Subscribe to Best Practice Best Practice, published by The Lion Rock Institute, is a quarterly journal that sheds light on the best practices in international public policy. Published in Hong Kong, Best Practice is well positioned as a gateway to developments and recommendations in law and policy, making it the essential guide for leading developments in public policy. Subscribers receive benefits and special rates to LRI events. One year Subscription: 4 issues for $600 per year at $150 per issue Two year Subscription: 8 issues for $540 per year at $135 per issue (10% off) Three year Subscription: 12 issues for $480 per year at $120 per issue (20% off) Bulk Subscription: HK $400 per year for 10 subscriptions or above (33% off) International Retail: US $25 per issue Delivery Address
Billing Address (complete if billing address differs from delivery)
Title: ................................................................................
Title: .......................................................................................
First Name: .....................................................................
First Name: ............................................................................
Last Name: .....................................................................
Last Name: ............................................................................
Company Name: ............................................................
Company Name: ...................................................................
Department: ...................................................................
Department: ..........................................................................
Address: .........................................................................
Address: ................................................................................
.........................................................................................
...............................................................................................
Postcode (leave blank if none): .............................................
Postcode (leave blank if none): ....................................................
Country: ..........................................................................
Country: .................................................................................
E-mail: ............................................................................
E-mail: ...................................................................................
Telephone: ......................................................................
Telephone: .............................................................................
Mobile: ............................................................................
Mobile: ...................................................................................
There is more than one delivery address. Please contact our office to give us the details.
PAYMENT DETAILS One Year for $600 HKD Two Years with 10% off for $1,080 HKD Three Years with 20% off for $1,440 HKD Please Check One: Cheque Enclosed to: The Lion Rock Institute (HK) Ltd. Direct Deposit: HSBC A/C 400-639415-001 (please send the deposit receipt with your order form)
Send me an invoice for the above checked plan Pay via Paypal at www.lionrockinstitute.org
For advertising and general inquiries, please contact: The Lion Rock Institute Suite 1207, Kai Tak Commercial Building 317-319 Des Voeux Road Central, Hong Kong Tel: (852) 8101 2112 Fax: (852) 3015 2186 Email: best.practice@lionrockinstitute.org Please call, fax or email your order to our office. Subscribe now to receive benefits and special rates to LRI events
Inside BEST PRACTICE Vol. 1 N0. 2 Summer 2009
20 The Language of Leadership
Ron Manners honours Sir Arvi Parbo for his service and comments on the way forward, not only for Australia, but for all others on the way.
5 6 7
Policy Recommended for the Market
From The Editor From The Founders Contributors
Cover Story
8
Rebuilding Market Institutions After the Financial Crisis
Bill Stacey navigates financial risk and regulatory changes and throws us a ladder to climb out of the slump.
Policy Recommended For The Crisis
14 Origins of the Financial Market Crisis of 2008
Anna J. Schwartz suggests how to avoid a replay of the factors that produced the credit market debacle.
17 Monetarism Defiant
Guy Sorman on legendary economist Anna Schwartz – the feds have misjudged the financial crisis.
Editor: Nicole Idanna Alpert Executive Director: Peter Wong Design & Production: Firstline Limited Cover Artist: Bay Leung Best Practice is published quarterly by The Lion Rock Institute to encourage discussion of policy and current issues. Topics and authors are selected to represent a multitude of different views, and those opinions expressed within Best Practice do not necessarily reflect the views of The Lion Rock Institute. The Lion Rock Institute welcomes reproduction of written material from Best Practice, but editor’s permission must first be sought.
26 The Privatization of Public Services
John L. Chapman on why privatization is indeed the only hope for renewal of once proud cities.
Leader’s Bookshelf
45 For Sleuthing Amateurs of Economics
The Economic Naturalist reviewed by Michael Mo.
46 Privatization Bears Fruit in the Big Apple
Privatization in the City reviewed by Lawrence W. Reed.
Odds and Ends
48 Master of Slaves
Jackie Chan has declined the value of freedom to show his obedience.
34 Hong Kong and Capital 50 Patriotic Panic Controls Jim Walker questions the controls in the betting arena.
Global Perspective Policy Analysis
37 Combating the Spread
of Fake Medicines Through Free Markets and Self-Interest
A low flying plane spotted in Manhattan causes panic.
52 Let’s Not Lose Our Minds
The mass hysteria surrounding the spread of swine flu does little to protect us.
Julian Harris and Alec van Gelder trail counterfeit medicines and suggest systems to help China shed its “Factory Asia” label.
Around The World
42 Restoring the Freedom to Trade
Alec van Gelder on the Freedom to Trade Campaign’s importance.
Editorial Office: Room 1207 Kai Tak Commercial Building 317-319 Des Voeux Road Central, Hong Kong Editorial Tel: +852 3586 8102 Subscription Service: +852 3586 8101 Fax: +852 3015 2186 Advertising inquires: Best.Practice@LionRockInstitute.org Production by: Firstline Limited www.FirstlineDesign.net Best Practice Advisory Board James A. Dorn, Alec Van Gelder, Philip Stevens Tom Palmer, Reuven Brenner, Gary Shiu Richard Wong, Francis Lui, Shih Wing Ching Donald J. Boudreaux
Article Submissions: All articles submitted to Best Practice must be exclusive unless permission has been sought. Articles should range between 600 and 5,000 words but may differ if editor’s approval has been sought. Please send all articles with a cover letter giving a brief summary of the articles along with the author’s fax number, day and evening telephone number, mailing address, email address and short bio. Please send articles by email to Nicole.Alpert@LionRockInstitute.org Certain images within Best Practice are published under Creative Commons licenses. We endeavor to comply fully with the terms of such licenses to ensure attribution of the author of the relevant image. For more information or details about the authors of particular images, please view our website, www.lionrockinstitute.org, or inquire.
Summer 2009
3
From the Editor Fancy More Regulation?
T
he movement to increase regulation in order to rebuild the economy has a large following. At the same time, however, it is well known that some of the very regulations enacted years ago with the support of this movement backfired, playing a large role in the formation of the crisis. Knowing which regulations and policies to alter or roll-back is proving to be elusive, and committing to one school of thought amidst this confusion is worrisome. Many new policies have been considered for regulatory change under the auspices of now knowing better. But do policymakers really understand the outcomes of past policy and regulatory change – those that had admirable goals but turned out to be some of the main drivers of the crisis? The CRA regulation, while only one chapter of the tragedy, is notable because its impact was large enough to set the scene by lowering lending standards across the board. Its policy effect was detrimental: banks moved away from a focus on hard credit standards and other institutions proceeded similarly. This whole array of government policies to encourage home ownership vastly distorted the financial system, adding fuel to the fire. An illogical assumption, but still widely held, is that government agencies are able to “correct market failure” despite their bad track records. The thought of a bewildered-empowered tinkering again with financial products and policy (at some points, without having even understood what is up for legislation) is the stuff of nightmares. And yet, it’s our reality today, as improvident home-ownership policies were years ago. We should be wary of new regulations and rules when the political environment lacks necessary knowledge or endeavors to promote political goals. We should be wary when what’s actually happening in markets and businesses is being overlooked. After all, the readiness to pass new laws undermines the rule of law in the first place, which is why this summer’s issue of Best Practice: “Less is More” is dedicated to monetary policy and financial regulations.
