Tim Harcourt

Australia’s Trade Minister Andrew Robb is regularly lauded as one of the most effective performers in the federal government for finalising his “trifecta” of free trade agreements (FTA) with South Korea, Japan and China – three of our fourth biggest trading partners.

And this week, Prime Minister Tony Abbott has been out selling an upcoming review to Australia’s existing free trade agreement with Singapore.

But while the political benefits of FTAs are generally accepted by Australians, they remain less convinced of the economic gains. And for some, FTAs are as popular as a German banker at a Greek wedding.

Activists, from the Left and Right, have strongly opposed FTAs. Multilateral pacts such as the controversial Trans Pacific Partnership (TPP) have fared even worse.

Given how hard our trade negotiators at DFAT work in marathon sessions to get ministers to headline-inducing signing ceremonies, they would have to ask are their unsung efforts really worth it?

First, the good news. Exporters, on average support FTAs. According to the DHL Export Barometer of 600 exporters in 2014, 35% of exporters thought the FTA with Japan would benefit their business (60% neutral), 36% with Korea and a whopping 60% with China.

In the case of Japan, 59% said it would increase exports, 38% said it would make them start exporting to Japan, and 22% said they would develop a new product or service for the Japanese market. The 2015 results to be released in August show even more successful results for Japan.

Even past FTAs are seen as remaining helpful – 55% said the US FTA was positive, 47% the CER with New Zealand, 41% the AANZFTA with ASEAN, 38% Singapore, 37% Thailand, and 23% Chile. And 80% of the exporters surveyed are also importers so there are gains being made on both sides of the ledger.

But then there’s the bad news. Outside of the exporter community (or the importer-exporter community as it should be called) FTAs are not popular. But their opposition comes in very different camps.

Traditional neo-classical (neoliberal) or dry economists prefer unilateral liberalisation where a country takes down its own tariffs regardless of what its trading partners do.

But if that’s not on offer – as we do live in a world of “second best” – they prefer multilateralism, as bilateral agreements have the potential to be “trade distortionary” and create what Jagdish Bhagwati calls an overlapping “spaghetti bowl” of agreements.

Left-wing populists don’t like free trade agreements and see trade liberalisation as part of the toolkit of neoliberalism alongside privatisation and the winding back of public goods.

Right-wing populists don’t like free trade in the same way they don’t like global finance, the UN and especially immigration. Pauline Hanson drove this movement originally in the 1990s and it has many remnants, particularly in regional Australia and equivalents overseas such as UKIP in Britain and the National Front in France.

Then there are rent-seeking business figures who throw in a bit of anti-free trade populism so people buy their products (sorry, I mean buy Australian), which is more opportunism than based on ideology or any underlying philosophy.

But in practice, most exporters and politicians are usually trade pragmatists and just do any deal they can to get things moving. After all, the World Trade Organisation (WTO) is as dead as a Doha, so bilateral FTAs are probably the only game in town, given that it is all quiet on the multilateral front.

And bilateral deals are easier to sell on talkback radio than obscure concepts such as the WTO, the GATT, or “multilateral trade liberalisation” (see, it just rolls of the tongue, doesn’t it).

But there are some aspects to free trade agreements that have raised concerns of a different kind. This has been highlighted by the controversial TPP and the much maligned Multilateral Agreement on Investment (MAI) that died a quiet death after the OECD tried to champion it.

The famous Princeton political economist Dani Rodrik in his seminal work, Has Globalisation Gone Too Far?, pointed out the “over reach” that free traders made in moving beyond the simple elimination of tariffs and quotas.

Rodrik wrote his book at the time of the anti-globalisation protests at the WTO in Seattle. The “Battle in Seattle” was at the height of the MAI debate.

At the same time, the Europeans started to question the expansion of the EU, which started as a simple project to reduce trade barriers but then expanded to include a common currency and monetary union (and we all know how that has turned out).

Reducing tariffs and quotas is one thing, but now trade pacts include investor-state dispute settlement provisions that potentially allow companies to sue governments over public health policies such as plain packaging of tobacco, or hinder the pharmaceutical benefit scheme, or even labour market benefits (some US employers claimed public provision of healthcare in Canada was a trade barrier as the US has employer-based healthcare).

In the present debate, some have asked why labour market provisions are really necessary in trade agreements because, as Rodrik shows, open economies tend to provide social insurance and labour market institutions that protect workers (but not trade) and build a stronger constituency for free trade.

My own research shows that, overall, trade is good for workers as exporters pay, on average, 60% higher wages, offer more education and training, better occupational health and safety and more job security and equal employment opportunity than non-exporters.

Ultimately, getting the balance right between expanded economic opportunity from the open economy and fairness at home will make the FTAs successful.

