Promoting constructive vigilance

That was the sub-title to the substantial (200 pages or so) new report released last week by the Hoover Institution at Stanford University on Chinese (PRC) influence activities in the United States (but with eight case studies on the situation in other countries, including one on New Zealand which draws largely on the work of Anne-Marie Brady).

The report is the product of a working group of 33 academics, think-tankers, and journalists specialising in PRC-related issues.  Around half those involved are academics.  Of the 33, 10 are ‘international associates’ –  again, about half academics –  bringing perspectives to bear on PRC activities in other countries, including three Australians and Anne-Marie Brady.

I read the report over the weekend.  I’m not sure there is a great deal new in it, but it is easy to read, and extensively documented, and the accumulation of material helps build the picture.     And even on New Zealand, there are striking lines from the Magic Weapons paper that one forgets

The Chinese government considers New Zealand an “exemplar of how it would like its relations to be with other states.” One unnamed Chinese diplomat even characterized relations between the two countries as similar to China’s close ties with totalitarian Albania in the early 1960s.

Or bits I’d never noticed previously

Individuals with strong ties to United Front organizations have donated several million dollars, primarily to the National Party. One such individual, who donated $112,000 to the National Party in 2017, is listed as an officer of no fewer than seven United Front organizations.

Then again, it was Labour bestowing the QSM on Yikun Zhang.

But the focus of the report is on the United States.  In many areas one is struck by the similarity of the story to the work done on these issues for New Zealand.

The Chinese Communist party-state leverages a broad range of party, state, and non-state actors to advance its influence-seeking objectives, and in recent years it has significantly accelerated both its investment and the intensity of these efforts. While many of the activities described in this report are state-directed, there is no single institution in China’s party-state that is wholly responsible…..   Because of the pervasiveness of the party-state, many nominally independent actors— including Chinese civil society, academia, corporations, and even religious institutions— are also ultimately beholden to the government and are frequently pressured into service to advance state interests.

or

China’s influence activities have moved beyond their traditional United Front focus on diaspora communities to target a far broader range of sectors in Western societies, ranging from think tanks, universities, and media to state, local, and national government institutions. China seeks to promote views sympathetic to the Chinese Government, policies, society, and culture; suppress alternative views; and co-opt key American players to support China’s foreign policy goals and economic interests.

or (more remarkably in the much larger US market)

In the American media, China has all but eliminated the plethora of independent Chinese-language media outlets that once served Chinese American communities. It has co-opted existing Chinese-language outlets and established its own new outlets.

The report builds to a set of policy principles and recommendations.  They group the principles and recommendations under three headings: Transparency, Integrity, and Reciprocity.   Under the first two headings, most of what they suggest seems (a) sensible, and (b) relevant to other countries where these issues arise, including New Zealand.

Here are the Transparency principles (there are more detailed recommendations below many of these).

Transparency is a fundamental tenet and asset of democracy, and the best protection against the manipulation of American entities by outside actors.

• American NGOs should play an important role in investigating and monitoring illicit activities by China and other foreign actors. They should as well seek to inform themselves about the full range of Chinese influence activities and the distinctions between legitimate and illegitimate influence efforts.

• Congress should perform its constitutional role by continuing to investigate, report on, and recommend appropriate action concerning Chinese influence activities in the United States. It should update relevant laws and regulations regarding foreign influence, and adopt new ones, to strengthen transparency in foreign efforts to exert influence.

• Executive branch agencies should similarly investigate and publicize, when appropriate, findings concerning these activities, with a view to promoting healthy and responsible vigilance among American governmental and nongovernmental actors.

• The US media should undertake careful, fact-based investigative reporting of Chinese influence activities, and it should enhance its knowledge base for undertaking responsible reporting.

• Faculty governance is the key to preserving academic freedom in American universities. All gifts, grants, endowments, and cooperative programs, including Confucius Institutes, should be subjected to the usual procedures of faculty oversight.

• US governmental and nongovernmental sectors should disclose financial and other relationships that may be subject to foreign influence.

And yet, to reflect on this list of items is to realise how much more serious the issue is here.   There are few relevant NGOs, the media is struggling and thinly-resourced, and instead of Parliament taking any sort of lead we have the former PLA intelligence official sitting in Parliament, not apparently bothering either National or Labour, and Raymond Huo –  with various United Front connections, and openly championing PRC perspectives –  chairs our Parliament’s Justice committee, dealing with electoral law.    The Opposition leader is soliciting large donations through people with close connections to Beijing, and Jian Yang is reputed to be the biggest National Party fundraiser.  (Again, in this regard US campaign finance laws, including disclosure provisions, are well ahead of our own.) The National Party’s president praises the Beijing regime and its leader, and if Labour’s president hasn’t been heard from for a while, he has form in that area too.   Our system is already corrupted, whereas (from the report) on this particular dimension the threat to the US system is still nascent.

As for the executive (political and official), they remain keen to say quite as little as possible – on any dimension of the issue (donations, cyber-security, Chinese language media, threats –  whether to Professor Brady or people in the ethnic Chinese community), and direct money to propaganda outfits like the New Zealand China Council to help keep the populace in line.  Winston Peters this morning refused to even accept an interviewer’s description of the PRC as becoming “increasingly authoritarian” (although, as he implied, there has not been a time since 1949 when it been anything other than highly authoritarian and repressive).

What of disclosure?  I linked the other day to a comment from consultant and former academic Paul Buchanan about PRC funding of parts of our universities.  If true, these contributions (and those of any other foreign government) should be fully and routinely disclosed.   And what about travel?   In the flurry of stories about Yikun Zhang it emerged that the Mayor of Southland had been travelling to the PRC, working closely with (and travelling at the expense of) Beijing-affiliated Zhang.   I was struck reading the Hoover report by the observation that US members of Congress can’t accept gifts of travel, and the same day I read that a reader sent me a link to a story about Clutha Southland National MP Hamish Walker (and other local body officials) on (PRC) paid trips to China.   Shouldn’t any such (paid for) trips simply be prohibited?  I’m sure MPs do their jobs better for some travel, but either they personally or the New Zealand taxpayer should be paying.  Not vested interests –  corporate or other governments.

What about integrity?  These were the high-level principles

Foreign funding can undermine the independence of American institutions, and various types of coercive and covert activities by China (and other countries) directly contradict core democratic values and freedoms, which must be protected by institutional vigilance and effective governance.

• Openness and freedom are fundamental elements of American democracy and intrinsic strengths of the United States and its way of life. These values must be protected against corrosive actions by China and other countries.

• Various institutions—but notably universities and think tanks—need to enhance sharing and pooling of information concerning Chinese activities, and they should promote more closely coordinated collective action to counter China’s inappropriate activities and pressures. This report recommends that American institutions within each of the above two sectors (and possibly others) formulate and agree to a “Code of Conduct” to guide their exchanges with Chinese counterparts.

• When they believe that efforts to exert influence have violated US laws or the rights of American citizens and foreign residents in the United States, US institutions should refer such activities to the appropriate law enforcement authorities.

• Rigorous efforts should be undertaken to inform the Chinese American community about potentially inappropriate activities carried out by China. At the same time, utmost efforts must be taken to protect the rights of the Chinese American community, as well as protecting the rights of Chinese citizens living or studying in the United States.

• Consideration should be given to establishing a federal government office that American state and local governments and nongovernmental institutions could approach—on a strictly voluntary basis—for advice on how best to manage Chinese requests for engagement and partnership. This office could also provide confidential background on the affiliations of Chinese individuals and organizations to party and state institutions.

That last suggestion seemed like one that should be considered here, as local government figures seem all to keen on accepting PRC approaches for relationships, oblivious to (or unconcerned by) the wider political context.  I’m not sure what Yikun Zhang’s interest in the Mayor of Southland specifically is, but I’m pretty sure it isn’t just that they got on well over a beer.  As the  report notes

….it is important for local officials to understand that local American “exchange” companies that bring Chinese delegations to the United States and promote professional interactions between the United States and China all depend on official PRC sanction and have received approval to receive Chinese delegations. The business model of such companies is, of necessity, as much political as financial. Even if they conduct high-quality programs, they should not be viewed as disinterested actors. They, too, are subject to rules made by the Chinese Communist Party, its united front bureaucracy, and united front strategic imperatives.

Where I was a bit more sceptical –  and where there seems to be some ongoing debate –  was around the idea of Reciprocity.    As academics, think-tankers and journalists, they are  –  as group – frustrated over how difficult it is for many to get visa access to the PRC, research in the PRC, use PRC government archives etc.  They contrast this to the fairly open access PRC researchers and employees of PRC media outlets have in the United States, and propose that the US should tighten up to try to gain greater access for outside researchers and journalists to China.  One can understand their grievance, but are these people really suggesting that open societies (the US or places like New Zealand) should adopt a PRC approach to things?    When it comes to foreign trade, “retaliatory” tariffs mostly end up hurting consumers in the country imposing them. Perhaps things are different when it comes to idea, research etc, but surely one of the great strengths – not vulnerabilities –  of our sort of system is our openness?

Early in the report I was struck by the observation that the working group did not “generally oppose” Confucius Institutes  (three in New Zealand, very many in the US –  although some have since been closed by the host universities).  But as I read on I found the specific recommendations

Confucius Institutes We do not endorse calls for Confucius Institutes to be closed, as long as several conditions are met.

US institutions should make their CI agreements public to facilitate oversight by members of the university community and other concerned parties. Those agreements, in turn, must grant full managerial authority to the host institution (not on a shared basis with the Hanban), so the university has full control over what a CI teaches, the activities it undertakes, the research grants it makes, and whom it employs. The clause in all Hanban contracts that CIs must operate “according to China’s laws” must be deleted.   If these standards cannot be attained, then the CI agreements should be terminated.

Furthermore, universities should prevent any intervention by CIs in curricular requirements and course content in their overall Chinese studies curricula or other areas of study by maintaining a clear administrative separation between academic centers and departments on the one hand, and CIs on the other. Finally, universities must ensure that all public programming offered by their CIs conform to academic standards of balance and diversity and do not cross the line to become a platform for PRC propaganda, or even a circumscribed view of a controversial issue. In fact, this report would suggest that universities not permit Confucius Institutes to become involved in public programming that goes beyond the CI core mission of education about Chinese language and culture. To go beyond these two categories invites opportunities for politicized propaganda.