Our cover story, “Rebuilding Market Institutions After the Financial Crisis,” by Bill Stacey, explores financial risk and regulatory changes while addressing numerous areas to suggest what shape reforms should take. Anna Schwartz helps us move forward by understanding the past as she explains the factors of the crisis and the expansive monetary policy under the last U.S. administration. Notably, this section, Policy Recommended for the Crisis, indicates that allowing regulations, and the risks involved with them, to play a larger role than the current market devices themselves is too big a risk to take. John Chapman opens our Policy Recommended for the Market section with “The Privatization of Public Services,” in which he details two cities’ government activity compared to that ascribed to markets. Chapman debates that the outcome of cities like Detroit is far from inevitable; the real reason for their failure is a greater size of government coupled with a lack of competition for public services and high taxes. Jim Walker uncovers a betting arrangement of suspect form in “Hong Kong and Capitol Controls” where people in Hong Kong are virtually banned from betting and watching horse races overseas. Best Practice’s Global Perspective Policy Analysis returns with Julian Morris’ and Alec van Gelder’s “Combating the Spread of Fake Medicines.” Both fascinating and helpful, they suggest policies that provide easy and counterfeit-proof systems to make all pharmaceuticals safer. Leader’s Bookshelf reviews enjoyable and influential books and for further enjoyment, Odds and Ends closes this issue with a very entertaining round-up of international happenings. We’ll meet again next season, but until then, let me know what you are thinking – you can reach us at best.practice@lionrockinstitute.org.
Nicole Idanna Alpert
Summer 2009
5
From the Founders On Where Hong Kong is Headed
T
he second issue of Best Practice comes at you at a pivotal time in Hong Kong’s history. While the fallout of the financial crisis is still having far reaching impacts on our city, we seem to be seeing through this crisis and already looking beyond. While the financial realm is of course important, it oft seems that the greatest threats to our success come from within. Hong Kong is consistently ranked the freest economy in the world, but those living in Hong Kong are only too aware of when the government intervenes. Sometimes the results are comic – like the recent decision and hopeful reversal not to license shoe shiners. The question has to be asked: Whose idea was it to require shoe shiners to get a license anyways? Are there concerns about unlicensed shoe shiners over-buffing patrons’ shoes to an unsightly sheen? Or if we didn’t restrict the numbers, shoe shiners would take over the city with their pernicious…stools and buffing rags? No doubt there are mid-level bureaucrats earning a decent living off of licensing the absurd. In this case, it is certain they live better than those whose humble livelihood they would seek to extinguish. To those dutifully keeping Hong Kong’s leather bright, this is no joke however, but rather a theft of their honest work and dignity that goes with it. More far reaching in its impact is the proposal for a minimum wage. The economic arguments against it are well known and feared by workers on the edge of employment and employers on the edge of survival. Less understood is the moral damage of it. While the impact of government intervention seems obvious to us here, you have to experience it in social democracies to really see why Hong Kong ranks so well. Restrictive labour laws, of which minimum wage is a starting point for a tsunami of red tape, keep those with the most to gain from honest labour out of the workforce. School dropouts,
6
BEST PRACTICE
recovering teenage addicts and the unskilled elderly are kept from gainful employment. For the young, never working leads to a life of indolence and crime. On the rare occasion they find work, they find it unfamiliar and irksome. In Europe and North America, those who would clean the streets at a lower than minimum wage instead make those streets dirty with crime and despair. For the elderly and unskilled, being replaced by a less expensive camera from their night watchman job robs them of their ability to contribute to people’s safety and well-being – and their dignity arising from a job done with honour. The elderly of the West are often living quiet lives of desperation, rather than working with pride in later years like those in Hong Kong. The elderly, yet vibrant men, working the alley behind Shanghai Tang are the frontline potential victims of labour restriction that would rob them of their pride. Will we replace it with welfare and the message that their usefulness to the world is done? By introducing minimum wage, will we do the same to young men who are just beginning life, without the full benefit of education? Imagine the impact on these valuable young people who, while not meshing with our rigid education system, can still make an honest contribution to the world. Policy has real impact on real lives. This is the motivation behind the founding of Best Practice. Hopefully we can use it to find a better way, a Hong Kong way, and not repeat the mistakes of the socalled “advanced” economies. Hong Kong’s way has been a better way for many years. We should not be shy to use the world’s best practice – but also create it, so the world may follow in our footsteps.
Simon Lee Chao-fu Andrew Shuen Pak-man Andrew Work
CONTRIBUTORS
Bill Stacey
Anna J. Schwartz
Guy Sorman
Ron Manners
Jim Walker
John L. Chapman
The Chairman of Hong Hong’s leading free market think tank, The Lion Rock Institute. He is also on the Board of Advisors of the Mannkal Economic Education Foundation. Professionally, Bill has been an executive with leading financial institutions in Asia and globally. He is currently a partner in boutique equity house, Aviate Global.
One of the world’s greatest monetary scholars. With her expertise on banking and money analysis, she became the president of the Western Economic Association. She also published a book with Milton Friedman, A Monetary History of the United States, which was very influential. At the age of 93, she is still with the National Bureau of Economic Research and is one of the most prominent economists there.
French professor, columnist and author. He has written twenty books that preach the ideals of creativity and modern capitalism. His ideas about renewable energy and environmentalism in his book Progress and its Enemies are particularly controversial. He is currently working on a book on Economy as a science.
A fourth generation prospector with over 40 years of experience in the mining industry in WA. He is Chairman of the Mannwest Group of private companies, and is also the Managing Director of Mannkal Economic Education Foundation, an educational foundation. He is currently working on his next book entitled Heroic Misadventures.
The founder and managing director of Asianomics Limited, an economic research and consultancy company. Prior to establishing Asianomics in December 2007, he was the chief economist at CLSA Asia-Pacific Markets. He was voted best regional economist by the Asiamoney Stockbrokers Poll between 1994 and 2004 as well as frequent number one rankings in the private Greenwich surveys of fund managers in Asia, Europe and America.
An Adjunct Scholar in Economics, working at AEI under the auspices of the National Research Initiative where he researches and writes on the history and impact of private equity investment on the U.S. economy.
Alec van Gelder
Julian Harris
Michael Mo
Lawrence Reed
Eugenio Suarez
Anuj Jhunjhunwala
Project Director of the Trade and Development Programme at International Policy Network, a think tank based in London. His work on trade, health, technology and development issues has been published in many news outlets. Alec holds a Master’s degree in International Economics and Development from UCL in Belgium and speaks English, Spanish, French and Dutch with fluency.
A Research Fellow at International Policy Network, a think tank based in London. He works on international health policy and has recently authored articles on counterfeit and substandard drugs published in many outlets. Last month IPN launched his paper on the topic: “Keeping it Real: Combating the spread of fake drugs in poor countries.”
In his final year of studies at City University of Hong Kong. His experience campaigning for Barack Obama in America inspired him to attempt to apply similar campaign strategies in Hong Kong. Michael is a native of Hong Kong and is fluent in Putonghua. He is also one of the editors of idea4HK think tank and is currently working at The Lion Rock Institute for the summer.
Served as Mackinac Center for Public Policy’s President, a Midlandbased research and educational institute, for its first two decades starting from 1987. At age 55, he became president emeritus of the Center. On September 1, 2008, Reed assumed the presidency of the Foundation for Economic Education, headquartered in Irvington, New York.
