Tuesday, January 20, 2015

Curious case of Uber in Korea

First published in The Korea Herald.

Over the past couple of years, the sharing economy ― a system built around the sharing of human and physical resources ― has caught the world by storm. While the practice of sharing goods has always been common between closed groups ― friends, family and neighbors ― now the concept has evolved into a profitable business model.

It has been helped largely by the strides in information technology that led to the worldwide boom in Internet penetration and smartphone use.

The sharing economy has many advantages. It can reduce costs for available goods, services and time. You can use a product or service only when necessary, and don’t have to deal with the normal headaches. On the other hand, an owner can unlock the potential value of an item, such as a room, a vehicle or a consumer good when it’s not in use. The sharing economy also offers access to things that might not be practical to own or obtain.

Some of the most notable businesses that have boomed on the concept of the sharing economy are Airbnb, Snapgoods, DogVacay, RelayRides, TaskRabbit, Getaround, Liquid, Zaarly, Lyft, LendingClub, Fon and Poshmark.

With the range of services offered, one can rent a room or a whole home, get petsitters for dogs, allow people to borrow cars from neighbors, help people to hire others for jobs and tasks, rent bikes and cars, and even get hard cash when in need, share a home Wi-Fi network, and buy or sell used clothes.

Given the huge advantages that this system offers, similar services are bound to proliferate around the world, and most likely in technology-driven Korea.

On the face of it, people should welcome such businesses with open arms and governments should have no objections.

Then why is it that the so-called sharing economy business Uber is being hauled over the coals by the Seoul city government? And moreover, is the government unfairly targeting the app that helps summon a car for a cost?

As 2014 drew to a close, the Seoul Central District Prosecutors’ Office issued an indictment against CEO Travis Kalanick and the firm’s Korean unit for violating a law prohibiting individuals or firms without appropriate licenses from providing or facilitating transportation services.

This was immediately met with protest by the company, which was echoed by countless “sharing” enthusiasts across the world.

However, although I am all for disruptive technologies and hugely back the concept of the sharing economy, I am with the Seoul government on this case.

Over the past several months, Uber has asked the mayor of Seoul to revise the laws so that citizens can use the service without worrying about breaking the law. However, even after it was flatly refused it went ahead and started offering the service without getting clearance.

It began offering UberX as a paid service, with a base fare of 2,500 won ($2.24), with an additional 610 won per kilometer and 100 won per minute. By comparison, base fare for local taxis starts at 3,000 won plus 100 won per 142 meters and 100 won per 35 seconds.

It smacked of arrogance to believe that since they were able to operate in so many cities around the world, they should be able to operate in Seoul. Uber had no right to start services when they knew that it was a gray zone they were operating in, and had been repeatedly warned.

The company knows that under current laws, anyone using his own passenger car to carry paying customers is subject to imprisonment for two years or less, or fines of up to 20 million won.

When you want to start a flourishing business, you just don’t abuse the goodwill of the government and cock a snook at the authorities. Wait till all the regulatory hurdles are cleared and then start your business. Lobby for amending the regulation, but do not jump the gun.

To make matters worse for the company, a city ordinance has been passed to criminalize the violators and reward up to 1 million won to those reporting illegal Uber taxi operators beginning in January. Using a private car for a taxi service is also punishable by an immediate six-month suspension for that car.

Coming to my second point of defense of the Seoul government decision. The reason Uber has grown so quickly worldwide is because it is not regulated the same way that traditional taxi services are. Proponents of the service say that it’s about time for monopolistic, overregulated city cab services to be broken up. They argue that people deserve options, better pricing and more nimble technology, which Uber offers.

However, the way I see it, taxis are a public utility and the government has every right to regulate them. Imagine if companies started offering other public utilities without regulation ― a sure recipe for chaos and disaster.

It is not very easy to get a taxi service license in Seoul, and the market is already saturated with around 6,000 taxis. Given this, the service offered by Uber has the potential to deal a severe blow to the taxi industry, whose hands are tied due to excessive regulations, even as the upstart “illegal” taxis are waiting to pounce on the opportunity. Most taxi drivers come from a lower-income background, and it is like kicking them in the stomach; the issue is not about depriving “unregulated” taxi drivers of additional income as Uber is making it out to be.

On top of it all, data privacy is something that has not been clearly addressed by the company. There are also doubts about the screening process and the training that is provided to the Uber drivers, which has become an issue in many cities. Because of the way their system operates, the safety concerns will only increase. Maybe that is why Uber claimed that “UberX is safer than any other mode of transportation in Seoul.”

However, safety is not really an issue for the public when it comes to taxis in Seoul. The taxis here are amongst the safest in the world, unlike in, say, Delhi. It is just an ad line that holds no water. Moreover, the company says the same thing in all places it operates, but molestation cases are not dying down. The company has a standard answer when faced with such cases: We are cooperating with the authorities. We are just a platform to connect people to drivers and are not directly responsible.

Given these clouds, it will be better for the company to clear all the regulatory hurdles before offering the service here, instead of readying for a legal battle.

Having said that, now that the Seoul government has taken on Uber, it should ensure that the misdemeanors of its taxi drivers ― for example rash driving or refusing passengers ― should be strictly dealt with. It should push forward regulations strengthening the crackdown on taxi drivers, and increase the supply of alternative transportation. Once the public stops complaining about the existing taxi services, the government will be on a firmer footing.

Sunday, January 18, 2015

Corruption and business ethics in Korea

First published in The Korea Herald.

On most occasions, the Korean government latches on to any new international report or study that commends the country, be it on competitiveness, ease of doing business, regulatory reforms or education. However, there has been remarkable silence from bureaucrats and government officials regarding the latest Corruption Perceptions Index recently released by Transparency International.