In short, it’s about balancing the right for the exporter to have a go, with the worker’s right for a fair go, and ensuring that global output and income can spread throughout the emerging economies and developed world alike.

Tim Harcourt is the J.W. Nevile fellow in economics at UNSW Business School, and author of The Airport Lounge Economist and Trading Places. A version of this post appeared on The Conversation.

Wolfgang Kasper

In November 2011, Spanish voters returned a conservative government by a decisive majority, voting out the most left-wing socialists in their history who had gone overboard with an impatient Keynesian stimulus, job-killing energy policies, re-regulation of labour markets and elitist, new-age social reforms.

The newly elected conservative government, led by a Mariano Rajoy, threw the economic rudder around to practise fiscal sobriety, sack thousands of government employees and hangers-on, and cast itself in the role of a support organisation of competitive ­enterprise.

To the vehement annoyance of trade union central, several factory unions in the car industry cut deals with foreign investors, committing to five strike-free years in exchange for job security and guaranteed real wages. New car models have been assembled and conquered export markets, and the economy has turned from deep recession to hesitant economic growth.

From 2008 to 2012, despite frenetic stimulus spending, real per-capita incomes in Spain had plummeted by more than 18%. But in 2013, the holistic all-out reform effort of the new conservative government managed a rise in real per-capita incomes of 3%, and this year will bring another 2%.

The government’s leadership was inspired in its confident, almost heroic undertaking by the successful example of a previous conservative government – the Aznar administration of 1996-2004 – which overcame the deficits and mass unemployment left behind by the preceding Gonzalez socialists.

The exorbitant risk premiums on Spanish interest rates have fallen well below Italian levels as market confidence has returned, but unemployment has stayed extremely high, about 25%, partly because of public-sector sackings, though private job creation has taken off.

As Spain’s unemployment benefits are time limited, many have to make do without government handouts. Those I know manage – poorly – with family support, in casual informal work. Many young professionals are learning German and Chinese. Many have turned their backs on the traditional major parties and barrack for populist extremists.

The government has curbed subsidies to solar farms and quixotic windmills, some of which have been abandoned by their disappointed rent-seeking owners. The life of nuclear power plants has been pragmatically extended. Some of the many infrastructure projects of the Zapatero era (2004–2011) are mothballed; others are being pragmatically completed despite still complicating the budget.

New controls on regional government spending have created some political acrimony but reinforce the consistent message: “We need discipline and an enterprise-friendly order.”

The task of turning the economy around has been made much harder, of course, because eurozone membership has knocked out monetary policy. The entire burden of restoring economic vigour rests on domestic fiscal and labour-market policies.

Collectivist observers belittle the Rajoy team’s incipient success: new flexible service jobs are called inferior … “the recovery will not last”. Like the Thatcher reforms, Spain’s liberal policy is poorly understood by the commentariat; the spontaneous forces of freer markets are underestimated.

Although much is left to be done, one can already conclude that the Spanish turnaround will be called a miracle by ignor­amuses, who failed to understand why postwar Germany or East Asia boomed. Miracles are, after all, something that one need not explain, and from which one cannot learn.

Wolfgang Kasper is an emeritus professor of economics at the Australian Defence Force Academy campus of UNSW Australia in Canberra. A version of this post appeared in The Australian.

Geoff Harcourt and Anne Junor

Focusing on growth, the Brisbane G20 leaders’ summit has not grappled with three key issues. How much more growth can the planet survive? How can poorer nations raise their living standards to parity with the “developed” world? And within both rich and poor countries, how can a fairer distribution of the benefits of growth be realised?

The key problem of our time is the possibility of pursuing three goals simultaneously – ecological sustainability, economic development and a more equitable distribution of wealth within and among nations.

Harvard economist Stephen Marglin argues affluent nations must limit further increases in their standard of living. Priority must be given to the development goals of poorer nations and to addressing poverty in the affluent world. But even this cannot be done within present wasteful approaches to growth. A radical rethink of the foundations of economics is required.

Six economists and sociologists from Cambridge, The Hague, India, Italy and Australia debate this challenge in the December 2014 issue of The Economic and Labour Relations Review.

Macquarie economist Wylie Bradford questions the need for a root and branch alternative to mainstream economics. He argues existing theory is soundly based in a view of humanity and nature that has continually been adapted since the ancient Greeks. Bradford argues it can be adapted further to address the present circumstances.

Conversely, Shachi Amdekar and emeritus professor Ajit Singh from Cambridge University UK argue global warming mandates a new starting point for economics. The conventional self-interested individual is no basis for conceptualising what’s needed to tackle the terrible threats to human survival resulting from modern economic processes.

Andrew Fischer, from Erasmus University, Rotterdam, says poor nations can develop, even while the world economy decarbonises.

