for people to suffer less – that’s widely accepted.

“Much of Layard’s activity on behalf of happiness in England related to bolstering the mental health system. In general, if you want to reduce suffering, mental health is a good place to start – because the extent of illness is enormous and the intensity of the distress doesn’t allow for any talk of happiness. We also need to talk about poverty and about improving the workplace environment, where many people are abused.”

My interview with Kahneman took place as I started working on the Haaretz series of articles “The Secret of Happiness,” and was initially meant to conclude it. It was the key to the entire series. It’s interesting that Kahneman, one of the leading symbols of happiness research, eventually became dubious and quit, while proposing that we primarily address causes of suffering.

The “secret of happiness” hasn’t been deciphered. Even the term’s definition remains vague. Genetics and luck play an important role in it.

Nevertheless, a few insights that emerged from the series have stayed with me: I’m amazed by Layard’s activity. I was impressed by the tranquility of the Buddhist worldview and the practices that accompany it. Personally, I’ve chosen to practice meditation with a technique adapted to people from Western cultures.

I learned to collect experiences and not necessarily memories, which can be disputed. I don’t mind sitting for three hours in a Paris café or spending a day wandering through the streets of Berlin, without noting a single monument or having a single incident that I could recount. I gave up on income to do what I enjoy – like, for instance, writing about happiness and music.

Above all, it has become clear that our best hours are spent in the company of people we like. With this resource, it pays to be generous.

https://www.haaretz.com/israel-news/.premium.MAGAZINE-why-nobel-prize-winner-daniel-kahneman-gave-up-on-happiness-1.6528513

Southeast Asia: Changing Geo-Political Dynamics in the Trump Era


August 30, 2018

Southeast Asia: Changing Geo-Political Dynamics in the Trump Era

Widespread reports of China’s hegemony over the neighboring region miss the nuance of fast-shifting political and strategic dynamics

Phnom Penh 
A historical map depicting China's flag over Southeast Asia. Photo: iStock

Is China truly establishing dominance over neighboring Southeast Asia, or is it a prevailing perception among academics and journalists who have uncritically adopted a pervasive pro-China narrative built on Beijing’s rising investment and influence in the region?

Two recent Southeast Asian elections denote a shifting spectrum. Last month’s general election in Cambodia, by far China’s most loyal ally in the region, was taken by some as indication of how far the country has moved away from its past Western backers and closer to Beijing.

Image result for Hun Sen-President Xi

As Cambodia abandons multi-party democracy for one-party authoritarianism, similar to the dominance of the Communist Party in China, some see Cambodia as the first domino to fall in China’s grand regional ambition for political and economic control over the nearby region.

Indeed, some in Cambodia’s exiled opposition have claimed that the country has become a de facto “Chinese colony” under Prime Minister Hun Sen’s ruling Cambodian People’s Party (CPP).

The Harapan coalition’s win at Malaysia’s May 9 general election, however, pointed in the opposite direction. The long-ruling United Malays National Organization (UMNO) was ousted by an alliance whose campaign narrative was built in part on opposing Chinese investment, which boomed under the previous government.

Now as prime minister, Mahathir Mohamad has cancelled US$22 billion worth of Chinese-backed infrastructure projects, including a Belt and Road Initiative-inspired high-speed rail line, for reasons of fiscal prudence.

While Mahathir warned of the risk of new forms of “colonialism” during a recently concluded tour of China, he also made the diplomatic point that his government isn’t anti-China.

Indeed, some in Cambodia’s exiled opposition have claimed that the country has become a de facto “Chinese colony” under Prime Minister Hun Sen’s ruling Cambodian People’s Party (CPP).

The Harapan coalition’s win at Malaysia’s May 9 general election, however, pointed in the opposite direction. The long-ruling United Malays National Organization (UMNO) was ousted by an alliance whose campaign narrative was built in part on opposing Chinese investment, which boomed under the previous government.