In its much-awaited yearly report, the nongovernment organization ― calling itself the “global coalition against corruption,” with 100 national chapters and an international secretariat in Berlin ― gives a comparative list of corruption worldwide. The organization is widely recognized as a corruption crusader and has built up a solid reputation since it was established in 1993.

The cornerstone of its work is the annual Corruption Perceptions Index. It also publishes the Global Corruption Barometer, Bribe Payers Index and Government Defense Anti-Corruption Index.

The CPI quantifies the perceived levels of public sector corruption around the globe, and over the past two decades has become one of the key corruption indices worldwide.

It focuses on corruption that involves public officials, civil servants or politicians. The data sources used to compile the index include questions relating to the abuse of public power and focus on bribery of public officials, kickbacks in public procurement, embezzlement of public funds, and the strength and effectiveness of public sector anticorruption efforts. The scores, therefore, provide a reflection of the amount of corruption faced by ordinary people and businesses in a country.

In the 2014 CPI, Korea ranked 43rd among the 175 countries surveyed. The Asian countries and territories ranked above Korea include Singapore (7), Japan (15), Hong Kong (17), UAE (25), Qatar (26), Bhutan (30), Taiwan (35) and Israel (37). Interestingly, Korea was ranked No. 39 in 2010 and No. 40 in 2005.

What does this tell us?

Clearly, Korea has a long way to go when it comes to tackling corruption. As long as its government and politicians are perceived to be corrupt, this will hamper investment and affect growth. With other territories in the vicinity being perceived as less corrupt, it is natural for investors to eye them first.

It is true that over the years the country has made many efforts to tackle corruption and has tweaked a lot of regulations to ensure transparency. Anticorruption acts have also been enacted. But it clearly is not enough.

Excessive bureaucracy, weaknesses in corporate governance, inconsistent application of laws and regulations, and nontransparent regulatory processes are among the challenges that have been cited by many foreign companies in Korea.

Moreover, the corruption watchdog Anti-Corruption and Civil Rights Commission has been criticized for its poor ability to focus on corruption issues as it lacks independence and efficiency. It does not have a mandate to independently initiate investigations, but it can request cooperation from the relevant agencies, such as public prosecutors.

In the 2013 Global Corruption Barometer, the current government’s anticorruption efforts were found to be “ineffective,” with 39 percent of those surveyed perceiving that the level of corruption had increased in the previous two years. Moreover, 70 percent of households evaluated Korean political parties as being “corrupt” or “extremely corrupt.”

In last year’s World Competitiveness Report issued by the World Economic Forum, Korea ranked 26th out of 144 countries, its lowest position in 10 years. It also ranked 33rd in terms of transparency of government policymaking, and 97th in terms of public trust.

For that matter, for many years now the foreign media has constantly reported that the chaebol in Korea are so powerful that the ACCRC has no jurisdiction over them, even when they are involved in tax evasion, bribery and price-fixing. Except for a few outlets, the local media has been largely silent on the close nexus between politicians and the large business houses. It is evident that despite the protests by civil society, they are only getting stronger.

Each time a big-shot chaebol head is snagged by the prosecution and convicted by the courts, our politicians step in to bail them out of their misery. The constant refrain one hears from them is their “importance to the national economy.” Earlier the courts too used the same logic to give suspended sentences and a rap on the knuckles to “powerful” white-collar criminals, but thankfully now such judgments are rare.

In fact, it has become a global joke, and Korea has become a laughing stock for continuing with the policy of frequently granting special presidential pardons to businessmen, but the thick-skinned politicians have blinders and shamelessly continue their routine.

In the latest instance, ruling party politicians started howling for presidential pardons for some prominent chabeol owners in end-December. Finance Minister Choi Kyung-hwan too is reported to have recommended for the presidential office to release top chaebol owners.

By their logic, if you are rich and powerful with a huge business empire, you can freely break the law, because putting you behind bars will hamper your company, and since your company is so important for Korea, it will hamper economic growth and push Korea down from its advanced country status. What they do not realize is that if businessmen are given a free hand to evade taxes, set up slush funds and cheat investors, the country will automatically fall in the eyes of the world. Overseas investors will be put off, which will only stall economic growth ― much more so than if the businessmen are behind bars.

President Park Geun-hye has vowed to administer the law strictly and treat all criminal offenders equally. To that end, she has not granted special pardons to any politicians or businessmen in prison since taking office in early 2013. It remains to be seen whether she will succumb to pressure this time around. If she does, then many of the businessmen will continue to have scant regard for the law and Korea’s corruption ranking will continue to slip. If she does not, then it will be a strong signal that the law is equal for everyone.

As it is, Korea is perceived to have a pervasive system for conveying favors in return for monetary consideration, along with lax enforcement of existing anticorruption laws.

President Park should walk the talk and make abolishing corruption a top priority by overhauling the anticorruption systems. She should go beyond the Kim Young-ran law ― a comprehensive anticorruption bill aimed at public officials, likely to be enacted by January 2016 ― and end the practice of dealing out pardons to convicted chaebol chieftains.

Thursday, January 15, 2015

Regional agreements gaining steam

First published in The Korea Herald.

While bilateral free trade agreements, as a means to further the market-opening and rule-making agenda, have been globally picking up steam, there have also been parallel efforts to usher in a plethora of regional trade agreements and economic unions.

Given the uncertainty of the multilateral agreement under the ambit of the World Trade Organization, which has been dragging on for years, efforts to form regional agreements are picking up. Although many of them are overlapping, 2015 could see some progress being made on at least some of the deals.

They will have a significant impact on global trade. It is an opportunity for countries that seek to diversify their trade partners to closely follow the deals that are being put in place, to get first-mover advantage.

