Mannkal Economic Education Foundation

Paul’s Perspective

From South Australia to Buenos Aires in three letters: EBA

admin, 4 March 2016

Paul McCarthy, 4/3/2016

Wasted talent” could have been the national motto for Argentina when I visited in early 2014. A century ago, Argentina and Australia were on an economic par; today, Australia’s earnings per capita are more than double Argentina’s. Two countries with similarities in geography, access to trade routes, climate, culture, resources and land nonetheless chose very different paths last century.

The evidence is all around Buenos Aires – from the faded grandeur of crumbling and graffiti-strewn buildings to the cacophony of daily political protests, the counterfeit cash passed off by every taxi driver and the bored jobless men sitting in the streets. So you have vast treasures of minerals, some of the world’s best agricultural land and huge shale gas reserves? Too bad if you can’t develop them because foreign investors won’t deal with a country that has a taste for military coups and debt defaults. Argentina could be one of the world’s richest countries were it prepared to put in the hard yards, exploit its strengths and be a best practice economy.

“Best practice”, or its absence, leads us back to South Australia and the defunct Holden plant. Robert Gottliebsen, writing in The Australian here describes the industry-killing roles of the Enterprise Bargaining Agreement (EBA) that governed Holden (and a similar one that is destroying Arrium, formerly Onesteel, in Whyalla.) It’s bad enough that the plant was de-facto managed by the unions, pay rates were ridiculously high and new technology was effectively banned. But the biggest problem lies in how EBAs are perpetuated by the Fair Work Act, in the heart of the system itself.

It was hoped that a buyer would be found to take over Holden’s plant and Belgium-based Punch International soon arrived on the scene. Yet under the “Transfer of Business” provisions of the Fair Work Act, a bad EBA can be passed from one failed enterprise to another – as Gottliebsen describes, like a “virus”. By simply doing similar work to Holden in its former plant, or by hiring a single ex-Holden employee covered by the EBA, Punch could have found the Fair Work Commission ordering it to adopt the very same EBA that had ruined Holden – despite Punch never having been party to the EBA. After killing its host this industrial Ebola would infect any newcomers, leaving Punch to take the only rational option: hold its breath and get out as fast as possible.

This ridiculous state of affairs is what happens when a country is more concerned with protecting welfare than gaining wealth. As any cricket batsman or market trader knows, when you play simply to try to preserve what you already have, you don’t last long. Protecting Holden’s former workers destroyed their jobs – now, the system is protecting them out of new jobs. The cost to Australia of deterring foreign investment, destroying industries and keeping people on welfare is monstrous.

Will Australia reform its nonsense industrial relations system, adopt best practice and seize a better future? The alternative is to follow the Argentine route and waste our talent. I hope I haven’t already visited our future across the ocean.

The Next Financial Crisis?

admin, 1 February 2016

The ASX’s Elmer Funke-Kupper nailed it in the PwC survey of global chief executives tabled at Davos this week when he said the world was burdened with $US200 trillion of debt that could not be paid back.

The opening quote of an article by Stephen Bartholomeusz in The Australian last week (A Global Debt Time Bomb Is Ticking) neatly illustrated the threat to the world economy. Ironically, the warning was delivered at the Davos Forum, an annual gathering of the very global financial, corporate and political elite responsible for both the 2008 Global Financial Crisis and the subsequent near-decade of economic stagnation, which for many has been a depression.

At the root of the GFC was a long period of artificially low interest rates. Cheap money encouraged people and institutions to borrow, spend and chase increasingly risky returns. The returns turned out to not be worth the risk (in part, due to US Government lending on homes people couldn’t afford).  The crisis hit, the risk-takers squealed and taxpayer funds bailed them out. When this (predictably) failed to return business-as-usual, the US Federal Reserve, Bank of England, Bank of Japan and even the European Central Bank embarked upon unprecedented levels of Quantitative Easing, a program which, put simply, amounted to pumping cash into banks and large institutions. Academics claimed this would flow directly to households; the results have shown a slight trickle at best.

If insanity is doing the same thing twice and expecting different results, QE was a double-down bet on the asylum. This new cash splash, with money even cheaper than in the pre-crisis period, saw funds flow into commodities, energy, real estate, emerging markets, the Dow, vintage cars; any market where hard assets could be bought with cheap but idle cash. Where cheap money bid up a bubble prior to 2008, more, cheaper money has blown up a bigger bubble in more asset classes. But the real economy, of value-added production, has not recovered. No wealth is created by the government printing money (diluting the value of existing savings) and lending it to those who bid up existing assets. This creates “activity” and contributes to the flawed statistic, GDP, but doesn’t increase the net stock of wealth – as is apparent in the US, where times are not good for most. Real incomes are not rising, jobs are not secure and many work part-time, often in multiple jobs to get by. Living standards have not grown in a broad-based manner over the last eight years. The alleged benefits of QE haven’t transpired, but the increased debt remains.

