Transnational Law Blog

Behind President Obama’s Warning of “Double Dip” Danger

Today, in an interview with Fox News in Beijing, President Obama warned that “the US economy could head into a ‘double-dip recession’ unless urgent steps were taken to rein back America’s mounting level of public debt,” reported the Financial Times. Speculation about a double dipping, also known as W shape economy, has been on going among academics ever since the US economy showed signs of recovery. I have long been argued that there will be a U shape recovery- a sluggish recovery but not another recession- and 2010 will be an adjustment period where real recovery will occur closer toward the end of 2010. 

At the moment, the effects of the fiscal stimulus will soon phase out at the end of this year and will probably finish by early next year barring any additional stimulus. Thus, 2010 means to be a deciding year for the shape of the U.S. economy, depending mostly either on the economy’s ability to recover on its own by increasing productivity and producing new jobs or on further government intervention to artificially boost the economy once again. I suspect both of these factors must occur concurrently for a stronger and real recovery to happen.

Let us set aside the first factor of self-recovering economy. Instead, let’s think about potential government intervention for a moment. Given the U.S. on-going commitment in the Middle East, namely Afganistan, Iraq and recently Iran, as well as the newly proposed health reform, the Obama administration has less latitude to ask Congress for another major stimulus package. This is not to mention the moral hazard issue posed by this approach. One of the remaining options is to stimulate the U.S. economy by increased trade volume, hence devaluation of the U.S. dollars.

In his recent interview with NBC news, president Obama asserts: “If we just boosted our share of exports by 1 per cent, that might be 250,000 well-paying jobs in the United States.” “So export promotion would be an example of something we could do without spending money,” quoted the Financial Times.

One major problem of this strategy is that the U.S. largest trade partner who currently benefits from enormous trade surplus with the U.S. is China. In response to the depreciation of the dollar against other major currency, Chinese government immediately pegged the yuan to U.S. dollar causing the yuan to depreciate even further than its artificial rate. The new peg effectively deflects the U.S. effort to stimulate U.S. trade volume with China. There is, indeed, an urgent need for President Obama to pay Asia a visit to prevent further distortion behavior from the Chinese exchange regime.

I found China’s new tactical complaint that “low US interest rate were fuelling a new global asset bubble based on the carry trade in US dollars” disturbing. In order to keep the dollar value low, interest rate must remain low. Economically, the devaluation of the dollar has two major negative impacts on China: increased trade pressure and decreased value of Chinese dollar reserve. Being the largest foreign holder of U.S. treasury bonds with roughly $800b on its books, China is seeing the value of its dollar assets depreciate with the dollar. Nevertheless, how could a government, which consistently devaluates its currency to earn comparative advantages on global trade criticizes the exact behavior done by its major trade partner? How about Chinese government allowing the yuan to adjust to its real value by floating its currency first?

 

Dani Rodrik was right that global protectionism was held back this during the 2008-2009 recession, but it is making a come back leading by China, the U.S. and is slightly followed by the rest of Asia. Unless we see better economic recovery and proper governing effort on trade protectionism, Europe and the rest of the world will soon join the league.

To add more complexity to the US- China diplomatic environment over trade issues, did you know that China exchange regime may in fact complies with the IMF Articles and the relevant provisions of the WTO?

On a separate and more positive note: U.C. Hastings was rated 11^th in the nation based on Super Lawyer Magazine’s new ranking. The Wall Street Journal Law Blog posted about the new ranking system here.

--Images by the Wall Street Journal (Balancing Act) and the Financial Times (Chinese Renminbi).

Sri Lanka and Trade Policy: Concession or Sanction?

The European Union last week produced an official notice derived from its year-long investigation on human right violation in Sri Lanka. Here are the Commission's final report, and the independent expert's report. Given the Commission's conclusion that Sri Lankan government breached its human rights commitments during it 25-year civil war with the Tamil Tiger, the country is set to  loose its trade concessions, known as GSP Plus, to the European Union, a sanction which will cost the country more than $100m trade benefits. Mr. Rajapaksa’s government has recently secured a $2.6 billion loan from the IMF with very little strings attached despite some delay due to international pressure and warnings of human rights violation in April and May.

From the European Commission:

The Commission has completed a thorough investigation into the human rights situation in Sri Lanka and in particular whether Sri Lanka is living up to the commitments it made to respect international human rights standards when it became a beneficiary of the European Union's GSP+ trade incentive scheme which provides for additional trade benefits.

The report comes to the conclusion that there are significant shortcomings in this area and that Sri Lanka is in breach of its GSP+ commitments.

We will now consult with Member States on whether to prepare a proposal with a view to temporarily suspending these additional trade benefits.

In response to the Commission’s announcement, Financial Times Editorial responded with a legitimate defense for Sri Lanka by emphasizing the inherent purpose of trade preferential treatments, which has been a successful economic instrument to lower many countries’ poverty line.

Sri Lanka is threatened with losing its trade rights because of human rights abuses committed by its government in the course of the conflict with the Tamil Tiger rebels. Such violations are well documented and abhorrent. But it is perverse to punish the clothing industry and other exporters for the actions of security forces they cannot control. In extremis, trade restrictions are a legitimate means to isolate the most vile abusers of human rights, particularly when an authoritarian government controls the entire country and its economy. That is not the case here. Sri Lanka is not Burma.

Using trade as a strategic tool makes the global trading system hostage to endless political posturing and negotiating games. Governments should grant trade preferences on simple, fair criteria, largely based on the poverty and vulnerability of trading partners. Trade deals should be a means for poor countries to haul themselves out of poverty, not a tool of foreign policy manipulation by their richer counterparts. Sri Lanka’s exporters have used their access to the European market well. They should keep it.

 I wrote about my trouble of justifying this civil war as well as concern over human right violations in Sri Lanka early this summer, and thought that leaders of both the Tamil Tiger and Mahinda Rajapaksa’s government should be charged for war crime violations of international humanitarian law including unlawful killings of civilians particularly children and young men as well as forcing child soldiers. However, the removal of GSP Plus to publicly punish Sri Lanka and its people instead of the government, as argued by the Financial Times, seems unjustifiable ex-post. The penalty is estimated to cause more than 2% contraction of Sri Lanka’s troubling economy alone. Separating trade policy from politics and diverging international alliances (Sri Lanka, Iran, China versus other Western countries) is much harder than it sounds. Nevertheless, Sri Lankan workers and exporters should be excluded from international sanction against the country’s military government, while other available legal instrument, i.e. charge for violation of humanitarian right, remains a better tool for the purpose of punishment and deterrence.

