Economic Crises and the Crisis of Economics


January 17, 2017

Economic Crises and the Crisis of Economics: Economists should learn to be humble and accept their own limitations

by Paola Subacchi@www.project-syndicate.org

Paola Subacchi is Research Director of International Economics at Chatham House and Professor of Economics at the University of Bologna. She is the author of The People’s Money: How China is Building an International Currency.

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Is the economics profession “in crisis”? Many policymakers, such as Andy Haldane, the Bank of England’s chief economist, believe that it is. Indeed, a decade ago, economists failed to see a massive storm on the horizon, until it culminated in the most destructive global financial crisis in nearly 80 years. More recently, they misjudged the immediate impact that the United Kingdom’s Brexit vote would have on its economy.

Of course, the post-Brexit forecasts may not be entirely wrong, but only if we look at the long-term impact of the Brexit vote. True, some economists expected the UK economy to collapse during the post-referendum panic, whereas economic activity proved to be rather resilient, with GDP growth reaching some 2.1% in 2016. But now that British Prime Minister Theresa May has implied that she prefers a “hard” Brexit, a gloomy long-term prognosis is probably correct.

Unfortunately, economists’ responsibility for the 2008 global financial crisis and the subsequent recession extends beyond forecasting mistakes. Many lent intellectual support to the excesses that precipitated it, and to the policy mistakes – particularly insistence on fiscal austerity and disregard for widening inequalities – that followed it.

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Some economists have been led astray by intellectual arrogance: the belief that they can always explain real-world complexity. Others have become entangled in methodological issues – “mistaking beauty for truth,” as Paul Krugman once observed – or have placed too much faith in human rationality and market efficiency.

Despite its aspiration to the certainty of the natural sciences, economics is, and will remain, a social science. Economists systematically study objects that are embedded in wider social and political structures. Their method is based on observations, from which they discern patterns and infer other patterns and behaviors; but they can never attain the predictive success of, say, chemistry or physics.

Human beings respond to new information in different ways, and adjust their behavior accordingly. Thus, economics cannot provide – nor should it claim to provide – definite insights into future trends and patterns. Economists can glimpse the future only by looking backwards, so their predictive power is limited to deducing probabilities on the basis of past events, not timeless laws.

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And because economics is a social science, it can readily be used to serve political and business interests. In the years leading up to the financial crisis, global economic growth and profits were so strong that everyone – from small investors to the largest banks – was blinded by the prospect of bigger gains.

Economists employed by banks, hedge funds, and other businesses were expected to provide a short-term “view” for their employers and clients; and to dispense their “wisdom” to the general public through interviews and media appearances. Meanwhile, the economics profession was adopting more complex mathematical tools and specialized jargon, which effectively widened the gap between economists and other social scientists.

Before the financial crisis, when so many private interests and profitable opportunities were at stake, many economists defended a growth model that was based more on “irrational exuberance” than on sound fundamentals. Similarly, with respect to Brexit, many economists confused the referendum’s long-term impact with its short-term effects, because they were rushing their predictions to fit the political debate.

Owing to these and other mistakes, economists – and economics – have suffered a spectacular fall from grace. Once seen as modern witch doctors with access to exclusive knowledge, economists are now the most despised of all “experts.”

Where do we go from here? While we should appreciate Haldane’s candid admission, apologizing for past mistakes is not enough. Economists, especially those involved in policy debates, need to be held explicitly accountable for their professional behavior. Toward that end, they should bind themselves with a voluntary code of conduct.

Above all, this code should recognize that economics is too complex to be reduced to sound bites and rushed conclusions. Economists should pay closer attention to when and where they offer their views, and to the possible implications of doing so. And they should always disclose their interests, so that proprietary analysis is not mistaken for an independent perspective.

Moreover, economic debates would benefit from more voices. Economics is a vast discipline that comprises researchers and practitioners whose work spans macro and micro perspectives and theoretical and applied approaches. Like any other intellectual discipline, it produces excellent, good, and mediocre output.

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But the bulk of this research does not filter into policymaking and decision-making circles, such as finance ministries, central banks, or international institutions. At the commanding heights, economic-policy debates remain dominated by a relatively small group of white men from American universities and think tanks, nearly all of them well-versed devotees of mainstream economics.

The views held by this coterie are disproportionately represented in the mass media, through commentaries and interviews. But fishing for ideas in such a small and shallow pond leads to a circular and complacent debate, and it may encourage lesser-known economists to tailor their research to fit in.

The public deserves – and needs – a marketplace of ideas in which mainstream and heterodox views are afforded equal attention and balanced discussion. To be sure, this will take courage, imagination, and dynamism – particularly on the part of journalists. But a fairer, more pluralistic discussion of economic ideas may be just what economists need as well.

Davos elites struggle for answers as Trump era dawns


January 16, 2017

Davos elites struggle for answers as Trump era dawns

By Noah Barkin

http://www.reuters.com/article/us-davos-meeting-preview-idUSKBN14Z07V

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DAVOS, Switzerland – The global economy is in better shape than it’s been in years. Stock markets are booming, oil prices are on the rise again and the risks of a rapid economic slowdown in China, a major source of concern a year ago, have eased.