Poorer nations need to accumulate capital to reduce poverty, and Fischer explores how the “developed” world can make environmentally friendly changes in the composition of its consumption expenditure, to maintain effective demand in the world as a whole.

Stefano Bartolini, from Siena University, provides empirical evidence that declining social capital underlies rich nations’ current unsustainable economic growth. He paints a picture of isolated people in gated communities, protected by security systems, spending their leisure on over-consumption.

Bartolini provides alternative models of institutions, cities, social spaces and lifestyles, reversing the trend decline in social capital, creating benefits for both human wellbeing and the environment.

Wendy Harcourt, from Erasmus University, provides examples of academics and grass roots activists changing the ways in which communities function, building links between neighbourhoods in rich and poor countries and regions. She outlines a new community economics, based on “meshworks” – loosely connected networks of learning.

In response to the UN call for post-millennium development goals, emeritus professor Amiya Bagchi of Kolkata Institute of Development Studies proposed the following:

(i) More effective regulation of global capital, through host country requirements for local procurement and utilisation of innovations; more effective regulation of pharmaceutical patents; and closure of tax havens.

(ii) Stronger environmental protection through restriction of environmentally risky oil and mineral exploration and more public funding for research and investment in renewable resources and organic farming.

(iii) Inter-regional measures such as a global fund to support the viability of small island nations; and enforceable international conventions on asylum seekers, with maltreatment of migrants justiciable in international courts.

(iv) Intra-country redistribution through legislated minimum wages; gender equality in education and healthcare; pro-peasant land reforms, recognising women’s agrarian role; and communal models of property rights for forest-using people.

Whether or not economic theory moves beyond the utility-maximising individual, the survival of the planet is likely to depend on a new growth model based on social cohesion. The blueprints exist: the planetary risk may galvanise their adoption.

Geoff Harcourt is a visiting professorial fellow at UNSW Business School, where Anne Junor is an associate professor, deputy director of the Industrial Relations Research Centre and editor-in-chief of The Economic and Labour Relations Review. A version of this post appeared on The Conversation.

Tim Harcourt

The recent death of former prime minister Gough Whitlam at the grand old age of 98 was a significant event in Australian history, but also in China. After all, it was Whitlam who took the risk of visiting Peking (now Beijing) as leader of the Opposition in 1971, despite domestic pressure to shun China.

At the time, Whitlam took a lot of heat from the incumbent McMahon government – but only for about a week, when it was revealed that US secretary of state Henry Kissinger had been in Peking, too, paving the way for president Richard Nixon to recognise China.

After winning the 1972 election, Whitlam returned to Peking as prime minister in 1973 when he and his independent and equally charismatic wife Margaret were feted as great friends of China. It was a triumph. In many ways Whitlam was the first Western leader to recognise China. When talking to him – and, later, his chief of staff John Menadue – it was explained that the decision to recognise China was part of the Whitlam vision to engage Australia more comprehensively with the Asia-Pacific region.

Whitlam and South Australian Labor premier Don Dunstan had already fought hard to get rid of the White Australia Policy from their party’s platform. For most of the 20th century, Australia restricted immigration to ‘white’ people (that is, mostly the British and northern Europeans) despite its proximity to Asia and the presence of an indigenous population who were not white.

Whitlam and Dunstan took the principled view that if you wanted to trade and invest with people, or sell education services to them, you shouldn’t prevent them from immigrating because of the colour of their skin or racial origin.

It was part of the big picture, diplomatically to engage with Asia, and to allow the exchange of ideas, art and culture as well as goods and services – to feel more confident in the region, particularly after the difficulties of the Vietnam War.

Since 1971, China and Australia have gone from strength to strength and China is now our number-one trading partner, number-one export destination, and number-one import source (the two-way trade relationship alone is worth almost A$142 billion). China and Australia have gone through different phases in our economic partnership. First, we had the trade of commodities phase, where we exported ‘rocks and crops’ (resources and agriculture) to help China’s industrialisation and urbanisation as it pulled millions of people out of poverty. For Australia, this was both a ‘mining boom’ and a ‘dining boom’.

Then we developed advanced manufacturing and professional services, and foreign investment started to flow both ways. The second and third-tier cities of China, such as Chengdu, Chongqing and Wuhan, began attracting Australian builders, architects and designers as it invested in infrastructure for its rapid rural-urban migration and growing middle-class consumerism. Brisbane planning and design consultancy Place Design has a Chengdu office to build landscape gardens for the urban middle class. It’s a long way from the rice paddies of the poor rural areas.

We are seeing a new phase with the development of financial services and other forms of co-operation, such as the conversion of the Chinese currency to Australian dollars, a new free trade agreement (FTA) and potential Australian support for a Chinese development bank, following on a tradition of strong Australian support for China on major international issues, such as support for China to join the WTO, and support in APEC and the G20.