*Image by the Economist

New Wave of Insider Trading Charges as Judge Approved Wiretaps for White Collar Crime Investigation

It’s all over the news, and I should not be caught by surprise. Yet here I am becoming very disturbed by the loopholes in our financial institutions, which gave rise to an unprecedented amount of white collar crime - from Bernard Madoff to Raj Rajaratnam. Wall Street this week has seen the biggest insider trading charges in its history, charges alleging the involvement of various ratings firms, consultancies and half a dozen US public companies including IBM, Intel and two top hedge fund managers of Galleon and New Castle. Complaints filed in the court of the Southern District of New York are posted here.

The $20M insider trading case is currently seen as “a potential watershed in aggressive law enforcement”. Why did it take the SEC so long? Transaction cost or the difficulty in assembling evidence for insider trading? So far the FBI has received a judge’s permission to tap Mr. Rajaratnam’s phone, an authorization not traditionally available for white collar crime.  In the meantime, the Financial Times reports:

Billionaire investor Raj Rajaratnam and present and former executives of Bear Stearns, IBM, Intel, and McKinsey were charged on Friday in an alleged insider trading scheme that US prosecutors called the biggest ever involving hedge funds.

Mr Bharara said the investigation, aided by an unnamed co-operating witness, was continuing. He said the charges “should be a wake up call for every hedge fund manager and every Wall Street trader and every corporate executive who is even thinking about engaging in insider trading”.

Prosecutors claimed Mr Rajaratnam, founder of the Galleon hedge fund, and others used insider information from sources inside hedge funds, public companies, Moody’s Investors Service and an investor relations firm to trade ahead of earnings announcements, acquisitions and joint venture deals. 

The alleged scheme, which ran from 2006 until earlier this year, involved trades in companies including Google, IBM, Sun Microsystems and Hilton and produced profits of more than $20m, most of which went to Mr Rajaratnam, according to federal prosecutors. The Securities and Exchange Commission, which brought civil charges, put the proceeds of the scheme at more than $25m.

Among those charged with trading on and providing tips were Mr Rajaratnam; Danielle Chiesi, an employee of New Castle, a hedge fund set up by Bear; and Mark Kurland, a New Castle executive who formerly served as Bear’s head of research and asset management. Some alleged offences occurred after Bear – and New Castle – were acquired by JPMorgan Chase in March last year. New Castle, which faces civil charges filed by the SEC, was separated from JPMorgan in late 2008.

The SEC investigation is far from complete since those who are at risk of prosecution may choose to cooperate with the authorities and pass on names of other people and other hedge funds that they have shared information with. The case against Galleon is predicted to be just the “tip of the iceberg,” said Jacob Frenkel, a former SEC enforcement lawyer. 

America's Third Nobel Peace Prize In A Decade

At 4am, the news that president Obama received the Nobel peace prize came to me just as unexpected at it was for all of us. However, as the dust settled, and president Obama finally responded with his speech in the White House's rose garden saying that the prize is "an affirmation of American leadership on behalf of aspirations held by people in all nations." I have to admit a growing sense of admiration and honor by his response to the unexpected, yet often controversial, award. The Financial Times reports:

Awarding the SKr10m ($1.4m) prize, the Nobel committee said: “Only very rarely has a person to the same extent as Obama captured the world’s attention and given its people hope for a better future. His diplomacy is founded in the concept that those who are to lead the world must do so on the basis of values and attitudes that are shared by the majority of the world’s population.”

Mr Obama, appearing in the White House rose garden, on Friday morning said he was "both surprised and deeply humbled” to win the peace prize.

"I do not feel that I deserve to be in the company of so many transformative figures that have been honoured by this prize,” the president said.  "Let me be clear. I do not view it as a recognition of my own accomplishments, but rather as an affirmation of American leadership on behalf of aspirations held by people in all nations."

Mr Obama said other countries should view the award as a "call to action” to jointly address global challenges.

Barack Obama speaks in the White House Rose Garden after the US president was awarded the 2009 Nobel Peace Prize- Image by the Financial Times

A Proposed Solution for California Budget Crisis

People pointed to California's divided government and the supermajority law, which requires the legislature to adopt a budget with a two-third vote as reasons that cause the ongoing budget crisis in the Golden State over the last decade. The budget, which was passed by Arnold Schwarzenegger on July 24 of this year was said to virtually guarantee another fiscal crisis next year despite the fact that it comprises $15 billion in service cuts, including $8.1 billion in education cuts. This is not to mention that California budget shortfall is projected to top $40 billion over 2009-2010 fiscal years.

In searching for the answer to California budget crisis, two law professors, professor Chris Elmendorf of UC Davis and professor Ethan Leib of UC Hastings, recently proposed an attractive solution published in the New York Times' Op-Ed Columns.  Here is how it would work.

If the Legislature and the governor fail to adopt a budget four weeks before the deadline for the new fiscal year, a group of randomly selected citizens — one from each legislative district — would be convened to resolve the stalemate. Three competing budgets would be drawn up: one by the governor, one by the Democratic caucuses in the legislative branch and one by the Republican caucuses. (These proposed budgets would have to be finalized before the citizens were selected.)

For two weeks, the citizens’ assembly would hear from and question government leaders, policy experts, interest groups and other supporters and critics of the proposed budgets. The citizens would then deliberate among themselves and vote by secret ballot on which of the budgets to adopt. The vote would take place on the budgets as originally submitted; neither the citizens nor lawmakers would be able to make amendments. The winning budget would become law.

This arrangement would have a number of virtues. First, it would ensure that states adopt budgets in a timely fashion, protecting bond ratings and freeing lawmakers to attend to other important business.