“The state of global politics is worse than it’s been in a long time.At a time when we need more coordination to tackle issues like climate change and other systemic risks, we are getting more and more insular.”–Ian Goldin, Oxford University

And yet, as political leaders, CEOs and top bankers make their annual trek up the Swiss Alps to the World Economic Forum in Davos, the mood is anything but celebratory.

Beneath the veneer of optimism over the economic outlook lurks acute anxiety about an increasingly toxic political climate and a deep sense of uncertainty surrounding the U.S. presidency of Donald Trump, who will be inaugurated on the final day of the forum.

Last year, the consensus here was that Trump had no chance of being elected. His victory, less than half a year after Britain voted to leave the European Union, was a slap at the principles that elites in Davos have long held dear, from globalization and free trade to multilateralism.

Trump is the poster child for a new strain of populism that is spreading across the developed world and threatening the post-war liberal democratic order. With elections looming in the Netherlands, France, Germany, and possibly Italy, this year, the nervousness among Davos attendees is palpable.

“Regardless of how you view Trump and his positions, his election has led to a deep, deep sense of uncertainty and that will cast a long shadow over Davos,” said Jean-Marie Guehenno, CEO of International Crisis Group, a conflict resolution think-tank.

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Moises Naim of the Carnegie Endowment for International Peace was even more blunt: “There is a consensus that something huge is going on, global and in many respects unprecedented. But we don’t know what the causes are, nor how to deal with it.”

The titles of the discussion panels at the WEF, which runs from January, 17-20, evoke the unsettling new landscape. Among them are “Squeezed and Angry: How to Fix the Middle Class Crisis”, “Politics of Fear or Rebellion of the Forgotten?”, “Tolerance at the Tipping Point?” and “The Post-EU Era”.

The list of leaders attending this year is also telling. The star attraction will be Xi Jinping, the first Chinese President ever to attend Davos. His presence is being seen as a sign of Beijing’s growing weight in the world at a time when Trump is promising a more insular, “America first” approach and Europe is pre-occupied with its own troubles, from Brexit to terrorism.

British Prime Minister Theresa May, who has the thorny task of taking her country out of the EU, will also be there. But Germany’s Angela Merkel, a Davos regular whose reputation for steady, principled leadership would have fit well with the WEF’s main theme of “Responsive and Responsible Leadership”, will not.

‘Rejoicing in the Elevators’

Perhaps the central question in Davos, a four-day affair of panel discussions, lunches and cocktail parties that delve into subjects as diverse as terrorism, artificial intelligence and wellness, is whether leaders can agree on the root causes of public anger and begin to articulate a response.

A WEF report on global risks released before Davos highlighted “diminishing public trust in institutions” and noted that rebuilding faith in the political process and leaders would be a “difficult task”.

Guy Standing, the author of several books on the new “precariat”, a class of people who lack job security and reliable earnings, believes more people are coming around to the idea that free-market capitalism needs to be overhauled, including those that have benefited most from it.

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“The mainstream corporate types don’t want Trump and far-right authoritarians,” said Standing, who has been invited to Davos for the first time. “They want a sustainable global economy in which they can do business. More and more of them are sensible enough to realize that they have overreached.”

But Ian Bremmer, President of U.S.-based political risk consultancy Eurasia Group, is not so sure.

He recounted a recent trip to Goldman Sachs headquarters in New York where he saw bankers “rejoicing in the elevators” at the surge in stock markets and the prospect of tax cuts and deregulation under Trump. Both Goldman CEO Lloyd Blankfein and his JP Morgan counterpart Jamie Dimon will be in Davos.

“If you want to find people who are going to rally together and say capitalism is fundamentally broken, Davos is not the place to go,” Bremmer said.

Pace of Change

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Suma Chakrabarti, President of the European Bank for Reconstruction and Development (EBRD), believes a “modern version of globalization” is possible but acknowledges it will take time to emerge.

“It is going to be a long haul in persuading a lot of people who there is a different approach. But you don’t have to throw the baby out with the bath water,” he told Reuters.

Still, some attendees worry that the pace of technological change and the integrated, complex nature of the global economy have made it more difficult for leaders to shape and control events, let alone reconfigure the global system.

The global financial crisis of 2008/9 and the migrant crisis of 2015/16 exposed the impotence of politicians, deepening public disillusion and pushing people towards populists who offered simple explanations and solutions.

The problem, says Ian Goldin, an expert on globalization and development at the University of Oxford, is that on many of the most important issues, from climate change to financial regulation, only multilateral cooperation can deliver results. And this is precisely what the populists reject.

“The state of global politics is worse than it’s been in a long time,” said Goldin. “At a time when we need more coordination to tackle issues like climate change and other systemic risks, we are getting more and more insular.”

(Additional reporting by Ben Hirschler; Editing by Pravin Char)

 

China’s Investments–Geo-Political Implications for Malaysia


January 14, 2017

China’s Investments–Geo-Political Implications for Malaysia

by Dennis Ignatius

Image result for China's Investments in MalaysiaHe is praying for the best but not doing his best

China’s ravenous appetite for Malaysian infrastructure assets has resulted in yet another multibillion ringgit deal. In early January, a RM6.3 billion deal to redevelop and expand Penang Port was signed between two Chinese port operators (Shenzhen Yantian Port Group and Rizhao Port Group) and local partner, KAJ Development, a relatively unknown reportedly state-owned company incorporated in 2001.According to press reports, the project would increase the port’s ship handling capacity to 100,000 ships per year.