As I understand it, few of those tests would be met in respect of the New Zealand Confucius Institutes (the one that is, as I understand it, is that the Confucius Institutes are not involved in the host university’s own courses or curriculum).   And, in addition, there is the unstated dimension as to whether our governments and universities should be facilitating the presence of PRC-appointed and paid staff in our schools –  the PRC being one of the most heinous regimes on the planet (as well as ruling a relatively poor country, which means we allow the taxes of poor foreigners to help pay for the education of our kids.)  If the PRC wants to subsidise Chinese-language learning then good luck to them, but let them set up downtown and market for clients in the way other countries’ language-teaching operations (Alliance Francaise, Goethe Institute) do.

Reprising a theme in my post on Saturday, there was this line about the compromised nature of universities.

The message from China to US universities is clear: Do not transgress the political no-go zones of the Chinese Communist Party or government, or you will pay a price. Sometimes the pressure is overt; other times it is more subtle and indirect, but no less alarming. Some American faculty members report troubling conversations with university administrators who continue to view Chinese students as such a lucrative revenue stream that it should not be endangered by “needlessly irritating Chinese authorities.”

There is lots more in the report, which is well-worth reading if you have the time.

Perhaps my bottom-line unease about the report was a bit of a reluctance to call a spade a spade.    For example, at least amid the discussion of the difficulties foreign academics and journalists face in the PRC, there was either a touching naivete, or a wilful refusal to face the fact, that the PRC is not a normal country, that just needs a few nudges to bring their attitudes and behaviours into line.   Why would one expect the PRC to behave differently, given the nature of the regime?   Obviously, all those involved know much about the true situation, but there was an apparent reluctance to say out loud that the party/State is  –  and for decades has been –  a malevolent force, at home, abroad, and increasingly in other countries.  Look at the tens of millions killed under the depraved indifference of the Party, the masss incarcerations, the forced organ transplant, at the near-total absence of freedom of speech, freedom of religion, the rule of law, or at the decades of the one-child policy. Look at the huge scale industrial espionage.  Look at the militarisation of the South China Sea, the constant threats to free and democratic Taiwan, or all the influence activities the report documents in the US and other countries, including attempting to subvert ethnic Chinese abroad and pressure them –  whatever there citizenship –  to advance PRC ends.  I know some people regard comparisons between the PRC and late-1930s Germany as overstated or unhelpful.  But such parallels seem increasingly valid –  not as prophecy, but as description –  and helpful in prompting those –  some perhaps individuallly decent people –  who just go along, to stop and think about the nature of the evil they accommodate or abet.  New Zealand politicians, of both stripes, as an example.

We have to be more than sum of our deals, more than the flow of political donations.

People might (as I do) distrust Trump on these issues for his typical inconstancy.  The difference here is that there is a constancy, but one that seems determined to, in effect, serve PRC interests, not the interests of New Zealanders, or the values that underpin our society (perhaps those involved try to tell themselves the two interests are much the same?).   That is why I still regard the “choose between China and the US” line as a false one.  Our governments could choose to go along with much of whatever (limited amount) the US is doing in foreign policy (or not), and still have abandoned any sense of integrity around our own system.  Personally, much as I welcomed the decision to buy the P-8 aircraft earlier in the year, I’d be more persuaded by our “leaders” if they had

  • combined to get Jian Yang and Raymond Huo out of Parliament,
  • defunded the China Council,
  • amended electoral laws to stop Phil Goff funding his mayoral campaign with anonymous mainland donations and to force comprehensive disclosure (at the level of the ultimate human donors) of all significant political donations,
  • done something to manage the exposure of the universities and the way in which that exposure risks compromising effective freedom to speak,
  • agreed together to stop issuing statements of praise for the PRC and Xi Jinping, and
  • foreswore accepting donations from anyone with significant United Front connections.

As a start.

Without steps like that, we could end up banning Huawei,  buying P-8s, being in the good graces of the US and Australia, and it just wouldn’t matter much. We’d still have severely compromised the integrity of our political system and our own longer-term interests.

 

Universities and PRC-risk

A couple of days ago the prominent US economics blog Marginal Revolution highlighted a university in the United States which had taken out insurance against a significant drop in revenue from Chinese students.   The underlying article was here.  The policy had been taken out last year, but only now has the broker allowed the transaction to be publicised.

Here’s the gist

The University of Illinois at Urbana-Champaign has paid $424,000 to insure itself against a significant drop in tuition revenue from Chinese students.

In what is thought to be a world first, the colleges of business and engineering at the university signed a three-year contract with an insurance broker to pay the annual six-figure sum, which provides coverage of up to $60 million.

and

Jeff Brown, dean of the Gies College of Business, told Times Higher Education that the insurance would be “triggered” in the event of a 20 percent drop in revenue from Chinese students at the two colleges in a single year as a result of a “specific set of identifiable events.”

“These triggers could be things like a visa restriction, a pandemic, a trade war — something like that that was outside of our control,” he said.

Tuition revenue from Chinese students makes up about a fifth of the business college’s revenue.

Brown said that the insurance would cover the colleges’ losses if the decline was temporary and buy the university time to “make some adjustments to where we recruit” if it became a longer-term issue.

The article refers to the comments, mentioned here the other day, from a former head of Australia’s Department of Foreign Affairs and Trade

Last month, Peter Varghese, chancellor of Australia’s University of Queensland, suggested that universities should put revenues from Chinese students into a trust fund to insulate themselves against a future drop in enrollments from East Asia.

A few thoughts came to mind reading the article:

  • on the one hand, the insurance seems quite cheap (less than 1 per cent of the amount insured).  Even if a year ago there weren’t debates –  as now in the US –  about possible government restrictions on China student visa numbers – the risk of something going wrong wouldn’t have seemed small (after all, even pandemics happen more than once in a hundred years, and wars have also been higher frequency than that).
  • and, on the other, you have to therefore suppose that the contract is very tightly drawn, and it might well be difficult for the university to get a claim paid out.

It would also be interesting to have seen their analysis on the merits of paying a premium to an outside insurer as opposed to self-insuring.  The university concerned  appears to have an endowment of US$3.5 billion and a drop in Chinese student numbers doesn’t look like it could pose an existential threat to the institution as a whole.

And the policy seems unlikely to provide cover in the event that, say, the university president or a group of his/her senior academics were at some point to make a strong stand against the actions and policies of the People’s Republic of China.  That is something in the hands of the university and therefore almost certainly uninsurable.  If anything, one could imagine the insurance policy constraining their perceived freedom of action/speech.

But it also got me thinking about the compromised position of New Zealand universities.  Perhaps none of them is dependent on the China market for quite 15 per cent of their total revenue, although there will be individual departments and perhaps even faculties that will be at least that dependent.   In a new post, on why people on the left have been reluctant to support Anne-Marie Brady, I noticed this line from Paul Buchanan

The first, prevalent amongst academics, is concern about losing funding or research opportunities for publicly siding with her. The concern is obvious and acute in departments and institutes that receive PRC funding directly

Do we really have components of our public universities receiving direct funding from the PRC (Confucius Institutes aside, which are peripheral to the universities themselves)?  If so, surely such funding should be given more prominence, given the nature of the regime (scarcely benevolent and welcoming of scrutiny and criticism).

But even just in respect of student enrolments, the PRC market is clearly of considerable importance to the universities (and slightly far-fetched claims of increased penetration of the international student market are used to support Victoria University Vice-Chancellor – and China Council member – Grant Guilford’s bid to change the name of his institution).   Our universities are keen on lots of foreign undergraduate students for various reasons.  High numbers apparently help them in some of the mechanical international ranking schemes.   But the key driver is almost certainly the money.  Overseas students –  especially from non English-speaking backgrounds –  are quite expensive to support, but they can be charged full fees.  By contrast, the government caps both domestic student fees themselves, and limit the amount of direct support to universities in respect of those students (while, with gay abandon, offering interest-free student loans and fee-free entry to students themselves).  In a hugely distorted “market”, successive governments have set up the incentives that drove the universities further into exposure to the political whims of the PRC authorities.  Universities, in turn, were aided and abetted by the immigration policy provisions, that bundled-up work rights and qualification for post-study visas and residence points with study at a New Zealand institution.   In most fields, in most institutions, our universities simply aren’t so good (highly ranked) they’d attract large numbers on their own merits at full fees (although being a low wage Anglo country, presumably our fees are lower than those in some other countries).

The corruption of the system is double-edged.  There is the political dimension –  we are never likely to see a clarion call from our Vice-Chancellors opposing the repressive nature of the PRC regime, including the repression of academic freedom – such as it was – in China.  It seems unlikely they’d even speak up for, say, Anne-Marie Brady here –  certainly none have.  Once upon a time one might have looked to university vice-chancellors as among the eminent figures guarding and championing our traditions (for all the talk about academics as “critic and conscience”, a huge part of what they do is pass down the accumulated knowledge and wisdom, so that we don’t start anew each generation).  But not these days.  There are deals to be done –  connections with the PRC itself, even degree-granting programmes there –  and enrolment numbers to keep up.  Vice-Chancellors seem more like hawkers, than guardians and champions of our values.

But the other side of the corruption of the system relates to the pressure to pass people.  Those of us outside universities don’t see much of this directly, although occasional reports seep out.    But there was a Twitter thread the other day from an Australian economist, who teaches at the University of Queensland

One hears similar stories from time to time here (not necessarily specific to PRC students), and one can only assume they aren’t uncommon, (and that New Zealand universities are no purer, or their academics more resistant to pressure, than their Australian counterparts).

It is a very sad way to run a university system – at least if society expects anything more of universities than being degree-factories.   Rather than “critic and conscience” it has the feel of something more like corrupted exemplars of how off course our society has gone.

