The West envious of global economy led by China

As central banks in the euro zone and Britain edge closer this week to deciding that their flagging economies need yet more monetary stimulus, they can be forgiven for casting an envious eye towards China.

The same goes for the United States. Because of deadlock in budget talks, mandatory federal spending cuts are now being phased. They will brake a recovery that, as Friday's jobs report is likely to show, is already frustratingly weak.

China, the biggest contributor to global growth in recent years, has plenty of headaches of its own, of course.

Over reliance on investment in heavy industry, a financial system rigged in favour of the state, and a failure to integrate some 140 million rural migrant workers into urban life top the list of structural problems.

Louis Kuijs, an economist with Royal Bank of Scotland in Hong Kong, adds rising inflation, a renewed climb in house prices and a rapid expansion in 'shadow banking' to the government's to-do list for 2013.

But Kuijs and other economists expect outgoing Premier Wen Jiabao to reaffirm a growth target of 7.5 percent for this year when he delivers his last 'state of the nation' report to the annual meeting of parliament that opens on Tuesday.

China entered 2013 with solid growth momentum thanks to measured policy stimulus in the second half of last year. That impetus is now fading somewhat after a strong fourth quarter, as figures for January and February will probably suggest.

So, just as the West is looking to China to boost global demand, China is counting on a pick-up in the West as 2013 unfolds to help exports and revive corporate investment, Kuijs said.

"Looking at trade and industrial production indicators, we are all expecting a strengthening global picture, coming especially from the United States and Europe, but it's still a forecast: it's not showing up yet in the hard data," he said.

Euro Zone Disappoints

Indeed, the European Commission is projecting that the euro zone economy will shrink in 2013 for the second straight year. And February's survey of purchasing managers was downright weak.

"This increases the chances of a rate cut, but it's still not our baseline assumption," said Petr Zemcik, director of European economics at Moody's Analytics in London. "The ECB has done all it can at this stage."

His comments were in line with a Reuters poll of economists, which saw a 90 percent chance that the ECB, the European Central Bank, would keep its main short-term interest rate unchanged at 0.75 percent when it meets on Thursday.

However, a growing minority expects the ECB will cut rates at some point. Doing so now, right after Italy's election produced a big protest vote against austerity, would invite the suspicion that the bank was acting out of political panic.

But President Mario Draghi is sure to be quizzed about further easing and possible activation of the ECB's bond-buying program for euro zone strugglers, especially if the bank lowers its 2013 growth and inflation forecasts again.

Jeffrey Anderson with the Institute for International Economics in Washington, a financial-industry lobby group, said a rate cut would send a useful signal of the importance of growth to voters weary of austerity.

The Italian economy has shrunk for six quarters in a row. Euro zone unemployment hit a record 11.9 percent in January.

At the same time, euro zone finance ministers, who meet on Monday, should excuse Italy from further fiscal tightening as its budget is close to structural balance, Anderson argued.

"Ways must still be found to prod Italy to move on overdue labor market liberalization. But action to boost near-term growth would help Europe to sustain the popular backing necessary to advance the reforms needed for the longer term," he said in a note.

Bank of England Closer to Easing

In Britain, the government seems determined to stick to budget austerity despite a sharp drop in manufacturing in February and a stinging defeat for Prime Minister David Cameron's Conservative party in a parliamentary by-election.

This keeps the onus on the Bank of England, three of whose nine policymakers have already voted to expand the central bank's stock of asset purchases, now set at 375 billion pounds.

That could turn into a majority as soon as Thursday, when the BOE meets to set policy, if a survey two days earlier of the all-important services sector is weak, said Simon Hayes, an economist at Barclays Capital in London.

Further easing by the Federal Reserve is not on the cards. But job figures on Friday are likely to underscore that the U.S. central bank is in no hurry to withdraw its stimulus - the message Chairman Ben Bernanke relayed to Congress last week.

According to a Reuters poll, firms probably added 160,000 non-farm jobs last month, in line with January's 157,000 gain, while the unemployment rate held steady at 7.9 percent.

That is well above the Fed's goal of 6.5 percent. Moreover, federal spending cuts, if not reversed, will stiffen fiscal headwinds and could lop 0.5 percent off growth over the rest of this year, many economists estimate.

Nevertheless, Jim O'Sullivan, chief U.S. economist with High Frequency Economics in Valhalla, New York, is confident that it is just a matter of time before the Fed's ultra-easy policy starts to bear more fruit.

Job growth was already brisk enough to reduce the unemployment rate given a secular decline in the participation rate due to an ageing population, he argued.

"Based on what we're seeing in the labor market, in the battle between monetary stimulus and fiscal drag, the Fed is winning," O'Sullivan said. - Reuters

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Hit by US automatic spending cuts, tax hikes, budget cuts

Hit by US automatic spending cuts, tax hikes, budget cuts

The government spending cuts in the United States as the President and Congress fail to reach a deal will also affect poor developing countries as the aid budget, especially for food and medicine, is reduced.