Dominating the transport sector

The Penang deal comes on the heels of KAJ Development’s RM30 billion Malacca Gateway Project with another Chinese conglomerate, Powerchina International Group. The Gateway project includes extensive land reclamation and the development of what is expected to be the biggest port in the region.

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Barely 55 km away from the Malacca Gateway project, work has begun on the RM12.5 billion Kuala Linggi International Port project, funded by China Railway, Port & Engineering Group. When completed, Linggi port will become, according to a company statement, “the world’s preferred shipping hub in the Straits of Malacca” offering port facilities, storage and transshipment of crude oil and petroleum products and repair and bunkering facilities.

According to press reports, construction has gone ahead despite objections that the project could well be an environmental hazard. Not to be outdone, the Port Klang Authority is now planning to build another giant port on Carey Island which is expected to cost RM200 billion. According to reports, the transport ministry is in talks with China Merchants Group to finance the project.

On the east cost of Peninsular Malaysia, another Chinese company, Guangxi Beibu International Port Group already owns a 40% stake of Kuantan Port Consortium and is investing billions to double the port’s capacity. China is also a key investor in Sarawak’s Samalaju Industrial Port project.

At this rate, and given China’s already sizeable investments in our railway infrastructure, China will soon be the dominant player in Malaysia’s transportation sector.

Unanswered questions

Quite apart from the obvious security implications, China’s massive investments in ports and railways have also raised a number of concerns which have yet to be adequately addressed.

How much port capacity, for example, do we really need bearing in mind that we spent billions developing the Port of Tanjung Pelapas (making it one of the largest container ports in the region) and that not all of our ports are operating at fully capacity?

And how will other major port developments now being planned along the Malacca Straits, such as the mammoth Tuah project in Singapore and the China-funded Tanjung Sauh port in Indonesia’s Batam island impact overall capacity? It certainly looks like this whole port building frenzy has gone off the deep end, especially as no convincing argument has been made that such a significant increase in port capacity is even warranted.

Without credible feasibility studies and greater transparency, these projects could well end up like the Petroleum Hub project which was taken out of service in 2012 after the government had spent more than RM100 billion on land reclamation, costs which Malaysia’s long suffering taxpayers are now having to shoulder. 

It is also unclear what the actual financial arrangements are for many of these Chinese projects and what kind of concessions and guarantees Malaysia has had to offer. That some of these projects involve secret negotiations and secret agreements with companies that don’t appear to have much experience or which have been blacklisted by the World Bank, only adds to concerns about control, ownership, costs, viability and the potential for corruption.

And unlike earlier infrastructure projects where local companies retained significant oversight and decision-making authority, projects with China invariably end up with Chinese companies in charge of management, design, procurement and construction. Even the workers come from China!

Whatever happened to all our national policies about equity, local participation and transfer of technology? At the end of the day, it is hardly the kind of “equal, mutually beneficial, win-win” situation that the Chinese embassy here likes to brag about.

OBOR?

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The other thing about many of these Chinese projects is the constant reference by Malaysian politicians and businessmen to China’s One Belt One Road (OBOR) initiative. Suddenly, it is no longer about Malaysia’s national development goals or priorities but about whether or not it is relevant to OBOR.

It is perhaps a testimony to China’s increasing power and influence that many of our political and business leaders are now gamely parroting the Chinese line about how great and magical OBOR is and how fortunate we lesser mortals are to receive Chinese loans, Chinese technology and Chinese expertise to help build OBOR-related infrastructure.

What they don’t see or don’t want to acknowledge is that through clever financing arrangements, China is in fact getting us to pay for the infrastructure that it needs to establish economic primacy in the region. OBOR is primarily about China’s strategic national objectives; whatever benefits to Malaysia are purely incidental.

In the absence of a critical and in-depth assessment of whether these OBOR-related projects genuinely serve Malaysia’s interests and are worth the costs to Malaysian taxpayers, it would be ‘bodoh’ to acquiesce to it.

The geopolitical element

And let’s not be unmindful of the geopolitical considerations as well. Will we see Malaysian ports, for example, being integrated into the Chinese Navy’s regional infrastructure to support its growing naval presence in the region?

While the government is coy about the kind of naval access that has been given to the Chinese Navy for obvious political reasons, port calls by Chinese naval vessels are increasing. Two Chinese submarines, for example, quietly docked at Kota Kinabalu port recently while Chinese warships now regularly use other Malaysian port facilities.

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China of the 21st Century is a nation of geo-strategic thinkers and state entrepreneurs–Keeping Asia secure and safe means China is safe too.