But what of the future? Recently Australia was surprised to see China, under pressure from local producers, put through tariff hikes on coal targeting  Australia exporters. While this won’t derail the FTA, it does warn foreign observers how many decisions can be made by fiat in China, regardless of the economic logic.

Some have called for the Australian government to leverage its support of the Chinese development bank to try and reverse the tariff decision but it’s likely the two issues will remain separate. There are also more controversial measures to allow ‘purchase’ of permanent Australian residency via real estate investment which may pressure the local real estate market and provide incentive for party officials to invest (which could entice corruption).

On the other hand, Australia has supported the strong anti-corruption stance taken by the Fourth Plenary of the Party Congress and has vowed to co-operate with China on extradition of corrupt officials. These measures are directed at strengthening mutual trust between Australia and China because China now knows that to succeed in the 21st century, the country’s future progress is as much about corporate governance as it is about growth.

Whitlam was often criticised for his lack of interest in economics, compared with his interests in foreign policy, constitutional reform, urban issues, equal pay, the rights of Aboriginal Australians, and his support for Asian immigration.

But ironically, his brave call to go to China in 1971 was perhaps the most important economic decision made in Australian history during the past half century.

Tim Harcourt is the J.W. Nevile fellow in economics at UNSW Business School.

James Morley

Six years after the dramatic collapse of Lehman Brothers, the US economy is finally showing signs of a stronger recovery from the global financial crisis. The Federal Reserve (Fed) is winding down its quantitative easing (QE) programs and all eyes are on it to see when there will be “lift-off” of the federal funds rate from the zero lower bound.

In its last policy statement, the Fed used the phrase “considerable time” in describing how long it will continue its zero interest rate policy. Indications are that most members of the policy committee believe the first rate hike should occur in 2015.

The amount of digital ink spilt over the phrase “considerable time” has been striking (many news articles have considered the subject, including Marketwatch, The Wall Street Journal and CNBC). And it begs the question, why does everyone care so much about what the Fed says in its statements?

If the Fed were entirely unpredictable, then we would expect anyone worried about future interest rates (such as financial institutions, homeowners or small businesses) to care a lot about any hint as to what the Fed might do. But the Fed is not unpredictable in this way.

The Fed and other central banks behave in a fairly systematic fashion – sometimes referred to as the Taylor rule. This can be characterised as a mathematical adjustment of the policy interest rate in response to changes in inflation and the unemployment rate (or an estimate of the output gap). If this mathematical formula implies a negative interest rate, then the Fed will be constrained by the Taylor rule in applying a zero lower bound rate.

But do we pay attention to the Fed’s policy statements just to discern when its policy committee thinks inflation and the unemployment rate will imply a positive rate based on the Taylor rule? And does the Fed have some special information about when this will happen?

The answer to these questions is “probably not”. Yes, the Fed has good forecasters. But the reason why analysts study its statements is that it also has the ability to keep the interest rate at zero, even when the Taylor rule implies the rate should be positive.

Why would the Fed want to keep rates at zero in the future? The short answer is that perceptions it will do so can stimulate the economy in the here and now. And forward guidance about future rates can be used as a policy tool even when current interest rates are constrained by the zero lower bound.

By signalling that interest rates will be lower for longer than under their “normal” policy, the Fed is hoping to convince households and firms to increase their debt-financed spending.

Specifically, lower future short-term rates should lead to lower current long-term rates, which stimulates current expenditure on durable goods and capital investment.

There has been a lot of academic analysis on the effectiveness of unconventional monetary policies. The evidence for QE is mixed. It does seem to influence the prices of targeted assets. But it is less clear if it does so without an offsetting effect on the prices of other assets.

QE has been most effective when the Fed’s announcements about it have changed expectations about future monetary policy. QE can be seen as a signal that the Fed will do whatever it takes to prevent deflation, including keeping interest rates lower than would be implied by their normal policy.

As for forward guidance itself, there are challenges in identifying its quantitative effects on the macroeconomy.

In recent research, Mariano Kulish, Tim Robinson and I studied expectations of the length of time interest rates would be kept at zero. We found these expectations increased when the Fed significantly changed its statements about future policy.

For example, in mid-2011 the Fed’s policy statement became explicit about the timing of the expected lift-off. It moved from outcome-based to calendar-based guidance. In response, estimates of the expected duration of zero interest rates increased significantly. Output growth and inflation also seemed to react to the guidance at this time.

This case study demonstrates how forward guidance can work when the Fed makes its intentions clear.

The success of the Fed’s forward guidance policy is also supported by the recent stronger growth for the US economy. And it explains why everyone watches the Fed so closely for any indication of when lift-off will actually occur.

James Morley is a professor of economics and associate dean (research) at UNSW Business School. A version of this post appeared on The Conversation.

