Transnational Law Blog

The Lure of China and Economic Activism

I wonder what do you think about Google’s decision to confront China’s censorship by pulling out of the country entirely despite a potential lost of profit for not doing its business with now the second largest economy in the word? A Google's engineer that I talked to over the weekend seemed to struggle in making up his mind about pros and cons of the decision. From a business standpoint, Google’s behavior appears to go against the conscience of self-interest business practice. Even the Economist this week reminds us “the only thing more dangerous than dealing with China is not dealing with it.” Be that as it may, should the world be blindly consumed and guided by corporate profits? In its article, the Economist prescribed two clear rules in doing business with China

The first is that companies need to show an almost exaggerated respect for China’s traditions: the Chinese are simultaneously immensely proud of their history and highly suspicious of foreigners who, in their view, have repeatedly mistreated them. This means making a long-term bet on the country. P&G took three years to become profitable in China. L’Oreal took nine. KFC spent ten years perfecting its business model before becoming the powerhouse that it now is, with restaurants in 450 cities. It also means investing heavily in politicking. Stanley Wong, head of Standard Chartered’s Chinese operations, reckons that multinationals’ senior representatives in China must spend 30-40% of their time buttering up officials and regulators.

The second rule is that companies should never abandon their principles for short-term gains. Freedom of information is so central to Google’s identity that it was right to declare it sacrosanct and repudiate its previous willingness to negotiate it away for commercial advantage. Although the Chinese government may not accept such intransigence, as in Google’s case, the odds are better if firms slavishly follow the first rule.

That is a price worth paying. There is growing evidence that the Chinese market is living up to its promise...

The author seems as confused as the rest of the world in dealing with China.  I found the recommendation circular and deficient with unclear direction. As to the first advice, it is fundamentally flawed on both economic and governance standpoints.

With the lure of China, increased market competition would naturally result in amounting investment risk. With time, probability of larger returns of profit for latecomers is less likely as domestic market matures. If it took 10 years for KFC to make a profit in China, it would have taken other fast food chains much longer to penetrate and be successful in Chinese fast food market given the presence of successful first comers such as a big multinational fast-food giant like KFC. In a complex market as China, embedded in investment risks are ambiguous rule of law, widespread corruption and unspoken customary business practices. At the result, increase of competition among foreign investors in the long term could subsequently equate with higher risk of failure, not success. The fact that some first comers had succeeded in the past makes it less likely to replicate. Certainly, business diversification is also a part of many investor’s business model, but a guarantee of a long-term investment is almost nonexistent, counter to want the article hinted, and potential long-term financial loss is just as readily at hand.

Furthermore, at the current rapid speed of technology and copyrights infringement in China, unconditional acceptance of the Chinese Inc.’s policies could hardly benefit foreign investment in the long term. Don’t get me wrong, I do not deny that acquisitions of new advanced technology is vital for Chinese development particularly in the context of a transitional economy. However, from a perspective of a foreign investors who potentially will provide China with financial, management and technological resources, blindfold compliance of such uncontrollable infringement (intentional or not) not only hurts foreign investors in the short term but also risks long-term profits as foreign resources are diffused to local entrepreneurs. The trade off between the providence of advanced technology and economic benefits must happen at the government level so that the benefits would be guaranteed instead of be estimated with vague speculation. For the time being, such trade offs appears grossly inadequate.

The Economist’s advice is also flawed on the level of global governance. Under the veil of diplomacy, economic exchange is the main driver of international relations.  Therefore, analysts and consumers should be mindful that what is benefiting multinationals sometimes does not align with what is best for global economy and international stability. An over-evaluation of China’s potentials, which subsequently justifies Chinese business practices, as the Economist argued, is inconsistent with our goal of maintaining global balance and promoting economic growth.

It is ill-advised to tolerate a country that is being treated at equal with the rich world for its economic power, and yet lacks governmental providence of non-corrupted, non-infringed, equal and fair business practice. Such disparity fails to warrant political and legal stability necessary for both business success and global balance.