Currently an EconomicsPhilosophy major at Columbia College and is also the Treasurer for the Student Governing Board. Eugenio co-founded the University Chapter of the Cuban American Foundation. He interned with Congresswoman Ileana Ros-Lehtinen and was an editor for the Columbia Political Review. He is a native of Miami and fluent in Spanish. Eugenio is currently a Research Assistant in the Barnard Economics Department and working at The Lion Rock Institute for the summer.
A junior at Columbia University in New York City, majoring in Economics-Political Science. He interned in the Louisiana State Governor’s Office where he researched the effects of federal legislation on elderly welfare recipients living on Medicare. He is vice-president of the Columbia University South Asian club and active in the Rotoract service club. Anuj also has a good command of Hindi and is a native of Baton Rouge. He is currently working at The Lion Rock Institute for the summer.
Summer 2009
7
POLICY RECOMMENDED FOR THE CRISIS
Brian J. Matis
Wrong directions in regulatory reform are like removing the rungs from a ladder.
Rebuilding Market Institutions After the Financial Crisis Bill Stacey navigates financial risk and regulatory changes and assembles a ladder to climb out of the slump
W
hat will financial institutions look like in the future? What will be the impact of the financial crisis on the shape of the financial industry? Government policy, market process and entrepreneurial innovation are all likely to have an impact on these questions. Policy makers have in practice driven consolidation of the industry
8
BEST PRACTICE
in the last 12 months, creating banks from the largest securities companies and consumer finance companies. Yet policy makers continue to discuss the separation of commercial banking and investment banking in some form, worry about “too big to fail problems� and hypothesize regulatory changes that would drive industry structure. Markets are planned to be restructured from their original
form to exchange traded variants. Offshore and off balance sheet structures that have a long track record are now being wound up. Little of the policy debate seems well informed by the actual realities of markets and businesses in the industry. Here we look at what market signals might be saying about the future shape of the financial sector and compare that to proposals for change in the industry.
POLICY RECOMMENDED FOR THE CRISIS
Paul Raven
A slippery slope – navigating financial risk
hedging or with sufficient capital to absorb losses. Some hedge funds performed well Several problems emerged within through the crisis. Those that did the financial sector, all with different not, and many that failed, did not outcomes in performance. Foremost cause the systemic risks that had amongst these is arguably failure in been feared in earlier incidents of risk management. Some institutions financial upheaval. within the financial sector started How do we explain these to pull back from the mortgage wide differences in performance? securities market (Credit Suisse and Shouldn’t regulatory reformers be Goldman Sachs) as others (UBS looking at the different performance and Merrill Lynch) increased their of institutions to identify the exposures. There are also banks that direction of industry changes? If a largely avoided the use of off balance regulatory framework had led to an sheet conduits. Some banks managed extremely divergent performance, is to minimize illiquid securities on it realistic to expect new rules made their balance sheet, whilst others had in the same fashion to deliver more huge inventories held for sale. uniformly stable performance? When liquidity became an issue Many of these differences in for the financial sector, there were performance have origins in industry commercial banks that had strong structure. That structure has liquidity from retail deposits, but been strongly influenced by both also some that were underfunded. present and historic regulation. The There were investment banks with separation of commercial banking much stronger committed liquidity and securities companies in the support. Some banks, whilst they United States was a legacy of post had exposures to problem areas, depression legislation. Opportunities managed those risks better, with for finance and insurance companies to operate with more flexibility in some parts of their business are the result of blurring differences between financial products that invalidate old industry boundaries. Still within every segment of the financial industry, there are banks, securities companies and insurers that managed risks better. It follows that financial institution strategy, culture and management was also important. Responding to market, regulatory and institutional change, Pouring oil on the slope, many proposals for change in companies make choices. the financial system are flawed.
Some of these are wrong. Anyone working in a major financial institution is aware of the frailties of decision making in those firms. As scale increases, information flows are weaker. As products become more complex, top management knowledge and expertise is typically weaker. As profits in some areas become larger, influence within institutions shifts. Rewarding risk managers for saying no to profit making, but excessively risky opportunities is difficult. Design of incentives in large companies is an inexact science, where teams and individuals make a contribution. Within each of the specific markets where there were problems (mortgages, securitization, credit default swaps, SIVs and conduits, commercial real estate, leveraged finance) there were micro structures, regulatory issues and practices that need to be addressed. However, are there systemic issues that can be identified behind risk management failures in the recent crisis and these challenges? In economics, the theory of the firm, pioneered by Ronald Coase, tells us that firms exist to reduce transaction costs from external markets. Given that large parts of financial markets are amongst the most “efficient” markets that we know, it seems anomalous that in the financial sector there are so many institutions of such size and complexity which pursue greater scale despite the obvious costs. Given the pervasiveness of large firms with huge internal transactions and capital allocations to some extent outside the market, should we be surprised to see apparent “market failures” – in reality failures of managerial outcomes rather than market allocation of resources. Summer 2009
9
POLICY RECOMMENDED FOR THE CRISIS
Separation of Commercial and Investment Banking Separation of commercial and investment banking is one of the most common proposals from economists. Part of the idea is that regulators are very focused on depositor protection and that if depositors can be isolated from trading risks, securities activities can be left less regulated. “Too big to fail” problems are reduced and the costs of depositor insurance is lowered. A more radical version of the same proposal would require 100% reserve backed depository institutions.
Compensation Limits Compensation limits are proposed to reduce incentives to take excessive risk and align shareholders with employee interests. Yet legislative proposals entirely miss the point that the “principal-agent” problem at the core of bonuses paid for poor performance arises because of inadequate information, difficulty framing suitable contracts and/ or the high costs of moving to structures with superior incentives. Compensation limits will likely only “work” to reduce incomes in circumstances where they are not needed – where performance attribution is easy and akin to a sales
Pouring oil on a slope – proposals for regulatory change
10
BEST PRACTICE
Source: World Economic Forum
It follows that many of the proposals for change to the financial system are flawed. Rather than help improve management of risk, they pour oil on the slope.
There are two problems with these proposals. First, it is practically at odds with recent experience that saw “universal” banks as the survivors and largely eliminated big securities companies. Second, and more importantly, the distinction that might once have been meaningful is now moot. Deposit products can take many forms and depositors have shown a desire for yield that will always see them allocate funds away from a narrow depository institution. It is not at all clear why depositors should be protected from securities trading risks, but not credit risks in traditional lending. Indeed in practice, interest rate mismatchrisks have often been as big an issue for bank profitability as credit. In modern financial markets, trading is also an important part of almost all commercial banks. Foreign exchange and interest rate risk management products, as well as simple debt securities like commercial paper, are an integral part of operations. It is not possible to draw a line between commercial and investment banking activities.
My hypothesis would be that many of the failures by firms that contributed to the crisis are the result of the massive structure of legislation, regulation, taxation, supervision, consumer protection and competing non market provision of financial services that make markets less effective than they could be in the financial sector. Asking what regulations we need to reduce the risk of financial crisis is the wrong question. So is asking how we should redesign institutions to reduce risk. The right issue is how to eliminate transaction costs in the financial sector that impair the market allocation of resources which make more pervasive “principalagent” problems and increase moral hazard.