And thus there seems almost no chance that our universities –  or the Australian ones – will heed Peter Varghese’s advice (will his own even do so?).  Governments would have to take the issue seriously first, and that seems unlikely.    Putting aside some of the short-term profits as protection against a “rainy day” –  if the thugs in Beijing took a dislike to you – would probably immediately expose the problems in the financial standing of the universities and of our tertiary education system as a whole.  Better just to go along, get along, get the Vice-Chancellor on one or other of the pro-PRC propaganda bodies, pass the students, keep the contracts (with Beijing or Wellington), and keep supporting succesive governments in doing everything possible to avoid upsetting Beijing, to sacrifice the values of our society on the pyre of deals and donations.

But I was left wondering whether our own Export Credit Office –  a small intervention I’m deeply sceptical of –  would offer our universities the sort of insurance the University of Illinois was taking out.    They tout themselves as offering these services

NZEC can assist exporters to mitigate the effects of a buyer cancelling a contract or defaulting on its payments, as a consequence of commercial or political events beyond an exporter’s control.

And would we be better off if they did, or would the insurer just be even more keen on keeping the insured (the universities) in line?

In her writings, Anne-Marie Brady quite often introduces lines from Lenin, which appear to help shed some light on how the PRC operates.  As one reflects on our universities –  in particular – I’m reminded of the line that the capitalists would sell the communists the rope with which they’d later be hanged.   Perhaps one expects little of our “capitalists” –  businesses can prosper under any political regime (see Google worming its way back into China) – but universities were supposed to be better than that.  Governments share the blame, of course, but leaders of universities are moral agents, and should have their own responsibilities beyond just the income statement.

Economic failure CCP-style

I’ve touched on this point in earlier posts, but since at present there are lots of new readers, it is worth revisiting, and re-illustrating, the point: the People’s Republic of China (and more specifically, the Chinese Communist Party, that our leaders are so keen to cosy up to) has overseen a really poor economic performance.  It is, more or less, what one might have expected knowing that the rule of law would be absent, markets wouldn’t be allowed to function effectively, state subsidies (of all sorts) would be rampant, and so on.  It could have been worse, of course –  there was the utter chaos, misery, and (for a time) mass starvation from the late 1950s to the mid 1970s.  The handful of other remaining Communist-ruled countries are worse.   But even having stopped doing so much active destruction, the PRC results are unimpressive.    Any other conclusion surely invites that American line about the soft bigotry of low expectations.

Of course, it isn’t the line the PRC would have one believe.  And it suits too many politicians in the West to talk up China as a stunning economic success story.  But it isn’t.  Development economists, left and right, will talk up the hundreds of millions of people who’ve moved above the poverty line.  And that is great, except that (a) it was the CCP that did its utmost (perhaps unintentionally) to put them back below the poverty line in the first place, and (b) getting above the poverty line is a pretty feeble standard against which to judge the economic performance of a country that for centuries matched or exceeded the best material living standards anywhere.

Angus Maddison’s great collection of historical GDP per capita estimates is a typical starting point for such comparisons.    He reports estimates for some countries every few hundred years from year 1 AD, and then more frequent (increasingly annual) estimates for more countries in more recent centuries.  In 1 AD the estimates he reports had Italy with the highest material living standards, followed by Greece.  China was about the level –  or a bit ahead –  of most other places in Europe.   In 1000 AD, China was top of the rankings –  not by much, but it was number 1.  That shouldn’t be any great surprise to anyone who recalls the various Chinese inventions ahead of the discoveries of such things (printing presses, paper money, even very big ships) in the West.   By 1500, China was a bit behind Italy and Belgium, but not much different to most of the rest of western Europe (all well ahead of what is now the United States).

Scholars spill a lot of ink debating why China went into such severe relative decline (Japan also fell well behind and I presume –  though Maddison doesn’t have estimates –  other east Asian places did too).    Whatever the precise mix of explanatory factors that slippage happened.   In 1850, Maddison’s estimates have Chinese GDP per capita at about a quarter of that in the UK and the Netherlands, and less than 40 per cent of his “Western European 12 countries” average.  By 1900, estimated per capita GDP was only about 15 per cent of that in the highest income countries.

But perhaps as importantly, in 1900 China’s GDP per capita is estimated to have been about half that in Japan, and just a bit behind that in Taiwan (by then a Japanese possession).   As late as 1870, China had been not far from the GDP per capita in a range of Asian countries/territories for which Maddison now has estimates –  about on par with Korea, Taiwan, and Thailand, and a bit behind Japan, Hong Kong and Singapore.

And this is what they’d been further reduced to by 1976, the year Mao died.  I’m using the Conference Board’s PPP estimates, and have shown a mix of countries –  mostly east Asian and European, but with a few other interesting cases (eg Israel –  brand new in 1948) thrown in.

china 1

Such utter self-destruction and failure.  It wasn’t done by outsiders.  It wasn’t as if the PRC had faced uniquely bad external threats.  It was like economic suttee, with the depraved indifference of mass starvation thrown into the mix.

And how does the picture look today, with the Conference Board’s 2017 estimates.

china 2

The PRC has rocketed past the Philippines and Sri Lanka, and still trails the rest of this pack rather badly.   And this isn’t Tanzania or Rwanda, but a country that was once –  for centuries –  among the highest living standards anywhere in the world.  A country in a region where South Korea, Japan, Taiwan, and Singapore now manage advanced country living standards –  one of those a country that struggles to get international recognition and under constant threat from the PRC.

From the Maddison estimates, in 1980 the Soviet Union –  a region never at the forefront of material living standards –  had GDP per capita about the same ratio to that in the western European countries that China has today.  In fact, about where China was –  in relative terms –  in 1850 (see above).  It is a simply dismal economic failure in a country –  by a Party –  that would have so much potential were its people ever to be free, to ever be properly governed with the rule of law rather than the rule of Xi.

For the same countries, here are the real GDP per hour worked estimates.

china 3

It really is an astonishingly poor performance.  Or at least it would be unless you’d been told in advance that Japan, Singapore, Taiwan, and South Korea would establish market economies with the rule of law, sound governance etc etc (and none of it perfect) and that the PRC would remain a land where the (Communist) Party actively rules.  Then, the outcomes are probably much as one might expect –  China lags very badly behind, to the disadvantage of its people, even if to the enrichment (power, money) of its rulers.

On the IMF’s full list of countries, the PRC now ranks 79th (out of 187) in the GDP per capita (PPP) stakes.  Average real GDP per capita is a touch behind that in Iraq (yes, I was surprised) and the Dominican Republic, and a little ahead of Brazil and Macedonia.  Perhaps China’s growth rates are faster than those places, at least if one (a) believes the official data for the Xi period, and (b) discounts the massive distortions and misallocations associated with one of the largest credit booms in history.      But there is no sign of Chinese per capita incomes catching those of the leading countries any decade soon (if things unwind nastily, the gaps would even widen a bit for some years).

Taiwan, Korea, Japan, and Singapore are genuine economic success stories –  catch-up and convergence more or less as the textbooks suggested was possible.  Cause for celebration in fact.   The PRC?  Anything but.  Being big doesn’t change that –  even if it gives geopolitical clout to a lagging middle income country –  it just means more people are failed by their rulers (and by those in countries such as ours who give the rulers aid and comfort, pander to them, or simply cower in a corner).

Known by the company they keep

Where might one turn if writing today about the New Zealand/ People’s Republic of China issues?

One could start with yesterday’s extraordinary interview our Foreign Minister gave yesterday on Radio Live where, on the one hand, he laid into Jian Yang, and on the other seemed to suggest that anyone who questioned the activities of the PRC here or abroad was somehow motivated by racism.    Quite extraordinary.  And while we are on the subject of Jian Yang, perhaps Mr Peters could have a chat to the Prime Minister (who seems totally unbothered by Jian Yang), or to the MP from his own party who is Minister of Internal Affairs, responsible for citizenship law (Jian Yang having acknowledged a year ago that he misrepresented his past to get into the country in the first place, apparently under “guidance” fron Beijing).

And the Herald this morning was awash with material.  There was a rather wishy-washy editorial, which ended with the suggestion that if the delay in the Prime Minister’s visit to Beijing was “a rebuke it is not warranted”.   Well, of course not, both the Prime Minister and (successive) leaders of the National Party do their utmost to cover for Beijing, and never ever give offence.

There was the flippant cartoon, suggesting that all the PRC would be interested in here was the recipe for slow-cooked lamb, which one might just pass over without note if the issues weren’t so serious, the abuses undertaken by the regime –  at home and abroad – so grave.

There was another article in which the Prime Minister and Simon Bridges seemed to compete for who could grovel before the PRC regime –  tossing overboard any sense of decency or right – the most.    You’ll recall that Simon Bridges had a head-start, having been the minister responsible last year for signing New Zealand up to the rather warped aspiration of a “fusion of civilisations” –  with the PRC of all people.   According to Bridges

He said New Zealand’s default position should not be to question the legitimacy of China’s actions in the Pacific and around the world.

But, being independent and all that, and with the PRC’s track record, it actually doesn’t seem a bad starting point.  Perhaps his predecessors suggested our default shouldn’t be to question the legitimacy of Germany actions in the Europe in the 1930s, ….but I doubt it.  It is hard to see that Bridges is guided by anything resembling the word “principle”.

As for PM,

Ardern would offer no definite view when asked which country, United States or China, was more important to New Zealand.

“Some of the discussion around choosing lanes in which we swim does not fit with our independent foreign policy,” she told reporters.

“New Zealand has a range of important relationships, some for different reasons, some with different histories. But for me, the most important thing is maintaining the independence of that foreign policy basing it around New Zealand values, upholding those values and continuing to strengthen them when it is in New Zealand’s interests.”

No sign of anything resembling “principle” there either.  For her, it seems, “independence” is the primary virtue, not standing up for what is right, and standing up for the freedoms and interests of New Zealanders, including those in the ethnic Chinese community.   From both her and Bridges, it seems that visceral anti-Trumpism is being allowed to provide cover for simply sacrificing the integrity of our domestic political system, and a climate in which New Zealanders can go about their business in New Zealand –  including call out the abuses by the PRC –  free of fear.