Eurasian Economic Union

First off the block is the Eurasian Economic Union that is still “warm from the oven.” The Commonwealth of Independent States established an economic community in 2001 with the aim of creating a fully fledged common market. However, as it was not making much headway, the leaders of the CIS gathered in Minsk in October 2014 to formally cancel the 14-year-old setup to pave the way for the EEU to be the largest common market in the ex-Soviet Union region.

The treaty on the establishment of the EEU, which just launched on Jan. 1, is the basic document defining the accords between Russia, Belarus and Kazakhstan for the free movement of goods, services, capital and labor and conducting coordinated, agreed or common policies in key economic sectors such as energy, industry, agriculture and transport.

It is sought to rival the European Union and seeks to be the most advanced organization for regional cooperation the former Soviet bloc has seen. Armenia recently joined the union and Kyrgyzstan is expected to join on May 1, with more countries likely to follow.

Although many Western countries are concerned that it is simply a resurrected version of the Soviet Union, the EEU is a powerful economic bloc that accounts for one-fifth of the world’s gas reserves and around 15 percent of its oil. With the start of a new year, a new and serious geopolitical player is indeed emerging, and other emerging markets had better start paying close attention.

Trans-Pacific Partnership

The most talked-about deal in 2014, the Trans-Pacific Partnership, is a proposed regional regulatory and investment treaty that has gained traction recently, but seems to be stuck in a limbo. As of now, 12 countries throughout the Asia-Pacific region have participated in negotiations on the TPP: Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. South Korea has expressed interest in joining but has not taken a step forward.

The agreement intends to “enhance trade and investment among the TPP partner countries, to promote innovation, economic growth and development, and to support the creation and retention of jobs.”

If concluded as envisioned, the TPP potentially could eliminate tariff and nontariff barriers to trade and investment among the parties and could serve as a template for a future trade pact among APEC members and potentially other countries.

Over 20 chapters are under discussion in the negotiations. In many cases, the rules being negotiated are intended to be more rigorous than comparable rules found in the WTO.

As the countries that make up the TPP negotiating partners include advanced industrialized, middle income, and developing economies, the TPP, if implemented, may involve restructuring and reform of some participants’ economies. It also has the potential to spur economic growth in the region.

So far 20 formal rounds of TPP negotiations have been held, but the members have not reached a consensus on a number of contentious issues like intellectual property and liberalization of agricultural markets. Another problem has been that, the U.S. could not proceed because of political difficulties at home regarding the passage of a Trade Promotion Authority by Congress.

Transatlantic Trade and Investment Partnership

The so-called “mega deal,” the Transatlantic Trade and Investment Partnership is a trade agreement that is presently being negotiated between the European Union and the United States. Talks started in July 2013, but have faced a lot of opposition from civil society and trade unions in Europe.

The aim is to increase trade and investment between the EU and the U.S. by unleashing the untapped potential of a truly transatlantic marketplace. The agreement is expected to create jobs and growth by delivering better access to the U.S. market, achieving greater regulatory compatibility between the EU and the U.S., and paving the way for setting global standards.

In more concrete terms, the goal will be to eliminate duties and other restrictions for trade in goods. Freeing up commercial services, providing the highest possible protection, certainty and level playing field for European investors in the U.S., and increasing access to U.S. public procurement markets are also objectives.

The T-TIP negotiations will also look at opening both markets for services, investment, and public procurement. They could also shape global rules on trade. The seventh round of negotiations on the agreement concluded on Oct. 3, 2014.

Together, the European Union and the United States account for about half of world GDP and one-third of global trade flows. Latest estimates show that a comprehensive and ambitious agreement between the EU and the U.S. could bring overall annual gains of 0.5 percent increase in GDP for the EU and a 0.4 percent increase in GDP for the U.S. by 2027. While the road is quite long, all eyes are on this deal and some progress may be made in 2015.

Free Trade Area of the Asia-Pacific

A road map for the Free Trade Area of the Asia-Pacific was sketched out at the recent Asia-Pacific Economic Cooperation Summit in Beijing.

Ministers of the 21 APEC member nations agreed to “launch and comprehensively and systemically push forward the FTAAP process.”

In the summit declaration, it was stated that the rules-based multilateral trading system would remain a key tenet of APEC. The FTAAP should be pursued on the basis of supporting and complementing the multilateral trading system.

“The FTAAP should do more than achieve liberalization in its narrow sense; it should be comprehensive, high quality and incorporate and address ‘next generation’ trade and investment issues.”

A collective strategic study on issues related to the realization of the FTAAP by building on and updating existing studies and past work, providing an analysis of potential economic and social benefits and costs, performing a stock take of FTAs in force in the region, has been announced and will be submitted by the end of 2016.

The member countries account for 40 percent of the world’s population, 54 percent of its economic output and 44 percent of trade, making it a very powerful entity and clearly a deal to watch out for.

It will take a while, but given the interest shown by China, it may proceed faster than the TPP.

Regional Comprehensive Economic Partnership

In what could be a game-changer, the Regional Comprehensive Economic Partnership is a 16-party FTA launched by the leaders of the Association of Southeast Asian Nations ― Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam ― and six of its FTA partners: Australia, China, India, Japan, New Zealand and South Korea.

The negotiations for the agreement started in 2013 and are expected to be concluded by year’s end.

The RCEP would lead to greater economic integration, support equitable economic development and strengthen economic cooperation among the countries involved.

The agreement will cover trade in goods, trade in services, investment, economic and technical cooperation, intellectual property, competition, dispute settlement and other issues.

The sixth round of negotiations took place in New Delhi in the first week of December. However, members were unable to agree on a template for negotiations.

The grouping envisages regional economic integration, leading to the creation of the largest regional trading bloc in the world, accounting for nearly 45 percent of the world’s population with a combined gross domestic product of $21.3 trillion. The regional economic pact aims to cover trade in goods and services, investment, economic and technical cooperation, competition and intellectual property.

As of now, it is unlikely that the 2015 deadline will be met, but one can always be ready for surprises.