Now as Prime Minister, Mahathir Mohamad has cancelled US$22 billion worth of Chinese-backed infrastructure projects, including a Belt and Road Initiative-inspired high-speed rail line, for reasons of fiscal prudence.

While Mahathir warned of the risk of new forms of “colonialism” during a recently concluded tour of China, he also made the diplomatic point that his government isn’t anti-China.

Malaysia's Prime Minister Mahathir Mohamad (L) and China's Premier Li Keqiang talk during a signing ceremony at the Great Hall of the People in Beijing on August 20, 2018.Mahathir is on a visit to China from August 17 to 21. / AFP PHOTO / POOL / HOW HWEE YOUNG

“We should always remember that the level of development of countries are not all the same,” Mahathir said this week at a joint press conference with Chinese premier Li Keqiang. “We do not want a situation where there is a new version of colonialism happening because poor countries are unable to compete with rich countries, therefore we need fair trade.”

It is undeniable that China now plays a major and growing role in Southeast Asian affairs, even if judged by only its economic heft.

A recent New York Times report noted that every Asian country now trades more with China than the United States, often by a factor of two to one, an imbalance that is only growing as China’s economic growth outpaces that of America’s.

With China’s economic ascendency projected to continue – the International Monetary Fund (IMF) predicts China could become the world’s largest economy by 2030 – some believe that Beijing aims to replace the US-backed liberal international order in place since the 1950’s with a new less liberal and less orderly model.

Cambodia’s case, however, tests the limits of that forward-looking analysis. The US and European Union (EU) refused to send electoral monitors to Cambodia’s general election last month on the grounds the process was “illegitimate” due to the court-ordered dissolution of the country’s largest opposition party.

Washington has since imposed targeted sanctions on Cambodian officials seen as leading the anti-democratic crackdown, while new legislation now before the US Senate could significantly ramp up the punitive measures.

Hun Sen aired a combative response to threats of sanctions, saying with bravado that he “welcomes” the measures. Some commentators read this as an indication that Phnom Penh no longer cares about the actions and perceptions of democratic nations because it has China’s strong and lucrative backing.

Yet the CPP still made painstaking efforts to present a veneer of democratic legitimacy on to its rigged elections, something it would not have done if it only cared about Beijing’s opinions. Hun Sen now says he will soon defend the election’s legitimacy at the United Nations General Assembly, yet another indication that he still cares what the West thinks.

China’s rise in Southeast Asia is viewed primarily in relation to the US’ long-standing strong position, both economically and strategically. Many see this competition as a zero-sum game where China’s gain is America’s loss.

Along those lines, some analysts saw US Secretary of State Mike Pompeo’s recent whirlwind trip to Southeast Asia as “parachute diplomacy” that only underscored certain entrenched regional perceptions of the US as an episodic actor that has no real strategy for Southeast Asia.

The Donald Trump administration certainly lacks an overarching policy comparable to his predecessor Barack Obama’s “pivot to Asia,” a much-vaunted scheme with strategic and economic components that made Southeast Asia key to America’s policy of counterbalancing China.

Despite no new policy moniker, Trump’s administration has in many ways continued Obama’s scheme: Vietnam remains a key ally, support for other South China Sea claimants is unbending, military sales remain high, and containing Chinese expansion is still the raison d’etre.

It’s also been seen in the number of visits to Southeast Asia by senior White House officials, including high profile tours by Pompeo and his predecessor Rex Tillerson, Defense Secretary Jim Mattis, and Trump himself to Vietnam in November 2017 and Singapore in June.

A little noticed December 2017 National Security Strategy document, produced by Trump’s White House, explicitly notes that “China seeks to displace the United States in the Indo-Pacific region, expand the reaches of its state-driven economic model, and reorder the region in its favor.”

Yet perceptions of new Cold War-like competition in Southeast Asia often fail to note the imbalance between America and China’s spheres of influence in the region.