And then there was the frankly pretty scurrilous column by Fran O’Sullivan, “Academic draws a long bow on China”.  I thought it was pretty bad on two counts.  First, she accused Anne-Marie Brady of “China derangement syndrome”, and yet when one gets to the end of the column all O’Sullivan has to say in disagreement with Brady’s paper –  which, as published was only in working paper form –  was that it included Ruth Richardson among the former politicians now involved in the boards of Chinese (PRC controlled) companies.  Whatever the ins and outs of the Synlait situation, former Minister of Finance, Ruth Richardson sits on the board of one Chinese bank here, Don Brash chairs another, Jenny Shipley is on one of the boards, and former National minister Chris Tremain is on another.   In all cases, with the possible exception of Don Brash, no one supposes these appointments were about banking expertise.  It is about connections, and such appointments also have the side benefit of putting such senior former politicians in a position where they can’t really criticise anything the PRC does.   But, in a way, the second count bothers me more.  O’Sullivan is the “Head of Business, NZME”, but she is also co-chair of the China Business Summit, and sits on the Advisory Board of the taxpayer-funded advocacy and propaganda outfit, the New Zealand China Council.  Neither of those involvements was noted in the article.  General readers can’t just be assumed to know such things, and should be able to assume that staff writers and columnists have no personal interests in the causes they are championing.

(Oh, and there was also the de haut en bas tone –  O’Sullivan being a favourite of the establishment these day –  of  this comment on Brady’s paper

It highlights issues that the higher echelons of the NZ Government are currently grappling with: whether foreign-sourced political donations carry a tag; an alleged Mainland influence on Chinese nationals and local ethnic media and unanswered questions that remain over National MP Jian Yang.

Except that there is no sign of the Prime Minister or the Leader of the Opposition taking a stand on either issue.  Perhaps some officials are indeed troubled, but politicians call the shots.  We know there are problems – answered questions in the case of Jian Yang.  Bridges and Ardern simply refuse to face what they – and their predecessors –  have reduced our politicaL system to.)

But actually what I really wanted to write about today was an article not in the New Zealand media at all, but in the Chinese media (a Xinhua story to be exact –  thanks to a reader for sending through the link).

Both main party presidents –  Peter Goodfellow for National and Nigel Haworth for Labour –  have form when it comes to gushing over the PRC regime and its leader, Xi Jinping.  It keeps the donations flowing I suppose, and Goodfellow was the source of reported line that Chinese donors were less trouble than others.  Goodfellow is also reported as having business links with Jian Yang, including in the promotion of the Belt and Road Initiative, and –  as reported only relatively recently –  is closely involved in one of PRC-favourite Yikun Zhang’s promotional activities in New Zealand.

This story is about Goodfellow, who was apparently up in China last week, one of the

….attendees of a meeting held in Hangzhou, east China’s Zhejiang Province, on Friday.  The meeting to showcase Zhejiang’s achievements in high-quality development invited leaders and representatives of more than 80 political parties from over 30 countries.

The Chinese Communist Party was singing its own praises

Che Jun, secretary of Zhejiang Provincial Committee of the Communist Party of China (CPC), introduced the coastal province’s experiences in improving governance capacity to better serve economic growth, promoting innovation-driven development, nurturing new growth drivers while upgrading old ones, and building an ecological civilization.

and so was Peter Goodfellow

Noting China’s national rejuvenation is a good thing rather than a threat for the world, President of the National Party of New Zealand Peter Goodfellow expressed his willingness to strengthen friendly exchanges with the CPC and to actively participate in construction under the Belt and Road Initiative.

I’m sure we can all welcome China’s economic development, even as we note how badly the PRC lags behind Taiwan, Hong Kong, Singapore, as well as Japan and South Korea.  But there was a time, not that many decades ago, when hobnobbing with the Chinese Communist Party was looked on rather suspiciously in New Zealand (I’ve just been reading James Bertram’s  slightly sickening account of his party’s trip to China in the mid-1950s, meeting with Mao and Chou En Lai just before the dreadful Great Leap Forward ), but now the president of our largest political party is wanting to work together with Communist Party, source of so much evil for the PRC citizens in the subsequent decades.  And no serious observer any longer pretends that the Belt and Road Initiative is anything much other than a geopolitical play.  Peter Goodfellow seems keen on pretending otherwise.

Probably from his perspective, so far so routine.  He – and his Labour peers –  probably do this sort of stuff all the time, long since detached from the sort of values their respective parties were founded on.  But it shouldn’t be normalised. It should be about as shocking as their counterparts in the late 1930s praising the Nazi Party and pledging to work together in its geopolitical initiatives.  Bad as the appeasers were, that would have been unthinkable then.  It should be again today.

But in a way what really struck me was the company Peter Goodfellow was keeping in this article.    There was Arshad Dad, Secretary-General of  (ruling) Pakistan Tehreek-e-Insaf party.  There was Alsayed Mahmoud Al-Sharif, the first deputy speaker of Egypt’s House of Representatives, who was clearly very taken with the regime

….[he] said the experience of the CPC is worthy of deeper exploration.

“China, represented by Zhejiang, pays attention to the quality behind the speed in its development, continuously enhances its innovation and competitiveness, accelerates industrial transformation and upgrading, and opens up a unique, high-quality development path,” said Al-Sharif.

And Pavle Budakov, a Bureau member of the Socialist Party of Serbia.

But here’s the thing.  Pakistan is widely-recognised as something close to a Chinese client state, now deeply indebted to Beijing.    Egypt seems to be heading in somewhat the same direction, sucking in PRC money and labour (and “craving allies at a time when much of the world has recoiled from its brutal crackdown on dissent”) to build a new capital, and as for Serbia…..well, for a start the Socialist Party of Serbia was formerly the party of Slobodan Milosevic, and in an ongoing New York Times series on China (from whence the Egypt quote is taken), the Prime Minister of Serbia outdoes even Li Keqiang

Mr Li seeks to allay European worries that China poses a challenge to its rules. He promises that Chinese-financed projects will be awarded on the basis of competitive bidding.   “There needs to be open and transparent tendering”, the Chinese premier declares.

But the Serbia prime minister, Ana Brnabic, has just undercut that aseertion.  Asked moments earlier about the [highly-contetious, almost certainly uneconomic] high-speed rail from Belgrade to Budapest, she says Chinese companies have been promised construction work.  “China is a strategic partner”, she says.  “We are not putting out tenders”

Not even the deference that vice pays to virtue in pretending to a proper process.

Whether it is Beijing and the CCP, or these other regimes, our politics –  our political parties –  really should be better than that.  We had a long and honourable tradition, which our political parties seem only interested in trashing, along with the sort of values that underpinned this democracy, this society.

In closing, just two brief things.  The first is to encourage readers to view this short clip, sent to me by a reader.  It is the story of a (now) New Zealand Chinese family –  father and daughter.  The mother died in a PRC political detention facility, three months pregnant.  The regime wanted the father and daughter back (they’d got to Bangkok) but fortunately the then New Zealand government offered them refuge here.  They are still harassed by Beijing and its agents, formal or informal here, and threats made about family back in China.  Bravely, they are still willing to speak up and speak out, about their own awful experience.   I commented to the person who sent me the link

Powerful, sad, and yet a little hopeful too – that people aren’t willing to just give up and be quiet

Perhaps Todd McClay –  who repeats PRC propaganda about the Xinjiang internment –  could watch it, or Simon Bridges, or Jacinda Ardern.  These are New Zealanders.  And that is the regime to which you –  who purport to be “leaders” – give cover.  Surely they can’t really believe the regime is morally worthy at all, but perhaps it might be less shameful if that were their excuse, rather than “another deal, another donation”.  As Scott Morrison put it recently, in an Australian context, we have to be more than the sum of our deals.

Anastasia Lim isn’t a New Zealander. She is a Chinese-born Canadian actress who a few years ago won the Canadian competition to qualify for the Miss World finals.  She hasn’t been afraid to speak out about China’s human rights abuses –  including the forced organ transplants – and was thus banned from China (and thus the competition finals) in 2015.  If the PRC hoped to silence here, the ban only seemed to draw attention to her and her cause.  She pays a price –  her family back in China is scared to talk to her – but seems undeterred.  She is visiting New Zealand briefly next week.  Auckland readers might be interested in this  Monday evening screening of an award-winning film based around real-life PRC events,  at which she will host a question and answer session.  Perhaps Winston Peters could drop in, and listen to another courageous ethnic Chinese voice speak up about the regime in Beijing.

 

Implicit admissions and bids for resources

The Reserve Bank’s Financial Stability Report was released earlier this morning.  The headline, of course, was the easing in the loan to value restrictions on mortgage lending, although perhaps what should get more attention was the Governor’s suggestion that the avowedly “temporary” restrictions” will be in place for at least “the next few years”.     There was no good case for them –  putting a bureaucrat between willing borrowers and willing lenders – in the first place, and there is no good case for having them in place now.  Other than, of course, the interest that isn’t the public interest at all –  more discretionary power for an unelected unaccountable public official.

(Given the Bank’s repeated unease about dairy debt, it has also never been clear to me why LVR limits were appropriate for people buying houses but not for people buying farms. I used to raise the point while I was still at the Bank, and have never heard a satisfactory or persuasive response.)

Two other small things in the press release warrant just brief mention for now:

The first was this

Our preliminary view is that higher capital requirements are necessary, so that the banking system can be sufficiently resilient whilst remaining efficient. We will release a final consultation paper on bank capital requirements in December.

Time will tell how persuasive their case is, but given the robustness of the banking system in the face of previous demanding stress tests, the marginal benefits (in terms of crisis probability reduction) for an additional dollar of required capital must now be pretty small.

And the second was this

Aside from CBL, the insurance sector as a whole is meeting its minimum capital requirements. However, capital strength has declined and a number of insurers are operating with small buffers. The insurance industry must ensure it has sufficient capital to maintain solvency in all business conditions.

That is quite a shot across the bows of the sector, but it is worth remembering that when the solvency standards were set up the Reserve Bank consciously chose not to require insurers to hold sufficient capital to remain solvent in all circumstances. I vividly recall the day I asked, at the internal Financial System Oversight Committee, whether the solvency standards were demanding enough that they would have prevented the AMI collapse, and was told no.