Second, it would give the three institutional actors in the budgetary process — the governor and the Democratic and Republican caucuses — strong incentives to devise budgets that appeal to middle-of-the-road voters, not political ideologues or special-interest favor seekers. Citizens who participate in the two-week assembly would also learn an awful lot about their state’s fiscal situation and competing legislative priorities. These citizen participants would not be as susceptible to sound-bite misinformation as in more traditional exercises of direct democracy.

Our scheme would also do wonders for accountability. When budgets are adopted under divided government (or supermajority requirements), it is hard for voters to figure out exactly who is responsible for the shape of the compromises. If the upside of divided government is centrist compromise, the downside is weakened retrospective accountability at the polls. Our approach to budgeting promotes accountability because the enacted budget would unequivocally belong to “the governor,” “the Republicans” or “the Democrats.” Dissatisfied voters would know exactly whom to reward or fault when they go to the polls at the next election.

Finally, our proposal honors Americans’ insistence on a strong popular voice in government, without demanding too much of citizen participants. It would require them to perform only a fairly simple task: rank your preferences among three proposed budgets, after hearing out the proponents and opponents of each.

I found the professors' proposal convincing. Nevertheless, given how fed up our voters are as showed during May 2009 special election, I am concerned if Sacramento's effort to solve the budget crisis would get the same treatment it deserves to have. Being the tenth largest economy in the world, California has been loosing its competitive advantage in the eyes of investors by being the state that can't solve its problems. The longer Californians refuse to subjectively face this dilemma, the more harmful and long-lasting the effects.

The Case Of Ben Bernanke

Last week, most news applauded Obama’s reappointment of Ben Bernanke as the chairman of the Federal Reserve. Of the few commentators who opposed the reappointment, Morgan Stanley Asia's Stephen Roach lists three critical mistakes that Bernanke made leading toward the financial crisis. He argues that Bernanke should not be reappointed because his “pre-crisis actions played an equally critical role in setting the stage for the most wrenching recession since the 1930s.”

First, and foremost, he was deeply wedded to the philosophical conviction that central banks should be agnostic when it comes to asset bubbles. On this count, he stood with his predecessor - serial bubble-blowing Alan Greenspan - who argued that monetary authorities are best positioned to clean up the mess after the bursting of asset bubbles rather than to pre-empt the damage. As a corollary to this approach, both Mr. Bernanke and Mr. Greenspan drew the wrong conclusions from postbubble strategies earlier in this decade put in place after the bursting of the equity bubble in 2000. In retrospect, the Fed's injection of excess liquidity in 2001-2003, which Mr. Bernanke endorsed with fervour, played a key role in setting the stage for the lethal mix of property and credit bubbles.

Second, Mr. Bernanke was the intellectual champion of the "global saving glut" defence that exonerated the US from its bubble-prone tendencies and pinned the blame on surplus savers in Asia. While there is no denying the demand for dollar assets by foreign creditors, it is absurd to blame overseas lenders for reckless behaviour by Americans that a US central bank should have contained. Asia's surplus savers had nothing to do with America's irresponsible penchant for leveraging a housing bubble and using the proceeds to fund consumption. Mr. Bernanke's saving glut argument was at the core of a deep-seated US denial that failed to look in the mirror and pinned blame on others.

Third, Mr. Bernanke is cut from the same market libertarian cloth that got the Fed into this mess. Steeped in the Greenspan credo that markets know better than regulators, Mr. Bernanke was aligned with the prevailing Fed mindset that abrogated its regulatory authority in the era of excess. The derivatives explosion, extreme leverage of regulated and shadow banks and excesses of mortgage lending were all flagrant abuses that both Mr. Bernanke and Mr Greenspan could have said no to. But they did not. As a result, a complex and unstable system veered dangerously out of control.

I thought to myself what would be the risk of not having Bernanke being in charge of the Federal Reserves and whether the outcome would be worse or better given how susceptible investors are to internal changes. The argument that the monetary authorities should not pre-empt the damage of an asset bubble is a valid one. History, including the Great Depression, and Japan’s lost decade, repeatedly demonstrates how monetary tightening in the bull market is damaging to the economy in which speculations are inherently pervasive. Secondly, even if “global saving glut” should not be an excuse for American deteriorating saving accounts during the pre-crisis period, it is, by all means, a true phenomenon, which played a partial role in forming the financial crisis. Asia was not to blame for the crisis; although, the unprecedented accumulation of reserves in foreign currencies inadvertently augmented the US asset price bubble and widened derivative markets. Lastly, it is inescapable that more regulations are knocking on the door notwithstanding if it’s desirable to the Fed’s chairman. I suspect the reforms of banking and financial sectors will take the center stage as health care reform and economic recovery progress. Unless Stephen Roach could point out a better alternative to replace Ben Bernanke, at the moment, the risk appears to supersede the benefit of replacing him.

Sheehan is out of Retirement

I've talked about Cindy Sheehan before and was under the impression she had given up her war protest. I'm glad to read that Sheehan has once again taken up her charge and is dogging Obama while he is on vacation. The Breit Bart put it as follows:

After spending weeks dogging George W. Bush's presidential vacations, anti-war protester Cindy Sheehan is now trying to make life uncomfortable for President Barack Obama. Sheehan used to pitch a peace camp near Bush's ranch in Crawford, Texas, becoming a symbol of the anti-war movement after her son Casey died in action in Iraq. On Thursday, she and a band of anti-war protesters turned up outside the media center used by journalists covering Obama's vacation on the well-heeled east coast resort island of Martha's Vineyard.

"The reason I am here is because ... even though the facade has changed in Washington DC, the policies are still the same," Sheehan told a handful of journalists, against a backdrop of her "Camp Casey" banner. She told US peace activists to wake up and protest Obama's escalation of the war in Afghanistan, and complained that despite the president's anti-war stance, US troops remained in Iraq.

"We have to realize, it is not the president who is power, it is not the party that is in power it is the system that stays the same, no matter who is in charge."

"We are here to make the wars unpopular again," she said.

Won't get fooled again?