China is making strategic investments to fortify its position as the dominant player in the South China Sea with modern port facilities in ASEAN and expand trade in Chinese manufactured goods and services. It is using Malaysia to have important stakes in the Straits of Malacca (in Malacca, Penang and Johore ports). Why not, particularly when assets in Malaysia can be acquired on the cheap or profitable investments made  at inflated cost (for the benefit of corrupt UMNO and Barisan Nosional politicians). I am not against Chinese investments per se, but I am very concerned with deals done on a hush-hush basis by Najib and his cohorts. China’s moves in Asia does not end with the  South China Sea. It is back to the age-old objective of keeping the barbarians at the gate.–Din Merican

Of course, naval vessels from other countries regularly berth at our ports, and in itself is no cause for alarm. However, only China is aggressively pursuing territorial claims against Malaysia. For that reason alone, caution is called for. Does it make sense for us to facilitate the very naval force that is intruding into our waters, harassing our fishermen, laying claim to our reefs and islands and gathering data to support those claims?

Colony building

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There are also growing concerns about the massive residential and commercial development projects that are being built with Chinese capital.

The RM100 billion Forest City project, for example, one of two being built by Chinese conglomerate Country Garden, will reportedly house more than 700,000 people in a development that will include office towers, parks, hotels, shopping malls and an international school.

Meanwhile, China state-owned Greenland Group is building office towers, apartments and shops on 128 acres in Tebrau, Johor, while Guangzhou R & F Properties Co. has begun construction on the first phase of Princess Cove, another mixed development along the Johor coast, with hotels, offices, parks, shopping malls and clubhouses.

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In Kuala Lumpur, China Railway Group (CRG) will be developing the mega Bandar Malaysia project which is expected to cost between RM160 – 200 billion. Bandar Malaysia will host the world’s largest underground city together with shopping malls, indoor theme parks, a financial centre, residential and commercial units as well as the RM8.3 billion regional headquarters of China Railway.

CRG is also involved in another RM2.1 billion project in Ampang to build 7,000 residential units as well as commercial and retail outlets. In keeping with the management practices of most China-based corporations, CRG has been appointed the main contractor with sole responsibility for monitoring, managing and supervising the day-to-day construction and operations of the project.

Reports suggest that these massive residential and commercial developments in Malaysia are being marketed mainly to PRC nationals who wish to work, reside or holiday in Malaysia. Country Garden, for example, has been aggressively promoting its Forest City project in China; it is already the 11thmost popular investment destination for Chinese home buyers on Juwai.com.

In addition, relatively cheaper living costs, affordable private medical facilities, a (mostly) smog- free environment and proximity to both China and Singapore, make Malaysia a preferred retirement destination for middle-class Chinese. China’s ageing population (240 million over the age of 60 by 2020) makes for a huge potential market that Chinese developers are hoping to exploit.

If the expectations of these China-based developers are realized, we could be seeing more than a million PRC nationals living in Malaysia within a decade.

Malaysians must ask themselves whether it would be desirable to see a huge influx of citizens from just one country establishing foreign enclaves here. It is not beyond the realm of possibility that these colonies could soon evolve into exclusive, semi-autonomous zones serviced and managed by PRC nationals for the benefit of PRC nationals.

What impact will this have on the social, cultural and political fabric of our nation? How will it affect property prices? How will any downturn in the Chinese economy influence the local property market? How much of the related infrastructure costs of these projects are being borne by Malaysian taxpayers? And what kind of concessions are being given to these property developers?

Viewed from almost any perspective, therefore, Malaysia’s burgeoning economic, political and military relationship with China ought to set off alarm bells across the nation.

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The combination of a rising power with global ambitions backed by an unlimited stash of cash buying up strategic infrastructure assets, on the one hand, and a local political elite bent on staying in power at all costs tethered to cronies more interested in profits than patriotism, on the other, could prove a fatal one.

Even in the best of circumstances, it would be simply too risky to allow any one country to dominate our economy and control critical infrastructure networks the way China is now set to do. It gives China too much power and influence in the affairs of our nation and it leaves us too indebted, too exposed to a country whose intentions must be considered with some circumspection.

How far will China go to protect its position?

One thing we can be sure of, though, if history is anything to go by: the more China invests in Malaysia, the more China will be tempted to intervene and meddle in our affairs to protect its investments and ensure its strategic position is not jeopardized. Indeed, China has already begun to do so.

In a statement just this week, the Chinese embassy lashed out at opposition leaders and others for questioning the government’s policies towards China, accusing them of having ulterior motives and instigating hatred against China and warned that “China will not allow anyone to jeopardize the mutually beneficial bilateral cooperation between China and Malaysia.”

Amazingly, the Embassy also dared to presume to speak for Malaysian Chinese when it suggested that such actions by the opposition would not earn them the trust of the Malaysian Chinese community.

Clearly, the Chinese embassy now feels it has the right to threaten our politicians, inveigh against those who raise questions about China’s investments and inject itself into what is essentially a domestic discussion.

Such brazen interference in our domestic affairs will only get worse. How far will China now go to stifle domestic opposition and criticism to its increasing role in our nation? Will it work behind the scenes to prop up local pro-China leaders in much the same way as the CIA did in other countries? 

The most pressing foreign policy challenge

Tellingly, while the Chinese embassy grows bolder, many of our own leaders remain silent despite blatant acts of interfere in our domestic affairs.

In the early years of our relationship with China, our security agencies were extremely concerned that Malaysia’s ethnic Chinese community might sell out to China; who would have thought we would end up in situation where many of our politicians and officials would be so blinded to the challenges that China now presents or worse still, resign themselves to the inevitability of some sort of Chinese domination?