Bartholmeusz quotes William White, former Chief Economist of the Bank for International Settlements, as saying,  “Things are so bad there is no right answer. If they raise rates it will be nasty. If they don’t raise rates it just makes matters worse.” QE has turned out to be little more than an elites’ version of Kevin Rudd’s $900 cash splash which failed to ignite consumer growth because it didn’t address the economy’s actual problems. Offering cheap debt to bankers hasn’t stimulated the real economy because it was already suffering from too much cheap and misallocated debt. Now, as the debt catches up with a weak economy, we must deal with the same problem as in 2008; just with a heavier debt burden.

Doubling down at a casino may result in the occasional euphoric win, when the game is one of pure chance. The economy, suffering heavy debt and mal-investment, is an entirely different proposition.

Cuba – Behind the Blockade

admin, 7 January 2016

How to describe Cuba? Words like “charming” and “retro” splice easily with “bureaucratic” and “stagnant”. My recent honeymoon saw us spend four nights in what is not only a pleasant city for tourists but a country whose political problems give it a unique nature, and it is this uniqueness rather than the tourist travelogue that is most interesting. The balmy weather, cheap rum, cigars, Spanish-era Old Town and classic cars contrast with a visible poverty and a sense of deliberate economic decay. As with any dictatorship (this one made 8,000 political arrests last year), the tenor is set at the top; as it trickles through, it seems to strip people of their individualism and accountability. Everyone knows what the official line is, yet no-one can speak for it.

It started at the check-in for Cubana Airlines at Cancun airport. When travelling, one should always take idiosyncracies with a grain of salt and remember that we are guests in their country – if you’re going to get worked up by their ways, then don’t choose to travel there. I watched in mild amusement at the most ramshackle and lengthy check-in process I’d ever seen while noting the high number of consumer products passengers were taking for resale in Cuba – everything from microwaves to TVs to air-conditioners. A premium-class line was available – but aren’t all passengers equal under socialism? Perhaps they still are, as no-one used it, allowing the attendant to read a book rather than serve the waiting economy-class passengers.

The plane had no livery but was comfortable inside, though not stylish, and the 65-minute flight was uneventful. Havana airport clearly has been used for military purposes in the past and was fairly unkempt and underutilised. Airports are all about logistics and can give a few clues as to how well a country operates. The Havana luggage collection area was better than some I’ve seen – it had a conveyor belt – but we waited about 45 minutes before it started to move, and it stopped intermittently to the sound of grinding gears. Immigration was uneventful, though I noted the female Customs staff had a standard uniform of very tight, short skirts and intricate lace stockings. Was it to Mr Castro’s taste or did they hope to snag a wealthier foreigner as their ticket out of Cuba?

Cuba remains a very closed-off country – our mobile phones couldn’t pick up any networks and money is particularly hard to access. We had been warned not to rely on our Mastercard/Visa cards and had instead pre-paid our hotel and brought Euros to exchange. As it turned out, US dollars could be changed into the Cuban convertible currency (CUC) at the airport, with the CUC slightly stronger than the USD (of course!). Tourists may only use CUCs; the domestic CUP currency is used by Cubans and cannot be converted. No doubt a thriving black market exists somewhere. Four burly secret-policemen in ill-fitting suits lounged around the exchange counter, keeping half an eye on proceedings. Having exchanged enough for our holiday (we hoped), we took a new Renault cab for the 40-minute drive to Havana.

Looking out the car window, electricity and lighting were minimal and the people seemed poor – not well-dressed and lounging around aimlessly. All private cars were dated from the 1940s and 1950s, had patchwork welding and spewed black smoke. What industry I did see seemed in a state of disrepair and the largest billboard declared “Socialismo o Muerte” (“Socialism or Death”).

We stayed at the Hotel Telegrafo, one of the premium hotels in Havana. Like the cars outside, it was built in a different time – a beautiful art-deco building with vast expanses of corridors and big rooms that would not survive a modern developer’s focus on yield per square foot. The main lift was out of order, the water went off one afternoon, and tissues were unavailable. Interestingly, a whole range of US TV channels were available, including 24/7 MTV – so the first song to blare through my open window and down the streets of anti-Yankee Havana was the US rapper DJ Khaled shouting,  “All I Do Is Win”. The hotel staff were fairly friendly and responsive, and breakfast was held in an opulent dining room with live classical music –typical of a Communist country, great effort is taken to excel in certain areas while others are neglected entirely.

Now forget Jenny Craig, paleo diets or boot camps. If you want to lose weight, go to Cuba – the food ranges from inedibly awful at worst to disappointingly bland at best (the Chocolate Museum in the Old Quarter being a pleasant exception). The borders appear to have closed to spices and culinary trends as firmly as any other “contraband”. My Irish heritage is drawn to a potato, but not when it had the taste of soap (I’m not exaggerating). I briefly considered taking it back to my room, as we had run out of actual soap. On the upside, they do make a very good rum cocktail, and tours of rum and cigar factories are popular. Apparently Havana Club is like Fosters Beer – that’s the rubbish they export rather than drink – and the local Santiago de Cuba is one of the best I’ve ever tasted. Even better, a full bottle cost the equivalent of only 8 USD.