ASEAN Economic Community

The ASEAN Economic Community seeks to establish ASEAN as a single market and production base, making ASEAN more dynamic and competitive with new mechanisms and measures to strengthen the implementation of its existing economic initiatives; accelerating regional integration in the priority sectors; facilitating movement of businesspersons, skilled labor and talents; and strengthening the institutional mechanisms.

Other areas of cooperation are to be incorporated later. The AEC envisages key characteristics: a single market and production base; a highly competitive economic region; a region of equitable economic development; and a region fully integrated into the global economy.

Although ASEAN has come a long way toward realizing its goal, the challenges that remain suggest that it may miss its end-2015 deadline.

Union of South American Nations

One dark horse is the Union of South American Nations, which is going to be a regional organization integrating two existing customs unions: Mercosur and the Andean Community of Nations, as part of a continuing process of South American integration. It is also modeled on the European Union and was established in Brasilia, on May 23, 2008, and entered into force on March 11, 2011, but full integration is yet to take place.

On Dec. 5, 2014, the 12 members ― Bolivia, Colombia, Ecuador, Peru, Argentina, Brazil, Paraguay, Uruguay, Venezuela, Chile, Guyana and Suriname ― announced new proposals at a summit meeting in Ecuador.

They have taken steps to create South American citizenship and freedom of movement and also opened the organization’s new permanent headquarters in the Ecuadorian capital of Quito.

Part of this proposal is to create a “single passport” and homologate university degrees in order to give South Americans the right to live, work and study in any UNASUR country and to give legal protection to migrants ― similar to freedom of movement rules for citizens of the European Union.

Plans are also afoot for the advancement of financial integration and sovereignty, such as the Bank of the South and Reserve Fund, a currency exchange system to minimize the use of the dollar in intercontinental trade, the creation of a regional body to settle financial disputes, and a common currency “in the medium term.”

African Free Trade Zone

For long an underestimated region, the East African Community, Common Market for Eastern and Central Africa, and Southern African Development Community have already begun negotiations to merge, which is a precursor to a single trade area across the continent.

Africa’s free trade zone is expected to be operational by the end of 2017. They include Angola, Botswana, Burundi, Comoros, Djibouti, Democratic Republic of Congo, Egypt, Eritrea, Ethiopia, Kenya, Lesotho, Libya, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Rwanda, Seychelles, Swaziland, South Africa, Sudan, Tanzania, Uganda, Zambia and Zimbabwe.

In October 2014, they agreed to launch a tripartite FTA as a way of contributing to economic growth of the blocs and the entire continent. The tripartite FTA will encompass 26 member states from the three blocs with a combined population of 625 million people and a gross domestic product of $1.2 trillion and will account for half of the membership of the African Union.

The free trade area is expected to offer huge opportunities for business and investment and will attract foreign direct investment into the tripartite region. The business community is also expected to benefit from an improved and harmonized trade regime in a 26-nation free trade zone and enjoy the reduced cost of doing business.

Pacific Agreement on Closer Economic Relations ― Plus

The Pacific Agreement on Closer Economic Relations, or PACER, is a framework agreement to deepen trade and investment liberalization in the broader Pacific on a step-by-step basis.

Participants in the PACER Plus negotiations are: Australia, Cook Islands, Federated States of Micronesia, Fiji, Kiribati, Nauru, New Zealand, Niue, Pala, Papua New Guinea, Republic of Marshall Islands, Samoa, Solomon Islands, Tonga, Tuvalu and Vanuatu.

PACER Plus negotiations for a regional trade and economic integration agreement were launched in August 2009. A series of meetings on the PACER Plus were held in Fiji in December 2014 to progress the negotiations. It is expected to boost private sector development and create economic growth and employment opportunities, and bring the Pacific Forum economies closer.

There are some bumps, of course, with many Pacific countries wary of the dominant roles played by Australia and New Zealand.

Tuesday, January 13, 2015

Crucial year for tackling climate change

First published in The Korea Herald.

Toward the end of 2014, there was incremental progress in global efforts to tackle the fallout of climate change. It is now expected that all countries will reach a broad consensus when they meet in Paris in November and December this year.

The United Nations Climate Change Conference was held in Lima, Peru, from Dec. 1-12, to negotiate a global climate agreement. This was the 20th yearly session of the Conference of the Parties, or COP 20, to the 1992 U.N. Framework Convention on Climate Change, or UNFCC, and the 10th session of the Meeting of the Parties, or CMP 10, to the 1997 Kyoto Protocol.

While this was a conference in the annual series, and was hailed as an important first step ― it resulted in a five-page text now officially known as the Lima Call for Climate Action ― toward a full climate change deal, more attention is being directed toward the 2015 UNFCC in Paris.

In Lima, about 190 nations agreed on the building blocks of a new-style global deal to combat climate change amid warnings that a lot tougher action will be needed to limit increases in global temperatures. The proposals call on countries to reveal how they will cut carbon pollution.

Under the deal, governments will submit national plans for reining in greenhouse gas emissions by an informal deadline of March 31, 2015, to form the basis of a global agreement at the Paris summit.

Notably, most of the tough decisions about how to slow climate change were postponed until then.

The text, agreed two days into overtime after two weeks of talks came close to collapsing, because of objections by emerging economies led by China and India, who were concerned that previous drafts imposed too heavy a burden on emerging economies compared to the advanced ones.

The compromise preserved a notion enshrined in a 1992 climate convention that the rich have to lead the way in making cuts in greenhouse gas emissions. It also satisfied rich nations that want the fast-growing emerging economies to rein in emissions.

Some environmental groups, however, were not satisfied and said that the deal was far too weak. They also warned that negotiators had left too many contentious issues unresolved before the deadline for reaching a deal in Paris.

