Asian Function

Last month, this writer posted an admittedly arcane essay on the death in Belgium of the Ethiopian prime minister, Meles Zenawi, noting the resultant political vacuum in a fragile, unpredictable region of the world, and the threat of instability to the period of remarkable economic growth of the Ethiopian economy. Here's a quick update: last week, the country's ruling party, the EPRDF, appointed Hailemariam Desalegn, as the new prime minister. The power transition was unprecedentedly peaceful, and has raised hope for some easing of the political repression that characterized Zenawi's rule. (Here's a quick comment - don't expect much soon in this regard.) America must be relieved, as Desalegn has stated a clear intention to continue close cooperation with Washington on security matters, particularly in neighboring Somalia and the new state of South Sudan. The important question now is whether Desalegn can consolidate power over numerous political and ethnic factions. Stay tuned.

The Ethiopian essay ​also noted that the country remains one of the world's poorest - it ranks 212 out of 226 countries on a per capita basis. Today, this writer thought it might be refreshing to take a look at an economy at the other end of the wealth and function spectrum - Singapore -  the island-state at the southern tip of the Malaysian peninsula. A quick primer - at 3.5 times the size of Washington D.C., and just over 5 million people, Singapore is the 40th largest economy in the world, but its 5th richest. Since independence from Malaysia in 1965,  it has been growing rapidly for decades, alongside other Asian "tigers" such as Japan, Taiwan and South Korea. Given its dearth of natural resources, it established a model of open international trade in services and in goods, the latter conducted through its vast natural seaport (the world's busiest). Capitalism is the byword for conduct. But, at the same time, the government - in an almost 18th century European mercantilist fashion - has intervened actively to, in essence, encourage foreign direct investment (particularly in electronics manufacturing, petroleum refining, and, more recently, pharmaceutical manufacturing). The near-obsessive thrust of this economic policy has been over many years to export. As a result,  and in marked contrast to many other developed economies, its international trade and current accounts (and public budget) are all typically strongly positive. The World Bank ranks the country first (out of 183) among the easiest places to conduct business.

There is a downside. This so-called "Singapore Model" of development has been accompanied by what some Westerners might describe as intrusive government presence in virtually every other facet of Singapore society. Thus, for example, education, housing, public conduct, land use, and the media are never out of the sight of bureaucrats. Law and order, as defined by the government, underlies all; penalties for illegal activity - even personal misconduct - are harsh. There is also a clear economic downside - the excessive focus on order has, not surprisingly, begun to stifle productivity. Singapore's Ministry of Manpower is well aware of this trend, and has accordingly established the National Productivity and Continuing Education Council, with the overall goal of generating "smarter" work. Results-driven Singaporeans, it seems, may lack creativity, flexibility, and a comfort level - so key in modern knowledge economies - with the often disorderly process of innovation.

I will write again about Singapore, as I receive "on-the-street" reports from a family member currently residing there.​

Asian Dysfunction

America is hardly the only advanced economy characterized by, on the one hand, wily central bankers intent on doing all they can to spur growth, and, on the other, elected officials, dedicated to one dogma or another, and thus incapable of striking the political compromise necessary to restore fiscal balance, thereby encouraging private consumption and investment.

This week, Japan became the latest country to play one of its monetary policy cards. ​Masaaki Shirakawa, Governor of the Bank of Japan, announced his Bank's own (aggressive) expansion of quantitative easing (QE), the unconventional monetary policy tool of choice now that short-term interest rates are near zero in Japan, and elsewhere.  He pledged to buy 10 trillion yen (about $128 billion) of financial assets (government bonds and other securities) with the objective - as with other QE programs - of further lowering long-term interest rates, flooding the domestic economy with money, and thus stimulating that missing ingredient, demand.

The Japanese economy ( a quick primer - the second largest in the world until overtaken by China in 2010, and almost equal in size to the German and French economies taken together) has for two decades been stuck in a cycle of stagnation and deflation - the so-called "lost decades". Years of remarkable post-war growth came to an abrupt end with the bursting of a property asset bubble in the early 1990's (does this sound at all familiar?). Recovery has been elusive. Two mainstream ​political parties have presided - the LDP (Liberal Democratic Party) which lost power in 2009 after decades of near-uninterrupted rule, and the currently-governing DPJ (Democratic Party of Japan). To describe either of these parties as sclerotic is an understatement - one particularly cryptic Japanese protestor was heard as decrying them - quite to the point -  as "well beyond their sell-by dates". Both are grey and cynical, having governed over a period of seemingly endless fiscal policy stimuli, with little result other than to bring the country's outstanding public debt to 230% of GDP.

So, Japan, like America, faces political gridlock, economic stagnation, unprecedented levels of public debt (although Japanese debt, unlike America's, is financed largely through domestic savers​), an aging population, and export concerns as the yen remains strong and China, Europe and America slow. Central bankers are the only game in town, it seems, though their firepower is now limited. (One hope for Japan is an upcoming general election, when a new political party, the Japan Restoration Party, led by the 43-year-old mayor of Osaka, should gain influence if not governing power nationally.)

