Looming danger on contrast and competition of economic models

The successful East Asian model of ‘state-driven capitalism’ is being threatened by TPPA proposals.

The Trans-Pacific Partnership (TPP) is a secretive, multi-national trade agreement that threatens to extend restrictive intellectual property (IP) laws across the globe and rewrite international rules on its enforcement.

MANY articles and books have been published on the contrast and competition between the present Western and the Asian-style economic models.

Western countries are said to have the free-market model based on competition among private firms, with the government taking a hands-off approach.

East Asian countries are branded as practising “state capitalism” in which the government plays a major role in helping the local private sector and the state also fully or partially owns many enterprises.

The Western countries are increasingly attacking the Asian model, claiming that state-owned companies or state-aided commercial firms have an unfair advantage vis-à-vis foreign firms competing with them.

In our region, countries with a substantial role of the state include China, Malaysia, Vietnam and Singapore. Of course, in Japan and South Korea, their domestic firms grew to become world-beaters with the systematic backing of their governments.

For these countries, the so-called state capitalism (or in the case of socialist countries, market-oriented socialism) have worked well through industrial development and relatively high and sustained economic growth.

Some Western countries have been trying to curb or even eventually eliminate the Asian model of state-owned or state-aided capitalism.

This is largely hypocritical because the America, European and Japanese agricultural sectors are highly subsidised and protected; many of their farms could not survive without massive state aid and high import tariffs.

Many of their banks and industrial firms are also subsidised in various ways, including through multi-billion dollar bailouts in the wake of the recent financial crises.

This has not stopped these countries from attacking the Asian model. The latest attempt to curb this model is through the negotiations in the Trans Pacific Partnership Agreement (TPPA), a trade and investment treaty involving the United States, Canada, Malaysia, Singapore, Vietnam, Brunei, Peru, Chile, Australia and New Zealand.

The TPPA contains an important section on State-Owned Enterprises (SOEs), championed by the United States and Australia.

The TPPA drafts are secret, so the text of the SOE section is not known. However, it can be anticipated that the section will contain disciplines to curb and shape the behaviour of three types of SOEs.

The recently concluded US bilateral FTAs contain a competition chapter that deals with two types of SOEs. For example, the US-Peru FTA has disciplines on designated monopolies and state enterprises, and it is likely that the United States will propose something similar in the TPPA.

That FTA says that government monopolies shall act solely in accordance with commercial considerations, including with regard to price, quality, availability, transportation, when buying or selling the monopoly goods or services.

They shall provide non-discriminatory treatment to investments, goods and services of other TPPA members. And they shall not use their monopoly position to engage in anti-competitive practices through its dealings with its parents, subsidiaries or other enterprises with common ownership in a non-monopolised market that adversely affect the investments of other countries.

State enterprises shall similarly provide non-discriminatory treatment in the sale of goods or services to investments of other countries.

More importantly, the United States and Australia are proposing a third type of SOE to be subject to disciplines. According to press reports, Australia has also introduced the principle of “competitive neutrality” to discipline the SOEs.

How this principle will apply can be anticipated from the Australian government’s competitive neutrality guidelines.

This is based on the concept of a “government-owned business”. The state-owned business enterprise which competes with private companies may obtain advantages, impeding the ability of the private sector to compete on equal terms.

According to the Australian guidelines, these advantages include exemptions from taxes; cheaper debt financing (because of the low-risk classification or government guarantees); absence of need to make a commercial rate of return; and exemption from regulatory constraints or costs.

To offset these advantages, the Australian guidelines cover how government businesses should pay taxes in full; pay back to the central government the difference in their loan costs vis-à-vis private sector loan costs; pay licence fees equivalent to the central government; and ensure they obtain a commercial rate of return.

It is likely therefore that the draft of the TPPA will have disciplines along the lines above on a third category of SOEs, government-linked business entities involved in commercial activities that compete with the private sector.

The proposed disciplines could be along the line that “advantages” enjoyed by government-linked businesses such as those mentioned in the Australian guidelines be disallowed.

The implications for Malaysia, Vietnam and Singapore would be serious because their national economies are characterised by important roles of state-owned enterprises or government-linked companies.

The countries would have to move away from their successful development model and economic structure.

Moreover, SOEs have many functions including providing social services to the public, ensuring that poor and vulnerable groups are given special consideration.

This often means that SOEs cannot operate on solely commercial grounds; and that several of them depend on government subsidies and assistance, and there are also cross-subsidies in that the profitable aspect of an SOE may finance non-profitable (but socially important) activities. There is a danger that the TPPA section on SOEs will prevent or hinder the socially useful functions of SOEs.

The TPPA negotiations are still going on, and a text on the SOEs section is not yet final, so there is scope for different views to be expressed.