One minister, for instance, recently remarked in his blog that “it is futile trying to resist China’s great march forward just like it was futile to resist Western colonialism 500 years ago.” He also said that China is buying up assets all over the world and that is something that “Malaysia needs to accept or else get left behind and perish.”

Let’s be clear: this is not about trying to stop China from rising or about shunning Chinese investments but about ensuring that we don’t get colonized again, about making sure that China does not get to the point where it controls our economy and is able to dictate policy as it already does in some neighbouring countries.

Whatever it is, Malaysians must not be lulled into a false sense of complacency by all the sweet talk of mega contracts, grandiose promises of prosperity and jobs or the effusive pledges of eternal friendship for that matter.

China is no different from any other big power and we would do well to be wary when dealing with it.

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As the late Tun Ghazali Shafie, arguably the best Foreign Minister we’ve ever had, was fond of reminding us at Wisma Putra: small countries on the peripheries of a big power don’t have the luxury of taking anything for granted.

At the very least, we owe it to ourselves, and to future generations, to have a national debate on this, the most pressing foreign policy challenge we now face as a nation. And the Chinese embassy would do well to butt out of it.

 

 

Malaysians–You have the right to know the truth


January 11. 2017

Malaysians–You have the right to know the truth

Are you willing to fight for it? Nothing is for free.

by Mariam Mokhtar@www.freemalaysiatoday.com

Image result for Malaysia's Corrupt Prime MinisterThis Man was tutored by Dr. Mahathir to mess up Malaysia

You claim that you are desperate for change in Malaysia, but how hard are you prepared to work for it? You know that there can be no true democracy without a free press, but how have you contributed to the struggle for media freedom?

Leaders who are insecure or who grow crazy with power will seize control of the media to make it toe the government line. You know this already because most of what you read in the conventional media are glowing articles about the state of the nation despite the price hikes and the rise in crime rates that worry you.

Most law-abiding citizens fear those who threaten the peace. You feel helpless because you are prosecuted for “threatening the peace” with the innocuous remarks you make on Facebook while others who threaten to bathe the streets in blood get a light rap on the knuckles.

So you withdraw further into your shell. The quest for change becomes somebody else’s problem, not yours anymore.

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No wonder our national finances are in one big mess. We have this Siregar fella in charge of our Treasury while another mamak called Hamsa as head of our Blue Ocean civil service.

Meanwhile, you privately complain about the corruption scandals, the abuse of power, the waste of government resources, the tedious bureaucracy, the arrogant civil servants and the lack of accountability of MPs and senior civil servants.

You feel that it is the job of the opposition to effect change and unfairly call them weak when, in truth, they are severely handicapped by a lack of resources.

You compare Malaysian journalists with their foreign counterparts and complain that ours are meek because they refrain from asking tough questions, but when whistleblowers were hauled to court, journalists were harassed and jailed, editors threatened with sedition and publications blocked and threatened with closure, what did you do to help protect your right to know the truth?

Did you look the other way or did you harass your MP, write to the press, start an online petition or protest against the lack of press freedom? Or did you excuse yourself because you have a job to protect and many mouths to feed? Did you tell yourself, “After all, I’m not a journalist”?

You were probably saddened when publications were forced to shut down because companies feared to place advertisements with them and they were thereby deprived of revenue. It did not move you to donate money to keep them open. You somehow convinced yourself that it was not your job to fund others. You failed to see that if every one of several hundred thousand people like you were to donate a few ringgit, it would add up to a large amount of money.

Of course, you are desperate for change. Sadly, it is your inaction that fuels interference in your media.

Mariam Mokhtar is an FMT columnist.

Crony capitalism–Dealing with murky moguls


December 4, 2017

Crony capitalism

Dealing with murky moguls

http://www.economist.com/news/leaders/21698261-how-disentangle-business-government-dealing-murky-moguls

THE past 20 years have been a golden age for crony capitalists—tycoons active in industries where chumminess with government is part of the game. As commodity and property prices soared, so did the value of permits to dig mines in China or build offices in São Paulo. Telecoms spectrum doled out by Indian officials created instant billionaires. Implicit state guarantees let casino banking thrive on Wall Street and beyond. Many people worried about a new “robber baron” era, akin to America’s in the late 19th century. They had a point. Worldwide, the worth of tycoons in crony industries soared by 385% in 2004-14, to $2 trillion, or a third of total billionaire wealth; much of it (though by no means all) in the emerging world.

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Now cronies are on the back foot. Their combined fortunes have dropped by 16% since 2014, according to our updated crony-capitalism index (see article). One reason is the commodity crash. Another is a backlash from the middle class. Corruption scandals have lit a fire under governments in Brazil and Malaysia. Elsewhere, pressure is coming from the top down. India’s reforming prime minister, Narendra Modi, is trying to subject his partly closed economy to a blast of competition. Xi Jinping, China’s autocrat, thinks graft is the big threat to one-party rule, and is trying to root it out.

Crony capitalism—or “rent-seeking”, as economists call it—shades from string-pulling to bribery. Much of it is legal, but all of it is unfair. It undermines trust in the state, misallocates resources and stops countries and true entrepreneurs from getting rich. So the dip in crony activity is welcome. To stop it roaring back, governments need to seize the moment.