Peter Swan

Almost everyone in a study soon to be published in Perspectives on Psychological Science thinks CEOs are paid significantly too much – almost everyone it suggests, except Australians.

The study, by Chulalongkorn University’s Sorapop Kiatpongsan and Harvard Business School’s Michael Norton uses survey evidence to discover “what size gaps people desire” when it comes to pay, comparing estimates of the wages of people in different occupations – CEOs, cabinet ministers and unskilled workers – with their ideals of what those wages should be.

They measure the gap by the ratio of CEO pay to average unskilled worker pay, finding quite a high degree of consistency across people from 40 different countries and from diverse backgrounds.

Nonetheless, there is a surprising outlier – Australia. Responding Australians would like to see a ratio of 8.3 times. The average across the countries is nearly half at 4.6 times. Australia’s ratio is the highest in the 16 countries for which the authors’ have actual pay data.

Perhaps not so surprisingly, it is more than 400% higher than the desired ratio in egalitarian Nordic countries such as Denmark.

One country in particular outside the group of 16 outdoes Australians in tolerating inequality — Taiwan — with a desired ratio of 20.

Apart from revealing a general desire for equality, the study also reveals how out of touch with reality most respondents are. For example, the mean estimate across 40 countries of the respondents’ estimate of the actual pay ratio was ten-fold, about twice the average desired ratio. By contrast, the actual ratio across the 16 investigated countries is 101, ten times higher.

For example, for the US respondents the estimated pay ratio was 30, compared with the actual ratio of 350, meaning they believe the worker at the ideal ratio would be earning US$1.8 million, when in reality the average CEO earns US$12.2 million while the average unskilled worker earns US$34,645.

In the face of such ignorance, these survey results make the case for abolishing the survey profession itself.

Australians (and South Koreans) by far topped the list in guessing average CEO pay with estimates of 41 times. This is almost half the actual ratio for Australia and thus closer than respondents in most other countries who typically had far higher error rates.

Perhaps we should be relieved that for most countries these pay ratio estimates are substantially lower than the amounts company leaders actually earn. Would the truth stimulate more French Revolutions and huge hikes in tax progressivity?

Sweden, for example, once had a magnificent marginal tax rate of more than 105% for high-income earners. This lasted until voters discovered that their most beloved best-selling author had lower take-home pay the more she earned.

Actually, ignorance is not a monopoly possession of the respondents. Some of the “credit” must be attributed to those who did the survey and published the results. For example, it is meaningless to talk about CEO pay ratios without considering the size of the company.

Typically, the larger the company, the higher the pay. Using raw pay numbers, each doubling of firm size increases pay by 30%. Since on average Australian companies are far smaller than in the US, our pay ratio falls way short of the US’s 350 times score.

This means we miss out on the “bargain” to shareholders constituted by the highest paid CEOs at the largest US companies. Since pay far from doubles with each doubling of firm size, large-firm CEOs cost shareholders very little relative to market capitalisation and earnings, in contrast to small-firm CEOs.

In fact, some prominent CEOs – such as the late Steve Jobs of Apple fame – choose to be paid a notional salary (US$1 in the case of Jobs) rather than the hundreds of millions they contribute to shareholder value.

Do they do this because of their love for shareholders and the average unskilled worker? No.

George W. Bush reduced the tax on dividends from the personal marginal rate to a maximum of 15%. But he still retained the double-taxation of company and personal income (unlike Australia). It then became more tax advantageous to receive dividends when one owned as much of the company as Jobs did.

Why does CEO pay go up with firm size at all? Actually, this relationship largely exists because size becomes a proxy for success and thus managerial talent. Such talent, the Steve Jobses of this world, is in limited supply. If one controls for talent then pay only increases by about 22% for each firm-size doubling.

My research with Jaeyoung Sung shows that firms compete for talent largely by raising pay for performance sensitivity, that is, by encouraging stock and option ownership. The reason for this is that typically only the manager is aware of his or her own talent. With more “skin in the game”, the highly talented manager’s effective take-home pay is much higher and can in some cases amount to billions of dollars.

Smaller firms in particular cannot afford to pay as much in direct cash pay. Hence, we see sensitivity falling rapidly with increases in firm size. Larger firms can afford to pay more. For them, talented CEOs are a bargain.

The real message of the survey study for Australians is that we are more tolerant of inequality, including pay outcomes, than are most other nations. This makes it easier for us to attract talented managers out of the limited global pool.

Importantly, it means that outcomes for most Australians will be better than is the case in the rest of the world. We can expect our economy to continue to outperform.

But this will be true only for as long as the Abbott government restrains its enthusiasm for raising marginal tax rates — much to the nation’s long-term detriment.

Peter Swan is a professor of finance at UNSW Business School. A version of this post appeared on The Conversation.