GLOBAL TRENDS By MARTIN KHOR

Related posts:

The US Pacific free trade deal that's anything but free? 
US launches financial attacks against its allies! 

New economic thinking

LAST weekend, over 400 top economists, thought leaders, three Nobel Laureates and participants gathered in Hong Kong for the fourth Annual Institute for New Economic Thinking (INET) conference, co-hosted by the Fung Global Institute, entitled “Changing of the Guard?”



So what was new?

In the opening session, Dr Victor Fung, founding chairman of Fung Global Institute, quoted Henry Kissinger as saying, “Americans think that for every problem, there is an ideal solution. The Chinese, and Indians and other Asians think there may be multiple solutions that open up multiple options.”

That quote summed up the difference between mainstream economic theory being taught in most universities and the need to build up a new curriculum that teaches the student to realise that there is no flawless equilibrium in an imperfect world and that there is no “first-best solution”.

Instead, what is important is to teach the aspiring economist to ask the right questions, and to question what it is that we are missing in our analysis. It is important to remember that theory is not reality, it is only a conceptualisation of reality.

Nobel Laureate Friedrich Hayek, one of the leading thinkers on open societies and free markets, explained why the practice of mainstream economics is flawed. In 1977, he said, “A whole generation of economists have been teaching that government has the power in the short run by increasing the quantity of money rapidly to relieve all kinds of economic evils, especially to reduce unemployment.

Unfortunately this is true so far as the short run is concerned. The fact is that such expansions of the quantity of money, which seems to have a short-run beneficial effect, become in the long run the cause of a much greater unemployment. But what politician can possibly care about long-run effects if in the short run he buys support?”

Sounds familiar on present day quantitative easing?

In his 1974 Nobel Laureate Lecture entitled “The Pretense of Knowledge”, Hayek showed healthy scepticism: “This failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences an attempt which in our field may lead to outright error.”

Hayek understood what is today recognised as quantitative model myopia. What cannot be easily measured quantitatively can be ignored. Then it is a small step to assume that what can be ignored does not exist. But it is precisely what cannot be measured and cannot be seen the “Black Swan” effect that can kill you.

In other words, economists must deal with the real world of asymmetry information, that there exists Knightian uncertainty, named after University of Chicago economist Frank Knight, what we call today unknown unknowns.

Unknown unknowns arise not just from accidents of Mother Nature, but from the unpredictability of human behaviour, such as market disorder, which is clearly complex and ever-changing.

If unknown unknowns are common in real life, then a lot of the economic models that appear to give us precise answers may be wrong. In other words, for every question, there is no unique answer and the solutions are “indeterminate”.

George Soros, who helped found INET, explained his theory of reflexivity based on the complex interaction between what he called the cognitive function (human conception of reality) and the manipulative function (the attempt by man to change reality).

His theory of reflexivity in markets differs from mainstream general equilibrium theory in one fundamental aspect. General equilibrium models assume that market systems are self-equilibrating, going back to stable state. Borrowing from engineering systems theory, we now know that this is a situation of negative feedback a system that gets disturbed fluctuates smaller and smaller till it returns to stable state.

The trouble with nature and markets is that positive feedback can also happen. The fluctuations get larger and larger until the system breaks down. Nineteenth century Scottish scientist James Maxwell discovered that steam engines can explode if there is no governor (or automatic valve) to control the steam building up.

At about the same time, English bankers learnt that banks can go into panic regularly without the creation of a central bank to regulate the system. Markets therefore need a third party the state to be the system “governor”. Free market believers think that the market will take care of itself. John Maynard Keynes was the first to recognise that when free markets get into a liquidity trap, the state must step in to stimulate expenditure and get the economy out of its collective depression.

In the 21st century, we have evolved beyond Keynes and free market ideology. Belief in unfettered markets has created a world awash with liquidity and leverage, but the capacity of advanced country governments to intervene Keynesian style has been constrained by their huge debt burden.

Larry Summers has pointed out that Keynes invented not a General Theory, but a Special Theory for governments to intervene to get out of the liquidity trap. The fact that we are still struggling with the liquidity trap means that economists are searching for new solutions, such as borrowing from psychology to explain economic behaviour.

The INET conference introduced the thinking of French literary philosopher, Rene Girard, and his theory of memetic desire, to explain how social behaviour more often than not get into unsustainable positive feedback situations, either excessive optimism or pessimism. How do you get out of such situations? Girard introduced the concept of sacrifice. We will have to wait for the next conference to explore this new angle.

Intuitively, all life is a contradiction. The sum of all private greed is not a public good. It does not add up. Someone has to sacrifice, either the public or a leader.

Schumpeter's great insight about capitalism is that there is creative destruction. He only restated the old Asian philosophy that change is both creative and destructive. But out of change comes new life.

In sum, contradictions are creative. What is new is often old, but what is old can be new.

