Professor Fariborz Moshirian

Tensions remain in Europe as details of exactly how the European Central Bank will stabilise the bloc’s bond markets, now there are possible plans for a new wave of bond purchases aimed at helping to calm the euro zone’s turmoil, and optimism the European Central Bank (ECB) will provide more help to euro zone nations under pressure from the markets.

For the euro, the biggest uncertainty is whether the debt-laden governments of Spain and Italy will take up the ECB’s hinted offer that they seek financial aid from European bailout funds as a precondition for the ECB buying their bonds. Such assistance would likely come with strict controls over fiscal and economic policy.

For the euro zone to find its way through this crisis, any intervention in the bond markets needs to be combined with a bolder overhaul of the system itself. However investors are so worried that the slightest sign of a problem means they rush into safe-haven assets. Right now the EU needs a detailed plan to build a banking union and to mutualise some debt.

The markets are however very nervous. There are still many challenges facing Greece and Spain. The ECB has so far not taken enough action to stabilise the bond markets, and details of how it will do this and how effective it will be remain unclear. There are ongoing concerns about the potential for opposition from Germany – the euro zone’s largest country and paymaster – to any large-scale bond-buying program.

Professor Fariborz Moshirian is the Director of the Institute of Global Finance at the Australian School of Business.

Tim Harcourt | The Airport Economist

The world economy is used to surprises – usually on the downside. But one on the upside over the past year has been the reforms in Burma and the lifting of economic sanctions. The surprise reforms of the new Burmese government of President Thein Sein, the election of Aung San Suu Kyi to parliament and the latter’s call for Burma to open up to trade and investment have been monumental changes given Burma’s recent past. Australian Foreign Minister Bob Carr was one of the first foreign politicians to visit Burma since the new developments and other western nations have lifted sanctions and made (tentative) moves to invest in and trade with Burma under the new regime.

But what is the economic impact of sanctions and what happens to economies after sanctions are lifted? The economic evidence is mixed when looking at trade sanctions against South Africa, Southern Rhodesia (now Zimbabwe), Cuba, Fiji and now recently Burma. According to Yale University economist Philip Levy the economic sanctions against South Africa were more ‘psychologically hurtful’ to the apartheid regime than economically damaging, although there is evidence that disinvestment by major institutions like Chase and Barclays had more of an impact than trade sanctions. As in the case of Cuba and Southern Rhodesia, 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. Levy believes that the collapse of the 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.

But what about Burma? Will it be a special case? It is clear that Burma has some big mountains to climb economically given the long days of military rule, isolation and the fact that it is a very poor and populous country. As the world’s leading Burma expert Professor Sean Turnell says: “Burma is paradoxically a resource rich but economically poor country.” One reason has not just been the isolation due to sanctions but also the enormous economic distortion of maintaining such a large military presence with no external defence purpose. According to Turnell, Burma kept “300,000 men under arms” (i.e. almost the population of Canberra) despite there being no obvious “genuine external threat”, which is similar to the economic burden placed upon South Africa of the vast bureaucratic apartheid apparatus (not to mention the ethical burden). The defence overhang for Burma has put its fiscal policy under serious strain and created inflationary issues dissuading investment. Maintaining the military apparatus in Burma has also created bureaucratic distortions, sucking away resources from much needed infrastructure, health and education, and handicapped Burma’s human capital development (creating too many idle low skilled soldiers and not enough farmers, teachers or other skilled workers).

The military overhang is the most pressing constraint on Burma’s return to any form of economic normalcy. But now Thein Sein has made some moves in the pro-democracy direction, what can Burma do straight away economically? Turnell has identified ‘low hanging fruit’ such as providing visas on arrivals for tourists, eliminating export taxes and import licences, allowing banks to lend to farmers, and deregulating interest rate ‘caps’ and other financial regulations. But at the end of the day, economic development must come in the agricultural sector and in resources and Burma needs to develop institutions in areas like banking and finance where there is almost no viable sector to speak of. And that’s all dependent on the capacity of Burma to reduce the military presence in the economy and society and create ‘room’ for other sectors. In a country where the armed forces have had so much control for so long, that’s a big ask.

