Tim Harcourt | The Airport Economist

For most of our respective histories, Australians have typically ignored Brazil. That was partly down to the tyranny of distance, as the two great southern lands were so far away from each other that it was a case of “out of sight, out of mind”. Our colonial ties were very different too. Australia looked to the British Empire and Brazil to the crumbling Portuguese ; our legacy was transportation theirs was slavery;  and while Australia looked to London, Brazil looked to Lisbon. Brazil, with political instability and economic crisis, seemed like a place with too many problems that was best to keep away from (except at carnival time).    More recently, the sheer importance of our bilateral economic relationship with China sometimes seemed to leave little room to consider other emerging markets.

But times are changing and the rise of the new Brazil has seen many international delegations flying down to Rio, (and Sao Paulo, Brasilia, Belo Horizonte, Porto Alegre and the rest of Brazil’s burgeoning metropolises) to seek stronger economic ties with Brazil. Brazil is being overrun by international business diplomatic delegations from the US, Canada, Germany, Japan, China and increasing the emerging powers of Asia, the Middle East and Africa too.

Although we are hardly a first move, Australia has now joined the pack with significant investment in Brazil by Pacific Hydro, Westfield, and major resource, agribusiness and infrastructure players. The Australian Government has also redirected resources to Brazil and Austrade has made a strong push to strengthen ties with Brazil when the spotlight hits the country with the FIFA World Cup in 2014 and the Rio Olympic Games in 2016 with its highly respected Business Club Australia programme.

So why all this attention on Brazil?  As we highlight in a new report, there are several good reasons for Australians to pay more attention to this other great southern land.

It’s economic.  Brazil is already a major global economy. Brazil is the world’s fifth largest country by population and the seventh (on a purchasing power parity ppp basis) or sixth (on a US dollar basis) largest country in the world, accounting for between 3 and 3  ½  per cent of world output (depending on how GDP is measured). As an agricultural, mining and aviation exporter, it’s a food aerospace, resources  and energy superpower with Petrobras, Vale, Embaer, JBS Beef and Ambev some of the world’s most influential multinationals and investors.  Granted, Brazil’s recent economic performance has disappointed.  Growth last year slumped to less than one per cent and policymakers must now manage a complex macro environment.  But key fundamentals, including sheer size and vast ecological wealth, keep Brazil firmly in the ‘too big to ignore’ camp. 

It’s diplomatic. As a member of the BRICSA grouping (Brazil, Russia, India, China and South Africa), Brazil is playing an important role in international affairs as we have seen in the World Trade Organisation (WTO) and G20 multilateral fora.  Brazil has undertaken a charm offensive in the developing world under the ‘South-South banner’. Under President Luiz Inacio ‘Lula’ da Silva, Brazil opened up 53 new embassies in Africa and has expanded its sphere of influence across the globe.  The diplomatic initiatives have continued under President Dilma Rousseff: A Brazilian will be the next head of the WTO.

It’s because of China. Australia now faces a resources rival in Asia. We saw at the height of the global financial crisis (GFC) that Australia and Brazil were the two largest beneficiaries of the Chinese stimulus package, as Brazil and Australia’s resources and energy stoke China’s rapid urbanisation and industrialisation.

It’s because of shared challenges.  Like Australia, Brazil has had to manage the complexities of the current resource boom, the challenges of Chinese investment into sensitive resource sectors, and the side-effects on its exchange rate from quantitative easing and the so-called currency wars. 

None of this is to deny that there are risks to Brazil’s outlook. Our co-author Patrick Carvalho, who outlines Brazil’s recent macroeconomic achievements, has also warned of: “Weak infrastructure, inefficient bureaucracy and tax system, expensive and unfair pension system and despite some recent improvement, high crime rates.”  As he reminds us, “economic development is a marathon not a sprint” And Brazil is still some distance from the finish line.

However, for all of these challenges, as the world’s 6^th largest economy, Brazil is an important player, and like with the Girl from Ipanema, it’s now Australia’s turn to do the wooing.

A shorter version of this blog post was previously published in The Australian Financial Review.

Tim Harcourt is the JW Nevile Fellow in Economics and an adjunct professor in International Business Strategy, at the Australian School of Business, the University of New South Wales (UNSW) & author of The Airport Economist:  www.theairporteconomist.com.

 Tim Harcourt and Mark Thirlwell are the co authors, along with Fernando Cardim and Patrick Carvalho, of Great Southern Lands: Building ties between Australian and Brazil, a report by the Lowy Institute & COALAR.

Justin O’Brien

Australia cannot ignore the Singaporean investigation into attempts to manipulate key financial benchmarks. 

The investigation by the Monetary Authority of Singapore into the attempted manipulation of key financial benchmarks has profound implications. Notwithstanding the fact that no evidence of actual success has been proffered, Singapore has moved quickly and decisively to change the domestic and international regulatory battleground.

The regulatory change is based on very loose principles articulated by the International Organization of Securities Commissions earlier this year. The decision is a considerable victory for IOSCO, which is chaired by Greg Medcraft of the Australian Securities and Investments Commission. Its articulation of global principles, although purposively vague, was designed to demonstrate both the timeliness and efficacy of international coordination. In fleshing out these principles in a radical redesign, Singapore is providing a much needed route map to navigate two pressing hazards.

The first of these is how to handle the investigation and enforcement process. The MAS action has foreclosed individual investigation and the piecemeal erosion of trust associated with periodic disclosure of individual institution misconduct. Instead it opted for a comprehensive settlement. The second and potentially more significant navigational aid is how the settlement forcibly enlists the industry in protecting the integrity of the rate-setting process.