The countries put off decisions about the legal structure of the agreement, and deferred decisions about ensuring a flow of finance to developing countries. The biggest issue left unresolved for Paris is the burden for cutting greenhouse gas emissions.

However, that does not take away the fact that the Lima deal, with obligations for all nations, is a shift from the 1997 Kyoto Protocol that obliges only the rich to cut emissions.

As per the agreement, national pledges will be added up in a report by Nov. 1, 2015, to assess their aggregate effect on slowing rising temperatures, but there will not be a full-blown review to compare each nation’s level of ambition.

The text also lays out a vast range of options for the Paris accord, including the possibility of aiming for zero net global emissions by 2100 or earlier in a drastic shift from fossil fuels toward renewable energies such as wind and solar power.

If all goes well, China, whose emissions have overtaken those of the U.S., will as part of the agreement formally pledge to cut its greenhouse gas emissions, as will India, Brazil and other emerging economies. But much remains uncertain about the prospects. That is why the year 2015 is very crucial.

There is more hope than ever before that all the countries will be able to iron out their differences. Especially because before the Lima meeting several major economies declared targets to curb emissions. In October, the European Union committed to reduce greenhouse gas emissions by at least 40 percent below 1990 levels by 2030. In November, the U.S. and China jointly announced their reduction targets. The U.S. would reduce greenhouse gas emissions by at least 26 percent below 2005 levels by 2025, and China would seek to stop CO2 emissions from rising around 2030.

China has also promised to cap its annual coal consumption through 2020, after which its use of coal is expected to decline. In parallel, more than 20 countries have come forward to financially support the Green Climate Fund, a new multilateral fund that will help developing countries shift to pathways of low-carbon and climate-resilient growth. As of now it has received more than $9.5 billion in commitments.

For many years now, the division between the rich and poor nations have reduced hopes at U.N. climate talks. Going forward, it is hoped that this will be a breakthrough year.

As a recent report, “Paris 2015: getting a global agreement on climate change,” notes, a strong deal will make a significant difference in the ability of individual countries to tackle climate change.

“It will provide a clear signal to business, to guide investment toward low carbon outcomes. It will reduce the competitiveness impacts of national policies, and create a simpler, more predictable framework for companies operating in different countries.”

More importantly, a strong climate deal will also help to meet international development aims, which are at increasing risk from rising global temperatures. Eliminating poverty, improving health and building security are all outcomes linked to tackling climate change.

The joint report by Christian Aid, Green Alliance, Greenpeace, RSPB and WWF states that to ensure meaningful action on climate change, the deal must contain the following elements: ambitious action before and after 2020; a strong legal framework and clear rules; a central role for equity; a long-term approach; public finance for adaptation and the low carbon transition; a framework for action on deforestation and land use; and, clear links to the 2015 Sustainable Development Goals.

Making this conference a success is therefore essential. Will it be just another conference of big promises and disconcerting results? We have to wait and see how serious the countries are in tackling climate change.

Sunday, January 11, 2015

ICT evolving for consumers in 2015

First published in The Korea Herald.

Over the last few years, the impact of information and communication technologies on society has been enormous. ICT has deeply affected and reshaped most parts of our society, while radically influencing the global economy. No one can predict with certainty what role it will play in the future, but we do know that it will be significant.

One aspect of the growth of ICT in 2014 has undoubtedly been its entry into the “mobile era.” It is a tool that constitutes a new infrastructure, changing the way our societies function, while its technical applications give us totally new opportunities to develop new and better solutions to our existing problems.

As the latest International Telecommunication Union publication “2014 Measuring the Information Society Report” notes, the world witnessed continued growth in ICT last year and, by end-2014, almost 3 billion people had used the Internet, up from 2.7 billion at end-2013. While the growth in mobile-cellular subscriptions is slowing as the market reaches saturation levels, mobile broadband remains the fastest-growing market segment, with continuous double-digit growth rates in 2014 and an estimated global penetration rate of 32 percent.

International bandwidth has also grown steeply, at 45 percent annually from 2001 and 2013, and developing countries’ share of total international bandwidth increased from around 9 percent in 2004 to almost 30 percent.

The growth in Internet users ― including via smartphones and smart pads ― has witnessed a parallel, steep growth in the volume of Internet content. More and more people are actively participating in the information society by creating, sharing and uploading content and using social media and other Internet-based applications, covering a large range of topics and sectors.

Going ahead, this year we are likely to see a consolidation of the gains that have already been made, and there will progress on many other technologies that are now on the periphery.

Some of the technologies that have been forecast to make a big impact among consumers in 2015 include, among others, mobile cloud computing, the Internet of Things, 3-D printing, wearables and smart machines.

As noted by International Data Corporation, in 2015 the industry is going to accelerate its transition to the “Third Platform” for innovation and growth, built on the technology pillars of mobile computing, cloud services, big data and analytics, and social networking.

“In 2015, the Third Platform will account for one-third of global ICT spending and 100 percent of spending growth. The industry is now entering the most critical period yet in this era: the ‘Innovation Stage,’” it said in a recent report.

Of this, MCC is expected to be a hotbed of activity and will grow briskly. The combination of cloud computing, mobile computing and wireless networks will bring rich computational resources to mobile users and network operators, as well as cloud computing providers.

The ultimate goal of MCC is to enable the execution of rich mobile applications on a plethora of mobile devices, with a rich user experience. And as smartphones and other mobile devices continue to grow in market share, despite the sudden dip witnessed in recent months, there is likely to be more focus on serving the diverse needs of the mobile customer. Especially when it comes to making their data available whenever and wherever they are. There will be a rise in the delivery of on-demand computing resources and with wireless data set to emerge as the largest and fastest-growing segment, one can expect the cloud services to grow in parallel.