Chris Styles

I sat in a hotel room in Kuala Lumpur the night before a UNSW graduation ceremony and watched the lPO of Jack Ma’s Alibaba. Sitting in the shadow of the extraordinary Petronas Towers, it was strangely gripping TV.

Ma was interviewed on CNBC and was treated like a rock star. In his interview he repeated his mantra – customers are #1, employees are # 2 and shareholders are #3. But he still wants to make sure shareholders (or those soon to be shareholders) make money.

While at that point he didn’t have investors’ money, he said what he did have was trust. That seemed to be his key selling point for the company. One of the interviewers said he was feeling particularly uncynical about the whole thing. Ma has a vision to empower entrepreneurs through his e-commerce website and be the champion of small and medium-sized business in China.

“We want to be bigger than Walmart,” Ma says. He wants people to say that Alibaba is like Microsoft and Walmart – it changed the world.

Before the bell, the price was set at US$68. At that price this IPO should raise almost the total amount raised in IPOs so far this year. The scale – like all things in China – is immense. It will be the biggest IPO ever.

Masayoshi Son, CEO of SoftBank, biggest shareholder of Alibaba and now Japan’s richest man, followed Ma on TV and sang his praises. According to Son, money is not the goal, it’s about passion and vision. And Ma has both. Politics is not an issue. One is from China, the other from Japan.

When the stock went on the market, there was no indication of a selling price. There were hundreds of thousands of orders but no sellers. Indications were that the first sellers would come to market at around US$84-US$87.
Could this be the perfect IPO? Even with the uncertainties that come with the China market?

The stock finished the day at US$93, valuing the company at US$230 billion. More than Facebook.

In the heart of capitalism – the New York Stock Exchange – China could once again be changing the (economic) world order. Along with the Petronas Towers out my window, it is another reminder of the shifting centre of gravity to Asia.

The ticker for the company is BABA. “Ba” means 8 in Mandarin – a lucky number in Chinese culture. Ma and a bunch of investors got very lucky. Perhaps so too did global capitalism.

Let’s see if the luck holds.

Chris Styles is a professor of marketing and dean of UNSW Business School.

Professor Richard Holden

A “yes” vote to Scottish independence on September 18 would mean a great many things for Scotland, and also for the remains of the UK. But what would it mean for Australian business and financial markets?

It’s tempting to say “very little” — what do internal politics half a globe away have to do with us? Yet the Australian dollar strengthened markedly against the pound last week, almost surely due to a poll suggesting that the “yes” vote was ahead 47% to 45%.

To begin to understand what Scottish independence might do to Australian firms and markets, it’s important to understand what it would do to Scotland and the remains of the UK. The key economic question here is what currency the Scots would use.

The pro-independence team has been pretty clear about this. They’ll keep using the pound. And it’s true that the UK can’t stop them — just as Australia can’t stop New Zealand from using the Aussie dollar.

At first this sounds sensible — the pound is a big, liquid currency. The haggis — or whatever a Scottish currency would be called — would not be. Case closed, right?

Actually, no. Having a common currency without economic and political integration is a very, very dangerous thing. Monetary policy would be set by the Bank of England, presumably without reference to Scottish economic conditions. So if there was a recession in Scotland one would want lower interest rates, but unless the UK was also in recession of a similar magnitude the Bank of England would be unlikely to cut rates.

Worse, losing control of the ability to print money means that if Scottish debt got out of control it could not be inflated away. Ask Spain how that works out.

Worse still, Scottish banks would no longer be implicitly guaranteed by the UK. This is a huge deal.

The events of 2008 taught us how quickly modern-day bank runs can happen, how devastating the effects can be, and how only overwhelming credibility can prevent disaster. Scotland wouldn’t have that — and the remains of the UK would have no incentive to help out. Even if it wanted to, markets would have to believe it, and that’s far from a sure thing.

So it’s clear Scotland would be in a dangerous economic position — not obviously in trouble right away, but without any macroeconomic fire extinguishers if trouble arose.

This is a potential worry for major Australian exporters to Scotland — but there just aren’t very many of those. Australian companies with operations in Scotland could be affected.

A notable example is National Australia Bank (NAB), whose subsidiary Clydesdale Bank is located in Scotland and could face higher borrowing costs under independence. NAB has said it would seek to shift Clydesdale bank’s corporate registration to England in the event of a “yes” vote. But even in that case it’s a small part of the NAB.

The bigger concern would be if independence affects the remains of the UK in a significant way, since this is a bigger trading partner for Australia. As we saw last week, markets have rightly been concerned. At the very least there would be an 18-month-plus process of “demerging”, a process that would be complicated and distracting.