So can Australia play a key role? Bob Carr gave Aung San Suu Kyi a strong assurance that Australia was willing and able to play an important role in Burma’s return to democracy and long term economic viability. Australia has a big role to play in infrastructure given the need for roads, rail, ports and telecommunications to serve its 62 million plus population, BHP Billiton can help in the development of oil and gas, and ANZ can play a similar role to its Pan Asian banking strategy in neighbouring Vietnam, Laos and Cambodia, and Australia’s education institutions can help with human capital development. But most of all Australia’s comparative advantage in agriculture, as well as our expertise in education and tourism, means we are well placed to help with Burma’s capacity building in the same was as we’ve helped the developing economies of Burma’s neighbours in the Mekong Delta. But it will be gradual and ‘softly, softly’ as the world investment community monitors the progress of the pro-democracy reforms.

It will take years to recover from what has happened in Burma since the 1960s, economically, politically and psychologically, but the lifting of sanctions and some luke warm (but positive) responses from investors and exporters (including from Australia) may signify some small steps to recovery on the new road to Mandalay.

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.

Professor Fariborz Moshirian

I have doubts as to whether the meeting  this week of European Union leaders – which kicks off on Thursday – will produce any more measures to tackle the euro debt crisis.

The debt crisis is now in its third year and the latest country to be hit is Spain, which is the eurozone’s fourth-largest economy. Stock markets around the world fell sharply yesterday on doubts that the European summit will make any progress in solving the region’s debt crisis. Spanish and Italian bond yields rose in a sign of investor worries, while the price of US government debt rose as investors sought safety.

Certainly sentiment around the eurozone debt crisis is worsening ahead of the crucial meeting.

Right now, everyone is pessimistic, and while we had some positive commentary last week from the G20 meeting, this week there seems to be German resistance to moving forward with joint fiscal liability.

Spain and the Cyprus have now become the fourth and fifth countries to request aid from the eurozone’s bailout funds, extending a casualty list in a protracted regional debt crisis that is threatening to break up the 17-nation currency bloc.

More financial difficulties in Spain, Italy and France are likely to accelerate the process of fiscal integration in the euro zone. This will then allow Germany to provide more financial support to the eurozone members in exchange for more power for the European Commission to supervise and monitor the national budgets within the member countries.

France is resisting fiscal policy supervision by the European Commission. However, more bad financial news from Spain and further the economic down turn in the eurozone may allow both Germany and France to compromise and fast track the process of public finance integration and the emergence of Eurobond over time.

During the upcoming EU Summit, I would strongly urge national leaders to consider the greater interest of Europe ahead of their own national interest and I believe that a collaborative approach to the current financial crisis could make every country better off. This would prepare the European economy to compete with Asia more effectively in the medium term.

Professor Fariborz Moshirian is the Director of the Institute of Global Finance at the Australian School of Business.

From the Knowledge@Wharton today blog.

Is India heading towards the end of its much-touted growth story? A report by global credit rating agency Standard and Poor’s (S&P) released on June 11 seems to suggest so. Titled “Will India be the first BRIC fallen angel,” the report cautions that India may become the first so-called “BRIC” (Brazil, Russia, India and China) country to lose its investment grade rating.

According to the report, slowing growth and political road-blocks in policy making could lead to Indian paper being relegated to junk bond status. The report notes that “the division of roles between a politically powerful Congress president who can take credit for the party’s two recent national election victories, and an appointed Prime Minister has weakened the framework for making economic policy.” It further warns that “setbacks or reversals in India’s path towards a more liberal economy could hurt its long-term growth prospects and, therefore, its credit quality.”