Next is the new buzzword, the Internet of Things ― all-encompassing, cutting across existing product categories and industries ― which is supposed to provide an impetus to the so-called “third platform” era.

Its expected growth, along with the increasing consumer demand for an always-on, connected lifestyle, has made startups and large companies bullish on the IoT sector.

The invention of more and more intelligent and connected “things” will push the development of many new machines, applications and solutions. There are, however, many issues that still need to be tackled, including privacy, data ownership and spectrum congestion.

As noted by Jamie Moss, an analyst at the leading ICT research and advisory firm OVUM, “Its definition and constituents are expanding and evolving. All companies involved in the establishment of today’s ICT service infrastructure believe they have a pivotal role to play in the IoT. However, few accurately know what that role will be, or have a realistic estimation of the size of the opportunity. The IoT is beset by far more questions than answers.”

Experts are also expecting significant activity in 3-D printing. According to Gartner, 3-D printing will reach a tipping point over the next three years as the market for relatively low-cost 3-D printing devices continues to grow rapidly and industrial use expands significantly. New industrial, biomedical and consumer applications will continue to demonstrate that 3-D printing is a real, viable and cost-effective means of achieving improved designs, streamlined prototyping and short-term manufacturing.

Another segment that could see an explosion of innovation is wearables. But, even as many anxiously await the release of the iWatch, Apple’s own foray into wearables, the interest already appears to be diminishing.

According to a survey conducted by Ovum in mid-2014 across 15 countries, less than 10 percent of respondents planned to buy a wearable device in the next 12 months. At the same time, more than a dozen smart wearable devices have been launched since, and many of them have fared dismally.

As regards smart machines, there are already prototype autonomous vehicles, advanced robots, virtual personal assistants and smart advisers, which are likely to evolve, ushering in a new age of machine helpers. Experts think that the smart machine era could be the most disruptive in the history of IT. We can only wait and watch to see how they evolve.

Many new gadgets and software programs will make their way to the market in 2015, but the most understated technological change is the promise of new Wi-Fi standards. Emerging standards will increase Wi-Fi performance this year.

Also, when HTML 5 finally hits the market this year, it is set to become an essential technology for many organizations. With this new system, Web development tools will mature, as will the popularity of mobile Web and hybrid applications. Ultimately, businesses will be able to easily and quickly deliver applications across multiple platforms in a way they never could before, while consumers will be able enjoy superior-quality applications.

There will also likely be an uptick in mobile payment technologies as more and more companies roll out their services, and consumers get accustomed to convenient cashless transactions. In addition, there will be more on-demand apps for various services, like Uber, leading to the so-called sharing economy.

In short, be prepared for seamless mobile access, smarter and more flexible wearable mobile devices, and increasingly strong and flexible cloud computing technology. Moreover, mobile office, information sharing, socialization, electronic business, Internet finance and other services will become accessible anytime and anywhere, further improving our lives with added convenience. There will of course be more security challenges as hackers become more sophisticated.

Thursday, January 8, 2015

Currency wars on the horizon

First published in The Korea Herald.

Brazilian Finance Minister Guido Mantega popularized the term “currency war” in 2010 to describe policies employed at the time by major central banks to boost the competitiveness of their economies through weakening their currencies. As we enter 2015, the specter of currency wars appears to be once again looming on the horizon.

In layman’s terms, currency wars are said to occur when countries seek to devalue their currency to gain a competitive advantage ― exports become more competitive while imports become more expensive, leading to a rise in aggregate demand, which helps boost economic growth and reduce unemployment.

However, if one country seeks to become more competitive through devaluation, it means other countries become less competitive. Therefore, they may respond by weakening their currency too. This leads to a situation of competitive devaluation, where each country seeks to reduce its own currency’s value. In the end, this creates global economic instability by discouraging investment and trade.

With many major economies across the world yet to fully recover from the recession, and some facing the threat of deflation, central banks are slowly but surely seeking to boost demand through exchange rates.

According to data compiled by Bloomberg recently, weak price growth is stifling economies from the euro region to Israel and Japan. Eight of the 10 currencies forecast to decline the most through 2015 belong to nations that are in deflation or pursuing policies that weaken their exchange rates.

Lowering interest rates, quantitative easing and intervention buying are some of the measures that have become more prominent in recent months, and unless the respective economies recover, we are likely to see similar actions in 2015.

Taking a brief look at the major economies, this trend is not yet fully confirmed, but the possibility remains high.

The U.S. Federal Reserve has been pursuing quantitative easing for some time, but with a gradual economic recovery, expectations for a pickup in inflation and a strong dollar, it has hinted at the possibility of policy normalization. As crude oil prices are continuing to slump to historic lows and inflation has not picked up, such a move would have to be well-timed.

In its Dec. 17 statement, the Federal Open Market Committee noted that economic activity is expanding at a moderate pace. Inflation has continued to run below its longer-run objective, partly reflecting declines in energy prices. Market-based measures of inflation compensation have declined somewhat further; survey-based measures of longer-term inflation expectations have remained stable.

“When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run,” it said in a statement.

As such, if global growth remains weak and the dollar becomes too strong, the Fed might decide to change its position and continue with monetary easing, or even accelerate it.

Meanwhile, the European Central Bank recently announced new stimulus policies, and unveiled a promise to buy asset-backed securities and covered bonds. With Europe’s fragile recovery slowing down the rest of the world and inflation running at a fraction of the ECB’s goal, President Mario Draghi has raised the prospect of large-scale asset purchases. So far, it has stopped short of full-fledged quantitative easing, but is widely expected to consider a package of broad-based asset purchases including sovereign debt this month.

With a decline in oil prices, which have led to a fall in the value of the ruble, Economists are of the opinion that Russia won’t speed up its plan to allow the ruble to trade freely next year, even though the central bank’s continued defense of the currency has cost it a lot of money.