 

US President Donald Trump (L) and Vietnam's President Tran Dai Quang (R) attend a welcoming ceremony at the Presidential Palace in Hanoi in Hanoi on November 12, 2017.Trump told his Vietnamese counterpart on November 12 he is ready to help resolve the dispute in the resource-rich South China Sea, which Beijing claims most of. / AFP PHOTO / POOL / KHAM

Absent President Donald Trump’s Asia Policy, China emerges as the dominant  player in Southeast Asia

China’s two most loyal regional allies are arguably Cambodia and Laos, countries of less economic and strategic importance than America’s main partners Indonesia, Thailand, Singapore and Vietnam.

The historically pro-US Philippines has gravitated somewhat into China’s orbit under President Rodrigo Duterte, though at most there has been an equalization of its relations between the two powers rather than outright domination by China.

Strategic analyst Richard Javad Heydarian recently noted that Duterte likes to think of himself as a “reincarnation of mid-20th century titans of the so-called Non-Aligned Movement,” though Heydarian suggested that this could prompt a backlash from the Philippine public that remains resolutely pro-America.

Malaysia, another country that was thought to have been moving closer to China, has ricocheted strongly in the other direction after the change in leadership from pro-China Najib Razak to China-skeptic Mahathir Mohamad.

Thailand has boosted military ties with Beijing since the country’s military coup in 2014, which caused some panic in Washington, but a recent incident has shown just how fragile their bilateral relations remain.

After two boats sank near the resort island of Phuket in early July, killing dozens of Chinese tourists, Deputy Prime Minister Prawit Wongsuwan blamed the Chinese tour operators, commenting the accident was “entirely Chinese harming Chinese.”

His claim led to calls in China for tourists to boycott Thailand, which could cost the country roughly US$1.5 billion in cancellations, according to some estimates. Thailand’s tourism sector is now facing a major public relations problem after China’s jingoist state-owned media lambasted Prawit’s tactless response.

More explosively, rare nationwide protests in Vietnam in June were sparked by nationalistic concerns that a new law allowing 99-year land leases in special economic zones would effectively sell sovereign territory to China.

There are strong perceptions, aired widely over social media, that Vietnam’s ruling Communist Party is too close to Beijing, a cause of resentment that some analysts suggest is the country’s biggest potential source of instability.

Even in perceived pro-China nations like Cambodia and Laos, anti-China sentiment is rising in certain sections of the public. Arguments that Chinese investment actually harms the livelihoods of many Cambodians, especially in places like coastal Sihanoukville and Koh Kong, is on the ascendency.

Social media criticism has centered on a concession deal the Cambodian government entered with a Chinese company that effectively gives it land rights to an estimated 20% of Cambodia’s coastline.

The same goes for Laos’ ruling communist party, which has taken steps to curb the growth of certain sectors dominated by Chinese investment, such as banana plantations and mining, over public complaints about their adverse health and environmental impacts.

The IMF and others, meanwhile, have expressed concerns that Laos risks falling into a Chinese “debt trap”via its Beijing-backed US$6 billion high-speed rail project, a claim that Prime Minister Thongloun Sisoulith felt the need to publicly rebuff in June.

Still, there is a certain misapprehension that China’s rising economic importance to the region, both as a provider of aid and investment and market for exports, necessarily equates to strong political and strategic influence.

It doesn’t always add up that way. In January, China fractionally overtook America as the largest importer of Vietnamese goods, according to the General Department of Vietnam Customs. Nonetheless, Hanoi remains decidedly pro-US in regional affairs and that position isn’t expected to change, even if its exports to China continue to outpace those to America.

More fundamentally, China’s rising economic presence in the region is in many instances destabilizing relations. Rapid growth in Chinese investment to Malaysia in recent years prompted a public backlash, a phenomena seized on by the victorious Harapan coalition. There are incipient signs the same type of backlash is now percolating in Cambodia and Laos.

Chinese investment is likely to play a role in Indonesia’s presidential and legislative elections next year, perhaps negatively for incumbent President Joko Widodo, under whose tenure China has become the country’s third largest investor.

“The relationship with China could turn toxic for [Widodo],” Keith Loveard, senior analyst with Jakarta-based business risk firm Concord Consulting, recently told the South China Morning Post.