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A few will not want to. Cronyism is central to Vladimir Putin’s vision of Russia, the country that scores worst in our ranking. Others, though goaded by public anger at inequality and corruption, will find it hard to confront vested interests. On April 29th Mexico’s Senate failed to pass two anti-corruption measures (see article). Often the biggest difficulty is knowing where to start. It is all very well to demand efficient courts, fair regulators and an end to illicit political funding. These matter, but are the work of generations.

The quickest fixes

So governments should focus on four quicker steps. The first is to take care when public resources pass into private hands. Botched privatisations created Russia’s oligarchy—and many cronies elsewhere. Mexico is opening up its oil monopoly; Saudi Arabia plans to; and other developing countries, from Brazil to India to China, may privatise state-controlled firms to raise cash and improve efficiency. Unless the sales are fair, a new generation of cronies will be born.

Second, governments must rein in state-owned banks. In the past decade state-lending booms in Brazil, India and China have enriched well-connected moguls—and built mountains of bad debt. Rather than prop up the banks, governments should overhaul the way they are run.

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The third step is to make it harder to stash crony cash overseas. Global capital flows have made the world richer, but also allowed cronies to hide in tax havens. Public registers of “beneficial ownership”—the humans behind the trusts and shell companies—would make that harder. This is on the agenda of an anti-corruption summit in London next week (see article).

Finally, be prepared for cronyism to adapt. China’s epic industrial boom will not be repeated; the days of making billions by shipping iron ore from Goa to Guangdong are over. Technology may be cronyism’s next frontier. It is ripe for rent-seeking: profits are huge and monopolies arise naturally. Governments should not seek to micromanage tech firms, but ought to push vigorously for competition and transparency.

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America’s original robber barons provoked a reaction that led to the Progressive era. At the turn of the 20th century, politicians passed antitrust laws and corruption ebbed. America became richer, stronger and more politically stable. Emerging economies face a similar moment. They should not waste it.

The Year of the Demagogue: how 2016 changed Democracy


December 30, 2016

The Year of the Demagogue: how 2016 changed Democracy

by Lionel Barber–The Financial Times

https://www.ft.com/content/7e82da50-c184-11e6-9bca-2b93a6856354

From Brexit to Donald Trump, this year has seen a thundering repudiation of the status quo

Image result for donald trump person of the year 2016

On the morning of June 21, two days before the Brexit referendum, I met David Cameron in Downing Street. During a 25-minute conversation, the Prime Minister assured me that everything would be all right on the night. I wasn’t entirely convinced.

In hindsight, Brexit defined 2016. This was the year when the unthinkable became possible, the marginal invaded the mainstream, and Donald Trump, a property tycoon and television host, was elevated to US Commander-in-Chief.

Image result for Present at the Creation (1969), Dean Acheson

In his memoir Present at the Creation (1969), Dean Acheson, a former US Secretary of State, describes how he and fellow “Wise Men” helped President Harry Truman to build a new liberal, rule-based order after the Second World War. It was founded on institutions: the United Nations, the IMF, the World Bank and the NATO alliance.

In 2016, as Trump dismissed NATO as “obsolete” and his consigliere Newt Gingrich described Estonia as a suburb of St Petersburg, it felt at times as if we were present at the destruction.

Acheson epitomised the East Coast establishment. He was a diplomat, lawyer and scholar — an expert, if you like. This year, the establishment was hammered, the experts humbled. Most missed Brexit. Many declared a Trump victory impossible. Michael Gove, a leading Brexiter, caught the public mood: “People in this country have had enough of experts.”’Trump won by attacking the Republican party as much as his Democratic opponent’ © Getty Images

Brexit and the Trump triumph mark a revolutionary moment. Not quite 1789 or 1989, but certainly a thundering repudiation of the status quo. Some detect echoes of the 1930s, with Trump cast as an incipient fascist.

It was a good year for strongmen: Vladimir Putin in Russia; Recep Tayyip Erdogan in Turkey; Xi Jinping, now promoted to “core” leader in China. It was an even better year for demagogues, the crowd-pleasers and rabble-rousers who feed on emotions and prejudice. In the year of the demagogue, several vied for the lead role: Nigel Farage, then Ukip leader, godfather of Brexit and Trump acolyte; Rodrigo Duterte, a brutal newcomer to power, who pledged to slaughter millions of drug addicts to clean up the Philippines; and Trump himself, who constantly marvelled at the size of his crowds.

Yet the 1930s analogy is in many ways misplaced. We are nowhere near a Great Depression. The US economy is approaching full employment. The pre-Brexit UK economy has seen employment rise by just over two million since 2010. Credit is flowing. Corporate profits are up. The trouble is that swaths of the population, often those living outside the great cities, have little sense of the economic recovery.

Real incomes in the UK have not grown for the past decade. In the US, 95 per cent of households still had incomes last year that were below those in 2007, according to the Economic Policy Institute think-tank. In Europe, unemployment in the eurozone, especially in countries such as Greece, Spain and Italy, remains high. Yet the wealth of the top one per cent (“the privileged few”, to borrow Theresa May’s mantra) has continued to rise.