The moves we make on government policy, market process and entrepreneurial innovation shape the future.
commission (e.g., equities broking or advisory businesses). This would drive those activities to boutiques. Limiting compensation will face the same problem as managers of financial institutions where the time frame of profitability is long, capital allocation difficult to determine and individual contributions hard to assess. Promoting rather than limiting markets is a better solution to that problem. Eliminating the “Shadow Financial System” Eliminating the “shadow financial system” of structures that have been largely “off balance sheet” and domiciled in offshore jurisdictions is proposed to increase regulatory scrutiny and transparency. However, the jurisdictional competition provided by the “shadow” system has been crucial to reducing transaction costs – it has allowed
POLICY RECOMMENDED FOR THE CRISIS
efficient dispersal of risks. These very factors led to the growth of the “shadow” system. The answer to the shadow financial system problem is not to eliminate it, but to reduce transaction costs in all jurisdictions.
Higher Capital Requirements Higher capital requirements are proposed to build confidence, provide a buffer for losses to prevent failure and for the largest institutions to limit counterparty risks that could have systemic consequences. However, it can be argued that the very detailed Basle 2 capital requirements were contributors to the crisis as banks shifted systematically to lower capital allocation products and moved away from products where capital requirements were increasing. Capital requirements are a large barrier to entry that makes it harder for new competitors to enter the market. Regulatory requirements have been manifestly too low in some areas, whilst giving counterparties false confidence about capital in others. In the hedge fund industry, prime brokers are effectively the regulators of leverage for their clients. Although they have made mistakes, they have done a
much better job than government regulators of banks or ratings agencies. This might provide a hint of a better model for governing financial leverage and capital than the current approach. Stress Tests Stress tests were designed to reassure counterparties and customers that institutions were financially sound. In practice they undermined confidence in institutions, created a long period of uncertainty and applied arbitrary rules that likely required some banks to raise capital that they did not need. This undermined private attempts to provide capital to the financial system. Financial institutions should continually test their financial stability under low probability, high cost scenarios and make plans to deal with those contingencies. Many did that reasonably effectively. “Sharing” Risks in Securitized Loans “Sharing” risks in securitized loans is a more recent proposal to align the interests of originators of loans Paul Falardeau
Change of Regulatory Responsibilities Change of regulatory responsibilities seems inevitable. It also seems largely beside the point. Unified regulation worked poorly in the U.K. during this crisis (although arguably it was pre-empted by panicked political responses). Fragmented regulation worked poorly in the U.S. In fact, far more systemic risks emerged from heavily regulated companies (AIG) than lightly regulated companies (hedge funds). The very process of changing regulatory institutions adds to costs and makes it more difficult for market participants to adjust to change. Notionally “functional” regulation (e.g., treating providers of services with a similar economic effect equally) seems to make more sense than the institutional regulation of the U.S. However, identifying tomorrows’ systemic risks is more likely to come from competitive processes and competing jurisdictions than a single regulator with that focus. The focus amongst politicians on bringing hedge funds under the umbrella of existing regulators is baffling. After the Long-Term Capital Management (LTCM) crisis, counterparties revisited their relationships with hedge funds, improved their control over collateral and improved management of leverage. These processes proved robust during the crisis, albeit causing problems for some funds. What government
regulators can add to this process is not apparent.
The result of ignoring market signals when shaping regulatory change is increased risk and reduced innovation.
Summer 2009
11
POLICY RECOMMENDED FOR THE CRISIS
with investors. However, it will again require participants in the securitization process to be larger and better capitalised institutions, reducing competitive pressures. Many investors do want originators to have “skin in the game,” but the proposed requirement to have a five percent stake in any issue preempts more efficient and lower cost alternatives to the same problem. Rating Agencies Rating agencies arguably carry a significant burden of responsibility for the poor information they provided about risk for investors as the “AAA” brand was broadened to cover different risks. The potential conflicts within the model where issuers pay for the service have been widely discussed. The power of incumbents was driven by lack of competition as much as the fee model. Alternative fee structures could not compete with the privileged position of incumbents that was mandated by regulators. In short, none of the major proposals for industry reform address the underlying drivers of both company and specific market failures. Substantial regulatory changes are needed. There are good models of “deregulation” that increase the scope of markets, adding to the stability and efficiency of the financial system.
Building a ladder on the slope What form should regulatory and institutional reform take? The imperative is to reduce the costs of the industry adapting and allow markets to emerge as substitutes for managerial, legislative and regulatory decisions that all went astray in the crisis. 12
BEST PRACTICE
Institutional change and adaptation is very difficult in the financial sector. Elaborate licensing, high capital requirements and complex compliance issues mean very high barriers to entry. This makes it difficult for new firms that are often smaller with better incentive structures and a more focused strategy to emerge. Both consolidation and break up of financial institutions needs to be made much easier and at lower costs. This will allow specialists to set benchmarks as new markets emerge and allow more “boutique” structures with less principle-agent problems to play a bigger role in the industry. Taxation has been a pervasive driver of the structure of financial institutions, product development and leverage. Corporate and transaction taxes lead to innovative product structuring, but also reduce the efficiency of markets and can increase risk. Dealing with the tax issue is not a matter of closing loopholes, rather it requires less and lower taxes to reduce distortions. Only lower tax rates effectively reduce the incentive to amass excessive corporate debt caused by the non deductibility of the cost of equity funding. It should be no surprise that companies and financial institutions in the low tax jurisdiction Hong Kong have much more conservative gearing than many of their international peers. Although currently not in favourable standing, the benefits of jurisdictional competition have been proved by the different performance of regulators globally through the crisis. The trend to convergence, especially focused on systemically important institutions, will reduce adaptation in the financial sector.
Although the world experienced a very global crisis, local problems cause specific responses and improvements from countries and companies. Many improvements in regulation globally came from the specific experiences of small countries like New Zealand in the 1980s or Asia in the 1990s. Efforts to increase transparency in the financial sector are likely to be beneficial, but only to the extent that they are pursued at a reasonable cost. One of the ironies of the “Spitzer” changes to equity research is that it reduced investment in research, the quality of research and the prospects of analysts identifying new information. The reforms decreased access to company management and constrained opinionated research, which reduce the chance of identifying new areas of problems in the sector. Many accounting changes also make it more difficult to understand underlying financial trends. For example, mixing markto-market valuation changes with actual income and expenses in profit and loss statements obscures rather than clarifies. Competition to identify new information is likely to produce better outcomes than just requirements to disclose more information. Incentive changes are also important. It is not as simple as reducing the size of payments or making them longer term. Looking within investment banks, there are many challenges in the most common compensation models. Profitability of trades might not coincide with the calendar year or reporting cycle. Charges for capital allocation to riskier activities are often not done well. Cross subsidies between divisions are legion and allocations to management functions
M. F. Michele
POLICY RECOMMENDED FOR THE CRISIS
Everyone is paying attention to the market.
compared to “producers” are difficult. However, these issues are so important for the industry that they cannot be left to central rules and plans. Management is constantly trying to improve incentives. Where they fail, good people leave to work for competitors or establish themselves as the new competition. Note that many putative compensation “excesses” have coincided with a move away from options based incentives now that these are expensed. Simple models for expensing options often impose too high a cost on long dated and well out of the money options that can provide strong alignment between shareholder and staff interests. Internal capital allocation to optimize returns is also made more difficult by proscriptive regulatory capital rules that open a gap between economic and regulatory capital. Regulatory capital processes should retreat from detailed and proscriptive approaches to simple, general rules that provide minimum guidelines. Markets left to their own devices before the financial crisis were driving substantial changes which at the margin improved the structure of the financial industry. These
changes should not be hampered or ignored. Parts of the industry were consolidating and seeing higher returns with scale. Processing parts of the financial sector were consolidating quickly, sometimes within large firms, sometimes with specialists consolidating across firms. Credit card and merchant processing, custody, trade finance and securities clearing were areas consolidating globally. Alongside this was a trend towards less capital intensive parts of the industry moving into smaller or “boutique” firms in areas like advisory and cash equities. This is probably largely a feature of better incentive structures in smaller firms, where human capital is more important than financial capital. Supporting this trend, new technology has made it easier to operate with “global” coverage on a smaller scale. Even in relatively capital intensive trading businesses, there was a shift of activity and talent from investment and universal banks to hedge funds. Reasons for this would include the greater efficiency of external investors directly allocating capital between strategies (rather than internal management allocation in banks). In particular, external investors were good at removing low return capital from underperforming managers. Clearly, incentive structures were superior for many people within hedge funds. The ability to relatively easily establish (and close) hedge funds meant a dynamic and very competitive market.