But two other things caught my eye in the full document.

The first was that the Bank no longer seems to be claiming that LVR controls –  coming between borrowers and lenders for five years now –  have done anything to improve the soundness of the financial system (while they have inevitably impaired the efficiency of the system).  Those are the statutory goals the Bank is required to use its powers towards, and yet in the document today we find this (in the cartoon summary at the front):

The restrictions have reduced the number of borrowers who would be forced to sell their houses or significantly reduce spending if they ran into financial problems.

But, even if true, that is not the same –  at all – as improving the soundness of the financial system. It is about “nanny knows best” customer protection, which is no part of the Bank’s mandate.   You can’t be forced to sell your house if the Bank’s action prevented you from getting into one in the first place.

And here is the claim from the body of the document

The Reserve Bank’s LVR restrictions have leaned against the build-up in risks from high household debt by increasing the amount of equity borrowers have in their homes. The restrictions have seen the proportion of outstanding mortgage debt to households with loans larger than 80 percent of the value of their houses fall from over 20 percent in 2013 to under 7 percent. This extra equity provides households with more room to avoid cutting consumption or defaulting on their loans if economic conditions deteriorate or if interest rates rise.

Nannying again, not (apparently) focused on the soundness of the financial system.  As a reminder, the two diverge because (a) even if LVR controls modestly reduced housing lending risks, we never get a good sense of what other risks banks have taken on to maintain profits, and (b) because less risky lending means banks need to hold less capital.  Capital relative to (properly assessed) risk-weighted assets is the key issue when it comes to solvency.

From the text there is no way of telling whether the Bank’s focus has really changed or just the marketing. But marketing –  from a powerful public agency – should be aligned with, and disciplined by, mandate.

And then there is climate change.  In the Governor’s press release there was this

In the medium-term, an industry response to a variety of climate change-related challenges appears likely, requiring investment.

Which is pretty cryptic, perhaps even empty.

But in the full document there is a two page spread on “The impact of climate change on New Zealand’s financial system”.   There is lots of text, and very little substance.  It smacks of the Governor bidding for relevance – signalling to his buddies on the (political and business) left –  and involvement in the wider whole of government programme, and perhaps worse, it looks like a bid for more budgetary resources (a case we know the Bank has been making) or amended legislation to do things like

The Reserve Bank is developing its own climate change strategy. The strategy focuses on ensuring that climate risks are appropriately incorporated within the Reserve Bank’s mandate. The Reserve Bank also stands ready to collaborate with industry and government to help position New Zealand for the challenges ahead.

This for a body with two city offices, and a balance sheet full mostly of exposures to New Zealand government debt and overseas government debt.

The text burbles on about possible risks, but it all adds up to very little.     There are numerous risks banks and borrowers face every decade, every century.  Relative prices change, trade protection changes, external markets change, exchange rates change, technology changes, economies cycle, land use law changes.  Oh, and the climate changes.

If one looks at the structure of New Zealand bank (or insurer balance sheets) it just isn’t credible that climate change poses a significant risk to the soundness of the New Zealand financial system (that pesky law again).   Some individuals are likely to face losses from actual and prospective sea-level rises, but banks (and insurers) typically have diversified national portfolios.   People can’t have mortgage debt without insurance, and so the insurers are likely to be constraining people first.   Much the same surely goes for the rural sector?   Sure, adding agriculture into the ETS at the sort of carbon price some zealots have called for would be pretty detrimental to the economics of a dairy debt portfolio, but then freeing up the urban land market probably wouldn’t be great for residential mortgage portfolios, and we don’t see double-page spreads from the Reserve Bank on that issue, or the Governor trying to play himself into some more central role in that area.     It smacks of politics –  signalling the Governor’s green credentials –  more than anything legitimately tied to financial system soundness.

But then we probably should not be surprised. The Governor sells himself as head of a tree god (fortunately there was none of that stuff in today’s document), and gives speeches on climate change, but eight months into his term still hasn’t managed to give a speech on either of his main areas of statutory responsibility (monetary policy or financial supervision/regulation/stability).

 

Squirming and hoping the issue goes away

The Prime Minister was briefly put under the spotlight on Radio New Zealand this morning on the narrow issue of her reaction to the open letter regarding the Anne-Marie Brady/PRC situation.   The Radio New Zealand story reports that

The prime minister said at her weekly post-Cabinet press conference on Monday that she would not be making any moves to condemn China, despite rising concern from academics about the country’s attempts to suppress talk of its interference in domestic politics.

And in her interview this morning she was at pains to minimise and play down the issue, on the defensive, and playing red herrings

“As much as I support academic freedom, I also have to be careful how much I’m seen to interfere in the police as well…

Had anyone suggested she interfere in the Police?

If you took her responses line by line, each line might have seemed reasonable on its own.  But what it added up to was the sound of someone who (a) desperately wanted the issue to go away, and (b) was not interested at all in providing a clarion call for freedom from fear, whether for Professor Brady and her family, or those members of ethnic Chinese community in New Zealand who report harrassment and threats (including to family in China) from Beijing’s agents if they dare to exercise rights –  to speak up and speak out –  in New Zealand.  She seemed totally unbothered that an investigation, which she tried to imply was being conducted solely by something like the Riccarton suburban police station, was still going on after nine months.  Maybe it really is, but as Professor Brady notes

But Prof Brady said she had been told her case was closed.

“The discussions I’ve had with police make it clear that they’ve done everything they can, and I think that they would be ready to make a report to the government.”

She said this was a case for the national security teams at the highest levels, and not just a police matter because it was “not an ordinary burglary”.

The Prime Minister gives every sense that she wishes the whole situation would go away. Perhaps she doesn’t.  Perhaps she really cares about the freedom of New Zealanders. But it wasn’t the impression she was giving.  It came across as it might if the Prime Minister were more concerned about the interests of a few big businesses (public and private) selling to China, and perhaps the flow of political donations (presumably greater now she is in office).   Only she can really allay that impression, if in fact it is false.

From my perspective, one of the sad aspects of this affair is that people sticking up for Professor Brady seem to have been almost entirely from the left (I don’t know most of the people on the open letter list, but I’m guessing there aren’t many people not of the left on the faculty of the AUT school of social sciences and public policy (from whence many of the signatories come)).  But what is interesting is that much of the pushback also seems to come from the left. I’ve seen some particularly nasty comments in the comments sections of, for example, the left-wing The Standard blog.

And this morning one of the more respected figures of the left, Chris Trotter, is out with a full-blown attack, (“The Case of the Problematic Professor), having a go at Professor Brady and suggesting that all that should guide government policy on these matters is some narrow economic perspective –  what is good for Fonterra, or Red Stag, or Auckland University is good for New Zealand.  It almost deserves a post of its own, but just (relatively) briefly some comments.

He writes that annoying “China, on the other hand, can be extremely injurious to this nation’s economic health”.    Well, no, actually not.  Should the government of the People’s Republic ever decide to attempt to “punish” New Zealand they could create some short-term damage, and perhaps even some serious damage in individual sectors, but our total exports to China are about 5 per cent of GDP, and we have tools like monetary and fiscal policy to stabilise the economy in face of shocks.  China doesn’t make us rich (or, actually, as underperforming as we are), we do.  And do we have any self-respect or not?

Weirdly, for someone who is part of the Free Speech Coalition, Trotter seems to suggest universities should be pretty hesistant about criticising China.

Prattling on about being the “critic and conscience” of society is all very well, but when New Zealand’s universities are so dependent on the continuing inflow of international students, is it really all that wise to antagonise one of the largest contributors to this country’s educational export trade? It would be interesting to see how the nation’s vice-chancellors would react if equivalents of Anne-Marie Brady started popping up on their own campuses. Each academic activist launching equally uncompromising attacks against the Peoples Republic. How would all that criticising and conscientising affect their bottom-line I wonder?

Well, indeed, and the absence of the vice-chancellors from yesterday’s statement (or any other) was notable, but Trotter’s point argues for managing our universities differently, in a way that reduces our short-term vulnerability to thugs, not just pushing deeper into the market, and becoming more afraid of our own shadow, indifferent to those actually being intimidated.

Then Trotter repeats one of Murray McCully’s old lines –  no more true for being repeated from the left.

New Zealand lives by its agricultural exports – which is why the New Zealand-China Free Trade Agreement was so important when the Global Financial Crisis struck. Without it, this country would have had significantly less to come and go on. Chinese consumers saved us from the sort of vicious austerity measures that afflicted the people of the United Kingdom and Greece. The nature of the Chinese system has not changed since 2008.

The economics is simply wrong (I’ve pointed out in previous posts the similarities between the path of our economy and that of the US over the last decade) and what about that last sentence? Most observers will say China has changed markedly, and for the worse, under Xi Jinping, and at very least that the hopeful trajectory many in the West envisaged certainly hasn’t come to pass.

Then Trotter has a go at Brady herself

The good professor is not, however, above advancing a little soft power on her own account. Is it no more than a coincidence that she has been called upon to present her ideas to the Australian parliament during the “China Panic”? Or that her academic articles and speeches are followed closely, and receive considerable approbation, in Washington DC? That the name of Anne-Marie Brady started appearing in our news media at exactly the same moment as the rivalry between the USA and China ratcheted-up several notches – was that nothing more than serendipity?

Might not her appearance before the Australian parliamentary committee have something to do with (a) her expertise, and (b) a bipartisan Australian commitment to taking PRC influence activities seriously?  And as I understand it, her name became prominent here after she released her Magic Weapons conference paper –  not intended for publication until a later book came out –  after the FT/Newsroom (hardly agents of Trump) published the astonishing story last year on Jian Yang’s background.

Trotter writes in praise of the crass Donald Trump approach to Saudi Arabia, reflected in the appalling statement last week.  In Trotter’s description – which he appears to endorse – if that involved “turning a blind eye to cold-blooded, state-sanctioned murder, then so be it”.   If the Prime Minister really wants to line up with Donald Trump’s approach to foreign policy, perhaps she could at least come out and say so.  But, as a reminder, evil as the Khashoggi murder was, he wasn’t a US citizen.  Anne-Marie Brady and many of the intimidated in the ethnic Chinese community are New Zealand citizens.