The benchmarks are conceived as a public good that industry has an obligation rather than an interest in protecting. Cleverly, the MAS has forced ‘skin in the game’ by demanding individual banks increase the level of reserves deposited with the central bank.  Under the terms of the settlement, released on Friday, the banks implicated have to deposit additional reserves in Singapore for a period of one year, during which they will not receive any interest.

The exact amount depends on the degree of complicity in the scandal, with the highest imposed on ING, RBS and UBS (S$1-1.2 billion each). What is also clear, however, is that the MAS does not trust the capacity of any of the banks to clean this mess up without external supervision. The banks are required ‘to report their progress to MAS on a quarterly basis, and conduct independent reviews to ensure the robustness of their remedial measures.’ Self-certification, therefore, is deemed in itself inadequate.

The Association of Banks in Singapore is to be stripped of its capacity to self-regulate the benchmarks. Manipulation or attempted manipulation is to be made specific civil and criminal offence. At the same time, the authorities have made it clear that ongoing integrity can only be vouchsafed by a significant change in practice. The MAS has managed to force the industry to institute an effective early-warning system linked to blacklisting those directly implicated (if not charged with wrongdoing). It notes that ‘the industry will put in place measures to facilitate reference checks, so that an institution would be made aware if a potential hire had been implicated in attempts to inappropriately influence benchmarks.’ 

In taking such robust enforcement action, Singapore is guarding itself against the possibility that any future civil or criminal proceedings in the United States will seek to quarantine guilt to subsidiaries operating in Asian markets. Its integrated approach also has the capacity to break the impasse within the IOSCO taskforce set up to evaluate how benchmarks can be refined. The United Kingdom continues to insist Libor and its facsimiles can be reformed; the United States by contrast wants it replaced by observed rates. These too, however, run the risk of being manipulated.

It goes without saying that the primary focus of the MAS investigation will be the main British Banks implicated, including RBS and Barclays. It is, however, also significant that US banks have been censured formally. The involvement of two major Australian banks – ANZ and Macquarie – in the scandal also raises serious questions about the efficacy of oversight here in Australia.

Because ANZ and Macquarie were in the bottom range (S$110-300m) they failed to make initial international media reports. Although Macquarie itself does not itself submit to the Association of Banks in Singapore benchmark rate, it too is found to have ‘deficiencies in governance, risk management, internal control and surveillance systems.’ Along with the other banks censured it must adopt measures to address deficiencies and appoint an independent party to ensure the robustness of remedial measures.

With the MAS action, the manipulation of financial benchmark scandal has gone global. Australia, the lucky country, has for once not been saved by the tyranny of distance. In today’s globalized marketplace, it is too obviously implicated for regulatory agencies here in Australia to ignore.

Professor Justin O’Brien is director of the Centre for Law, Markets and Regulation at UNSW  Law.

His most recent research paper on Libor has just ben published by Edmond J Safra Center for Ethics at Harvard university. It is available for download at http://ssrn.com/abstract=2277172

A shorter version of this article was previously published in The Australian Financial Review.

However, Australia’s approach to monetary policy has not been as standard, when compared to many other countries. Since 2008, many economists and central banks have modified their views on what is an acceptable level of inflation.

Sound arguments can be made to justify an inflation rate of 4 per cent. Whereas, the RBA post 2008 has instead increased interest rates when needed to keep the inflation rate averaging within the 2 to 3 per cent band.

This policy resulted in Australia having very high interest rates, relative to other countries, which pushed the Australian dollar to extreme levels, damaging many sectors of the Australian economy over the last three years.

The RBA currently has the official cash rate at 2.75 per cent, however, there is a strong argument that this could have been done much sooner. It may have resulted in inflation averaging around 4 per cent for a period, though in the current economic environment, this would have been beneficial.

Private sector debt levels and house prices are at excessive levels and moderate inflation over a number of years is one way for adjustment to occur to more sustainable levels of real (inflation adjusted) debt and house prices.

Given the volatility in the mining sector, for a strong Australian economy, we also need other sectors of the economy to be strong. Over recent years, monetary policy has provided insufficient support for these other sectors.

The impact of monetary policy on the unemployment rate can often be delayed. For example, the relatively high interest rates and resulting high exchange rate in recent years, is only now showing up in a rising unemployment rate.

Due to this delayed reaction, current expansionary monetary policy is unlikely to prevent the unemployment rate from rising over 6 per cent. If the goal is to keep the unemployment rate from rising too much, more fiscal stimulus will probably be required.

The recent New Zealand experience provides lessons to be learned. New Zealand’s response to the global economic crisis was unconventional and focused on monetary stimulus with little fiscal stimulus (despite moderate levels of government debt) which resulted in the NZ unemployment rate sharply rising to over 7 per cent.  

However, the rebuild due to the Christchurch earthquakes, provided a major stimulus to the economy (similar to a very large fiscal stimulus) which resulted in a substantial reduction in the unemployment rate. The unemployment rate in Christchurch (NZ’s second largest city) is now below 5 per cent.

Australia still has moderate government debt levels which allows the government the ability to provide further fiscal stimulus.  In addition, to the obvious benefits of keeping people employed, government spending on projects such as infrastructure spending, can provide great long term benefits for the economy.

Dr Jonathan Reeves is a financial economist at the Australian School of Business, UNSW Australia.