Russia’s central bank, led by Gov. Elvira Nabiullina, has so far failed to reverse the currency plunge even after spending a fifth of its international reserves and raising its key interest rate five times since March 2014. One can expect sharper rate moves to sway the currency market.

With Japan’s Prime Minister Shinzo Abe back in the saddle, the Bank of Japan is widely expected to continue with its quantitative easing programs to get the economy back on track. At the end of 2014, it engaged in one of the largest experiments in quantitative easing and has been selling yen and buying U.S. assets. This may pick up pace, depending on the progress of its recovery.

China has long been accused of currency manipulation. Many economists also expect the People’s Bank of China to continue its monetary easing, now that GDP has slowed down. Only recently it lowered lending and saving rates and increased the ceiling for deposit rates in an effort to boost the growth rate of its economy. The country has room to ease further, which shouldn’t be disregarded if the economic situation fails to improve.

According to experts, if the risk of deflation rises amid the unwinding of its credit bubble, there’s a risk that China will follow Japan and devalue the yuan.

Xinhua news agency cited a government official as saying that monetary policy will be kept prudent ― “There will be greater focus on monetary policy being appropriately tight or loose.”

Many other emerging economies are either trying to stabilize prices or gain competitiveness by weakening their currencies as they ease their monetary policies. Everything depends on how the economies fare.

South Korea, like China, is desperately trying to fight deflationary pressures with rate cuts. Malaysia started raising rates in July 2014 and Indonesia followed suit in November. The central banks of India and Thailand are not engaging in monetary loosening right now, although their inflation rates are moderating.

In a recent note, ANZ forecast 3 percent depreciation in Asian currencies over 2015, “a similar decline to that seen in 2014,” noting that “risks are tilted toward a larger depreciation should tighter U.S. monetary policy lead to larger portfolio outflows from the region.”

The groundwork for currency wars in 2015 is clearly being laid

Saturday, January 3, 2015

Skidding on oil prices

First published in The Korea Herald.

The biggest “energy story” in 2014 was no doubt the oil price crash, which many say has “upended the geopolitical chessboard.” Worth watching in 2015, therefore, is who will recover and dominate the play ― the Organization of Petroleum Exporting Countries, Russia’s President Vladimir Putin who is fighting with his back against the wall, or the U.S. shale companies who are allegedly being targeted by OPEC members.

As the U.S. Energy Information Administration has noted in its latest outlook, “The recent declines in oil price and associated increases in oil price volatility have created a particularly uncertain forecasting environment, and several factors could cause oil prices to deviate significantly from current projections. Among these is the responsiveness of supply to the lower price environment.”

Despite OPEC’s recent decision to leave its crude oil production target at 30 million barrels per day, if crude oil prices continue to fall, Saudi Arabia and others could choose to cut production, tightening market balances.

“The level of crude oil production outages could also vary from forecast levels for a wide range of producers, including OPEC members Libya, Iraq, Iran, Nigeria and Venezuela. Additionally, the price and lag time required to cause a reduction in forecast non-OPEC supply growth, particularly U.S. tight oil, is not known. The degree to which non-OPEC supply growth is affected by lower oil prices will also affect market balances and prices.”

In layman terms, it’s a very complex situation and to clearly understand the dynamics of oil prices and its impact on the world economy, we need to analyze major events in the past 50 or so years that affected the price and availability of oil.

Brief history of oil prices

The formation of OPEC: OPEC is an intergovernmental organization that was founded in Baghdad in 1960. Comprising 12 members today ― Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela ― it has the capability and clout to create a major impact in world oil markets as they hold more than 40 percent of the total oil supply. After five years, OPEC relocated its headquarters from Geneva to Vienna.

The first “oil shock”: In 1973, during the Arab-Israeli War, Arab members of OPEC imposed an embargo against the U.S. for supporting Israel. The embargo caused the price of oil to quadruple and led to an “energy crisis” in Western countries. This led to a high inflation rate in the industrialized countries as they depended on oil supplies from the OPEC nations. This was actually a turning point, as the developed countries realized the need and importance of finding new sources of oil, alternate fuels and better conservation techniques.

The second “oil shock”: In 1979, the Shah of Iran was deposed and oil exports from Iran stopped. The U.S. was importing a large part of its crude oil from Iran and was badly affected by this shortfall.

The Iran-Iraq War: In 1980, Iraq launched a war against Iran, the battle between two big oil producing countries blocked about 8 percent of the total crude oil supply. However, Saudi Arabia and other OPEC nations increased production to avert a supply crisis.

Oil glut: In 1986, the oil price fell from $27 to below $10 a barrel. This was because of slow economic growth in industrial countries due to oil shocks, energy conservation initiatives and overproduction.

First Gulf War: In August 1990, Iraq invaded Kuwait. The combined loss of production along with the threat of a blockage of production in Saudi Arabia made prices spiral. The war was started by a U.N.-authorized force from 34 nations led by U.S, against Iraq in response to invasion of Kuwait.

Early 2000s: In early 2000, a weakened U.S. economy and increases in non-OPEC production put downward pressure on prices. In addition, crude oil prices plummeted in the wake of the Sept. 11, 2001, attack on the U.S.

The Iraq War: During this fragile time, 2003, inventories remained low in the U.S. and other OECD countries, while Asian demand for crude oil was growing rapidly. In 2004 and 2005, the war and struggle in the Middle East continued as the spare capacity fell. The lack of assurance in production ability to cope with further disruptions added a substantial risk premium to crude oil prices.

Global economic crisis: 2008 saw crude oil prices fall about 80 percent before OPEC put in place its largest-ever production cut at 2.5 million barrels a day in December. The member countries largely adhered to assigned quotas and saw oil prices substantially recover by 2009.