Posner v. Macroeconomists

This week brings a heated debate between Judge Posner and some prominent economists including Brad DeLong of UC Berkeley. The debate comes at the heart of my recent discussion with a lawyer who is also a faithful follower of Paul Krugman blog. I argued that certain opinions made by Paul Krugman are so political that readers should distinguish them from his academic accomplishment. Otherwise, the misjudgment may bring about misinformed opinion. Judge Posner took it one step further by questioning the ethical responsibility of academic economists in influencing public opinion through their academic tools. Here is a quoted entry from the Faculty Lounge by professor Kim Krawiec:

In his August 18 blog post for The Atlantic, Honesty about the Stimulus, Posner criticizes the August 6 talk by Christina Romer, chair of the President's Council of Economic Advisers, entitled "So, Is It Working? An Assessment of the American Recovery and Reinvestment Act at the Five-Month Mark."  She is referring, of course, to the economic stimulus package, and her answer is “absolutely.”

Posner, however, does “not think her analysis is responsible,” and is “concerned with the fact that academic economists, when they become either public officials or public intellectuals (like Paul Krugman), leave behind their academic scruples.”  Posner picks through Romer’s arguments in some detail, so you should read his post (and her report, linked above) in its entirety to fully understand the substance of the dispute.  Posner concludes by questioning the ethical responsibility of economists who write for the media or join the government:

This raises the question of the ethical responsibility of academic economists, such as Romer (and Krugman, and Lawrence Summers, and many others), who write for the media or join the government, either to adhere to academic standards in their nonacademic work or to make clear to the public that they are on holiday from those standards and that what they say in their public-intellectual or governmental careers should not be thought identical to their academic views.

Mark Thoma (here) and Brad DeLong (here) are not pleased, and quickly enter the fray in defense of Romer. In Unidentified Pretend Economist, Thoma asserts that Posner is wrong on many points:

Yet, nowhere does he say “I don’t know what I am talking about because I am a judge, not a macroeconomist.” Instead, in his role as a public intellectual, he acts like he is an expert in the field. Ethics indeed.

DeLong launches a more extended critique.  In Richard A. Posner's Ethical Lapses, he argues that Posner writes dishonestly about the stimulus package, and that Posner’s piece contained at least seven major ethical lapses.  According to DeLong:

In my view, anyone holding themself out as a public intellectual has one duty: to be smart. Being smart involves (a) checking your arithmetic, (b) building up your intellectual tools, (c) using Google, (d) reading works until you understand them, and (e) not writing things where you have absolutely no clue about what you are talking about.

Does Richard Posner think that he is behaving ethically here? In my view, he has failed to satisfactporily [sic] perform any item of that checklist.

On August 19, Posner responded to DeLong, again on the Atlantic blog, in Christina Romer Defended by an Angry Academic Colleague, dismissing the bulk of DeLong’s claims and arguing that the piece reinforced his distrust of macroeconomists' analysis of the economic crisis.  That’s all for now, but you know where to get the blow-by-blow if (when?) Judge Posner starts arguing with someone else.  

The Transnational Law School

Much to my surprise and fascination, Peking University ("Bei Da") opened a School of Transnational Law in the Fall of 2008 that has a curriculum nearly identical to that of a U.S. juris doctor (JD) program and requires three years of study. Even more amazing is that the school is seeking ABA accreditation, the first law school outside of the U.S. to seek such accreditation. There is an excellent article on USC's US-China Institute Blog simply entitled China Legal (h/t China Law Blog) that provides a good overview of the program goals and development. I particularly enjoyed the following quote from the school's Dean, Jeffrey Lehman:

When pressed about whether his school constitutes possibly outsourcing American law, Dean Lehman replied, "I view it less in economics and more in cultural. What we're seeing is the spread and development worldwide of a transnational legal culture where features of different legal cultures and systems are being shared. I think it is good for American society; for American economy if those ideas and principles and systems become part of a shared worldwide vocabulary. The more lawyers everywhere speak American law as well as their own country's law, the better it is for America."

I find this particularly insightful, especially in light of articles like Business Taxes in China. Feels just Like Home from the China Law Blog, which recommend retaining an accountant who understands the tax laws in both your home country and the country where your business is located and adds that these people are few and far between. As the world gets smaller and business becomes more and more transnational, we're seeing an ever increasing need for not only multi-lingual attorneys but also attorneys who are fluent in multi-legalese. Peking University's School of Transnational Law is a large step in that direction.  

Adds Wang, "I'm very confident STL will get ABA accreditation. The Chinese students specializing in America law help maintain the growth of the international trade and business transaction rather than decrease it. The more Chinese people understand American law, the more Chinese know how to talk to Americans, the more business is created. This means more jobs, transactions, and opportunities will be created for paralegals and junior associates in the United States."

Anyone following the development of China readily knows that its modern legal system is very young but evolving rapidly. A common problem I recall from China is finding a PRC attorney who has the analytical and advocacy skills that are the staple of American legal training and practice. By introducing the curriculum of a US law school to Chinese students at the School of Transnational Law, it will greatly increase the caliber of attorneys in China.

Zhang Lining, who graduated with an English degree from Ocean University in Qingdao states, "I was deeply interested and attracted by the school because it gave me chance to use analytical skills. I have an American coach in debating and during training, we analyzed the issues in two different ways. I think in law school, I can be trained as a thinker."

Even if the school never gets accreditation from the ABA, I have no doubt it will make a huge contribution to the educational and legal system in China.  I've commented in the past that the evolving legal system and culture in China is not only generating more business opportunities but is also changing how the Chinese perceive themselves as individuals within the Chinese legal system.

I've written a series of posts entitled A Reason to Have Faith in China's Legal System that comment on the development of grass-roots legal oragnizations that enforce the employment/contractual rights of migrant workers. Dean Lehman has stated that the curriculum of the Transnational Law School spans the entire spectrum of the legal practice, including but not limited to international business. As an example, he said Mark Rosenbaum of ACLU fame will be teaching about public interest advocacy next fall. In a country where we're already beginning to see grass-roots organizations forming such as those mentioned above, I can't wait to see how the students respond to someone like Mr. Rosenbaum! China's young lawyers are China's future and the Transnational Law School is a very exciting contribution to that future. I think it's AWESOME. I honestly can't think of any other way to describe it. Simply AWESOME.    