Global recession looms again, unless America, still the world's dominant economy, and Japan ​decide to use fiscal policy constructively.

Another Monetary Bailout

Yesterday, while US Congressional leaders continued their stand-off, thus further delaying policy changes urgently needed to restore fiscal balance, confidence, and growth in the American economy, the Federal Reserve once again stepped in to do what it can from an increasingly limited set of monetary tools. 

Chairman Bernanke announced QE3, a third round of quantitative easing whereby the Fed purchases certain financial assets, in this case mortgage-backed securities, with an objective of lowering mortgage interest rates​ and thus encouraging early signs of strengthening in the housing market. Such purchases of these, and perhaps other securities like government bonds, will continue indefinitely until there is clear evidence of a sustained downward trend in unemployment. It was also announced that short-term rates will be kept at current, historically-low levels until at least the middle of 2015, thus extending this time horizon from the end of 2014. 

Stock markets, perhaps surprised by the degree and scope of the measures, rallied strongly, and may well show further strength when they open Friday morning. This is a similar pattern to that in Europe last week when the European Central Bank announced its own intention to buy the sovereign bonds ​of countries such as Spain, Italy and Greece ( see my posting of September 8).

In making the announcement yesterday, Chairman Bernanke emphasized that  these monetary measures alone, without ​accompanying fiscal policy changes, cannot be expected to do all that is required. Interest rates have been very low for several years now, yet economic growth has been anemic and unemployment has remained persistently high. As this writer has stressed in several earlier postings, the real policy challenge now is fiscal - to begin to reverse the spiral which has brought total US government debt outstanding to over 100% of GDP. A credible, long-term plan in this regard would be nothing short of an elixir for US and, indeed, world, economic growth.

Action by elected officials - not central bankers - is the missing ingredient.

Arab Spring, Arab Fall

The US State Department confirmed this morning that the US Ambassador to Libya, ​Christopher Stevens, was killed along with three of his staff in an attack yesterday on the American Consulate in Benghazi. It's a cruel irony that Ambassador Stevens had strongly supported the Libyan rebels as they fought to overthrow Colonel Muammar Qaddafi in the Arab Spring uprisings. At the same time, demonstrators in Egypt stormed the American Embassy in Cairo, again. Both these attacks stemmed from Egyptian media reports about a YouTube trailer for the gratuitous, American-made video, "Innocence of Muslims", which insults the Prophet Muhammad.

Whatever one's particular belief, it is, at the very least, discouraging that violence fueled by religious differences ​once again dominates headlines from the Middle East. This is a region where the Arab Spring turmoil, which swept away long-time dictators in Tunisia, Libya, Egypt and Yemen, has nonetheless left these economies with still daunting economic challenges. Unemployment among young adults, for example, is estimated at over 25%, the highest of any rate anywhere in the world. The new government in Egypt - headed by its first-ever democratically elected President, Mohamed Morsi, the leader of the Muslim Brotherhood's Freedom and Justice Party  -  is financially stressed to the point that it has been forced to enter into negotiations with the International Monetary Fund (IMF) for a bailout loan, reportedly in the range of $5 billion.

Here's the point. The $5 billion, if granted, on however generous terms, is a fraction of the current financial needs of the Egyptian government.​ But an IMF Agreement is also designed to boost the confidence of other government and private investors, leading, presumably,  to a resumption of capital inflows. Yesterday's religious violence is anything but a catalyst for such essential inflows.

Monetary Policy Is Not Impotent, Yet

As a quick follow-up to my posting of September 5, in which I argued that the important economic policy challenges​ in the world are now fiscal, not monetary, it is nonetheless interesting to note the "Mario Draghi" effect from last Thursday.

On that day, as was widely expected, the European Central Bank announced​ another sovereign bond-buying program (technically called "outright monetary transactions")  designed to lower governments' cost of financing the debt and current public expenditures in countries like Spain, Greece and Italy. The effect was immediate: Spanish long bond yields, for example, which had begun to decline early last week in anticipation, fell further on Thursday and Friday, to as low as 5.6% (compared with a record-high 7.6% in July). Similar drops were evident for other bond maturities, and in other southern European countries.

These are welcome moves, but hardly sufficient by themselves to "save the Euro", Mr. Draghi's expressed goal. Stopping, then reversing, the public debt/deficit spirals in Europe (and, of course, elsewhere)​ is the fundamental fix required. This is fiscal policy, over which only elected governments, not central banks, have direct influence. Lowering the financing cost of debt provides time - a breather - but as Paul Ryan noted on Thursday, "there is no substitute for good fiscal policy - we cannot expect central banks to go on bailing out their respective economies".

Watch for my upcoming postings on the progress (or lack thereof) of fiscal re-balancing. ​