Trotter concludes urging that the Prime Minister should stay silent, and that in so doing she will “earn the respect of Beijing and Washington alike”.  More likely, both would despise her, if for slightly different reasons.  More importantly, it would be the sort of stance –  prioritising a few big businesses over the interests and values of New Zealanders –  that eats away at any residual respect people have for the political process and our “leaders”.   Far better the words from Scott Morrison’s recent speech (as aspiration, if not always observed)

I fear foreign policy these days is too often being assessed through a narrow transactional lens.   Taking an overly transactional approach to foreign policy and how we define our national interests sells us short.

If we allow such an approach to compromise our beliefs, we let ourselves down, and we stop speaking with an Australian voice.

We are more than the sum of our deals. We are better than that.

As a reminder of just how compromised our university hierarchies are I found this graphic on the Auckland University website.

au students

Not only is the dependency on foreign students rising, but the foreign student numbers are totally dominated by PRC students.    I’m usually very keen on free and open trade, but when you find yourself dealing with thugs, the sensible response (in almost any business or area of life) is to pull back and reduce your exposure to thugs, not to simply do the kowtow –  perhaps especially when you are a university, residue of some of greatest bits of the Western tradition.    We can’t allow our values, and the safety of our people, to be simply played around with to protect the interests of a few big (public and private) corporate businesses.   In Australia, a former Secretary of Foreign Affairs and Trade recently called for Australian universities to not act as if the revenue will always be there

“While demand remains high, it makes little sense for Australian universities to turn their back on the revenue stream offered by students from China and elsewhere,” he said. “But it would be wise to invest the profit margin for the longer term, not use it for current expenditure. Put it into a future fund or endowment, which would give universities a measure of resilience in the event that the market abruptly shifts for reasons beyond the control of universities.”

That would seem prudent here too, but of course it might force governments to look harder at the long-term financial structuring of our tertiary sector.

Finally, there was a story on some of these issues on Newsroom this morning, the key line in which is best captured in this tweet.

As Geremie Barme notes further (perhaps rather generously on the government’s intentions)

“China’s challenge to everybody in this region … is it requires governments are much smarter in dealing with a rising superpower that is aggressive, totalitarian, bullish and nasty in many ways, but also is varied and complex and interesting and engaging.”

Standing up to China, while still maintaining a working relationship, was difficult.

“It’s hard work and it’s constant work. This Government wants to do good but can’t quite manage to do so,” Barmé said.

“This is the real deal, and New Zealand’s never had to face this … You have to sit down and you have to work out, what is a consistent long-term policy, at least for the life of this Government. And how do you articulate that.

“And I get the sense they haven’t done that; Jacinda Ardern just runs for cover.”

She can’t even bring herself to talk, concernedly, about the astonishing situation in which a former PRC intelligence official, Chinese Communist Party member, sits in our Parliament –  close to the Embassy, never criticising the regime for anything –  having acknowledged that he misrepresented his past to get into the country in the first place.

I guess it suits the handful of big corporates and university bosses that she simply keeps quiet.  It should shame the rest of us.

Economics of climate change

I’ve written a few posts here about the economics of climate change, and of the sorts of goals the government proposes to adopt in response.  On the one hand, OECD and IPCC work has suggested that, if anything, the New Zealand economy in aggregate is likely to benefit a bit from warming (albeit with sectoral and regional ups and downs –  the sort of thing that is a normal part of economic life).  And, on the other hand, the government’s own modelling, undertaken by NZIER, suggests a very high real economic cost to New Zealanders from pursuing a net-zero target.

And so I was interested to see a headline on the Wall St Journal website this morning

U.S. Government Report Warns of Economic Losses From Climate Change

The story noted

Its conclusions are at odds with statements by President Trump, who has been skeptical of global-warming trends, questioned the validity of climate science, and challenged federal regulations designed to control greenhouse-gas emissions.

“There has been no external interference in the development of this report,” said David Easterling, director of the technical support unit at the National Centers for Environmental Information, who helped prepare the 1,500-page assessment.

That’s good.

But what did it have to say about these economic costs?

The impact of global climate change is being felt across the country and, unchecked, could cause U.S. economic losses totaling hundreds of billions of dollars a year by the end of the century, says a new U.S. government report released Friday.

“Hundreds of billions of dollars a year” is a lot of money, but then (a) the US is a big economy, and (b) the end of the century is a long time away (especially once you apply any sort of discount rate).

How big?  Well, US GDP last year was US$19.4 trillion dollars.

I clicked through to the report document itself.  Unfortunately, there isn’t a distinct economics chapter (although there are sixteen separate topic chapters). But the summary did report these comments.

Some aspects of our economy may see slight near-term improvements in a modestly warmer world. However, the continued warming that is projected to occur without substantial and sustained reductions in global greenhouse gas emissions is expected to cause substantial net damage to the U.S. economy throughout this century, especially in the absence of increased adaptation efforts. With continued growth in emissions at historic rates, annual losses in some economic sectors are projected to reach hundreds of billions of dollars by the end of the century—more than the current gross domestic product (GDP) of many U.S. states.

All of which made me even more curious, as I’d had the hazy impression in my mind that US emissions had already peaked, and yet this report talks of the economic costs of emissions continuing to increase at historical rates.

And sure enough there was this chart on the EPA website

us-greenhouse-gas-emissions-1990-2016

In other words, whatever the historic rates of growth of emissions were, there has been no growth since the early 1990s, and the trend appears to have reversed in the last decade.

I guess the report has in mind global emissions rather than US-specific ones, but then these days China’s choices (and non-choices) are the bigger issue.

And what about the size of the US economy at the end of the century?  If we assume very conservative numbers (no population growth and perhaps 1 per cent per annum productivity growth) then in real terms an economy of US $19.4 trillion in 2017 would be one of about $44 trillion per annum.  If the real economic costs of climate change are “hundred of billions of dollars per annum” by the end of the century that must mean a number less than one trillion dollars. In other words, the scary headline reduces to a cost that is, at most, 2 per cent of GDP.  Not nothing.   But it is (a) long time in the future –  discounted back to today at any reasonable discount rate, it will be equivalent to a lot less than 2 per cent of GDP, and (b) the discussion on the economic impact in the summary does not mention at all the potential economic costs of policy measures to accelerate the reduction in emissions already underway.   Those costs are likely to be materially smaller than those facing New Zealand (the 10 to 22 per cent of GDP estimate from the government’s NZIER modelling, falling most heavily on the poorest) but they aren’t likely to be trivial either.

Whatever the case for doing something dramatic, and potentially quite economically costly, on climate change, it doesn’t seem reasonable or sensible to base any such argument on the economic consequences for rich countries of doing nothing.   It is easy to produce big dollar numbers far enough into the future, but no credible modelling I’ve heard of suggests that climate change is a material long-term economic threat to existing advanced economies –  and certainly not to New Zealand.

Not adequately reforming the Reserve Bank

Lest Reserve Bank readers think I’ve lost interest in them, it is time for an update on the Reserve Bank of New Zealand (Monetary Policy) Amendment Bill, currently before Parliament.

The government introduced this not-very-good piece of legislation some months ago, carrying out their election pledge to reform the Bank, but in such a minimalistic way that it is likely to make next to no difference.  Being seen to have done something, anything, seemed to be more important than properly overhauling our monetary policy agency, to be fit for purpose in an open and transparent democracy.   As a well-informed commenter here put it a few months ago

It appears to me that the Government has largely made its mind up about what it wants; the illusion of change rather than anything fundamental.

It’s a pity because as you say, this is probably a once in a generation opportunity to throughly review the legislation, to learn from best practice abroad, and bring into being a stronger Reserve Bank better aligned with public benefit.

What was proposed seemed only marginally better than the status quo, and even then on a couple of dimensions only.  The reforms proposed simply didn’t address the evident weaknesses in the way the Bank has been run, including:

  • the dominance of a single unelected official,
  • the structural weaknesses that made it unlikely the Board would ever really hold the Governor to account (despite being designed entirely to do so), and
  • the lack of transparency of the institution.

Some of these issues can be seen as “cultural”, but legislation supports, and underpins, the sort of culture we can expect to see in powerful public institutions.

The bill was sent to the Finance and Expenditure Committee for consideration.  I made a submission, which I wrote about here.    Although I made some specific suggestions in other areas, including a better formulation of the proposed employment objective, and on how the Board works, my main concern was about the proposed new Monetary Policy Committee where I noted

The Monetary Policy Committee provisions of this bill are unambitious and disappointing, especially when set against the expressed aspiration of a once in a generation update to the legislation to reflect the way in which the world (including central banking) has changed since 1989.  Among the features of our age are a much degree of openness, a greater recognition of uncertainty and of the benefit of an open contest of ideas, and less willingness to build institutions based on a deference.  This bill reflects almost none of that.

In considering the bill, I would urge the Committee to look closely at the experiences of open central banks in the United Kingdom, the United States, and Sweden (in particular).  All are more open than anything envisaged in this legislation, and in the way the Minister has described his intentions for how the proposed New Zealand system should work.  Each of those central banks has had strong individuals willing and able to challenge consensus views, and to debate monetary policy issues thoughtfully and openly.  They do so in part by avoiding designing a system where the Governor (chief executive) has a too-dominant formal role.  The current bill does not really address that glaring weakness in the New Zealand system.

I concluded my post on the issue this way

This shouldn’t be a particularly partisan issue.  Everyone should want a better, more resilient, better-governed institution handling monetary policy, and for the regime itself to command confidence across the political spectrum.  I hope the select committee deliberations do finally prompt the Minister of Finance and the government to reconsider, to give up their small ambitions, and to embrace the idea of more far-reaching change and improvement in the way monetary policy is governed, contested, and accounted for.

I wasn’t optimistic.    The chair and deputy chair of the committee are both parliamentary under-secretaries; the chair the under-secretary to the Minister of Finance.  It is hardly arms-length parliamentary scrutiny.  And, from their public comments and a couple of reports I saw of committee sessions, the National Party members seemed more interested in playing partisan politics –  with silly arguments that adopting a (marginally) more internationally comparable model was putting at risk New Zealand macroeconomic stability.

