A Sub-‘Prime’ Sovereign Wealth Fund
Former Treasurer Peter Costello says that the Future Fund he created is a ‘prime sovereign wealth fund’ and ‘probably the most respected’ in the world. But that is not the conclusion of the Washington think-tank the Peterson Institute, which has compiled the most comprehensive international ranking of sovereign wealth funds (SWFs). The Peterson Institute gave the Future Fund a score of only 80 out of 100, which is below the average of 84 given to the other pension funds in its sample of 53 SWFs in 37 countries. Thirteen other sovereign wealth funds were given a higher overall score in the Peterson Institute rankings, including those in Timor-Leste and Trinidad and Tobago.
In terms of accountability and transparency, the Future Fund scored only 75 out of 100, below the 89 out of 100 given to the State Oil Fund of Azerbaijan. On governance, the Fund scored 86, a little below the average of 87 for other pension funds in the sample. By contrast, New Zealand’s Superannuation Fund ranks third overall with a score of 94 and a perfect score of 100 for governance as well as accountability and transparency.
The Future Fund’s fractious board and the controversy surrounding the process for appointing the new Future Fund chairman only serves to underscore the Peterson Institute’s finding that the Future Fund falls well short of world’s best practice.
For more on the Future Fund, see our Policy Monograph Future Funds or Future Eaters?
posted on 16 March 2012 by skirchner in Economics, Financial Markets
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Some Political Leadership on Foreign Direct Investment
Trade minister Craig Emerson has called for increased foreign direct investment in agriculture, in contrast to the federal Coalition’s calls for increased Foreign Investment Review Board scrutiny of foreign investment in the sector. It is one of the few acts of political leadership in this policy area since the late 1980s.
It is hard to believe now, but in the 1980s there was something of a bidding war between the federal Labor government and the opposition Coalition to liberalise the regulation of FDI. It culminated in then opposition leader John Howard’s undertaking to abolish the FIRB in his 1988 Future Directions manifesto. Both sides of politics recognised that restricting FDI increased foreign debt at the expense of foreign equity. The federal Coalition took a principled stand not to make a political issue of the Hawke-Keating government’s liberalisation measures.
Australia has often relied on external pressure rather than domestic political leadership in liberalising FDI. The 2005 Australia-US Free Trade Agreement resulted in a significant liberalisation of FDI screening thresholds in response to US concerns that would have been unlikely in the absence of the agreement.
The conventional wisdom holds that the existing discretionary regime for the regulation of FDI is as much liberalisation as the Australian political system can sustain. Yet the current system replaced an open-door regime that was in place until the early 1970s, at least if we ignore the statutory restrictions in certain sectors. The Australian political system has historically supported a more liberal FDI regime at times when economic nationalism and xenophobia were even more pronounced than they are today.
The shift to a discretionary regulatory regime from the early 1970s has normalised the idea that foreign direct investment should be regulated at the border rather than in-country on a national treatment basis. It is a legacy of the economic nationalism of Gough Whitlam and Rex Connor that continues to hold Australia back.
posted on 12 March 2012 by skirchner in Economics, Foreign Investment
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A Sovereign Wealth Fund is Not the Same as Fiscal Responsibility
Treasury Secretary Martin Parkinson addressed the issue of a sovereign wealth fund in a speech to the Australia-Israel Chamber of Commerce. Parkinson said that ‘Treasury is often characterised as being opposed to an SWF – yet our comments are neither supportive nor critical.’ In fact, Treasury and the RBA are just as often characterised as supportive of a SWF when they have been studiously equivocal. Whether Australia chooses to make greater use of a SWF is ultimately a decision for politicians. It is appropriate for Treasury and the RBA to discuss the implications of this policy choice, but we should not expect them to come down explicitly in favour of one side of the argument.
Parkinson’s speech makes clear that greater use of a SWF is not the same thing as more responsible fiscal policy:
the creation of an SWF per se does nothing to address either Australia’s net debt position or, more broadly, the level of government or national savings over time.
If the Australian Government had financial liabilities of $10 billion and runs a $1 billion surplus, it can reduce gross liabilities to $9 billion, or it can maintain them at $10 billion and buy $1 billion of financial assets to be held in an SWF – in both cases, net financial liabilities are $9 billion.
The only way the creation of a Sovereign Wealth Fund delivers a faster improvement in net debt is if it is used to justify a tightening of fiscal policy that would not otherwise be achieved.
As such, if we are to have a sensible discussion about the merits of an SWF, the proponents of such Funds, whether at the national or sub-national level, need to be clearer about precisely what they have in mind. Absent tough fiscal decisions, an SWF does not constitute a contribution to future fiscal sustainability.
Robert Carling and I make this point in our CIS Policy Monograph, Future Funds or Future Eaters? If contributions to a SWF, like the budget surplus itself, are no more than a residual after the government is done spending and taxing, then there is no reason to believe that a SWF changes government behaviour. A SWF, like a budget surplus, is a consequence not a cause of fiscal policy decisions. The IMF found there was little impact on government spending in its study of countries making use of SWFs.