Trapped in the Middle-Income Class, Malaysia Is Finding Its Way Out

Once considered one of the Asian dragons, foreign investors have largely forgot Malaysia in the decade following the 1998 Asian financial crisis. However, there have been some important recent reforms in business law in Malaysia as the government of Najib Razak finds ways to push its liberalization agenda further in order to attract more foreign capital in the form of market exchange and direct investment.

The most important recent reform has been the relaxation of rules requiring ethnic Malay investors to have at least a 30% stake in any listed company. With the new law “newly listed companies will now be required to make available only a 12.5% stake to ethnic Malay investors without any obligation to achieve the quota if the issue is not taken up by them,” reported the Financial Times. The new regulation arguably aims to ease ethnic tensions and protectionism in favor of Malays of ethnic minorities. The three major ethnic group s include Malays (51%), Chinese (24%) and Indians (7%).

 In addition, the government also took a significant step by changing the restriction on the former foreign ownership ceiling for asset management funds and brokerages. According to the Financial Times, “under the new rules, ‘qualified and leading’ foreign fund management companies in the wholesale segment will be allowed to set up operations in Malaysia without need of a local equity partner, while the foreign shareholding limit for unit trusts in the retail sector will be raised to 70 per cent from 49 per cent. Similar change also applied to foreign ownership ceiling for brokerages.

Back in the early 1970s, while implementing various policies in order to attract foreign investors, particularly those that could bring in technological development, the Abdul Rayak government imposed legislation to the effect that Malays (the major ruling ethnic group) must own 30% of most local companies. This discriminatory condition, defended four decades ago as “a genuine assault on poverty”, eventually helped embed a system of privileges for well-connected insiders and widened the political gap between the government and various business groups to the extent that various policies can no longer be effectively implemented.

Like Thailand, Malaysia has absorbed manufacturing FDI for many decades. However, during the last decade, the rise of China, the impact of the Asian financial crisis and progress in regional and global integration have forced the country into a new developmental phase. Aside from attracting more foreign investment, improving domestic capacity has become the cornerstone for continuing the development of Malaysia; however, such “leveling up” efforts have for the most part been “excruciatingly slow”, if not entirely unsuccessful.

The steps taken by the Malaysian government in recent months have arguably come “more than a decade too late”. Nonetheless, foreign investors remain cautiously optimistic. The reforms in question are, by their nature, long-term; as such, eventual evidence of success will hopefully tempt investors to return to the country: “The Malaysian market was in danger of slipping off the edge of investors’ radar screens. Now it has the potential of becoming more important again,” said the Financial Times.

My impression is that external threats such as the rise of China, the Asian financial crisis or the global integration of the Asia Pacific region can only take partial responsibility for Malaysia’s economic standing. It is probable that the bigger and less apparent problem lies in the fragmentation of the political and social ties between the central government and various  interest groups causing failures to enforce or implement policy in recent years. For example, in the Malaysian government’s Second Industrial Master Plan (“IMP2”) of 1996-2005, the concept of “manufacturing plus plus”  correctly sets out,  what a middle-income country such as Malaysia should do in order to advance to the next stage of development. Yet Malaysia largely did not succeed in meeting its own goals during the implementation period of IMP2. Whatever the cause of the social and political fragmentation, it was not substantial enough to slow down the growth process in the decades prior to the Asian financial crisis; and yet for some reason, it appears that the crisis was a turning point after which the internal problems of Malaysia began to hinder further development. Consequently, any reform effort under the title of “liberalization” must offer adequate attention to the internal conflicts of the country, or else the dragon may continue to slumber.

Do You Really Own That E-Book?

"Control At A Distance" is a very interesting article over at Balkinization about Amazon.com using the internet to delete copies of George Orwell's books 1984 and Animal Farm from various people's Kindles after learning that the publisher did not want to grant the rights to Kindle. Jack Balkin cleverly points out that "the irony of deleting a book about Big Brother watching you was lost on both the publisher and Amazon.com." He also makes the following commentary:

"For centuries, we have understood, or rather believed, that owning books came with certain rights, including the right to keep what we purchase and to use it, mark it up, and sell it in any way we like. We were free to purchase books and keep them in our homes, without telling anybody what we were reading, or indeed, what page we had last looked at. Amazon's Kindle system upends all of these expectations. Amazon knows what books you have on your Kindle, and, in theory, it can even know the book you are currently reading, and even the last page you've read on each of the books you own. It can delete books, add books, or modify books, all without your permission. It can change features of the Kindle at will. In upending our assumptions about our freedoms to read books in private and use them as we see fit, Amazon threatens many of the basic freedoms to read we have come to expect in a physical world. If we want to preserve these freedoms, we will have to reform copyright law and privacy law to control the new intermediaries who can control us at a distance."

I just want to add that any reforms will have to have an eye to transnational reform as electronic copies of anything obviously transcend national boundaries. What that will look like exactly is rather fuzzy. I doubt treaties like TRIPS or normal international trade organizations will be able to truly regulate/enforce electronic IP rights. This kind of property will have to protect itself; technology will be designed to protect technology similar to how it is now. There could even be an aspect of marketing, like introducing e-book readers that promise to protect your e-books from intrusive powers like Amazon.com.  

In the Darkening Shadow of California Budget Crisis

A few days ago, I received some updated news from our Chancellor at UC Hastings regarding Governor Arnold Schwarzenegger’s proposal to cut 100% state funding for the law school. With $24 billion deficit, the governor was searching for further cuts to make up the remaining $5.5 billion and UC Hastings' 10.3 million public fund, equivalent to approximately 25% of the school budget, was proposed to be taken away all together except for $7,000, which is the nominal amount required from the state by the bequest of the founder, S.C. Hastings. The proposal provoked deep distress within Hastings community since it would amount to $8,175 increase in tuition for Hastings' 1260 student population. The problem is further complicated by the fact that Hastings' 2009-2010 tuition has already set for the new school year. Other alternatives are much less feasible such as admitting more students to Hastings over-crowded facilities or letting go highly qualified faculties which would in turn damage the law school's teaching quality and overall rankings. Otherwise, should UC Hastings, supposedly an arm of the UC system, convert into private law school? I will leave this debate to BLT's readers.