Something more profound is happening in advanced democracies. The forces at work are cultural, economic, social and political, driven in part by rapid technological change. Artificial intelligence, gene editing, self-driving cars — progress on all these groundbreaking technologies accelerated in 2016. Each is massively empowering (the smartphone has given everyone a voice) but also massively disruptive (the impact of artificial intelligence on jobs has barely begun to be felt).

In political terms, Brexit and the Trump triumph highlight the decline of the party system and the end of the old left-right divide. The centre-left appears in terminal decline. This month, François Hollande, whose approval rating hit a low of 4 per cent, ruled out a second run for the Elysée. Jeremy Corbyn, the hard-left leader of the opposition Labour party, had more to say about the death of Fidel Castro than Britain departing the EU. Matteo Renzi, the centre-left reformer in Italy, lost heavily in his own referendum on constitutional reform and promptly resigned.

In 2016, we saw, finally, that this period — call it Globalisation 2.0 — is over

The Conservative or Christian Democrat centre-right fared better but remains under pressure from an anti-immigrant, nationalist fringe, from Austria to England, France, Germany, Hungary, the Netherlands and, increasingly, Poland. In 2016, we witnessed the birth of the “Fourth Way” — a new brand of politics that is nativist, protectionist and bathed in a cultural nostalgia captured by Trump’s pledge to “Make America Great Again”.

The second development is a widespread disillusion among western democracies with globalisation, the postwar phenomenon marked by three trends: the Roaring Eighties deregulation of the Reagan-Thatcher era; the 1994 Uruguay Round agreement on global trade liberalisation; and the opening of a market economy in China. The progressive abandonment of controls on capital, goods, services and labour, epitomised by the launch of the single European market and the single currency, reached its apogee in the summer of 2007. In 2016, we saw, finally, that this period — call it Globalisation 2.0 — is over.

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In the year of the demagogue, several vied for the lead role, including the Philippines’ Rodrigo Duterte’ © AFP/Getty Image

Free trade has become ever harder to sell to a public worried about job security and the competitive threat from developing countries. Trump denounced the Trans-Pacific Partnership pact between the US and 11 Pacific Rim countries, and the North American Free Trade Agreement with Canada and Mexico. Hillary Clinton, once a free trader, caved. No one countered that the US consumer, including many Trump voters, bought cheap goods at Target and Walmart thanks to efficient global supply chains and cheap labour in the developing world. Hostility to free trade was a vote winner. Only last-minute arm-twisting of the Walloon regional government in Belgium salvaged a Canada-EU trade pact seven years in the making.

Free movement is also in question. Europe has experienced mass migration on a scale not seen since the late 1940s. In 2016, the refugee flow from the Middle East and north Africa was stemmed at one end thanks to a German-brokered deal with Turkey but record numbers travelled (and drowned) on the treacherous route from the central Mediterranean to Italy. Terror attacks, notably in France, heightened public insecurity about immigrants. There was a sense governments had somehow lost control, of national borders and national identity.

This explains the power of Trump’s pledge to build a “beautiful” wall on the Mexican border, and Theresa May’s conference jibe about politically correct multiculturalism: “If you believe you are a citizen of the world, you are a citizen of nowhere.” The party faithful in Birmingham cheered but cosmopolitan London, home to hundreds of thousands of “foreigners”, including Mark Carney, the Canadian Governor of the Bank of England, was not amused.

The Brexit referendum exposed an economic gap between winners and losers of globalisation; but also a cultural divide between those comfortable with the pace of change, from technology to same-sex marriage, and those wanting to slow down the clock and rediscover their roots in ethnicity, religion or nationality.

 Leave’s slogan in the Brexit campaign, “Take Back Control”, was simple and brilliantly effective across classes and generations. Constitutionalists liked the idea of regaining sovereignty from EU institutions. Everyone liked the idea of reclaiming money from Brussels and diverting the savings to the NHS. Clamping down on immigration was a vote-winner. No matter that these claims were deeply misleading (as were Remain’s claims of imminent economic disaster in the event of a Brexit vote). Throughout the year, facts were elastic concepts.

In 2016, the world woke up to “fake news”, sponsored by political activists but also increasingly by state actors and their surrogates. The CIA accused Russia of being behind the leaking of emails from the Democratic National Committee, a shocking, brazen attempt to interfere in a US presidential election.

Trump dismissed the claims as ridiculous, as did his supporters. Throughout this political cycle, many appeared to live in a parallel universe where facts were entirely subjugated to opinion.

Scottie Nell Hughes, a Trump supporter and CNN commentator, explained: “So one thing that’s been interesting this entire campaign season to watch, is that people that say facts are facts — they’re not really facts. Everybody has a way — it’s kind of like looking at ratings, or looking at a glass of half-full water. Everybody has a way of interpreting them to be the truth or not truth. There’s no such thing, unfortunately, anymore as facts.”

Trump’s victory gives succour to the demagogues-in-waiting in 2017

Welcome to the world of post-truth politics, turbocharged by technology such as the smartphone. A single device allows individuals to project in real time an unfiltered version of the news and (often highly partisan) views across Facebook, Google and Twitter. In the US election, journalists, once enjoying a degree of trust as the filter of last resort, were howled down or singled out on Twitter as “disgusting” or “lame”.