S&P’s latest statement on India is in line with its earlier move a few weeks ago. In April, the agency had lowered India’s rating outlook from stable to negative and warned that further action would follow if India did not get its act together. India’s sovereign rating by S&P is BBB-, which is the lowest investment grade rating among the BRIC countries. It is also the only BRIC country with a negative outlook. S&P’s rating for China is AA- with a stable outlook. For Russia and Brazil, it is BBB with a stable outlook.

S&P’s newest warning spooked the markets — the stock market went down and so did the rupee (although they did recover the following day) — but the government seems unfazed. In a statement, Finance Minister Pranab Mukherjee said: “Between April 2012 and now, there are no significant events to indicate that the economy’s vulnerability to shocks has increased, though growth numbers for the fourth quarter [of] 2011-2012 have come below expectations.” Barely a few hours before the S&P report was released, while addressing a function in New Delhi, Mukherjee had said: “I do not accept the prophecies of self-styled Cassandras that GDP growth will go down.”

How much of this is bravado — and what measures the government will take to get back on track — will be clear in the coming weeks and months. For now, there is not much to cheer about. India’s GDP growth for the January–March quarter at 5.3% was the lowest in nine years. For the year 2012-2013, growth estimates now are at around 6% — way below the 7.6% the government had projected at the beginning of the year. The country is also facing fiscal and current account deficits.

According to Rajesh Chakrabarti, assistant professor of finance at the Indian School of Business, the possibility of a downgrade by S&P is not surprising, since the India brand has been taking a hit on many fronts for the past several months. However, he is not convinced by the reasoning offered by the agency. “While there is indeed a slowdown on policy initiatives and growth has slowed down, the fact that a country [could lose] its rating because some of the anticipated things did not happen is a rather strange argument. Normally, a downgrade would happen because of adverse events rather than non-happening of positive events.” He adds that growth slowing down per se is not a risk factor. “While [slower growth] may reduce the prospects of future gains, it does not make the country more risky.”

At the same time, Chakrabarti believes that the move by the rating agency could be a timely warning for the government. “If the government wakes up [as a result of S&P’s warning] it will be great for the country and the economy. But of course to what extent the government reacts to it remains to be seen.”

Others, too, believe that S&P’s move could have an upside. “I see it as a positive development for the economy and the market. This will push the government to move faster on reforms, with the RBI (Reserve Bank of India) helping through rate cuts,” said Dharmesh Mehta, managing director – institutional equity at Enam Securities, talking to the daily newspaper Times of India. Samiran Chakraborty, chief economist and head of research at Standard Chartered Bank, told business daily Business Standard: “Getting growth on track assumes more importance than ever, and a pro-growth policy stance will be critical.”

Over to the Indian government.

This post previously appeared in the Knowledge@Wharton today blog: Is the India Growth Story Over?

 Tim Harcourt | The Airport Economist

A recent visit by a pop icon can demonstrate the vast cultural diversity of the region we simply lump together as ‘Asia’ despite its amazing mix of ethnicities and cultures. When Lady Gaga visited Japan, she was the first high profile foreign female to visit the country after the twin natural disasters of the Earthquake and the Tsunami. Her visit was considered good for morale for a grieving Japanese public in aftermath of the disasters that shook the community literally and psychologically. In fact, Australian Prime Minister Julia Gillard also visited Japan after the disasters and was the first foreign head of government to spend some time there (then French President Nicholas Sarkozy only touched down briefly).

But Jakarta is not Japan. In Indonesia Lady Gaga was gagged and concerts cancelled. Is this surge of political nationalism related to the upcoming elections and parties jockeying for position? Several foreign observers of Indonesian politics say it isn’t anything to do with elections but just the need to respect the values and mores of the world’s largest Muslim population. And in any case many touring acts come through Indonesia and the rest of South East Asia without incident.