Here is the good news from our Chancellor:

Dear Students,
 
We are pleased to announce that on Friday, June 5th the budget conference committee voted unanimously to substantially restore UC Hastings' state funding, which will put reductions made to the law school’s budget in substantial parity with cuts applied to the UC system.  If this decision stands, we will still receive a budget cut, but nothing as extensive as 100 percent of our state support, as recommended by the Governor.  CFO David Seward reported that several members of the committee spoke about the calls and emails they had received, about UC Hastings' unique history as California's oldest law school, and the inequity of singling the law school out for disparate treatment.

California’s budget crisis is not over, however, and difficult choices remain to be made.  The conference committee stated they might have to revisit the higher education budget later in their deliberations, including support for UC Hastings.  In addition, even if the legislature continues to support the restoration of UC Hastings' state funding, the Governor can countermand, or “blue pencil” the legislative recommendation.  So it is important that we not relax our vigilance.  We will continue our work on educating the legislature and the Governor's office.

People talk about the long-term benefit of education as a type of secured and high turnout investment for the future. Yet, at the time of crisis and financial difficulty, the value of education almost always faces challenges and skepticism and funding for public education is often on the top the reconsidered list. What appeared as signs of unequal treatment among public universities for higher education is the reality that the funding cuts for all UC Universities are at roughly 20% while Hastings faced nearly 100% withdrawal from the state. With the recent establishment of UC-Irvine law school, one may also rightly ask, as Senator Denise Ducheny, D-San Diego did: "Why would we start a new law school when we've had Hastings around for more than 100 years, and it has a great reputation?"

I was deeply concerned with public reaction and was distressed over the result of California’s deficit-reducing ballot initiative last month. The result convinced me that misinformed exercise of democratic power through special voting can be much more damaging than non-action itself. Yet, the long-term effect of a possible alternative such as having no voting incentive seems entirely unjustified and unacceptable. This is the case where I suspect that the communication between our governor office the people had failed allowing information disparity gave rise to hostile sentiments toward a possible solution for California budget crisis. My direct experience with the state's budget crisis through Hastings community also reminds me that the harmful effects of these deepening cuts could be much worse for other institutions that are more dependable on public fund. Thankfully, about 75% of Hastings budget are raised through other sources.

The glorious celebration of California's dot-come and asset booms has been long gone. How Californians cope with this financial calamity and budget tightening remains to be seen in days ahead. What I do know for certain is that public service will be drastically reduced, income inequality will rise, hence, lowering quality of life. Lastly, it is the poor and various under-represented groups that will suffer the hardest hits among us all.

As the Dong Falls, Vietnam Faces a Harder Test at the Time of Global Crisis

The Financial Times recently reported that the Vietnam's dong is depreciating steadily as budget deficit and account imbalance grows with "chronic current account deficit that reached $8.4bn, or 9.3 per cent of gross domestic product, in 2008". Vietnamese government is facing the threat of not gathering enough money for its $80bn fiscal stimulus package as bonds and other commercial tools are falling flat. Investors are holding onto foreign currency due to the uncertainty of the dongs mostly credits to growing trade imbalances and insufficient foreign reserves.

This is a predictable test that most developing countries face at this stage of development, and is what economists considered as the "original sin," for which domestic currency is not used for foreign loans and on long term domestic loan contracts. Reliance on foreign currency for domestic exchange and long term loans make the country highly vulnerable to exchange shock and speculative attack which were the major drivers of the 97-98 Asian financial crisis. The Vietnamese government has little choice, and each option carries relative cost. Raising more reserves will temporary slow down growth, but this must to be done to boost investor's confidence on domestic market and to provide a stable macro economic framework for further development. Vietnamese government must find the outlet to do this- better now than later.

China's Rising Power and the Hope for a Multi-Polar World

Recently David Pilling of the Financial Times published a thought-provoking article under the title: “Asia Pays Tribute to Its New Superpower,” which discusses how the rise of China during the time of economic crisis has been perceived within the region and beyond. I found the true nature of this article troubling. David Pilling said it right: there is a sense of “trepidation at the rise of China’s power.” Such idea fuels much of my thoughts the past couple of days. Pilling opened his article by a contemplation of a potential multi-polar world.

There has been much chatter about the “G2” lately. But the idea that the US and China can together, and semi-exclusively, take on the world’s biggest problems is overdone. That day may come. For the moment, though, there are limits to how much an authoritarian government presiding over a relatively poor country can contribute to global problem-solving. For now, the rise of China and the relative decline of the US are more likely to mean a multi-polar than a bipolar world.

The article lists some indicative examples to demonstrate how the world has changed its grasp diplomatically toward China. By owning roughly $1,400bn of the U.S. asset, Chinese government had quieted Hillary Clinton on issue related to human rights, Taiwan and Tibet during her visit early this year. During the G20 gathering in London, France’s president, Nicolas Sarkozy, expressed his withdrawal from supporting Tibetan independence. Smaller countries have provided greater service. Vietnam’s prime minister, Nguyen Tan Dung recently spent one week touring China in anxious mode to close the $11 billion trade gap between the two countries. The South Korean warning of the “Beijing Consensus” reported to leave its Korean diplomats in Beijing apprehensive. What’s more? Taiwan is likely to allow China’s Mobile to purchase 12 percent of the Far East Tone, a Taiwanese mobile operator. Such commitment arguably was arranged to earn Beijing’s agreement toward the Taiwanese’s presence at the WHO’s annual meeting. In just a few days, the news was sufficient to boost Taiwanese stock market up nearly 15%  after Beijing announced its consent. 

I sometimes wonder how the political and economic landscape of the world be transformed if China grows to be the second largest economy in the world taking over Japan and the European Union. That day may not be postponed that much further. Nonetheless, despite an impressive rapid growth in the past two decades, at $7,600 per capita, China’s per capita GDP still ranks 107th in the world. The country itself is also facing various internal problems namely food and resource shortage, raising unemployment, social and regional marginalization, as well as a degrading environment that together raise serious question of Chinese economic sustainability. There are much awaiting this nation in the post-crisis period to resolve its internal issue. For now, the idea of a multi-polar world offers me much greater comfort.