 
Tan Sri Andrew Sheng is president of Fung Global Institute.

China sends peace message

The Boao Forum reiterates the need for regional stability for Asia to continue to enjoy economic prospects.



THE Boao Forum for Asia, which concluded in the small town of Boao on southern China’s Hainan island, has reached an important consensus from Asia.

Major Asian leaders want every country in the continent to ensure regional stability so that Asia will continue to enjoy its fast-paced economic prosperity.

Speaking at the opening of the forum, which was running for its 12th year, Chinese President Xi Jinping was the first to make clear his stand – China will not wage a war unless its enemy severely threatened its sovereignty.

He said that China would continue to resolve any differences and disputes it has with its Asian counterparts amicably while expanding cooperation in the continent.

“On the basis of maintaining the sovereignty and safety of our territories, we will work hard to maintain good relations with our neighbours as well as overall peace and stability in our region,” he said.

Xi said China is a peace-loving nation whose people have deep and painful memories of the war and revolt era.

He said China and its Asian neighbours relied on each other as China could not develop in isolation from the rest of Asia and the world, while the world could not enjoy prosperity and stability without China.

“Over the past decade, trade among Asian nations jumped from US$800bil (RM2.4 trillion) to US$3 trillion (RM9 trillion). Trade between Asian nations and other countries increased from US$1.5 trillion (RM4.6 trillion) to US$4.8 trillion (RM14.6 trillion).

“That means trade in Asia is open. Regional and global cooperation goes hand in hand and does not go against each other. Everyone benefits from such cooperation.”

Myanmarese President U Thein Sein said that his government would place great emphasis on collaboration, transparency, accountability and inclusiveness in its political, economic and social reform processes.

He said in spite of the increasing global challenges, uncertainties and high risks, all Asian nations should be able to remain successful in the continent by upholding regional political, social and economic stability continuously.

Kazakhstan President Nursultan Nazarbayev said in order to boost the efficiency of cooperation, all Asian nations need to work together, coordinate with each other more and have a common action agenda.

He said they should explore their decision-making mechanism, accommodate the position of all countries and be more open to the outside world because no country could stay immune from the global impact.

Sultan of Brunei Sultan Hassanal Bolkiah said Asean has a role to play in promoting peace and collaboration.

Brunei’s Asean Chairmanship theme of “Our People, Our Future Together” this year reflects the vision of the Asean founders who believed open conflict would endanger the development prospect of its members.

Thus, they would be committed to refrain from the use of force.

“As the world becomes more and more connected, Asia’s success will contribute to a greater good in the global arena. We all share a collective responsibility in shaping a successful future.

“We are about to face competing political and economic interests and this will pose a threat to our resolve for partnership and harmony,” he said.

Indian Corporate Affairs Minister Sachin Pilot said Asia was one of the fastest growing continents in recent years but rapid growth would not occur if each country does its own thing in isolation.

“Good economics and robust growth are only attainable when there is understanding with each other.

“I am delighted to hear what the Chinese President was saying about how we need to have more peace and prosperity for us to grow.

“The global economic recovery can take 10 or 20 years, depending on how focused we are in Asia,” he said.

Australian Prime Minister Julia Gillard pointed out that what North Korea and South Korea were doing on the Korean Peninsula by provoking each other was the last thing Asia wanted to see.

“There, any aggression is a threat to the interest of every country in the region.

“For this reason, I do welcome the growing cooperation of all regional governments to prevent conflict on the Korean peninsula and to counter North Korean aggression.

“That cooperation is also a sign of what would be needed in future as we face other security challenges.

“Asia must be a region of sustainable security in which habits of cooperation are the norm,” she said.

Besides the latest tension on the Korean peninsula, Asia faces other security threats, especially the Kashmir conflict, Gaza Strip tension and counter-claims of islands and sea borders by China, Japan, Korea, Taiwan, the Philippines and Indo-China.

For the sake of regional stability and integration, to start off with, the forum’s vice-chairman Zeng Peiyan proposed for more infrastructures to be built to connect Asian nations together.

“There are two main things we need to work on.

“Firstly, we should establish exchanges and cooperation between each Asian economy on planning and building infrastructures such as electricity, railway, road and telecommunication.

“Secondly, we need to find a solution to the huge financing gaps in infrastructure development in Asia.

“Between 2010 and 2020, Asia will need some US$8 trillion (RM24 trillion) or more to fund infrastructure projects to sustain the current levels of economic growth.

“It will be good that each nation sets up an investment fund which specialises in providing financing services for the construction of such infrastructures,” said Zeng.

Made in China
By CHOW HOW BAN

Related posts:

North Korea likely launch nuclear missiles: China warns troublemakers at her doorsteps!

Boao Forum for Asia opens in China 

China, Brunei to foster ties