And, having expected little, I was not thus unduly surprised when the Committee reported back a couple of weeks ago.   It was a pretty short report, falling along partisan lines (ACT even called the bill “an invitation to corruption”), and recommending hardly any changes to the bill.    The one (welcome) change of significance relates to a new document provided for under this legislation, the charter.

The charter would impose additional requirements on the MPC relating to transparency, accountability, and decision-making procedures. The requirements in the charter would go beyond what is provided for in legislation, allowing for flexibility as best practice evolves. The charter would be set by agreement between the Minister and the MPC, while the remit [effectively the policy target itself] would be set by the Minister following a specified process. Whenever the Minister issued a new remit, the Minister and the MPC would need to consider issuing a replacement charter. We agree that there is a legitimate public interest in the MPC’s decision-making procedures (for instance, vote attribution), and that changes to the charter could potentially be quite significant. To increase transparency, we recommend requiring public consultation on key issues relating to a replacement charter alongside the consultation on the remit required by clause 37.

That is a small step forward, at least in principle.    However, since the first of these charters is to be set by the Minister and the Governor (rather than the MPC), and the initial provisions are likely to be quite influential in how the MPC operates for some considerable time, there should be a commitment by the Minister to apply the same process of public consultation to the initial charter as will be required for subsequent replacements.   I can’t see any sign of such a commitment, or legislative requirement, at present.

One of the things the Reserve Bank management has consistently opposed is the idea that members of the Monetary Policy Committee should be able to openly articulate their views on issues relating to monetary policy (whether in speeches, interviews, or in comprehensive published minutes.  The Minister of Finance appears to have allowed himself to be persuaded by those arguments –  arguments which serve the institutional self-interest of public sector managers, rather than the public interest, which is advanced by robust debate, inside and outside the institution, on issues characterised by huge uncertainty, and where bureaucrats have no monopoly on wisdom.  (And, of course, the Governor himself shows no sign of any sort of personal self-restraint, apparently regarding it as appropriate for him to talk on all manner of things, whether or not the Bank has responsibility for them –  just no serious speeches on his core areas of responsibility.)   There are good, and highly-regarded, central banks abroad that do things quite differently, much more openly –  without the scary bogeyman the Reserve Bank invokes (“adds to uncertainty, lacks clarity, creates confusion”) coming to pass.

The United States is one example of such a system.  And as a specific example of how a more open system works, the Wall St Journal had a long interview with Patrick Harker, president of the Philadelphia Fed, one of the regional presidents who rotates through voting positions on the FOMC.  In fact, when I went looking for the transcript again I found they’d had three such interviews in just the last few months.

interviews

Of course, the US is a big country with much deeper journalistic resources, but the key point is that markets didn’t shake, confidence in the Fed wasn’t eroded, because citizens (and markets) were able to see and hear what these influential policymakers thought about important issues.   And it wasn’t shocking that not everyone agreed on everything. There is no reason to think it would be different in New Zealand, if our minister hadn’t allowed the bureaucrats to wrap him round their little finger.  It was, after all, supposed to be a government committed to openness and transparency.

As I’ve noted here previously, the very narrow scope of the proposed New Zealand Monetary Policy Committee, the legislated dominance of the Governor, the lack of resources for MPC members, and the tight constraints on their ability to do or say much is likely to make it hard to attract good people into those roles, and won’t encourage those who do get appointed to take the position very seriously.   Of course, that will probably suit the government and the Governor

And so it will be interesting to see what people they finally manage to attract, both in the first round, and a few years later when the novelty has worn off.  A smart (but deferential) semi-retired person would probably fit the bill quite well, but since the government and the Bank have been clear they don’t want people who might rock the boat, and they apparently aren’t keen on economists, and since even the externals together will be a perpetual minority, you wonder why someone good would be interested.   Pocket money probably shouldn’t be the motivation, at least if the government were serious about putting in place a strong, well-functioning, MPC.  Of course, as it is, there is no evidence of such intent.

The (minority) external MPC positions were advertised some time ago.   As I wrote about a few weeks ago, it appeared that the recruitment process had run into trouble.   I’d lodged OIA requests for a breakdown of applicants and of those taken to the next stage of the process, but when the Bank responded they indicated that no one had been taken to the next stage of the process at all.   I hadn’t even asked about a short-list, just about the group who hadn’t immediately been ruled out as totally unsuitable.

The other day I had a first stage substantive response, providing a breakdown of the people who had lodged applications for the external MPC positions.

There were 75 candidates in total, including candidates identified through a search process, for the roles of external members of the Monetary Policy Committee being established under the Reserve Bank of New Zealand (Monetary Policy) Amendment Bill.

Of these 75 candidates: 23 percent (17 candidates) are women, 92 percent (69 candidates) are currently resident in New Zealand, and 8 percent (6 candidates) are currently employed at a university.

It was a surprisingly large number of people (although I’d asked about applicants, and it isn’t clear from the response whether all the people “identified through a search process” were necessarily actually wanting to be considered).

But it also makes it all the more odd that the process is moving so slowly.  There was a Reserve Bank Board meeting last week (the Board is responsible for the selection of MPC members) and yet the email I had earlier this week says they still don’t have a short-list.

Perhaps in the end they will manage a barely-credible set of appointees, but even if they manage it the first time (perhaps the Minister twists a few arms, and hands the nominations to the Board to send back to him), it is going to be hard to sustain even that as time goes on, so inadequate is the model the Minister has chosen.

It isn’t democratic (even questionable Deputy Commissioners of Police are directly appointed by elected people), it isn’t broad-ranging (the MPC has a deliberately very narrow mandate), it isn’t conducive to a serious contest of ideas (being too dominated by a single unelected person), it isn’t very accountable (formally or otherwise) and it isn’t very open and transparent.  It simply isn’t very good legislation.  And that is a shame, a lost opportunity.

 

Aid and economic failure: PNG

Apparently desperate not to upset anyone, the Prime Minister announced on Sunday at the APEC summit that, along with Australia, the United States, and Japan, New Zealand would contribute to a grand electrification scheme in Papua New Guinea.   Presumably she thought not even the bullies in Beijing might object to that –  so deals and donations might be safe (the only “values” evident in her foreign policy) – and she could throw a (pretty modest) bone to the countries we used to be allied with.

But it disconcerts me on two fronts.  The first is the way that, looking across the Pacific, New Zealand and Australia (and perhaps Japan and even the US) seem to be wanting to play the game Beijing’s way.    Beijing flings cash around in a somewhat cavalier way, in some mix of decent and poor quality projects, some mix of the transparently obvious and the less than adequately transparent, and our response is to do much the same thing.    At home we spray money around through, for example, the Provincial Growth Fund, and in the Pacific through beefing up our aid programmes, including last week’s Pacific Enabling Fund.  Our aid programmes don’t necessarily have a bad reputation, but the more they are used for avowedly political ends, the worse the quality will be, and the more we treat relationships as something for sale.  It is a bit like financial incentives for kids to improve reading or pass exams: it might appear to work in the short-run, but it commoditises what needs to be internalised.

Perhaps that is what happens when you have no values?  When the Prime Minister won’t name evil when she sees it, and when she presides over the corruption of New Zealand’s own political processes.    Countries didn’t take a stand against the Soviet Union because, say, the United States paid them to, but because they recognised the character of the regime in Moscow, and the oppression visited on its own people and thus in other Communist-controlled countries.  As various observers have noted, Beijing has no friends and allies, just clients bought and paid for, or intimidated quasi-vassals.   That shouldn’t be the sort of approach New Zealand (or Australia) fosters in response.  There was, for example, the quote I ran here last week from Scott Morrison’s recent speech

Our foreign policy defines what we believe about the world and our place in it.

It must speak of our character, our values.  What we stand for. What we believe in and, if need be, what we’ll defend. This is what guides our national interest.

I fear foreign policy these days is too often being assessed through a narrow transactional lens.   Taking an overly transactional approach to foreign policy and how we define our national interests sells us short.

If we allow such an approach to compromise our beliefs, we let ourselves down, and we stop speaking with an Australian voice.

We are more than the sum of our deals. We are better than that.

It isn’t clear that the New Zealand government could honestly say that.

I imagine the Prime Minister is one of those who believes in the efficacy of foreign aid –  and not just transactionally.   Most politicians and bureaucrats tend to.  I’m much more sceptical (drawing on both observation, and –  for examples –  the writings of scholars like Peter Bauer), and Papua New Guinea is a case in point.

I care quite a bit about Papua New Guinea.   When I was growing up our church supported missionaries there –  one of whom died flying the inhospitable terrain –  and (apart from an overnight in Brisbane to get there) it was the very first overseas place I ever went to.   At the ripe old age of 23, on secondment from the Reserve Bank, I became by default –  a series of “accidents” –  a sort of de facto chief economist and adviser on monetary policy, financial markets, banks, and so on (learning as I went) to their central bank, the Bank of Papua New Guinea. It wasn’t even foreign aid, at least directly –  the Reserve Bank did the recruitment, but I was paid (rather well) by the Papua New Guinea taxpayer.   It was a great experience, personally and professionally, and although I haven’t been back now in almost 30 years, there is a sense in which I left some of my heart in PNG.  One of the memorable moments in my life was the dawn service on ANZAC Day –  a working day in PNG –  at the Bomana war cemetery, not far from where the Japanese advance had been halted in World War Two.

When I went to PNG, it was just coming up to the 10th anniversary of independence from Australia –  I recall then then Minister of Finance telling us we couldn’t tighten monetary policy because it would put a damper on the celebratory mood.    When people worried (there) about foreign influence, it was still about people like us (a former Governor-General had a newspaper column which he not infrequently used to lambast young Australians and New Zealanders who he regarded as still having too much influence in the public sector generally).  But at that point, if PNG wasn’t prospering, it had had a reasonably impressive run of macroeconomic stability: under the tagline of the “hard kina” policy, PNG had had lower average inflation rates than New Zealand or (I think) Australia.