 

*Nations with highest GDP (in 2006, trillions of U.S. dollars), figure taken from the Hoover Institue.

Recommended Reading: The Faculty Lounge

I have been highly benefited from The Faculty Lounge Blog recently and thought that I should share this blog with TLB readers. At the Faculty Lounge, bloggers are mostly law professors who post commentaries and analysis of legal issues and other on-going debates that are either academic-like or accassionally with a more casual tone as they probably often do while chit-chatting at the school's faculty lounge. One of my favorite Hastings professors, Calvin Massey, also blogs here, although with less frequentcy. There are a wide range of subjects covered at this forum ranging from the creditability of US News rankings, Obama' options for the Superiour Court vacancy, book reviews, legal art to faculty tactics in grading final exams. The blog is an informative forum where one could also gain insights as to what concerns our law professors and how they think through issues that often relevant to our understanding of the law. I found this blog a compensation for the missing gap of knowledge that mainstream media is often lacking. I hope you will enjoy it as well.

An American Life Story

The Washington Post today offers a heartfelt portrait of Justice Souter that invokes much of my admiration and inspiration for the Superior Court Judge- a simple life fills with unwavering public service and modesty.

Justice Souter recently announced his retirement from the Highest Court leaving this June when the Court will recess for the year. At the age of 69, he would have then served in the bench of the Superior Court for 19 years. Souter's legal legacy in the heart of the liberals will never be forgotten, but the life that he led depicted in "Quiet N.H. Home Is Where Souter's Heart Has Always Been" humbles many of its readers.

"He never unpacked," said Thomas Rath, one of Souter's closest friends. "A few years ago, he said, 'I figured I'd take the pictures out of the boxes and hang them up, but I figured in a few years I'd be coming back to New Hampshire and I'd have to pack them back up, so I might as well leave them in the boxes.' "

At the relatively young age of 69, Souter is giving up what he once called "the world's best job in the world's worst city" for a life of simple solitude in Weare. It is a rural hamlet that fascinates him so much, he has told neighbors he may someday write a history of the town.

When he departs this summer in his Volkswagen sedan -- he dislikes flying and always drives himself to and from Washington, leaving at odd hours to game the traffic -- Souter will cross the Piscataquog River, drive past country stands selling maple syrup and fresh eggs, and turn down a narrow, unmarked dirt road.

**David H. Souter's house in Weare, N.H., a rural town where the Supreme Court justice has said he finds "restoration." He will return there this summer as he retires from the bench. Photo by Philip Rucker of The Washington Post.

Reaching Out to Sri Lanka

I have been regularly following up with the news from Sri Lanka. Images and news from this civil war brought me solemn concern and uneasiness. Here in London, I caught this scene one weekend early this month. A sense of helplessness arrived soon after I stepped deep into the scene seeing men, children, elders and women yelling out loud their urging need and asking for international intervention. They were right, Sri Lanka is facing a humantarian criris; although, the Tigers themselves also committed the type of war crime that they are pledging against Sri Lankan government. There can never be a right reason for war and violence. Yet, at times people involved seem to put on a convincing case with the Tamil Tiger for their own justice (or injustice).

Last Thursday, Sri Lanka's President, Mahinda Rajapaksa, rejected advice from European high-level delegations to proceed a temporary ceasefire and told the representatives to stop lecturing him.

 “The government is not ready to enter into any kind of cease-fire with the terrorists. It is my duty to protect the people of this country. I don’t need lectures from Western representatives,” said the President in a speech distributed by his office, the New York Times reports.

According to the United Nation, 6,500 civilian have died and twice have been wounded since late January. At the moment, there are still 50,000 civilians are trapped in the combat zone with very little humanitarian supports. The refuge camps are reported to be "overcrowding, malnourishment, dehydration and limited medical facilities." Despite growing tension with foreign governments, the Sri Lanka government has been unwilling to openly allow international support-groups to enter further into the war zone.

Last March, Sri Lanka reported its slowest economic growth rate in five years last year, at 6% underlining the need for the government to push ahead with talks on a bail-out from the International Monetary Fund. However, due to the government's resistance, the United States had decided to delay a $1.9 billion International Monetary Fund bailout for Sri Lanka’s central bank to pressure the government to do more to help trapped civilians.

Such intervention seems to do little to change the Sri Lankan government's attitude toward cooperation and helping displaced civilians from boths ethinic groups. International governments and agencies must continue to pressure Mahinda Rajapaksa's government to allow international humanitarian groups to rescue and provide basic aids to the war victims.

Over the Worst Yet, Japan?

We don't know for sure, but at least Japan is showing signs of stabilization. Despite growing deflation and addition contraction at 3.3% this year, the Financial Times today reported some stabilizing signs from the second largest economy in the world giving hope that the worst of the recession may be almost over.

So far, industrial production in March rose at twice the expected pace, climbing 1.6 percent month-on-month. In addition, factory output rose for the first time in six months. The Royal Bank of Scotland in Tokyo also reported: "factory production appears to be getting close to the bottom." That was March, industrial production is expected to continue rising further this month, as well as May due to manufacturers trying to make up for their previous inventory reductions.

Japan predicted stabilization sheds lights and a glimpse of hope for the Asia Pacific region; even though, recovery is probably still far from the horizon. Toyota is expecting its "worst slump in memory" (for almost six decades) and Normura recently revealed a record of $7.2bn net loss. Earlier this week, the Japanese government announced additional issuance of $175 in bonds as tax revenue shortfalls is becoming inescapable this coming fiscal year. However, it remains unclear if the central bank will strike for any further recovering measures. It is keeping overnight lending rate at 0.1 per cent at the moment.

We can't expect good news on global recovery just yet, but stabilization is a real good sign regardless.

Global Internet Rights and Censorship

The Internet has changed the way information is spread around the world. Internet usage has become ubiquitous in developed countries and it is still growing in less developed countries. The ability of populations to get information through the Internet is treated differently by various countries.

