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Profit? Yes! But Must be Clean

The Royal Commission Report into Misconduct in the Banking, Superannuation and Financial Services Industry will be released to the public this afternoon (4 February 2019). The Commission had already published an Interim Report in September 2018.

The Interim Report had hardly anything good to say about the industry. Rather, the Commission used the word “greed” to describe the industry’s behaviour and how the industry largely treated the ordinary customers. Otherwise, how can one explain fees charged for services not provided? Fees charged to dead people?

The Australian banking industry had been politically very successful for decades. In the post-GFC years, the industry used the excuse of  ‘rising costs of funds’ in international markets for raising their interest rates asynchronous to the RBA’s rate decisions. Nobody raised an eyebrow when the major four banks reported record profits year after year while still crying poor about rising costs of funds. The crux of the matter is the banking industry fell into a culture of profit at any cost and bank executives’ remunerations were linked to profit and revenue.  Thus, the bank executives in Australia all they cared for was whether they were contributing to the bank’s revenue and profit. Bank leaders did not care enough whether their employees were doing the right thing for their customers. If the bank management were thinking that they were more focused on creating shareholder wealth, shareholders thought differently.   ANZ, NAB,  and Westpac – all received a ‘first strike’  2018 under Australia’s ‘two strikes’ rule.  CBA  received a ‘first strike’ in 2016.

So, the bottom line is: yes, we want our banks to be profitable and financially strong. Yes, we need strong banks for a strong economy. But the profit must be clean.

Australia’s ‘per capita recession’ persists

Look at the graph below which charts Australia’s GDP growth rate both on an annual (the black line) and quarterly basis (the green columns). Should one be worried?

Not really, if one reads the statement of the Chief Economist of the Australian Bureau of Statistics (ABS). In the media release accompanying the latest quarterly GDP figures, the Chief Economist of the ABS is cited as saying: “The economy continues to grow as we head towards twenty-eight years of sustained growth” but acknowledges that it is below the long-term growth rate of 3.5%. If the quarterly trends persist, then one can expect the annual growth rate for 2019 to be 1.8% – which is barely above the population growth rate of 1.6%

 

Diagram shows GROSS DOMESTIC PRODUCT, Volume measures: Seasonally adjusted

Source: ABS

What the Chief Economist of the ABS does not acknowledge is that for three consecutive quarters, the GDP growth rate has been below the population growth rate. Hence, Australia has been in a ‘per capita recession’ in recent quarters, as leading economists and analysts have often pointed out.  There is a danger that the economy might tip into a ‘real recession’ with an actual decline in overall GDP for two consecutive quarters. While the Reserve Bank has dropped the policy rate to a historic low (1.25%), there is likely to be limited stimulus from monetary policy, as the Reserve Bank Governor himself acknowledged. As he put it: ‘There are certain downsides from relying just on monetary policy and there are limitations on what, realistically, can be achieved. So, as a country, we should also be looking at other options …One option is for fiscal support’.

One needs fiscal stimulus in the form of enhanced government expenditure, especially on infrastructure.  Relying on tax cuts is unlikely to be enough as an evaluation of the latest US experience shows. Alas, the Australian government is trapped in the language of accumulating fiscal surpluses as the primary metric of good economic management.

 

Lest we forget the post-election reality: ‘happiness’ in Modi’s India

Prime Minister Narendra Modi led the Bharatiya Janata Party (BJP) to another landslide victory in the 2019 Indian elections. It was even bigger than the 2014 elections. His party now has more than 300 seats in the Lok Sabha of 543 seats. The Opposition can barely muster more than 90 seats, with the once formidable Congress holding a paltry 52 seats. We are witnessing the consolidation of ‘Modi’s India’. As a leading political scientist observes, ‘…I am ascribing the victory primarily to Modi, not to the BJP.’