Even within large banks, some trading activities moved into more hedge-fund-like internal structures with mixed results. Universal banks were also in the process of breaking up. Many very diversified institutions had exited asset management and insurance. Strategies in the largest financial firms were starting to diverge. These trends were pointers to an industry that would emerge with some of the largest firms providing utility services to a much more fragmented, competitive and market based constellation of smaller firms. Specialisation within the industry was growing. The exchanges market was becoming much more competitive and many over the counter products were migrating to exchange traded alternatives. These trends were not mature, but arguably would have reduced “systemic” risks. In conclusion, attempts to restructure the financial industry are misguided and can in the long-term compound inefficiencies and financial risks in the financial system. The alternative is to focus on making markets work better. This classically requires lowering transaction costs, reducing barriers to entry, increasing adaptability of financial institutions and very importantly, reducing tax burdens and distortions. There are powerful models of this style of reform working well in financial markets around the world. Markets were “reforming” themselves prior to the crisis. It would be a shame if the response to the crisis reduces innovation and adaptation in the financial sector and actually increased risk. Bill Stacey is the Chairman of The Lion Rock Institute and a partner in a boutique HK based securities company.
Summer 2009
13
POLICY RECOMMENDED FOR THE CRISIS
Origins of the Financial Market Crisis of 2008 Anna J. Schwartz suggests how to avoid a replay of the factors that produced the credit market debacle Michael Daddino
The Fed had two paths to choose from – inflating the bubble with expansive monetary policy or reining it in by tightening it.
I
begin by describing the factors that contributed to the financial market crisis of 2008. I end by proposing policies that could have prevented the baleful effects that produced the crisis.
Factors contributing to the financial crisis At least three factors exercised significant influences on the emergence of the global financial crisis. Factor One: Expansive Monetary Policy The basic groundwork to the disruption of credit flows can be traced to the asset price bubble of the housing price boom. It has become a cliché to refer to an asset boom as a mania. The cliché, however, obscures why ordinary folk become avid buyers of whatever object has become the target of desire. An asset boom is propagated by an expansive monetary policy that lowers interest rates and induces borrowing beyond prudent bounds to acquire the asset. The Fed was accommodative too long from 2001 on and was slow to tighten monetary policy, delaying tightening until June 2004 and then ending the monthly 14
BEST PRACTICE
25 basis point increase in August 2006. The rate cuts that began on August 10, 2007, and escalated in an unprecedented 75 basis point reduction on January 22, 2008, was announced at an unscheduled video conference meeting a week before a scheduled FOMC meeting. The rate increases in 2007 were too little and ended too soon. This was the monetary policy setting for the housing price boom. In the case of the housing price boom, the government played a role in stimulating demand for houses by proselytizing the benefits of home ownership for the well-being of individuals and families. Congress was also more than a bit player in this campaign. Fannie Mae and Freddie Mac were created as government-sponsored enterprises. Beginning in 1992 Congress pushed Fannie Mae and Freddie Mac to increase their purchases of mortgages going to low- and moderate-income borrowers. In 1996, HUD, the department of Housing and Urban Development, gave Fannie and Freddie an explicit target: 42 percent of their mortgage financing had to go to borrowers with incomes below the median income in their area. The target increased to 50 percent in
POLICY RECOMMENDED FOR THE CRISIS
Monetarism Defiant Guy Sorman on legendary economist Anna Schwartz – the feds have misjudged the financial crisis
Before the monetarist revolution, most economists believed that the quantity of money circulating in the economy had no influence on prices or on growth.
A
nna Schwartz must be the oldest active revolutionary on earth. Born in 1915 in New York, she can still be found nearly every day at her office in the National Bureau of Economic Research on Fifth Avenue, where she has been tirelessly gathering data since 1941. And as her experience proves, data can transform the world. During the 1960s, with Milton Friedman, she wrote A Monetary History of the United States, a book that forever changed our knowledge of economics and the way that governments operate. Schwartz put ten years of detective work into the project, which helped found the monetarist theory of economics. “Not only by gathering
new data but by coming up with new ways to measure information, we were able to demonstrate the link between the quantity of money generated by the banks, inflation, and the business cycle,” she explains. Before the monetarist revolution, most economists believed that the quantity of money circulating in the economy had no influence on prices or on growth. History showed otherwise, Friedman and Schwartz argued. Every time the Federal Reserve (and the central banks before it) created an excess of money, either by keeping interest rates too low or by injecting liquidity into banks, prices inflated. At first, the easy money might seem to boost consumers’ purchasing power. But the increase would be only apparent,
since sellers tended to raise the prices of their goods to absorb the extra funds. Investors would then start speculating on short-term bets – whether tulips in the seventeenth century or subprime mortgages more recently – seeking to beat the expected inflation. Eventually, such “manias,” as Schwartz calls them, would begin replacing longterm investment, thus destroying entrepreneurship and harming economic growth. By contrast, by removing excess liquidity, the central bank can cause the sudden collapse of speculative excess, and it can also hurt healthy recovery or growth by constricting the money supply. There is now a near-consensus among economists that lack of liquidity caused the Great Depression. During the severe downturn of 1930, the Fed did nothing as a first group of banks failed. Other depositors became alarmed that they would lose their money if their banks failed, too, leading to further bank runs, propelling a frightening downward economic spiral. To encourage steady growth while avoiding the pitfalls of inflation, speculation, and recession, the monetarists recommend establishing predictability in the value of currency – steadily expanding or contracting the money supply to answer the needs of the economy. “At first, central bankers and governments did not accept our theory,” recalls Schwartz. Margaret Thatcher was
Summer 2009
17
POLICY RECOMMENDED FOR THE CRISIS
The Language of Leadership Ron Manners honours Sir Arvi Parbo for his service and comments on the way forward, not only for Australia, but for all others on the way Cliff
“Yes! [with enthusiasm] We are working very hard on just that.” Only 35,000 people attended his AGM, and I was there as a guest, not as a shareholder. In my opinion, Warren Buffett is doing more to restore the image of business in the U.S. than any other single individual. He is achieving this more by example than as a result of his actual net worth.
What is the language of leadership?
he secret of eternal life? Become legislated as a Federal Government program.” –President Ronald Reagan
T
Leaders are people who often say things that are unpopular and then see people change their mind about that particular issue. They absolutely ignore opinion polls. This has very little to do with high office, although that does help, because there are more people listening. However, that doesn’t stop people like Prime Ministers talking nonsense. So it’s possible for people in high office to actually not be leaders in this sense. Sometimes those people demand the most approval and get annoyed when people who need approval the least actually receive the most.