To be sure, China has translated some of its economic largesse to strategic advantage. Philippine President Durterte, for example, said in October 2016 that his country’s one-way security ties with the US would come to an end, though America’s provision of “technical assistance” during the Marawi City siege last year cast the extent of that into doubt.

China has also developed closer ties to the militaries of Thailand and Cambodia, so much so that the latter cancelled joint military exercises with the US last year. It has also resumed its past position of shielding Myanmar’s generals from Western condemnation during the recent Rohingya refugee crisis.

But America still remains the predominant security ally of most Southeast Asian nations, something that will only become more important as concerns about the spread of Islamic terrorism heighten. This month, Washington provided an additional US$300m in security funding to the region.

Only Laos, Cambodia and Myanmar buy more arms from China than America, according to the Stockholm International Peace Research Institute. The rest of Southeast Asia’s military procurements, sometimes exclusively, come from the US.

Still, some of China’s recent regional successes have been the result of America’s missteps. China has been greatly helped by Trump’s withdrawal of America from its long-standing leadership role in certain multilateral institutions, as well as his ad hoc policy towards Southeast Asia that favors more bilateralism.

Had Trump not withdrawn the US from the Trans-Pacific Partnership, a multilateral trade deal championed by Obama that excludes China, regional trade flows would be geared more towards America, providing an important counterbalance to many regional countries’ rising dependence on Chinese markets.

By doing so, Trump allowed Beijing’s multilateral economic institutions, like the Asian Infrastructure Investment Bank and the New Development Bank, to gain an upper hand.

Yet most reporting on China’s influence in Southeast Asia rests on the assumption that the trends of the past decade will continue into the future. But it’s not clear that Chinese investment will keep growing at the same rate – or even faster – while America continues to fumble over how best to engage with Southeast Asia.

US Secretary of State Mike Pompeo (C) poses with Thailand's Foreign Minister Don Pramudwinai (L), Vietnam's Deputy Prime Minister and Foreign Minister Pham Binh Minh (2nd L), Malaysia's Foreign Minister Saifuddin Abdullah (2nd R) and Laos Foreign Minister Saleumxay Kommasith (R) for a group photo at the 51st Association of Southeast Asian Nations (ASEAN) - US Ministerial Meeting in Singapore on August 3, 2018. Photo: AFP/Roslan Rahman

China cannot rule out that in 2021 America could have a new president able to articulate and implement a more coherent policy towards Southeast Asia, nor that upcoming elections in Indonesia and possibly even Myanmar see the rise of anti-China candidates.

Neither can Beijing rule out that India won’t become a major player in the region, despite it so far failing to live up to expectations. A recent report by the Council on Foreign Relations, a US-based think tank, asserted that it can be “a more forceful counterweight to China and hedge against a declining United States.”

Moreover, there is great uncertainty over whether the South China Sea disputes pitting China versus the Philippines, Malaysia and Vietnam, among others, might at some point turn hot, which would significantly alter the region’s security approach in place since the 1990s.

China’s growing trade war with the US could also impact on its relations with the region. Some believe China could soon devalue its currency in response to the US-China trade war, though Beijing says it won’t.

Not only would a devalued renminbi make Chinese-made products cheaper, negatively affecting competing Southeast Asian exporters, it would also affect the region’s supply chains as Chinese buyers would be expected to demand cheaper prices. Few, if any, in the region would win from rounds of competitive currency devaluations.

But viewing China’s power in the region vis-a-vis America’s is only part of the picture. Japan, and to a lesser extent South Korea, are also major players and potential counterweights to China.

Since the 2000s, Japan’s infrastructure investment in the region has been worth US$230 billion, while China’s was about US$155 billion, according to recent BMI Research, an economic research outfit. The balance might tip in China’s favor with the US$1 trillion Belt and Road Initiative, but probably not for another decade or so, BMI projects.