Cigar-rolling is done by hand in primitive factories that blare “news” (propaganda) over loudspeakers. To be a cigar-roller is actually a prestigious role which requires many years of training; to visitors from a developed economy it seemed like a punishment. Our presence in the factory was ignored but clearly not appreciated; despite being pre-booked our tour was only ad-hoc and appeared to be at the discretion of someone unidentified but clearly paid off. It was a dynamic I’ve seen in countries like Zimbabwe – where power is centralised and all officials are corrupt, the rules at ground level are made by whomever is bold enough to assert their authority following a process that resembles a poker game, with all the players eyeing each other off and trying to guess who holds which cards. But because control is illegitimate and non-permanent, the poker game never stops.

Havana is a pretty city and we were lucky to tour in a beautifully restored red and white 1954 Chevy – a car from the days when cars were designed to be beautiful. These are not the cars that most Cubans drive, however – the well-maintained cars are used for transporting high-paying tourists, not for personal use. The streets are decently maintained and traffic isn’t heavy, though the exhaust fumes certainly are. The famed seaside Malecon road is picturesque, though not on the land-side, where all the apartments are clearly old and not well-tended – almost everything in Havana is dilapidated.

Cuban Communism seems to have a higher tolerance for “bourgeois” past-times than other variants; rum, salsa dancing and beachgoing are popular. Girls celebrate their fifteenth birthdays by dressing in ball gowns, makeup and tiaras and having professional photo-shoots beachside or in the forest – perhaps it’s impossible to entirely suppress Latin extravagance (particularly among female Customs staff!) Surprisingly, religion was not suppressed and places of worship abound in the capital. My wife’s greeting of “Feliz Navidad” to our taxi driver at the airport was returned with delight, and Christmas trees and decorations were quite visible. Until the USSR fell in the 1990s, Cuba was a welfare country, relying entirely on Soviet aid. At this point Cuba was unable to feed or clothe its citizens and teetered on the brink of famine. In our guide’s words, “people had nowhere to turn but God” and churches responded, bringing food aid to the island. Apparently religion was tolerated since the Cuban Revolution; the depth of Christianity in Latin America made it impossible to eradicate although it was clearly not allowed to step outside certain bounds.

Cubans are now allowed to travel; my guide told me there are no restrictions from their own government, although the cost is high. Awareness of the outside world is low, internet access is expensive and slow, and the effects of propaganda in history education are clear. Our guide didn’t understand the word “best”, so I asked “what is numero uno thing for tourists in Havana?” “Numero Uno? Numero Uno in Havana is Raul Castro!” came the decisive reply. Later, I sensed a feeling of foreboding, even fear, when she described how Raul Castro has announced his retirement in 2017 but a successor has not been anointed. Officially, the task will be performed by their Congress (housed in a building resembling the US Capitol) but whether that will happen, and what the result will be were both unknown to our guide –and the prospect of something unpleasant filling the void was clearly unsettling to her.

Cuba has very little private industry, though private businesses are allowed to form in some sectors and must pay monthly permits. Some small cafes are housed in private homes that have varying and innovative menus and replace items they run out of. Otherwise, shops, hotels, restaurants and so on are all owned by the state, which shows in the level of service. The ultimate “can’t be fired, couldn’t care less” public sector mentality is on clear display. Even at a small local shop with its narrow range of Cuban-produced goods, I watched as an employee chatted on the landline telephone about baseball. Every few minutes he would cast a desultory look at the throng of customers waving cash over the counter and ask of one, “Si?” If you weren’t quick enough or your order wasn’t easily filled, he’d shake his head and turn back to the phone. His two colleagues stood chatting away, glad that their section had no customers and with no desire to help. Bored employees and impatient customers resigned to bad service – when the government is boss, there are zero incentives to produce and no accountability, leaving everyone worse off.

The newly-announced US Embassy was being prepared as we visited and changes are clearly afoot in Cuba. Foreign investment is slowly being sought, but it will long-remain a difficult country to invest in, with most important sectors both government-controlled and decimated. Even the sugar industry has not recovered and modernised, two and a half decades after the loss of free Soviet oil highlighted a need for agricultural reform. Cuba has potential and has many natural advantages, but it must first shed its authoritarian regime. The low-hanging fruit for foreign investment is obvious, but once it is permitted it will take quite some time and reassurance before investors can feel safe in their property rights. Even more fundamentally, a change of culture is required among a people used not to working for themselves and to whom concepts of productivity, profit, contract and customer service are unfamiliar. The good news is that any economy can be turned around with the correct free-market principles and Cuba is no exception. In anticipation of a brighter future, may I say, “Viva La Cuba!”