By a remarkable set of co-incidences, a couple of weeks ago I found myself talking to Warren Buffett, at his Annual General Meeting (AGM) in Omaha, Nebraska, and asking him a question that was troubling me: “Mr. Buffett, would America be a better country if you could reduce Wall Street’s influence over Washington D.C.?”
There are Immutable Laws of Leadership. One is balance. If you get too far in front of your troops, you start to look like the enemy. General Norman Schwarzkopf said: “Leadership is a combination of strategy and character. If you must be without one, be without the strategy.”
“Courage is resistance to fear, mastery of fear…not absence of fear.”
“
20
BEST PRACTICE
Woodrow Wilson remarked: “We grow by dreams. All big men are dreamers. Some of us let dreams die, but others nourish and protect them, nurse them through bad days … to the sunshine and light which always comes.” Wilson believed that vision is the key to understanding leadership, and real leaders never lose the childlike ability to dream dreams. Henry David Thoreau also captured the language of leadership when he suggested that: “We must learn to reawaken and keep ourselves awake, not by mechanical aid, but by an infinite expectation of the dawn.” As well as the ingredients of discipline, persistence and determination, a large helping of wisdom is essential. President Herbert Hoover probably captured it best: “Wisdom consists not so much in knowing what to do in the ultimate as in knowing what to do next.” Knowledge can be memorized but wisdom requires that we think things through. Wisdom is something that enables us to use knowledge correctly. Wisdom resists pressure groups, thinks for itself, and is reconciled to use its own judgement. Courage is Vital, Too. Mark Twain once said: “Courage is resistance to fear, mastery of fear … not absence of fear.”
POLICY RECOMMENDED FOR THE MARKET
The Privatization of Public Services John L. Chapman on why privatization is indeed the only hope for renewal of once proud cities
I
n public administration, there is no connection between revenue and expenditure … there is no market price for achievements.” – Ludwig von Mises Fifty years ago, Detroit was the fourth largest city in the United States, with a population of 1.7 million people, and at $8,500 per year, one of the richest cities in terms of per capita income. It was 3.5 times the size of Indianapolis, the 26th largest city, whose income was almost identical on a per capita basis.1 Today Detroit and Indianapolis are the 11th and 12th largest cities, respectively, with Detroit’s population cut in half from 50 years ago (and losing 3,000 people per year this decade), while Indianapolis has grown by 70% during the same time frame. Remarkably, Indianapolis now has a per capita income 50% greater than Detroit’s.2 How did this happen? One answer, according to the Mackinac Center for Public Policy, is that Detroit’s city government is far larger, more regulation prone, and more bureaucratic than Indianapolis’s city government: the ratio of residents to city employees, a key measure of city government productivity, is 50:1 in Detroit, one of the worst in the United States, but is 203:1 in Indianapolis, one of the best. More broadly, the central issue in political economy concerns
26
BEST PRACTICE
www.lumaxart.com
“
Union workers and businesses win with Indianapolis’ formula: a SELTIC like commission driving change, demanding a culture of excellence dominated by competitive bidding, and transparent reporting and openness.
the optimal delineation of the sphere of government activity versus that ascribed to markets, and in this essay we examine this question from the vantage point of municipalities.3 What does economic theory say about the proper role of government, and how do proponents of larger government attempt to justify their argument? Writers from Aristotle to
Locke to Adam Smith have inveighed against government intervention, and indeed, neoclassical economic theory has affirmed the superiority of free markets as the institutional backdrop most conducive to the generation of wealth. However, allies of big government rely on the modern theory that holds that government provision of goods
POLICY RECOMMENDED FOR THE MARKET
Hong Kong and Capital Controls Jim Walker questions the controls in the betting arena
The Heritage Foundation
Distribution of Economic Freedom
T
passed the Gambling Ordinance (Chapter 148 Section 8) which states: “Any person who bets with a bookmaker commits an offence and is liable – a) On first conviction to a fine of $10,000 and to imprisonment for 3 months; b) On second conviction to a fine of $20,000 and to imprisonment for 6 months; c) On third or subsequent conviction to a fine of $30,000 and to imprisonment for 9 months, Whether the bet is received within or outside Hong Kong.” This truly is a draconian ordinance worthy of any restrictive, authoritarian regime. In the government’s defence of such a law, it stated to Legislative Council members that it was protecting Hong Kong citizens from the temptations of gambling. However, it went further. The law can be applied to any foreign visitor to Hong Kong as well. In other words, the government decided to protect any foreign national – who may come from a country in which it is perfectly legal to gamble
he controls are, as always with the start of such things, selective and dressed up in language that suggests the government is protecting its citizens, and tourists, from themselves.
34
BEST PRACTICE
Jim Walker
F
or fifteen straight years Hong Kong has been named the freest country in the world in both the Wall Street Journal and Heritage Foundation’s Index of Economic Freedom. In 2009, Hong Kong slightly extended its lead over second-placed Singapore and scored a possible 90 out of 100 in the index. But here’s a question: does the Index take into account that Hong Kong imposes capital controls on its residents and visitors? The controls are, as always with the start of such things, selective and dressed up in language that suggests the government is protecting its citizens, and tourists, from themselves. In 2002, the Hong Kong government
Hong Kong residents owning horses abroad are essentially banned from watching their own horses race under current Hong Kong law, leading to a monopoly on the racehorse-betting industry by the Hong Kong Jockey Club.