Yet, whatever the impact on the remains of the UK, it’s hard to see how it would materially impact Australian business. The pound might weaken relative to the Australian dollar, potentially hurting Australian exporters. Having said that, we would all do well to heed former treasury secretary Ken Henry’s advice on Tuesday to be less focused on the real exchange rate in this country. The impact of a modest devaluation of the pound just won’t make much difference.

Could independence lead to a major blow-up of the UK’s economy? As we learnt in 2008, a major problem in any significant economy can quickly reverberate around the world. We are all interconnected now. A big problem in the remains of the UK could be a big problem for world financial markets, Australia’s among them.

This is possible, but it seems highly unlikely. The UK is a very large economy with its own currency and a broad web of international economic connections. Scotland is close, historic, and important – but independence is not likely to lead to an economic meltdown in the remains of the UK.

Perhaps it could change politics in the UK in a big way and this could have an effect. Perhaps a more conservative Tory leader would emerge. And perhaps that would lead to different economic policies. But that’s a lot of perhapses.

Demerging Scotland from the UK would be wrenching. It would affect both entities — especially Scotland — in lots of ways, including economically.

Whatever the pros of a “yes” vote for Scotland, it would bring with it huge economic risks. And some for the remains of the UK, too. For Australia and Australian businesses, the risk is small.

Richard Holden is a professor of economics at UNSW Australia Business School. A version of this post appeared on The Conversation.

Poke a Russian bear with a stick and he will retaliate. That’s the lesson facing Australian exporters today.

When Australia announced it would join the US and Europe in placing trade sanctions on Russia in response to Malaysia Airlines MH17 being shot down in Ukraine, it could do so realising there wasn’t much trade to talk about.

Australian-Russia trade is only worth A$1.8 billion – Russia is our 28th-largest export destination and 30th-largest import source. In fact, Russia’s main export destinations are – wait for it – The Netherlands, Turkey and the Ukraine.

It imports mostly from China (like everyone else), Germany and the US. Australia only accounts for 0.3% of Russian imports as Russia’s 44th-largest import source and we are Russia’s 99th-largest export destination (barely registering on the trade accounts).

But now Russia’s counter sanctions could hurt agricultural exports, particularly in wheat, dairy, beef and kangaroo meat (Russia is our main export market for kangaroo meat). In most cases Australian exporters will be able to sell items such as beef to Japan, Korea (thanks to the new FTAs) or Indonesia.

In any case, Russia had already reduced beef imports from Australia (due to alleged concern over growth hormones). These would be the only sectors adversely affected assuming no further Russian retaliation over energy or financial sector sanctions placed on them by the West.

So how will the trade sanctions play out? Russia’s actions could hurt Russia most of all. A government putting on tariffs or other forms of trade protection is a like a government shooting its own people during peace time. Or as the legendary Cambridge economist Joan Robinson used to say, trade bans are like “putting rocks in your own harbour”.

Putin might well be bringing food shortages back to Russia like the bad old days of the Soviet Union and tsarist regimes – something the poor Russian populace has been used to historically. For a democracy it would be unbearable, but at an 87% approval rating, Putin won’t worry about that.

As he told me at the APEC meeting in Sydney in 2007 when John Howard allowed then Opposition leader Kevin Rudd to speak: “How nice to allow your leader of the opposition to speak. I would do so also, except I don’t have one.”

So will trade sanctions work? In economic history the record is patchy. The evidence shows economic sanctions against South Africa were more “psychologically hurtful” to the apartheid regime than economically damaging, though there is evidence that disinvestment by major institutions such as Chase and Barclays had more of an impact than trade sanctions.

As in the case of Cuba and Southern Rhodesia (now Zimbabwe), trade sanctions did not have as much impact as restrictions to foreign investment. And, in any case, the economic distortions in the domestic economy (like South Africa’s apartheid labour market distortions) were as damaging as external sanctions.

Ironically, the collapse of the old Soviet Union was the key factor in enabling the white minority government to start negotiating with Nelson Mandela and the African National Congress, making South Africa a “special case” in terms of effectiveness of sanctions.

In a well-functioning economy sanctions can bite quickly, but as in South Africa (due to apartheid) and Myanmar (due to having a ludicrously large army for a country of its size) they can have mixed effects.

Russia has an oligopolistic, or we could say “oligarch-istic”, anti-competitive economy so the oligarchs will choose to absorb the sanctions or distort the effects. The West has tried to target Russian funds abroad (in the UAE and London’s Chelsea) as that’s where the Russian oligarchs keep their capital, but that’s going to be a difficult target.

The MH17 Russia–Ukraine crisis has a long way to go in terms of geopolitics, and trade is likely to be just one weapon of choice in the skirmish.

Tim Harcourt is the J.W. Nevile fellow in economics at UNSW Australia Business School and author of The Airport Economist. A version of this post appeared on The Conversation.