The recent emphatic electoral victory of the BJP has understandably led to joyous celebrations among millions of Modi’s supporters and his formal political allies in parliament, but such states of happiness are ephemeral. As the excitement of victory wanes, one needs to ask how ‘happy’ Indians are as measured by life satisfaction surveys. These surveys use the metric of the Cantril ladder of self-reported feelings of life satisfaction (0 being the worst, 10 being the best). Did Modi’s promise of ‘good times’ (acche din) and ‘inclusive development’ (sabka saath, sabka vikas), while advancing the cause of Hindu nationalism, boost the collective feeling of well-being among Indians on an enduring basis?

To gauge the state of happiness in India today under the Modi regime, one can turn to the 2019 World Happiness Report by the UN – the seventh such report. It uses data from Gallup to measure, rank and analyse the state of happiness across the world from 2005 to 2018.

India fares poorly. Its rank is 140 out of 156 nations based on an average of scores for the 2016-2018 period. It ranks significantly behind South Asian neighbours, such as Pakistan (ranked 67) and Bangladesh (ranked 125). The trend in the reported happiness index for India is worrisome. India slipped significantly in the rankings and the index itself fell by more than 1.1 points over time (from an overall index of 5.15 in 2005-2008 to 4.02 in 2016-2018). It shares this significant negative trend with several conflict-ridden countries, such as Yemen, Syria and Venezuela.

The 2019 report concludes that, in statistical terms, there is a close association between per capita income, healthy life expectancy, social support, freedom to make life choices, generosity, perceptions of corruption, and aggregate measures of life satisfaction. In the so-called ‘happiness league tables’, India seems to be dragged down by lack of social support and poor performance in healthy life expectancy even as per capita income has grown significantly over time.

There are other surveys that are broadly consistent with the findings of the UN report. Gallup conducted a survey in 2018 which showed that only 3% of Indians were ‘thriving’ (that is, the proportion who rated their current life satisfaction as 7 or more and their future life satisfaction as 8 or more) relative to 14% in 2014 (when the BJP came to power).  The Gallup report attributes this to very high levels of inequality in India and the huge rural-urban divide in which most of India’s agricultural households are in debt.

A 2018 survey of the Pew Research Centre reveals that the time-frame over which Indians are asked to evaluate their views of whether economic and social conditions are improving seem to matter a great deal. When asked if the financial situation of the average Indian is better today than 20 years ago, roughly 65% say that it is better. If, on the other hand, when asked whether the situation in terms of challenges facing India – such as lack of job opportunities – has gotten better or worse over the last five years (a time frame that largely encompasses the Modi government), few (21%) have positive observations to offer.

In sum, while a Modi-led BJP government can savour a splendid electoral victory, the challenge of governing a nation in which the state of happiness (as measured by self-reported life satisfaction) is rather low and has apparently worsened over time is formidable. How that challenge will be met remains to be seen.

Lest we forget the post-election reality: ‘per capita recession’ and the Australian economy

‘I have always believed in miracles’ proclaimed a clearly overjoyed Scott Morrison, as he is poised to continue his Prime Ministership after his party won the apparently ‘unwinnable’ election about a week ago. The Prime Minister is entitled to his beliefs, but one wonders whether he can ignore the harsh reality of a substantial growth slowdown of the Australian economy and its sombre ramifications.

In March of this year, media reports were full of references to the fact that the Australian economy was experiencing ‘per capita recession’ – see here, for example. While the economy was not in a recession in a conventional sense (two consecutive quarters of negative overall GDP growth), growth in recent quarters was so slow that it fell below the population growth. Thus, per capita growth on a quarterly basis became negative. Here is how one leading Australian economist puts it:

“National accounts figures show that the Australian economy grew by just 0.2% in the last quarter of 2018…The shocking revelation was that Gross Domestic Product per person (a more relevant measure of living standards) actually slipped in the December quarter by 0.2%, on the back of a fall of 0.1% in the September quarter.

These are the first back-to-back quarters of negative GDP per capita growth in 13 years – since 2006…”

Per capita recession, if it persists, can be insidious, as it puts downward pressure on real wage growth which, in turn, can stymie household consumption growth. Given that household consumption represents 60% of Australian GDP, sluggish spending by households, in turn, puts downward pressure on per capita GDP growth. This is happening against a background of falling property prices in major metropolitan areas which effectively attenuates the role of a positive ‘wealth effect’ on consumer spending. It is also possible that Australia, like other OECD economies, has entered an era of ‘secular stagnation’ typified by persistent sub-par growth.