with bookmakers – from the ravages of gambling. It does so by offering them a fine and imprisonment – there is no mention of counseling. Why might this be of interest to people living in Hong Kong? After all, there are no bookmakers in Hong Kong. The only legitimate betting agency in the territory is the Hong Kong Jockey Club operating through its outlets at Sha Tin and Happy Valley racetracks and its roadside venues. Betting is allowed in these locations on Hong Kong horse racing, selected soccer games, including the English Premier League, and the Mark Six lottery. What more could a Hong Kong resident want? What if a Hong Kong citizen happens to own racehorses in the U.K.? It is legal for Hong Kong residents to own these racehorses but, according to Hong Kong law, it is illegal for them to bet on them. And, it is illegal to bet on
GLOBAL PERSPECTIVE POLICY ANALYSIS
Combating the Spread of Fake Medicines Through Free Markets and Self-Interest Julian Harris and Alec van Gelder trail counterfeit medicines and suggest systems to help China shed its “Factory Asia” label Christina Rudy
A
“near scandal” is how the China Daily described the death of patients in Hong Kong hospitals last year – deaths thought to have been caused by substandard drugs.1 Meanwhile the outbreak of swine flu has led the Pharmacists Association of Hong Kong’s president to warn that many online versions of Tamiflu are fake.2 Drugs of poor quality, and even fakes containing deadly ingredients, plague especially the poorer parts of the world with Africa most severely affected. A recent study found over a third (35 percent) of antimalarials in major African cities were substandard,3 while a survey across Angola, Burundi, and the Congo declared that almost half (46 percent) of all drugs failed quality tests.4 Many of these drugs are counterfeits, often including no active ingredient whatsoever. Yet, as the recent revelations in Hong Kong demonstrate, the problem is by no means confined to the least developed countries. In the U.K. earlier this year, for example, counterfeit drugs worth a quarter of a million pounds were discovered in a raid.5 A couple of weeks later, the U.K. agency MHRA (the Medicines and Healthcare Products Regulatory Agency) discovered a batch of counterfeit insulin pen needles.6 Referring to a seizure of fake erectile dysfunction, anxiety and weight loss drugs, an MHRA official declared “[e]nquiries suggest that the counterfeit medicines originated from China.”7 Dangerously substandard and counterfeit products seem to go hand in hand, with certain areas suffering chronically from both. Some health activist groups contend that “substandard drugs” must be treated entirely separately from “counterfeit drugs”; 8 the latter, they argue, are “deliberately and fraudulently mislabelled” rather than drugs that are poorly made
simply due to neglect or mistake. The distinction, however, is of little difference to victims, and is typically impossible to maintain in the field. Regarding the aforementioned 35 percent of failed antimalarial drugs in Africa, how many of these can be proven to have been deliberately made badly? Moreover, who cares? If they fail to work, the effect is the same. Almost all counterfeit drugs will be substandard (why produce a fake if you can make a high quality version?). Similarly, substandard drugs are in a sense counterfeits as they are not what they purport to be. A substandard artemisinin drug which fails to cure malaria cannot claim to be a genuine antimalarial product. All such drugs are therefore “fakes.” The inescapable reality for Hong Kong is that China is thought to be one of the hubs of fake drug manufacturing in the world, although it likely trails India in this regard. Many of India’s 20,000 drug manufacturers purchase raw products (active pharmaceutical ingredients, API) Summer 2009
37
AROUND THE WORLD
Restoring the Freedom to Trade Alec van Gelder on the Freedom to Trade Campaign’s importance
W
e are now in the midst of a severe global economic downturn. The credit crunch has spilled over into the “real” economy and world trade flows have contracted by over nine percent – the biggest collapse since 1982. In addition to nationalising banks and taking over automobile industries, governments have responded in potentially even more harmful ways: by engaging in trade protectionism. Faced with rising unemployment and collapsing financial markets, politicians have felt strong pressure to “do whatever it takes” to protect domestic jobs. This response has popular appeal but could yield disastrous consequences. In many cases, governments are creating new trade barriers – or increasing existing barriers – to give local or national businesses an advantage over foreign competitors. New subsidies, tariffs, arbitrary regulations and even outright trade bans threaten to make a bad situation far worse by isolating economies, driving away investment and propping up inefficient industries with ever-greater government control. Instead of investing in their businesses, uncompetitive firms are investing in lobbying, queuing up to demand that their governments shelter them from more competitive products or services. Worse still is the hypocrisy of the situation. During the G20 meetings
42
BEST PRACTICE
in November 2008 and April 2009, leaders of the world’s biggest economies warned of the dangers of a rising spectre of protectionism. They pledged to avoid measures that would further reduce world trade. Yet that is exactly what governments are doing. According to a World Bank report released in March 2009, 17 of the G20 countries have implemented protectionist policies since the G20 pledge in November. Unfortunately, these misguided measures are not unique to the world’s biggest economies. Since September 2008, more than 50 policies judged to restrict trade have been enacted according to the World Trade Organisation (WTO). In response to a global escalation in food prices at the beginning of 2008, many countries implemented trade restrictions or outright bans on food exports. The sad irony is that these measures turned a difficult situation into an outright crisis in many parts of the world. This trend is particularly worrisome when we consider the effects of protectionism following the U.S. stock market crash in 1929. The Smoot-Hawley Tariff Act of 1930
S
dramatically escalated tariffs and other trade barriers. Just like today’s barriers, the Act’s proponents claimed it was necessary to guard against the full impact of the global recession. Smoot-Hawley, and the retaliatory titfor-tat tariffs imposed by other trading partners, contributed to a radical shrivelling of world trade from a total value of $68 billion in 1929 to just $24 billion in 1932. Smoot-Hawley is one of the reasons why the 1929 crash-induced recession ultimately became the Great Depression. Moreover, this protectionism also triggered a wave of economic nationalism and resentment that ultimately contributed to a breakdown in international relations and the outbreak of the Second World War. Global trade has evolved considerably since the 1930s. Shipping and communications technology have revolutionized the global supply chain. Workers in dozens of countries are often involved in processing and delivering products to a truly global marketplace. This international division of labour has created trillions of dollars in wealth, hundreds of millions of new jobs and
moot-Hawley, and the retaliatory tit-for-tat tariffs imposed by other trading partners, contributed to a radical shrivelling of world trade.
AROUND THE WORLD
helped more than a billion people lift themselves out of poverty. Trade is now better governed: the WTO and hundreds of other trade treaties impose swift and harsh penalties for countries that violate the terms of these agreements. But this progress must not be taken for granted. Since the outset of the financial crisis, governments have moved their “applied� tariff rates much closer to the upper “bound� limit defined by the WTO. Governments are inventing new ways to circumvent the conventional rules set by the WTO and other treaties. And this doesn’t even speak to other domestic policies that can impact trade: counter-productive regulation and legislation, overlyaggressive anti-trust policy that discriminates only against foreign companies, safety standards based on the “precautionary principle� which come at the expense of agricultural producers in other countries, and so on. All of these policy levers have been employed by politicians who seek short-term political gain by favouring domestic interests at the expense of consumers and broader economic development. Meanwhile, subtle trade barriers have the potential to tear apart the closest of trade partners. A salient example is the Buy American clause in President Obama’s stimulus package. This policy requires that stimulusfunded projects buy only U.S.-made steel, iron and manufactured goods. These provisions already have sparked outrage from Canadian producers – and even from some American businesses that have operations and supply chains that work their way through Canada. Some Canadian towns have already campaigned to “Not Buy American� and there are strong calls to nationalise the campaign.
T
he Freedom to Trade (F2T) Campaign, a global grassroots effort to promote free trade and to educate policy-makers and the public. Fighting back against these interventions – and subsequent retaliation – requires a truly global network of committed free trade proponents to make simple, effective arguments that demonstrate the folly of protectionism. International Policy Network and the Atlas Global Initiative have launched the Freedom to Trade (F2T) Campaign, a global grassroots effort to promote free trade and to educate policy-makers and the public. The campaign seeks to raise awareness of the benefits of free trade, to alert the public to the looming dangers of protectionism, to uncover “stealth protectionism� as it occurs, and to oppose existing and new protectionist measures. Launched in London on April 1, 2009 (ahead of the G20 meeting), the F2T campaign comprises a coalition of over 70 think-tanks spanning five continents and 50 countries. The Lion Rock Institute is Hong Kong’s only member of the F2T coalition. One of our first initiatives was to distribute a petition in support of free trade that has been signed by over 3,500 opinion leaders, entrepreneurs, distinguished economists and academics, policymakers and others. To distribute its message, the campaign is channeling argument through both “old � and “new� media. We are syndicating op-eds and briefing papers, and coordinating global speaking tours with renowned trade experts – but we’re also creating short videos, using blogs, Facebook,
and Twitter. F2T material has been translated into twelve languages, ensuring that the free trade message is promoted widely in languages spoken by at least six billion people. Through our global network of active campaigners, we hope to collectively name and shame the protectionists, and to win the emotive discussion about trade by showing the human face that benefits from falling trade barriers. While trade flows have so far been one of the major casualties of the global recession, encouraging trade by reducing barriers is the quickest route to recovery. We hope you will join our campaign to take on the protectionists! UĂŠ Visit and link to www.freedomtotrade.org. The site features current news about trade issues around the world, videos, and more resources. UĂŠ -ˆ}Â˜ĂŠĂŒÂ…iĂŠvĂ€iiĂŠĂŒĂ€>`iĂŠÂŤiĂŒÂˆĂŒÂˆÂœÂ˜ĂŠ>ĂŒĂŠĂŒÂ…iĂŠ website UĂŠ -Ă•LĂƒVĂ€ÂˆLiĂŠĂŒÂœĂŠÂœĂ•Ă€ĂŠ9ÂœĂ•/Ă•LiĂŠVÂ…>˜˜iÂ?\ĂŠ youtube.com/Freedom2Trade UĂŠ ÂœÂˆÂ˜ĂŠÂœĂ•Ă€ĂŠ/ĂœÂˆĂŒĂŒiÀÊvii`\ĂŠĂŒĂœÂˆĂŒĂŒiÀ°VÂœÂ“Ă‰ freedom2trade UĂŠ ÂœÂˆÂ˜ĂŠÂœĂ•Ă€ĂŠ >ViLÂœÂœÂŽĂŠ Ă€ÂœĂ•ÂŤ\ĂŠ “Freedom to Trade, Say No to Protectionismâ€? Alec van Gelder is the Coordinator of the Freedom to Trade Campaign and Project Director at the International Policy Network. For more information about the Campaign, email him at Alec@policynetwork.net.