Tokyo rarely boasts of its own soft power in Southeast Asia. Indeed, while Philippine leader Duterte’s overtures to China are among his major talking points, quietly it has been Japan, not China, that is funding his government’s ballyhooed major infrastructure programs.

Japan's Prime Minister Shinzo Abe (R) and Malaysia's Prime Minister Mahathir Mohamad shake hands during joint press remarks at Abe's official residence in Tokyo on June 12, 2018. / AFP PHOTO / POOL / Toshifumi KITAMURA

Japanese diplomacy towards the region falls somewhere between China and America’s. While Washington’s, at least past, insistence on human rights and democracy-building puts off to many regional countries, Beijing’s diplomacy is more laissez faire, as long as Chinese interests are protected by sitting governments.

Tokyo, by contrast, tends to practice quiet sustained diplomacy, decidedly in support of rule of law but without the threat of punitive measures if a partner government strays. That is likely one reason why there is little anti-Japan sentiment in the region and why its relations receive much less public attention.

Malaysia’s Mahathir, whose first trip abroad after May’s election win was to Tokyo, not Beijing or Washington, has recently spoken of Japan’s importance in regional affairs.

Mahathir shaped Southeast Asia’s approach to great powers during his previous tenure as Prime Minister from 1981-2003, and his belief that Japan can play an even larger role in regional affairs could soon be taken up by other regional governments.

“Specific Southeast Asian states are now seeking to diversify their strategic partnerships, beyond a binary choice between Beijing and Washington,” reads a recent report by the Council on Foreign Relations.

Mahathir’s apparent desire is for a more diversified regional network, similar to the hedging policies he promoted in the 1990s. Mahathir is certainly not pro-China, but neither is he pro-US.

What most Southeast Asian nations desire is not unipolarity but competition among many foreign partners that allows them to maximize benefits and negotiating leverage. When America and China, or Japan and India, compete to gain an economic and political footing, regional nations often win through the bidding.

 

 

Congratulations. Dr Khalid


August 24, 2018

Congratulations. Dr Khalid

PM appoints Muhammed Abdul Khalid as economic advisor

   Dr Abdul Khalid and Hwok-Aun Lee

Economist Muhammed Abdul Khalid has been appointed as the economic advisor to Prime Minister Dr Mahathir Mohamad.

This follows Muhammed’s stint as the secretariat head for the Council of Eminent Persons (CEP), which has served past its 100-day tenure.

Muhammed is best known for his talk show appearances, where he explains economic issues in simple language.

In 2014, he authored the well-received “The Colour of Inequality: Ethnicity, Class, Income and Wealth in Malaysia” which illustrated how Malaysia’s wealth gap was widening in tandem with its economic success.

He was formerly a research head at the Khazanah Research Institute, chief economist with the Securities Commission and senior analyst with the Institute of Strategic and International Studies.

He has also held positions with the United Nations Development Programme (UNDP), United Nations Children’s Fund (Unicef) and United Nations Economic and Social Commission for Asia and the Pacific (Unescap).

The Penang-born economist was awarded a PhD with highest honours from the Paris Institute of Political Studies, better known as Sciences Po, and is the founder of big data firm DM Analytics.

His appointment will take effect on August 27.

Demonizing State-Owned Enterprises


August 14, 2018

Demonizing State-Owned Enterprises

 

Image result for jomo kwame sundaram

Historically, the private sector has been unable or unwilling to affordably provide needed services. Hence, meeting such needs could not be left to the market or private interests. Thus, state-owned enterprises (SOEs) emerged, often under colonial rule, due to such ‘market failure’ as the private sector could not meet the needs of colonial capitalist expansion.

Thus, the establishment of government departments, statutory bodies or even government-owned private companies were deemed essential for maintaining the status quo and to advance state and private, particularly powerful and influential commercial interests.

Image result for state owned enterprises

SOEs have also been established to advance national public policy priorities. Again, these emerged owing to ‘market failures’ to those who believe that markets would serve the national interest or purpose.However, neoliberal or libertarian economists do not recognize the existence of national or public interests, characterizing all associated policies as mere subterfuges for advancing particular interests under such guises.