I might not have been paid by foreign aid, and yet the whole of the Papua New Guinea state (established bureaucracies and institutions, very nice new Parliament House etc) wouldn’t have functioned without such aid.  Most of the aid in those days was direct budgetary aid from Australia.  I can’t remember the numbers now, but it was a large share of total government spending.  Direct budgetary aid had, in principle, quite a lot going for it.  Locals got to make the choices about how the money was spent, in line with (their judgement of) national priorities –  as distinct from vanity projects which might have looked good on the glossy brochures of aid agencies.  On the other hand, direct budgetary aid was only ever likely to be acceptable in the longer-term with strong accountability and good governance locally.  And both were fading in PNG.   And all foreign aid, whatever its other pros and cons, tends to contribute to an appreciated real exchange rate –  higher domestic cost structures than otherwise – that make it harder for industries based locally to be internationally competitive and for the economy to prosper longer-term based on its own strengths.   Australia still gives over A$500 million a year in aid to Papua New Guinea.   Here is how Australia talks of the opportunities, challenges, and aspirations.

Despite huge resource potential and close proximity to Asian markets, PNG faces economic challenges and fiscal pressures. Poor law and order, lack of infrastructure, complex governance arrangements, weak public service, inequality between men and women, and rapidly growing population are challenges to its future prosperity. PNG also remains vulnerable to climate change and natural disasters, including earthquakes, volcanoes and tsunamis.

The population is overwhelmingly  poor and face hardship and 80  per cent of Papua New Guinean’s reside in traditional rural communities. The development challenges for children and youth in PNG are stark: an estimated 40 per cent of children are stunted, one in five children are not enrolled in school and nearly half the population is under the age of 20. Family and sexual violence is endemic, with some of the highest rates of violence against women and children in the world. It is also estimated around 15 per cent of the population have some form of disability.

Despite these development challenges, PNG is seeking to achieve upper middle-income country status by 2050 (PNG Vision 2050 [PDF 2.78mb]). Sector priorities, as set out in the PNG Government’s 2017 Alotau Accord II, include education, health, law and justice, infrastructure and sustainable economic growth. PNG’s economic growth agenda focuses upon investments in high impact infrastructure, job skills development and partnering with the private sector.

And yet what is striking is that despite those enormous natural resource opportunities, Papua New Guinea has done so appallingly badly.  It is almost as if Papua New Guinea was one of those countries where natural resources  –  without the institutions and attitudes to change the narratives –  have been a curse more than a blessing.  There was the Bougainville mine, there was Ok Tedi, there is Lihir, there is gas (and an LNG development) and so on.  And yet here, using IMF data, is how PNG’s real per capita GDP has done since 1980 (not long after independence, and when the PPP series starts).

PNG

I’m not showing comparisons with stellar performers like Taiwan, Singapore, or Korea, or even with China.  Instead the comparisons are with three modest developing/emerging market performers – Fiji, Indonesia, and the Philippines –  and with Australia and New Zealand.   Over almost 40 years –  and all that aid – Papua New Guinea’s real per capita GDP has dropped further behind that of each of these countries.   If you can’t grow faster than New Zealand has managed since 1980, starting so far behind, there is something very wrong.    GDP per capita was about 12 per cent of New Zealand’s in 1980, and it is about 9 per cent now.

And yet New Zealand, and Australia, just see fit to throw more money at it.    The feel-good aspect is no doubt strong –   photos of the Prime Minister opening new facilities at the Gordons Market –  and the crass geopolitical positioning too  (whether it was funding to host the APEC meetings themselves, or a few tens of millions for electricity –  which probably ticks both boxes).   But where is the wise domestic prioritisation –  the hard choices made by locals about their own resources –  or the good governance and accountability?

It isn’t as if these are just questions outsiders ask.  One could look, for example, to the website of Sir Mekere Morauta.  These days he is an Opposition MP, but over the years since Independence he has held all manner of top jobs –  first local Secretary of Finance, head of the largest bank, central bank Governor, and Prime Minister.  He can be a prickly character –  when I was there he was head of the largest bank, and consistently refused to come to meetings the Governor held with heads of the banks – but has been a major force for good in PNG over the decades.

From a statement he issued last week

Prime Minister Peter O’Neill must come clean on total APEC spending. It is unacceptable for the Prime Minister to keep hiding the vast amount spent on the meeting,” Sir Mekere Morauta, Member for Moresby North-West, said today.

“Public money is not his to do with as he pleases, wasting it on luxury cars and private parties for his cronies.

According to the Public Finances (Management) Act, Section 47K, the APEC Authority must be audited by the Auditor-General, Sir Mekere said. But there is no record of any audit.

The report of the Auditor-General on the APEC Authority must be tabled in Parliament. This has not happened. Mr O’Neill has been promising for ages to table the APEC budget and expenditure report in Parliament but has never done so.

“These latest irregularities are in addition to likely breaches of the Constitution, the PFMA and other laws I have previously outlined in relation to the APEC vehicle procurement,” Sir Mekere said. “The smell of corruption grows by the day, and only full inquiries by the Ombudsman Commission and the Fraud Squad can ascertain the truth.

And

“Mr O’Neill has been the most extravagant and self-indulgent Prime Minister in our history,” Sir Mekere said. “He and his cronies are living the high life at the expense of ordinary Papua New Guineans who are suffocating, gasping for clean air. Forty per cent of our people earn less than $1.90 a day. The extravaganza of APEC is a grotesque slap in their face.

“The Prime Minister admitted in a recent Post-Courier article that his Government’s corruption, waste and mismanagement mean there is not enough money to pay for essential services such as health, education, transport, infrastructure and law and order.

“Preventable diseases such as polio, leprosy, TB and malaria are surging, and people are dying – 21 children are now known to have contracted polio. Many schools are closing across the nation. Public servants are not being paid properly and other entitlements such as superannuation payments are being withheld. Essential infrastructure outside Port Moresby is crumbling into the dust, and government systems and processes are failing by the day.

“Transparency and accountability demand that the Prime Minister’s secrets be brought out into the open. Over to you, Mr O’Neill.

Not a word, of course, from our Prime Minister.  Just throw some more money in the pot, playing Beijing’s game.

Or for an independent take on a range of such issues, you could try this.

There are no easy fixes to Papua New Guinea’s failure –  other than the wishful thinking of assuming into existence things (“institutions”) that can only be created and sustained by painstaking and persevering effort.  But whatever the path to a better PNG, it is hardly likely to be helped by yet more of a cavalier bidding war among potential official donors.  Is there even any analysis as to how the grand electrification scheme –  good for headlines for a day or two –  is going to avoid falling foul of the same problems, the same poor governance –  that has become endemic?   Or does that simply not matter in the particular game the various governments –  Chinese, or our own –  are pursuing?

Papua New Guineans deserve a lot better –  mostly from their own leaders, but also from our own.

Exchange rate: no rebalancing in view

It doesn’t seem long –  and, in fact, it isn’t long –  since people were squabbling over a bit of a fall in the exchange rate.  The National Party was blaming the Labour-led government, while the government seemed to be taking some credit for the fall and talking about a rebalancing of the economy that they claimed was underway.  To support their claims, they not infrequently invoked the support of the rather left-wing Governor of the Reserve Bank.

And now they’ve all gone quiet again as the exchange rate has rebounded again.  On the Reserve Bank’s TWI measure, the rebound has been about 6 per cent.   Even by the standards of this decade –  when the exchange rate has been reasonably stable –  it isn’t that big a move.

TWI 18

The level now is about the same as the level at the time the choice of the new goverment was decided in October 2018.  It poses new fresh inflationary threat (which seemed to be the National Party concern when it was falling) and no greater buffering, or signal of rebalancing, as the government and the Governor had liked to claim.

What of longer-term comparisons?  Here I like to use the OECD’s real relative unit labour cost measure –  partly because there is a long run of data.     Here is how the longer-term picture looks (the dot representing today’s estimated level).

TWI 18 2

On average, the real exchange rate has been high since around 2003 (with a sharp but shortlived dip in the 2008/09 recession).   Even the lows the Prime Minister and Governor liked to talk up had still been a bit above the 15-year average (the grey line); current levels even more so.

But I’ve also shown (yellow line) the average for the entire period since 1980.  The current level of the real exchange rate is about 18 per cent above that long-term average.

That would make sense, and be welcome, if – for example – the last 35+ years had been ones in which New Zealand had been chalking up a stellar productivity growth performance, if New Zealand firms had been successfully many more foreign markets lifting the foreign trade share of the New Zealand economy.  But, of course, that hasn’t been the story at all.   There were short periods when it sometimes looked as if these sorts of developments were actually happening, but they’ve never lasted, and none of those periods have been in the last 15 years (when the real exchange rate has consistently averaged high).  Instead, our productivity levels have drifted further behind those in other advanced economies –  including, notably, over the last five years when there has been little productivity growth at all –  and foreign trade shares of our economy have stagnated and then shrunk.  Indicators of the relative size of the tradables sector of our economy have also not been encouraging.

These aren’t developments that should leave anyone very comfortable.  In the shorter-term, there isn’t much obvious impetus for strong domestic growth –  commodity prices are easing, confidence is weak, population growth is ebbing –  and the risks to the global outlook seem to be mounting, and perhaps even crystallising.  Then again, if things go badly wrong in the short-term, the exchange rate can –  and probably will –  move quite quickly.

The bigger concern is that there is no sign of an economy rebalancing towards some better – higher productivity, more outward-oriented, tomorrow.  And the persistently high exchange rate, over decades, seems to have been reflecting deeply misguided policies that have helped produce the last few decades of disappointing economic performance, all combined with a depressing indifference from the leading figures in all our main political parties.  There is little chance of breaking out of the slow spiral of continued relative decline without a quite materially different approach.  Part of making that work would be likely to involve the real exchange rate revisiting –  settling –  the sorts of lows we experienced at times in the first 15 or so years after liberalisation.    Even back then, when senior figures talked of rebalancing, it was mostly wishful thinking –  since the lows were purely the results of short-term cyclical forces.  These days, such talk bears even less relation to reality –  and to the scale of the challege before us.  But perhaps it generates a favourable news story for a day or two.