Some countries have codified the right to Internet access in law. Witness, for instance, Estonia’s 2000 law declaring Internet access to be a fundamental human right. Internet censorship is a big issue for freedom of information and civil right's groups. Human Rights Watch told the U.S. Congress last year that

Human Rights Watch believes that the Internet is a transformative force that can help open closed societies and provide the near-instantaneous flow of information to inform the public, mobilize for change, and ultimately hold institutions accountable. We have warned, however, that there is a real danger of a Virtual Curtain dividing the Internet, much as the Iron Curtain did during the Cold War, because some governments fear the potential of the Internet, want to control it and the companies that provide the services and products tied to it; and users fear the consequences of using it as a medium for openness and accountability.

This warning was timely because there are some worrying signs that governmental censorship is on the rise around the world. Australian lawmakers have recently proposed a controversial law that would institute a mandatory Internet filtering scheme. This is following a 2007 law that gave Federal police power to block access to any website.

Designed for the laudable goal of blocking access to pornography for children, the plan also has the potential to block websites discussing controversial topics such as euthanasia and anorexia. Citizens would not be allowed to opt out of the filtering (the original version of the bill would have let people contact their Internet service providers to opt out of the filtering.) Not surprisingly, advocates for freedom of information and rights groups have been extremely critical of the plan. One commentator even noted that a list of websites that would be blocked by the Australian law has been leaked, and it "has, in effect, given every 15-year-old in Australia a guide to porn online."

For a discussion of the proposed Australian law, including a defense of the law from a member of the Parliament, click here.

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The country that gets the most attention of Internet censorship is China. China already had the most sophisticated Internet censorship system in the world before last week's news that China has again blocked YouTube because of a video purporting to show Chinese police fatally beating a Tibetan protester. This is not the first time China has blocked access to YouTube; they do so from time to time when there are videos criticizing the Chinese Government.

Other recent Internet censorship acts by China include restricting access to international reporters covering the Beijing Olympics and China pushing the United Nations to curb Internet anonymity by drawing up surveillance and monitoring technical standards. Regarding the anonymity issue, a U.N. document leaked to Columbia computer engineering professor Steve Bollovin stated justifications for the China-drafted Internet standards:

A political opponent to a government publishes articles putting the government in an unfavorable light. The government, having a law against any opposition, tries to identify the source of the negative articles but the articles having been published via a proxy server, is unable to do so protecting the anonymity of the author.

According to a new study by the OpenNet Initiative, state-sponsored Internet censorship is on the rise. Other recent offenders include Burma, Bangladesh, and Turkey. According to Harvard Law Professor John Palfrey, "In five years we have gone from a couple of states doing state-mandated net filtering to 25."

If you are interested in combating the rise in censorship of the Internet, there are a number of groups you could join, including Human Rights Watch, Reporters Without Borders, and the OpenNet Initiative.

Federal and California State Tax: One Step Forward, Two Steps Back

 

If you would like to find out the tax aspects of Obama's stimulus package which seizes about 36% of the stimulus, as well as how the State of California mends its budget crisis through various tax increases, there was a recent discussion on federal and state tax issues given by professor Heather Field and professor Darien Shanske, two respected tax professors at UC Hastings. The discussion was recorded in mp3 format and is now posted here.[mp3]

Other than the applicable nature of the subject discussed, the discussion offered some insights of how CA tax increases will negate many parts of our federal tax credits and how our state’s constitutional setting makes it difficult to avoid similar budget crisis in the future.

In the first section, professor Field opened  by explaining the need for a stimulus package and why the tax system plays an important role in stimulating economic activities. Professor Field then discussed the various implementations of the tax aspect which include non-repayment credit for first time homebuyers, educational tax credit for students, and sales tax reduction for new vehicle. The lecture ended with a thought provoking discussion as to weather the stimulus will work as well as the short term and long term nature of these tax provisions. It is appeared that President Obama is seeking to keep some of these tax provisions permanent despite growing concern over our budget deficit. Here, professor Field nicely instigated the debate over the role of our tax system as a tool for income redistribution.

I thoroughly enjoy the professor's subjective approach toward controversial issues such as the role of our tax system and whether Obama’s tax cuts will sufficiently motivate economic activities in the short run. Field posited the question as to why the tax credits only applies for a “limited window,” and what would be the consequence of extending these provisions permanently.

Other than issues related to fairness and wealth distribution, economists have been concerned over inflation and potential negative impact on monetary system through tax instrument. We are injecting a huge amount of capital inflow to the economy, in the long run, it will take some painful interest hike to restrain these capital surplus, tame down inflation and pay off the budget deficit. Furthermore, at some point, consumers may stop responding to tax cuts as an effort to stimulate economic activities. Behavioral economics tells us that consumer behaviors are often altered by short term and long term expectations of the consumer’s future income.

The discussion quickly moved on to Darien Shanke discussion on California budget crisis and how California state has used tax system to mitigate budget problem in the time of overall global crisis. If California were an independent state, it would have been the tenth largest economy in the world. Here, professor Shanske introduced the not-so-obvious paradox: if California hasn’t overspent, why does a State which arguably has  the highest income and sale tax in the country constantly finds ways to bail itself out of budget crisis over the past couple decades?

The key problems rest in property tax and the fact that California doesn’t have a standard sale tax system. At ¼ of the country’s average property tax, the State imposes the lowest property tax rate in the nation. Because income tax is less sufficient and stable than property tax, our State budget has always been much more vulnerable in the time of crisis as it is now. For these reasons, our state is now seeing itself going through massive lay offs (10.5% unemployment rates in February), budget cuts on education, double fee on car registration and general income tax increases.

Professor Shanske then questioned how did end up here? Why can’t we simply increase property tax to balance the budget?  California is the only State in the country that requires 2/3 majority to pass the budget. Shanske reasoned that having super majority requirement is not too "insane", but if the State were to make it very difficult to change the budget and tax structure, it should have had a good initial arrangement. Here, our State legislators happened to choose the worse possible arrangement by adopting a highly unstable tax system, and making it very strenuous to change it. Given the State's distressing institutional constrains, professor Shanske left his audience empty of any probable solution. He is not to blame.

The lectures are immensely informative and thought provoking. Nevertheless, they do not require any tax background from its listeners to appreciate the on going changes and debates in the federal and state tax system. "The Tax Aspect of the Stimulus Package"[mp3] is a highly recommended tune.