ON MARCH 1, the United States government had to introduce spending cuts of US$85bil (RM263bil) for this year, as President Barack Obama and the Congress failed to reach an agreement on how to reduce the budget deficit.

The so-called “sequestration” marked a new failure in relations between the President and the Republicans in Congress.

The term “dysfunctional” is now commonly used to describe the US government system, as the deadlock between the President and Congress, and the animosity between the Democrat and Republican parties have blocked laws, policies and agreements.

The most visible of this dysfunctionality is in the government’s inability to come to grips with economic policy, especially by how much and how to reduce the budget deficit.

Republican budget deficit hawks are obsessed with slashing government spending to reduce the budget deficit. Prominent Keynesian-influenced economists like Paul Krugman and Joseph Stiglitz argue that cutting government spending in the midst of a weak economy is unnecessary and will tip the country into a new recession.

Obama himself is in favour of deficit cutting but wants it done in a balanced way – by increasing government revenue through increased taxes on the rich (or closing loopholes that allow them to avoid taxes) and by lesser spending cuts that do not affect the poor.

The “sequestration” issue began in 2011 when a deadlock developed between Congress and Obama over the budget. Obama then proposed that a list of specific automatic spending cuts would go into effect on March 1 if no new deal was reached.

The proposed cuts were deliberately chosen to be so bad that Congress would not allow them to take effect. Or so Obama thought. He would use this as leverage to get the balance of tax increases and smaller spending cuts that he had in mind.

But, in the end, the Republicans called his bluff, and now the spending cuts have come into effect – US$1.2 trillion (RM3.71 trillion) over 10 years, starting with US$85bil (RM263bil) this fiscal year.

The effects will be felt not only by Americans but also the developing countries. They include the negative fallout on global growth and expected cuts in aid going to poor countries.

This comes at a bad time as the rich economies are already on a downward path.

Last week, the Organisation for Economic Cooperation and Development, the group of 34 rich countries, said that the gross domestic product of its members fell by an annual rate of 0.6% in the last quarter of 2012.

The European Commission, meanwhile, predicted that the Eurozone economies would contract by 0.3% this year, which could prove to be optimistic given the recent political uncertainties in Italy.

The spending cuts in the US would add to the contractionary trend in the rich countries.

The continuously weakening of the Western economies will have adverse effects on exports, tourism, workers’ remittances and incomes in developing countries.

There is another and more direct dimension to the “sequestration” on the developing world. The government’s spending cuts will affect the budget for aid given to poor countries and to development programmes such as provision of medicines and food, according to a report by the Inter Press Service (IPS).

The new secretary of state, John Kerry, revealed that the State Department and its aid agency Usaid, would have to cut US$2.6bil (RM8bil) from their 2013 budget.

The cuts would include US$200mil (RM619mil) from humanitarian assistance and US$400mil (RM1.23bil) from global health programmes.

For example, the US would reduce its contribution to the Global Fund to Fight AIDS, Tuberculosis and Malaria by US$300mil (RM928mil) this year, meaning there will be less medicine donated to poor countries.

Kerry has written to Congress stating that this reduction would reduce the United States’ ability to provide food assistance to two million people and Usaid would have to cease, reduce, or not initiate assistance to millions of disaster affected people, and would “gravely impede” efforts at reducing AIDS-related and child deaths.

The IPS report also quoted Jeremy Kadden of InterAction (an alliance of NGOs aiding developing countries) as saying: “These cuts will cost lives. We’ve made very significant progress over the past 10 years, with real people improving their lives, and this would set that process back enormously, devastating actual people on the ground.”

He estimated that the budget cuts would lead to some three million children losing access to the basic education they currently receive; two million people would suffer reductions in or stop receiving food aid, while 600,000 children would lose nutrition assistance.

Unlike in the United Kingdom, where the Cameron government decided not to cut its aid budget despite huge slashing of the overall government budget, there is no exemption for overseas spending in the US sequestration exercise.

The poor in America will also be affected. About 600,000 low-income women and children will stop receiving food aid.

Also affected in the US$26bil (RM80mil) cut in domestic programmes are health, education, drug enforcement, national parks and Hurricane Sandy relief.

Low-income families will also be affected by a cut in public housing subsidies, which could hurt about 125,000 poor families, according to The Guardian.

The National Institutes of Health, which will suffer a 5% budget cut, is cancelling hundreds of research grants.

Another US$16bil (RM49.5bil) in mandatory spending will be cut, including in medicare, agriculture programmes and unemployment benefits.

The main cuts will however come from the military budget, down by US$43bil (RM133bil) in 2013, on top of the US$500bil (RM1.55 trillion) budget cut over 10 years agreed to in 2011.

Global Trends By MARTIN KHOR

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The former Sulu Sultanate, a foreign problem in history that became Sabah's

AP In this March 1, 2013 photo, Sulu Sultan Jamalul Kiram III, centre, whose brother Rajamuda Kiram, along with more than 200 of their "Royal Army" followers has occupied a Malaysian village since February 9, joins a protest outside the Blue Mosque at the suburban Taguig city, east of Manila.