Unless a SWF is embedded in a broader framework of binding and enforceable fiscal policy rules, there is no reason to believe a SWF will induce greater fiscal responsibility. If a politician supports a SWF but does not support fiscal policy rules, you know they cannot be trusted with a SWF.
posted on 08 March 2012 by skirchner in Economics, Financial Markets, Fiscal Policy
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FIRB Transparency and the Colmer Doctrine Revisited
Nomura’s head of mergers and acquisitions, Grant Chamberlain, has called for greater transparency in the regulation of foreign direct investment, as reported in The Australian:
There were generally clear guidelines when it came to FIRB policy, but “but when it comes to SOEs, the picture changes”.
He said the only public information recently had been the “Colmer doctrine”, comments made by then FIRB executive director Patrick Colmer at a conference on Australia-China investment in September 2009.
Mr Colmer said the Australian government preferred that foreign investment by state-owned enterprises was kept to less than 50 per cent for greenfields projects and less than 15 per cent for major producers.
Mr Chamberlain said that it was impossible to actually get a copy of Colmer’s comments and that there was confusion about what would be considered as a “major producer”.
In fact, it is possible to get a copy of the speech here, but only due to a Freedom of Information request I made of the FIRB. The saga behind the speech and my efforts to obtain a copy are detailed in this op-ed in The Australian. Chamberlain’s speech proves the point I made in my original FOI application that releasing the speech was in the public interest.
posted on 29 February 2012 by skirchner in Economics, Financial Markets, Foreign Investment
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The $1.7 trillion Road Not Taken
It turns out that Christina Romer recommended the Obama Administration implement a $1.7 trillion rather than $800 billion stimulus in late 2008 in order to “eliminate the output gap by 2011-Q1.” In one respect, it’s unfortunate that this was not implemented. While one can have an argument about whether an $800 billion stimulus was large enough, it would have been impossible to rationalise the failure of a $1.7 trillion stimulus. It would have been a definitive, even if disastrous, macroeconomic policy experiment.
posted on 23 February 2012 by skirchner in Economics, Fiscal Policy
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Mortgage Interest Rate Margins in Australia and the US
A story in the WSJ about mortgage interest rate spreads in the United States perfectly parallels the debate in Australia. The story notes that:
Analysts stress it is difficult to disentangle how much of the spread is due to pricing power from banks with more control of the market, and how much might represent structurally higher costs of doing business in the U.S. mortgage market reshaped by the crisis.
However, the fact that the US and Australia are experiencing essentially the same phenomenon argues against country-specific factors as the explanation. Capital markets are global and Australia is necessarily a price-taker in these global markets, a point forever lost on our parochial media and politicians.
posted on 22 February 2012 by skirchner in Economics, Financial Markets
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Future Funds or Future Eaters? The Case Against a Sovereign Wealth Fund for Australia
CIS have published a new Policy Monograph by Robert Carling and myself making the case against the use of sovereign wealth funds in the Australian context. We argue that the desirable objectives of a sovereign wealth fund can be better met through greater use of fiscal responsibility legislation.
The Business Council of Australia also argues against a SWF and in favour of fiscal policy rules in its just released 2012 budget submission.
posted on 20 February 2012 by skirchner in Economics, Fiscal Policy
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Quiggin versus Carling and Kirchner
John Quiggin accuses Robert Carling and I of ‘an appalling breach of elementary standards of research’ for not acknowledging that Alberto Alesina’s work on the effectiveness of fiscal stimulus and consolidations is ‘highly controversial.’ In fact, we referenced Alesina’s work precisely because it has featured so prominently in public debate, including in the pages of The Economist magazine. We also referenced Alesina for the comprehensiveness of his research. His papers include balanced summaries of the relevant literature. Alesina has responded to the criticisms of his work.
Even the most casual reader could not be unaware that this is a controversial topic, not least among academic economists. The op-ed was entirely premised on the existence of this controversy. We could have cited other literature on this question on both sides of the debate, but an op-ed is not the place for a literature review (Sinclair Davidson addresses the issue of peer review here). Alesina’s work and the debate around it is simply the most accessible, as John demonstrates.
It should be no surprise that there is conflicting evidence and debate on this question, something Alesina and we are happy to acknowledge even if we come down on one side of the debate. In the absence of some definitive natural experiment or methodological breakthrough, this is a controversy that will be with us for some time yet, despite John’s determination to see this and so many other controversies dead and buried in his favour.
posted on 10 February 2012 by skirchner in Economics, Fiscal Policy
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Give Austerity a Chance
Robert Carling and I have an op-ed in today’s AFR making the case for fiscal austerity. Drawing on the work of Alberto Alesina and his co-authors, we note that austerity may work politically as well as economically:
Interestingly enough, Alesina and his co-authors also show that fiscal consolidations do not generally reduce the popularity of governments or make it more likely they will lose elections.
Indeed, they go so far as to say that “it is impossible to find systematic evidence of predictable political losses following fiscal adjustments”.