Tim Harcourt

When Japanese Prime Minister Shinzo Abe was in Australia recently to talk trade and investment in Canberra and sign a free trade agreement (FTA) between the two countries, it kickstarted a relationship first formed in 1957.

Back then, the Japanese trade minister Abe (the present prime minister’s grandfather) negotiated the Commerce Agreement with John “Black-Jack” McEwen, Australia’s Country Party deputy prime minister and trade minister, which enabled Australia to finally embrace its geography and take commercial advantage of the industrial giant that Japan later became.

In 1957, with the memory of the Pacific war still in everyone’s mind, and with cold war tensions afoot, it took great courage to negotiate the deal and, as it turned out, great foresight given Japan’s subsequent economic development.

Now, Abe knows he needs Australia as an economic partner to achieve his current goals to revive Japan’s growth and the Japan-Australia Economic Partnership Agreement (JAEPA) has plenty on offer for both countries, particularly in agriculture and services.

For its part, Australia has been seeking cuts in tariffs and non-tariff barriers and more openness in Japan’s previously closed rural and services markets for some time, while Japan needs energy security from Australia – particularly in terms of liquefied natural gas,  given stiff competition from both South Korea and China.

But there are a number of other potentials. The first one is foreign direct investment. A more open Japanese economy will give Australian companies better opportunities to work in-market in Japan. According to the Australian Bureau of Statistics, only 3053 Australian businesses export to Japan (a number that has fallen by more than 500 companies since the GFC), and according to Sensis, 14% of all Australian exporting small and medium enterprises sell to Japan.

Fewer than 100 Australian businesses have offices or investments in Japan (compared with more than 3000 in China, for instance) despite Japan having a long-held position as Australia’s number-one export destination until very recently.

Another opportunity is finance. In a paper for the Lowy Institute, Huw McKay and Malcolm Cook point out that Australia and Japan are both regional leaders when it comes to the size and sophistication of their financial markets. China may be growing but their market is still in its early stages of development. Particularly as there have been frequent calls for reform of the world’s major economic institutions, Japan and Australia could play a key leadership role in financial issues facing the Asia-Pacific region.

While Australia-Japan trade flows are dominated by resources, there’s clearly room for expansion in trade in services between the two nations. During his term, former prime minister Junichiro Koizumi introduced a number of reforms in areas such as education, healthcare and government services that had been regarded as “untouchable” parts of the Japanese economy.

According to a local services sector expert, professor James Kondo of Tokyo University, Australian exporters have a comparative advantage in many areas that will open up: “The healthcare, wellbeing, education and the lifestyle sectors have traditionally been closed in Japan, but this will soon change to Australia’s benefit,” Kondo says.

A demographic phenomenon known as “freeters” may also play its part. While Japan is often talked about as the land of the greying sun because of its ageing demographics, there is an influential younger generation with different attitudes to travel, culture and work.

This is particularly evident in the labour market, where the Japanese tradition of lifetime employment and salary-men working for the same company has been replaced by the freeter phenomenon, where casual employment and ever-changing jobs and careers are changing the dynamics of the Japanese employment relationship.

There has been debate about the freeter concept. Some older scholars have claimed it is the choice of younger people to not be tied down to one employer or one job, while many freeters claim that they would prefer more job security but cannot find permanent positions because of the changing nature of work in Japan.

Nevertheless, the freeter phenomenon has opened up opportunities for Australian service exporters specialising in job placement and career services.

For example, Australian Terrie Lloyd, president of Linc Media, who set up (and later sold) an online recruiting company, Dai-job.com, aimed at freeter job-seekers. He sees this as a boom market because “traditionally, Japan engineers society, but now Japanese society is opening up in a manner that is neither engineered nor controlled”.

Lloyd believes the rise of the internet, mobile phones and SMS messages is “setting up a whole new youth sub-culture based on the information revolution which is more open to Western influences than ever before”.

Despite the potential gains to be had from the JAEPA – early studies estimated it to be worth A$39 billion and A$27 billion to the GDP of Australia and Japan respectively – there is still little awareness about the agreement, especially compared to talks with China.

In fact, according to a survey by logistics company DHL, only 35% of exporters thought an FTA with Japan would benefit their business, compared with 61% who were positive about a China-Australia FTA.

But there is some early evidence of “head-turning”, with 59% saying that once the potential FTA with Japan came into being, they would increase exports to Japan, while 22% of total exporters said they would now start exporting to Japan as a result of JAEPA. In addition, 22% said they would develop a new product or service specifically for the Japanese market.

Japan enabled Australia to have a beachhead into the region in the second half of the 20th century, now Japan and Australia will again be key players and partners as Australia tries to cement itself in the Asian century.

Tim Harcourt is the J.W. Nevile fellow in economics at the Australian School of Business and author of The Airport Economist. A version of this post appeared on The Conversation.