IT is too easy to dismiss the Lahad Datu standoff as typical of Sabah’s labyrinthine intrigue.

That would trivialise the rich history and cultural diversity of the state, besides mistaking a largely Philippine problem as being Sabah’s.

True, anywhere else in Malaysia with a significant Tausug population deriving from the former Sulu Sultanate’s diaspora, like the Klang Valley, would be unlikely to experience the drama of the past couple of weeks.

But none of the events in Kampung Tanduo, near Lahad Datu in eastern Sabah, was predictable or inevitable. The former Sultanate occupied only a small portion of Philippine territory and an even smaller portion of Sabah’s.

And yet, the peculiar combination of north-eastern Borneo’s demography, geography, history and political heritage provides a probable backdrop to just such a standoff. How did it all begin this time?

On Feb 9, nearly 100 Philippine nationals, several of them armed, arrived by boat to join a smaller group that had arrived earlier. They took over the village, claiming the area belonged to the Sultanate that they said they represented.

They also demanded recognition as the Royal Sulu Sultanate Army, as well as a meeting with an unnamed Malaysian leader. Malaysian authorities rejected both demands.

They further said they had come in support of Sabah’s Tausug population, alleging reports that following a Royal Commission of Inquiry into Sabah’s illegal immigrant communities, Tausugs would be deported.

Many locals would be surprised by the claim. Sabahan-Malaysian Tausugs, who prefer to be called Suluks, have long settled comfortably among Sabah’s three dozen or so ethnic groups.

Filipino Tausugs who arrived later as migrant workers, clinging more closely to their “Tausug” roots, may face a different reality. But ethnic persecution hardly if ever surfaces in Sabah because of, not despite, its rich cultural diversity.

The annual lease payment of RM5,300 agreed in 1903, increased from RM5,000 agreed in 1878, was also said to be insufficient. Others said the territory should be returned to the late Sultan’s descendants anyway.

Although British and Sulu versions of the 1878 agreement differed slightly, the Sulu version was clear enough: “… hereby lease of our own free will and satisfaction … all the territories and lands … forever and until the end of time, all rights and powers which we possess over all territories and lands tributary to us …”

Both the Philippines and Malaysia would rather do without such disturbances that serve only as irritants to bilateral relations. As modern nation states, both countries have evolved well past an extinct sultanate.

But there are also differences.

For Malaysia, the sovereignty and territorial claims of the former Sultan’s descendants are simply unacceptable. No such claims are negotiable.

The claimants argue that the sultanate’s territory had been leased only to Britain, with no agreement on incorporation into Malaysia. But their case is inconsistent.

Sabah, the former North Borneo, became a British protectorate from the late 19th century until it became a crown colony. It gained a brief period of independence before becoming part of the Malaysian Federation in 1963.

By then, the Cobbold Commission had determined that a majority of people in Sabah and Sarawak favoured the formation of Malaysia. For a century the former Sultan’s descendants did not retake territory, but instead agreed to continue accepting the lease payment under the previous arrangements.

The Philippine government, which subsumed the sultanate’s authority in the four provinces of Mindanao, also took over the role of pressing the claim to Sabah. Despite being a republic that had abandoned all royal authority, Manila continued with the claim before, during and after Malaysia’s formation.

Although the Philippine claim has since become dormant if not extinct, Manila found it difficult to renounce it. It has become an object of nationalists eager to strike populist postures in domestic Philippine politics.

The issue has a different spin among the Moro or Philippine Muslim community in Mindanao, of which Tausugs are a part. Despite Malaysia’s key role in peace talks between the two main Moro separatist groups and the Philippine government, both groups are not necessarily in Malaysia’s corner.

The MILF (Moro Islamist Liberation Front) disagreed with the takeover of Kampung Tanduo, saying negotiations should have been the way. This wrongly presumed that the issue was negotiable for Malaysia.

The MNLF (Moro National Liberation Front) is an even more enthusiastic supporter of the armed intruders. But it should be more mindful of the implications involved.

Since the former sultanate covered the Philippine provinces of Basilan, Palawan, Sulu and Tawi-Tawi in the ARMM (Autonomous Region of Muslim Mindanao), and only an eastern part of Sabah, followers of the former Sultan should first settle differences of territorial authority with the MNLF and the MILF before venturing into Sabah. They should also settle differences with Manila over such issues as hegemony, usurpation and compensation.

Both the Philippines and Malaysia, as sovereign states that had subsumed and developed beyond the Sulu Sultanate, have successfully concluded various agreements bilaterally and multilaterally. Those agreements confirm mutual acceptance of their respective statehood in their present configuration.

Besides, the former Sultan and his descendants had consented to the terms of the agreement in return for the lease payment. So long as payment is still made, they are obliged to continue abiding by the agreement.

That would make any unilateral attempt to retake territory by force of arms illegal and unjustified. Whether Malaysia will seek to prosecute after a resolution of the standoff is another matter.

Behind The Headlines by BUNN NAGARA

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