Despite these warning signs, the notion of per capita recession and its ramifications hardly featured during the election campaign. Yet, post-election, the Reserve Bank Governor has declared his hand. The RBA Governor stands ready to cut interest rates to support faltering growth and has expressed concern that this may not be enough unless there is adequate fiscal support.

The Prime Minister and his team are keen to project an era of continued prosperity built on the back of imminent tax cuts while brandishing the notion of a budget surplus. One wonders whether Scott Morrison and his colleagues in government are on a fool’s errand. Even if tax cuts are expeditiously done (which appears to be a big if), a well-known empirical regularity is that ‘tax multipliers’ are usually lower than ‘spending multipliers’  (that is, tax cuts have a moderate impact on aggregate demand relative to government expenditure, especially on infrastructure) and may not be enough to offset the impact of sluggish consumer spending on aggregate demand. Moreover, given that the Morrison government has pinned its credibility on attaining a budget surplus next year (and perhaps over the term of the new government), it has placed self-inflicted limits on pro-active fiscal policy. Instead of a growth strategy articulated in terms of significant investments in health, education, infrastructure and renewable energy which could stave off the risks of secular stagnation, the government appears committed to attaining a budget surplus regardless of changing economic circumstances.

 

Lest we forget the post-election reality: poverty in Australia

The ‘miraculous’ election victory of the centre-right coalition suggests that the majority of Australian voters have, once again, entrusted their faith in the status quo. Unfortunately, accepting the status quo also means accepting the grim reality that poverty in Australia is high by OECD standards.

A recent evaluation uses an accepted international benchmark to conclude that more than three million people – or 13.2 % of the population – fall below the poverty line (defined as those earning below 50% of median income and adjusted for housing costs). The report also suggests that Australia has the 14th highest poverty rate among 34 OECD countries – see here for comparative data.

During the campaigns that were held prior to the Federal elections, one heard a lot about taxes and budget surpluses, but hardly anything about ways in which poverty in Australia can be reduced on a sustainable basis. Does anybody recall the major political parties making a bold and compassionate commitment that they will seek to reduce poverty in Australia to one of the lowest levels among OECD nations over the next five years? Such a proclamation would require a serious rethinking of inclusive economic and social policies and go beyond hackneyed statements about a ‘fair go’ society.

Reflections on a training programme for Indonesian policy-makers

The Australian government funds both short-term and long-term awards geared towards developing countries.  Usually, Australian tertiary institutions make competitive bids to implement these awards. The International Business Development Unit of Griffith University recently won a bid to mount a short-term training programme geared towards mid-ranking bureaucrats in Indonesia representing a diverse range of ministries. The theme of this programme is ‘labour market forecasting needs for education policy’ which falls under the rubric of ‘Australia Awards Indonesia (AAI).’

I have the pleasure and privilege of being appointed a ‘course leader’. The programme has three components: (1) a pre-course component in Jakarta (2) an in-course component in Australia (Brisbane, with short study tours to Adelaide and Canberra) (3) a post-course component in Jakarta. The programme started in February of this year and concludes in July.

I have been involved with many short-term training programmes, mainly on behalf of the ILO, and also participated for three years in a New Delhi-based programme that was supported by IDRC, Canada. This capacity building initiative was geared towards early career researchers in South Asia. If I use these programmes as benchmarks, I would rate the current training programme for Indonesian policy-makers highly. I particularly like its emphasis on requiring participants to build a feasible and readily usable project that they could implement once they return to work in the post-training phase. I am expecting some concrete outcomes, such as new estimates of the digital economy using raw data from the labour force surveys, and original estimates of ‘NEET’ (young persons ‘not in employment, education or training’) also drawing on raw data from multiple surveys. Some participants are keen to develop an Indonesian version of a regular series on ‘Employment Outlook’ using an adapted Australian template. While the participants will be professionally enriched from these exercises, the beneficiaries are expected to be both broad and diverse.