China will stay a demanding business partner if foreign investors bow to its power and maintain absolute acceptance of the Middle Kingdom’s governing policies. Economic activism should not stop at organization and corporate level. In the face of an increasingly integrated global economy, economic activism must encompass countries and their political alignments to ensure fundamental rights and business equality are acknowledged and protected.

Edit: as this post is being written, the Financial Times today provides further insights into foreign investor’s frustration over China's new protectionist measures.

--Image by the Economist

 

March's Winners and Losers

We are moving further away from the double dips danger! Last month the US economy added 162,000 jobs- a strong showing of a potentially more sustained recovery for US economy. Payroll gains are largely boosted by private sectors and much less by temporary census hiring. Unemployment remains at 9.7% but is expected to go down in the near future. The Financial Times reported the winners and losers for employment gain as quoted below:

 The Losers

•     The unofficial unemployed: The broadest measure of labour market slack, which includes discouraged workers and those working part time for economic reasons, actually ticked up this month to 16.9 per cent, its highest measure since December.

•     Long-term unemployed: The per cent of long-term unemployed continues to rise. The number of people unemployed for 27 weeks or longer was 44.1 per cent in March, up from 40.9 per cent in February.

•     Medium-term unemployed: And it’s not just the long term unemployed that are finding the labour market increasingly hostile. The median duration of unemployment rose to 20 weeks in March, up from 19.4 weeks in February.

•     Would-be census workers: Census hiring only accounted for 48,000 new jobs in March, against expectations of 80,000. This bodes well for the overall strength of employment figures. Census jobs are temporary and aren’t indicative of greater business confidence the way other temporary jobs are. But for those who were hoping the census would provide a brief unemployment respite, the jobs haven’t panned out just yet.

•     Financial workers: It’s hard to have sympathy, these days. But employees in the financial industries lost 21,000 jobs last month. Insurance carriers were particularly hard hit, shedding 9,000 jobs.

•     Teenagers: Teenagers saw a 1.1 percentage point increase in their unemployment rate which now stands at 26.1 per cent. But that figure is volatile - it had fallen 1.4 percentage points from January to February.

•     Blacks and African Americans: The February drop in unemployment among Blacks was reversed in March, as joblessness rose 0.7 percentage points to 16.5 per cent.


The Winners

People with jobs: The average workweek rose by 0.1 hours to 34.0, a sign of increased business activity, and a harbinger of hiring to come. But, alas, the news wasn’t all good. The average hourly earnings fell by $0.02, or 0.1 per cent following February’s $0.04 gain.

•     Health care workers: Health care accounted for 27,000 jobs in March. The best field to be looking for work in? Ambulatory health care services - work with those who need outpatient services - which saw gains of 16,000.

•     Temps: 40,200 new private sector temp jobs were created in March, a sign of increased business confidence. But growth wasn’t as strong as it had been in January, when the sector picked up 49,200 new jobs.

•     Miners and manufacturers: Mining jobs increased by 8,000, compared to an average of 6,000 over the past five months. Manufacturing employment continued its upward trend, growing by 17,000 in March.

•     People without a high school diploma: The unemployment rate fell 1.1 percentage points. But that doesn’t mean the advice we all were given to finish high school was any bad thing: at 14.5 per cent, the unemployment rate for those with less than a high school diploma is far higher than more educated groups. 

As encouraging as the number appears, a closer look at the short list, nevertheless, shows worrying signs, especially where the losers include long-term and medium-term unemployed workers, as well as Black and African American workers. For the time being, Larry Summers was on point that a source of stimulus to the economy is "the sense that the country’s long-term problems – healthcare, energy, education, long-run fiscal deficits – are being addressed." More on the US recovery could be found on the Economist's special report this week.

--Image by the Financial Times

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.

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.  

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.