Nevertheless, regardless of their original rationale or intent, many SOEs have undoubtedly become problematic and often inefficient. Yet, privatization is not, and has never been a universal panacea for the myriad problems faced by SOEs.

Causes of inefficiency

Undoubtedly, the track records of SOEs are very mixed and often vary by sector, activity and performance, with different governance and accountability arrangements. While many SOEs may have been quite inefficient, it is crucial to recognize the causes of and address such inefficiencies, rather than simply expect improvements from privatization.

First, SOEs often suffer from unclear, or sometimes even contradictory objectives. Some SOEs may be expected to deliver services to the entire population or to reduce geographical imbalances. Other SOEs may be expected to enhance growth, promote technological progress or generate jobs. Over-regulation may worsen such problems by imposing contradictory rules.

Privatization has never been a universal panacea. One has to understand the specific nature of a problem; sustainable solutions can only come from careful understanding of the specific problems to be addressed. To be sure, unclear and contradictory objectives – e.g., to simultaneously maximize sales revenue, address disparities and generate employment — often mean ambiguous performance criteria, open to abuse.

Typically, SOE failure by one criterion (such as cost efficiency) could be excused by citing fulfillment of other objectives (such as employment generation). Importantly, such ambiguity of objectives is not due to public or state ownership per se.

Second, performance criteria for evaluating SOEs — and privatization — are often ambiguous. SOE inefficiencies have often been justified by public policy objectives, such as employment generation, industrial or agricultural development, accelerating technological progress, regional development, affirmative action, or other considerations.

Ineffective monitoring, poor transparency and ambiguous accountability typically compromise SOE performance. Inadequate accountability requirements were a major problem as some public sectors grew rapidly, with policy objectives very loosely and broadly interpreted.

Third, coordination problems have often been exacerbated by inter-ministerial, inter-agency or inter-departmental rivalries. Some consequences included ineffective monitoring, inadequate accountability, or alternatively, over-regulation.

Hazard

Image result for state owned enterprises

Moral hazard has also been a problem as many SOE managements expected sustained financial support from the government due to weak fiscal discipline or ‘soft budget constraints’. In many former state-socialist countries, such as the Soviet Union and Yugoslavia, SOEs continued to be financed regardless of performance.

Excessive regulation has not helped as it generally proves counter-productive and ultimately ineffective. The powers of SOEs are widely acknowledged to have been abused, but privatization would simply transfer such powers to private hands.

Very often, inadequate managerial and technical skills and experience have weakened SOE performance, especially in developing countries, where the problem has sometimes been exacerbated by efforts to ‘nationalize’ managerial personnel.

Often, SOE managements have lacked adequate or relevant skills, but have also been constrained from addressing them expeditiously. Privatization, however, does not automatically overcome poor managerial capacities and capabilities.

Similarly, the privatization of SOEs which are natural monopolies (such as public utilities) will not overcome inefficiencies due to the monopolistic or monopsonistic nature of the industry or market. The key remaining question is whether privatization is an adequate or appropriate response to address SOE problems.

Throwing baby out with bathwater

SOEs often enjoy monopolistic powers, which can be abused, and hence require appropriate checks and balances. In this regard, there are instances where privatization may well be best. Two examples from Britain and Hungary may be helpful.

The most successful case of privatization in the United Kingdom during the Thatcher period involved National Freight, through a successful Employee Stock Ownership Plan (ESOP). Thus, truck drivers and other staff co-owned National Freight and developed personal stakes in ensuring its success.

Image result for state owned enterprises

In Hungary, the state became involved in running small stores. Many were poorly run due to over-centralized control. After privatization, most were more successfully run by the new owners who were previously store managers. Hence, there are circumstances when privatization can result in desirable outcomes, but a few such examples do not mean that privatization is the answer to all SOE problems.

Privatization has never been a universal panacea. One has to understand the specific nature of a problem; sustainable solutions can only come from careful understanding of the specific problems to be addressed.

 

Dr. Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.