In the UK, both Leave and Remain regularly lambasted the BBC, which tried to remain neutral. Timothy Garton Ash, the Oxford historian, warned presciently about the risks of “fairness bias”. The danger was that the BBC, in seeking to remain impartial, would fail to be informative, especially on complex economic issues. “You give equal airtime to unequal arguments, without daring to say that, on this or that point, one side has more evidence, or a significantly larger body of expert opinion, than the other,” he wrote.

The Trump campaign presented “mainstream media” with a challenge on a different scale. His demagoguery broke every taboo in the book, casting Mexicans as “rapists”, eliding the difference between traditional Muslims and radical Islamic terrorists, and threatening to jail his Democratic opponent.

The TV networks, especially Rupert Murdoch’s Fox News, gave Trump far more airtime than other candidates. “It may not be good for America, but it’s damn good for CBS,” quipped Les Moonves, head of the media group.

Trump won by attacking the Republican party as much as his Democratic opponent. He spent hardly any of his own money, less than a fraction of the Clinton campaign’s war chest. His was the triumph of the brand.

Yet Clinton was a deeply flawed candidate at a moment when Americans wanted change — not a continuation of the Obama presidency by other means or a return to the Bush or Clinton dynasties. She had sky-high negative ratings, just like Trump. She was not liked, she was not trusted, and she was evasive. “Crooked Hillary”, Trump’s signature tweet, stuck for a good reason.

In this respect, it is misleading to suggest that the typical Trump supporter was an angry white man on opioids from West Virginia. Educated people voted for Trump. Women voted for Trump. As Salena Zito wrote in The Atlantic, Trump’s supporters took him seriously but not literally. By contrast, liberals, including the media, took Trump literally but not seriously. What this ignores is the damage the tycoon may have inflicted on public trust in American democracy. He coarsened civic discourse. He declared the political system corrupt. He even cast doubt on the legitimacy of the election not once but twice, declining to confirm he would accept the result if he lost.

Yet Clinton was a deeply flawed candidate at a moment when Americans wanted change — not a continuation of the Obama presidency by other means or a return to the Bush or Clinton dynasties. She had sky-high negative ratings, just like Trump. She was not liked, she was not trusted, and she was evasive. “Crooked Hillary”, Trump’s signature tweet, stuck for a good reason.

In this respect, it is misleading to suggest that the typical Trump supporter was an angry white man on opioids from West Virginia. Educated people voted for Trump. Women voted for Trump. As Salena Zito wrote in The Atlantic, Trump’s supporters took him seriously but not literally. By contrast, liberals, including the media, took Trump literally but not seriously. What this ignores is the damage the tycoon may have inflicted on public trust in American democracy. He coarsened civic discourse. He declared the political system corrupt. He even cast doubt on the legitimacy of the election not once but twice, declining to confirm he would accept the result if he lost.

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In the late spring of 2016, I travelled to Houston, Texas, to have lunch with James Baker, a former Treasury Secretary, US Secretary of State and White House Chief of Staff under Ronald Reagan and George Bush Sr. I asked him whether America could survive a Trump presidency. “We are a country of laws, limited by bureaucracy. Presidents are not unilateral rulers,” Baker replied.

This confidence in the power of democratic institutions will be tested in the coming months. Trump wants to undo Obama’s legacy and unleash the animal spirits of American capitalism. The initial reaction in the stock market bordered on euphoric. Foreign policy is the bigger risk. Trump wants to pursue an America First foreign policy, renegotiating trade pacts and obliging allies to pay more for their collective defence. His world is about money not values: America the selfish superpower, as Robert Kagan has described it.

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Trump’s victory gives succour to the demagogues-in-waiting in 2017, notably Marine Le Pen, who will almost certainly make it through to the run-off for the French presidency. A win for Le Pen on top of Brexit would surely spell the end of the European Union. Elections in the Netherlands may also signal a shift to the right. Even in Germany, Angela Merkel, running for a fourth term, faces a challenge from the populist right in the form of Alternative für Deutschland, which will make the task of forming a ruling coalition much harder.

Trump’s foreign policy, assuming action follows words, also leaves the door wide open for the rising power of China. His abandonment of the TPP — a geopolitical building block as well as a trade pact — has unsettled Japan and Pacific neighbours. His anti-Mexican rhetoric has undermined the peso and left Latin Americans wondering whether Beijing is a safer bet. Among the Baltic states and Scandinavia, many are fretting about NATO’s defence guarantee in the face of Russian aggrandisement under Putin.

For more than two centuries, the US has served as a beacon for democratic values such as pluralism, tolerance and the rule of law. For the most part, it has been on the right side of history. In 2016, Americans for the first time voted into the White House a man with no previous government or military experience. Like Brexit, it was a high-risk gamble with utterly unpredictable consequences.

Trump’s winner-takes-all approach and his lack of respect for minority rights violates a cornerstone of democracy and free society, as set out in the 10th of the Federalist Papers written by James Madison, one of the founding fathers. His position mirrors the more extreme Brexiter demands that the “will of the people” be respected at all costs. Anyone who raises objections — the media, the opposition or, indeed, the judiciary — risks being branded “enemies of the people”.

This is not merely populism run rampant. It is a denial of politics itself, which, as the late scholar Bernard Crick reminds us, is the only alternative to government by coercion and the tyranny of the majority.

We have been warned.

Lionel Barber is the FT’s editor