But political nationalism is one thing what about economic nationalism? With elections coming up, Indonesia is no different than any democracy with parties calling for tariff changes and protection of local industry. This is important for the Australia-Indonesian economic relationship too given our strong trade and investment links in Indonesia. I realised how important the bilateral ties were when I was recently the co-host of the the distinguished Australian Alumni Awards in Indonesia with Frida Lidwina, the host of Metro TV in Jakarta, and saw how many Indonesian business and political figures were Australian educated and very close to Australia. In fact, this was at the time of the live cattle issue on Four Corners, and one of Indonesia’s most famous Australian alumni was the Mahendra Siregar, Vice-Minister for Trade (now Finance who went to Monash), and there was plenty a tension in the room. But the Vice Minister was gracious in his remarks and it took a very skilled and professional performance by Australia’s Ambassador to Jakarta, Greg Moriarty to steer us through the issue. If anyone ever wanted to see the skill and professionalism of our diplomatic corps, I’d point to that performance by Ambassador Moriarty and his team in the Embassy in Jakarta as a great example of excellence.

But despite the headlines of Lady Gaga and live sheep, when I interviewed Australian businesses in the country most have found Indonesia to be quite accessible with a prosperous, growth story despite the political economy challenges of dealing with such a massive population on a diverse archipelago. For example, in financial services, according to the ANZ’s Joseph Abraham, the Bank has expanded from “2 to 28 branches in 4 years, which would be harder to do in alternative markets like China and India.” Abraham describes Indonesia as “a good growth story, with high rates of return, estimated to be around 30 per cent higher on average than other markets.”

Justin Collings of Leightons in Jakarta agrees. “Rates of return are healthy in Indonesia, there are risks but you must understand the risks and put a value on it,” he explained. Collings, whose operation with Leightons is 80 per cent in mining, is also building crucial rail and road infrastructure, does refer to changing governance in Indonesia but says that: “Regulations change a lot and are a challenge, but they can be managed effectively and the negative aspects minimised.”

Collins points to strong education levels as important to business practice in Indonesia. “Many of our Indonesian staff are Australian educated, and/or trained in Australia. For managers, the International schools in Jakarta are excellent, including the Australian and New Zealand schools.” Collins says that “they know you are living the life of a contractor because your kids are sick and your furniture is broken, but we’ve has none of those issues here in Indonesia.”

Another Australian executive in Indonesia, Greg Patching, of Orica, also regards education relationship between Australia and Indonesia as crucial to the business expansion that Orica is undertaking in Indonesia. “We regularly send Indonesian staff to Australia for technical and cross cultural career development, they learn a lot there and we certainly learn a lot from them as a result.” Patching, a Fremantle Dockers supporter and currently on the playing list of the Jakarta Bintangs Australian rules football club (a notable fixture of the club was the late Craig Senger, a wonderful Australian trade diplomat in Indonesia and friend of the author), says that “life does have its moments in Indonesia, but it’s nothing like the hardship of following the Fremantle Football Club.”

Speaking of football, another Australian business figure in the region, Andrew Glynn of agricultural company Agspec Asia, has forged a partnership with the world famous Liverpool football club’s International Academy and Soccer Skills to bring sport and recreation to rural Indonesia. Together with the Liverpool Football Club International Academy and Soccer Schools (Indonesia), Agspec has set up a community programme for the kids of farmers in the poor rural parts of West Java. According to Glynn, “I grew up in rural South Australia, near Mount Gambier, so I wanted to do something for farm kids here in Indonesia who really do do it tough. The generosity of the mighty reds – the legendary  Liverpool Football Club – is making it possible for these kids to reach their potential.” Indeed, Liverpool legend Bill Shankly would be proud.

So Lady gaga is not in Indonesia, but Liverpool is in, along with many Australian businesses. Given its still only a decade on from the Asian crisis of 1997-99 which saw IMF intervention and real problems for the nation, Indonesia has performed solidly. Indeed, with its new found robust democracy and economic growth rates, Indonesia continues to surprise us on the upside. But cultural sensitivity still matters on the world’s largest Muslim nation. So to think, probably the only thing Lady Gaga had to succeed in Indonesia, which should not have been too much of an effort, was to put on some pants.

A version of this blog post recently appeared 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. He recently co-hosted the distinguished Australian Alumni Awards in Indonesia.