This is entirely consistent with their finding that fiscal consolidations need not have adverse implications for economic growth and may even support growth. Electorates seem to recognise this, even if politicians do not.
posted on 08 February 2012 by skirchner in Economics, Fiscal Policy, Monetary Policy
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Why We Should Welcome the Relative Decline of Manufacturing
I have a piece in The Conversation arguing that the relative decline of manufacturing is a sign of economic progress:
The manufacturing share of developed economies has been in decline for decades. But that does not mean that manufacturing output has been declining in an absolute sense. Far from it. In the United States and the United Kingdom, manufacturing output was at record levels prior to the onset of the financial crisis. Manufacturing employment has fared less well, but this is symptomatic of substantial long-term productivity gains in this sector, not declining absolute levels of output.
Manufacturing has also been declining steadily as a share of world GDP. This should not be surprising. It is driven by much the same process that saw a decline in the agricultural share of GDP during the 19th and 20th centuries with the onset of industrialisation. As incomes grew, the share of food and other agricultural goods in consumption and production declined. The same is now happening with manufactured goods, as a greater of share of rising incomes is allocated to services.
posted on 17 January 2012 by skirchner in Economics, Free Trade & Protectionism
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Partisan Grading
Republican academics are associated with less egalitarian grading outcomes.
posted on 11 January 2012 by skirchner in Higher Education
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Labour Supply of Politicians
From a new NBER Working Paper:
Doubling an MEP’s salary increases the probability of running for reelection by 23 percentage points and increases the logarithm of the number of parties that field a candidate by 29 percent of a standard deviation. A salary increase has no discernible impact on absenteeism or shirking from legislative sessions; in contrast, non-pecuniary motives, proxied by home-country corruption, substantially impact the intensive margin of labor supply. Finally, an increase in salary lowers the quality of elected MEPs, measured by the selectivity of their undergraduate institutions.
posted on 10 January 2012 by skirchner in Economics, Politics
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EMU and International Conflict
Martin Feldstein writing in Foreign Affairs in 1997, demonstrating that the euro crisis was entirely foreseeable:
If EMU does come into existence, as now seems increasingly likely, it will change the political character of Europe in ways that could lead to conflicts in Europe and confrontations with the United States.
The immediate effects of EMU would be to replace the individual national currencies of the participating countries in 2002 with a single currency, the euro, and to shift responsibility for monetary policy from the national central banks to a new European Central Bank (ECB). But the more fundamental long-term effect of adopting a single currency would be the creation of a political union, a European federal state with responsibility for a Europe-wide foreign and security policy as well as for what are now domestic economic and social policies. While the individual governments and key political figures differ in their reasons for wanting a political union, there is no doubt that the real rationale for EMU is political and not economic. Indeed, the adverse economic effects of a single currency on unemployment and inflation would outweigh any gains from facilitating trade and capital flows among the EMU members.
posted on 14 December 2011 by skirchner in Economics, Financial Markets, Monetary Policy
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The Irrefutable Logic of Quantitative Easing
A useful thought experiment from Robert Hetzel:
The institutional fact that makes a liquidity trap an irrelevant academic construct is the unlimited ability of the central bank to create money. One can make this point in an irrefutable manner by noting that the logical conclusion to unlimited open-market purchases is that the central bank would end up with all the assets in the economy including interest-bearing government debt, and the public would hold nothing but non-interest-bearing money. Because that situation is untenable, individuals would work backward from that endpoint and begin to run down their money balances and stimulate expenditure in the current period.
posted on 13 December 2011 by skirchner in Economics, Financial Markets, Monetary Policy
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The Long March of Fightback
I have an op-ed in Online Opinion marking the 20th anniversary of Fightback:
Twenty years ago this November, the Liberal-National Party coalition released Fightback, the most comprehensive and market-oriented policy platform ever taken to a federal election. Conventional wisdom holds that Fightback was a political folly that saw the opposition lose an un-losable election. Yet in the last twenty years, much of Fightback has been implemented and even enjoys bipartisan political support. Fightback was a failure only when viewed through the lens of short-term electoral politics rather than public policy.
The1993 federal election is still considered Paul Keating’s greatest political triumph and John Hewson’s spectacular failure. But this is to elevate personal political fortunes above public policy outcomes. Fightback’s centerpiece, the goods and services tax, was supported by Paul Keating in 1985. It would be surprising if he now called for its repeal. Keating beat Hewson in 1993 but within seven years the GST prevailed and now serves to diminish Keating and his legacy.
Even with the advantages of incumbency, the Howard government’s 1998 tax reform package was as politically risky as Fightback. It nearly cost John Howard both the 1998 and 2001 elections. Yet it made Howard’s reputation as a reformer and few would argue with the economic legacy of the tax reforms introduced in 2000. As Paul Kelly has noted, if the Labor Party had implemented the 1998 tax reform package, the ABC would have been making documentaries about it for the next 50 years.
posted on 13 December 2011 by skirchner in Economics, Politics
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