Summer 2009
43
Call For Papers Consider adding your ideas to the debate and publish your work in Best Practice. Published in Hong Kong, Best Practice is well positioned as a gateway to developments and recommendations in law and policy, making it the essential guide for leading developments in public policy. Best Practice encourages all who have interest to submit their work for consideration. Submissions are considered on a rolling basis and original submissions are given priority. We encourage submissions of review articles, case studies, policy research and will consider editorial comments as well. Best Practice is published by The Lion Rock Institute, the authoritative voice in its field in Hong Kong. If you are looking to publish material concerning public policy, we hope that you will consider Best Practice first. Please send your work to nicole.alpert@lionrockinstitute.org for consideration.
www.wordle.net
ODDS AND ENDS
Master of Slaves Jackie Chan has declined the value of freedom to show his obedience
I
f the Chinese nation should be controlled, so should Jackie. From Jackie’s definition of “too much freedom,” he’d probably be happiest as the newest citizen of Pyongyang. In a pluralistic society, there must be clashes between ideologies and it is all about give and take among various interest groups. Jackie upset many Chinese people with his words, and I suppose he hasn’t yet experienced the peaceful transition of power between Labor and Liberals in the land down under (no wonder his house near Canberra has been burned out).
The intention of Jackie to deliver such a speech is obvious – to please Beijing. When the Central Administration has been pushing hard for “harmonized governance,” it is certain that Jackie would like to portray himself as tuned-in. Ironically, his latest film, Shinjuku Incident, has been banned for screening in the Mainland because it does not “harmonize enough.” Ultimately, it is Jackie’s right to please an authority for political convenience and ruin his pocket. Giving up his freedom is his right even though it philosophically appears unjust to become a slave of a
political power. So Jackie, the people of China should be controlled? Let’s hypothesize and instate some new controls. Say we make extramarital affairs illegal and those who are found guilty should be insulted in Tiananmen Square. If so, I bet Jackie will turn himself into a complete Aussie. Michael Mo, Hong Kong Advertisement
48
BEST PRACTICE
If you want thoughts on public policy, don’t come to us! But if you want best practice in producing marketing communications, event materials and websites, now that’s a different story…
At Firstline, our experience gives us the ability to understand your needs and provide a creative solution – on time and on budget. Firstline has been serving international and local clients for over 20 years, offering a full range of services. Our client list includes many large companies, clubs, associations, government and non-government organizations – clients with high expectations. For further information about our services, projects and useful resource material, please visit our website FirstlineDesign.net, call us on 2521 8081, or email Marketing@FirstlineDesign.net
11/F, Fung Lok Building, 163 Wing Lok Street, Sheung Wan, Hong Kong T: (852) 2521 8081 F: (852) 2522 3068 E: Marketing@FirstlineDesign.net W: FirstlineDesign.net
MARKETING
DESIGN
PRODUCTION
DIGITAL MEDIA
ODDS AND ENDS
Patriotic Panic A low flying plane spotted in Manhattan causes panic
O
n April 27, 2009, a Boeing 747 and two F-16s were spotted flying in Manhattan near the site of one of the most catastrophic terrorist attacks on American soil. Panic ensued. Everyone must wonder: there must have been sound reasoning to support this perceived assault. Surely it was a well planned event for a practice evacuation? Or maybe it was to check New York City’s emergency response time? Or, I don’t know, maybe the Obama administration “needed to update their photo files”? A photo op for Air Force One?
Well, that settles it – no need to panic. I’m sure all the folks with post traumatic disorder after 9-11 will be enchanted to see patriotic images of the President’s private 747 soaring by the Statue of Liberty. Yes, wave your flags and let us rejoice! Pardon me? Most of these pictures are classified? Well, it must be an issue of national security. We must not succumb to our emotions. If those sensitive photos fall into the hands of evil terrorists our safety would be in great peril. I am glad that the U.S. President, Barack Hussein Obama, and his administration have taken charge of the situation. First, failure to inform
the Mayor of New York was an astute political maneuver – override the competition. Not allowing citizens without proper clearance to view these photos is a bold and commendable stab at eradicating terrorism. And finally, we thank you Mr. President for the mysterious resignation of Louis Calder, the Director of the White House Military Office. This shows that the Obama administration will not accept nor condone errors of judgment. By the way, for the photos that were released – they could use some Photoshopping. Eugenio Suarez, New York Illustration: Bay Leung
50
BEST PRACTICE
ODDS AND ENDS
Let’s Not Lose Our Minds The mass hysteria surrounding the spread of swine flu does little to protect us
52
BEST PRACTICE
Illustration: Bay Leung
C
all it “swine flu,” “Mexican flu,” “H1N1,” or even “new flu” – whatever you call it, just be sure to pick a name that ensures complete chaos and fear amongst the general populace. After being labeled as a pandemic by the WHO earlier this year, the disease has fomented paranoia and confusion wherever it has spread – with ridiculous consequences. In April, the Egyptian government, afraid that its constituents may contract the disease by eating swine, slaughtered nearly 300,000 pigs despite a clear lack of evidence that any of these pigs carried the disease. As of this article, China and Russia have yet to lift import bans on American pork products. Even U.S. Vice President Joseph Biden got into the mix, stirring up the paranoia by exhorting Americans to avoid enclosed spaces like trains and airplanes. Biden said that given the circumstances, Americans should completely avoid all crowded, confined areas. A stimulus to the economy that would have been, for sure. The misinformation surrounding the spread of swine flu (now referred to as “H1N1” by the WHO and by major media outlets) has seemingly permeated all aspects of society.
Walk around Hong Kong for a couple of hours and it is easy to see such fear: stores proudly proclaim that they “disinfect door handles every 3 hours,” people walk around wearing flimsy face masks that have been proven ineffective in preventing the spread of viral, airborne diseases (SARS redux, anyone?), and there have been instances in which entire planeloads of people have been quarantined because of a single traveler’s innocuous sneeze. With this kind of paranoia rampant throughout the world’s
major cities, it is easy to see why even the most harmless of coughs would send an entire restaurant of people running out the door. Here’s a thought: don’t go crazy. Yes, take your precautions against the disease. Wash your hands regularly and cover your nose and mouth when you sneeze. Go to the doctor if and when you feel sick. But for the sake of humanity, just drink the Corona already. It’ll be good for you. Anuj Jhunjhunwala, New York