Turmoil in the Middle East: In the beginning of 2011, political turmoil in Egypt, Libya, Yemen, Syria and Bahrain, known as the “Arab Spring,” shook the oil markets once again. The oil market, already volatile in the aftermath of the global financial crisis of 2008, became even more volatile as fears that a drop in oil supply could occur due to the Arab Spring conflict drove oil prices to high levels.

Iran sanctions and Syrian violence: The push for tighter sanctions on Iranian oil exports and chaos in Syria in 2012 erupted and unnerved market participants, leading to spikes in oil prices.

Continuing unrest: Prices rose as tensions escalated between the U.S. and Syria, and have been volatile ever since. Then they started dipping suddenly. The reason for that is actually simple but complicated by geopolitics.

Back to basics

Prices fall when supplies are up and demand is down. New sources of oil ― including shale oil production, which has been booming in the U.S. ― has added significantly to the global supply. Coupled with the fact that Europe is still fighting off a recession, and alternative energy sources are price-competitive, demand for oil has fallen well below expectations.

Without being too simplistic, we must acknowledge that OPEC is manipulating oil prices. It has decided to keep production at current levels, which will actually end up driving prices down more.

Why would they do that? There are many observations. Many suggest that it is an attempt by OPEC producers, especially Saudi Arabia, to drive higher-cost U.S. shale drillers out of the market.

The theory is that because OPEC cartel members can drill at dirt-cheap prices, they can inflict despair on the lightly defended shale patch. In the end, U.S. drillers will have to surrender and shut down. Given their deep pockets this is likely, despite the denials.

As The Economist notes: “Four things are now affecting the picture. Demand is low because of weak economic activity, increased efficiency and a growing switch away from oil to other fuels.

“Second, turmoil in Iraq and Libya has not affected their output. The market is more sanguine about geopolitical risk.

“Thirdly, America has become the world’s largest oil producer. Though it does not export crude oil, it now imports much less, creating a lot of spare supply.

“Finally, the Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price. They could curb production sharply.”

We shall wait and see what 2015 holds for us.

Thursday, January 1, 2015

For world economy, a year of divergence

First published in The Korea Herald.

As we step into 2015, it would appear that on the back of a U.S. economic recovery, the dark days of the financial crisis are behind us. As the largest economy, accounting for more than one-fifth of global gross domestic product, the health of the U.S. economy has been critical for steady growth in the rest of the world through trade, foreign investment, financial markets and capital flows. Until now.

But, as recent developments have shown, going ahead, there are many more variables that will impact the global economy. Leave aside the fact that the International Monetary Fund has projected the global economy to grow by 3.8 percent in 2015, a little better than the estimated pace of 3.3 percent for the previous year.

Europe continues to deleverage with serious risks of falling back into a recession, Japan’s prospects remain clouded despite “Abenomics,” China’s growth is slowly throttling back, and Latin America and Southeast Asia remain a mixed bag, while India’s growth prospects are up in the air. The health of the world’s important economies is clearly diverging, and to understand this better we need to look at the prospects in all the major economic blocs.

Still miles to go

The world’s largest economy is still climbing out of the deep hole created by the recession with an annualized growth rate of around 2 percent over the past five years. However, over the last few quarters, the pace of growth has picked up and the broad consensus is that the U.S. economy is back on track.

The U.S. economy grew at a much faster pace than initially thought in the third quarter of 2014, with the Commerce Department raising its GDP growth estimate to a 3.9 percent annual pace from the 3.5 percent rate reported previously.

There is no doubt that the economy has hit a pivotal point, with many positive developments ― consumer confidence, the manufacturing sector in an expansion mode, strong corporate balance sheets, firmer global trade, less fiscal drag, a stronger job market and falling oil prices.

U.S. consumers also appear to be in better financial shape, with household debt falling. The fiscal restraint that has held back growth in recent years has more or less ended and the federal budget deficit is now at a consistent level as shown by the slowly declining federal debt-to-GDP ratio.

To top it off, businesses are once again hiring and investing, as a result of which the job market is quickly picking up and wage growth is reviving. With more money in their pockets, it will lead to more spending and fuel even more business expansion. The volatile housing sector is currently in much better shape with the number of foreclosures continuing to fall. Adding to consumers’ purchasing power is the sharp decline in oil prices.

The key to its economic story this year will be how fast the Federal Reserve raises interest rates, and the ensuing market reaction. Tapering of the Fed’s quantitative easing program has already begun, although an actual tightening is likely to take some time. It does appear though that the interest rate will remain near zero percent ― where it has been for six years ― through mid-2015.

With the economy in good shape, everyone is hoping that the global economy will move forward. Of course, geopolitical events overseas, and the domestic political wrangling between the Democrats and Republicans could put a wrench in the works.

Clouds across the Atlantic

Across the Atlantic, except for the United Kingdom, which is experiencing steady growth that will likely continue, the situation in the European Union does not appear too rosy. The eurozone is back in an economic rut with Germany, France and Italy still battling Depression-era levels of unemployment and the threat of deflation.

It appears that the European banking system has never really recovered from the financial crisis. As such, Europe’s slow economic recovery, which began in the second quarter of 2013, remains fragile.

Only recently, the IMF marked down prospects in the three largest economies ― Germany, France and Italy ― which it says are headed into their third consecutive year of recession. The fund warned that the probability of the eurozone reentering a recession has increased.

The German economy grew by 0.1 percent in the third quarter of 2014. Another quarter of contraction would have meant that Germany was officially in a recession. France reported 0.3 percent GDP growth, rebounding from a 0.1 percent decline in the second quarter and thereby avoiding falling back into a technical recession. Italy was not so lucky, with a contraction of 0.1 percent confirming that the economy has entered a technical recession.

The European Commission has observed that the eurozone would need another year to reach even a modest level of growth. The main risk, it has said, is that stalling or partial implementation of structural, fiscal and institutional reforms by member states may result in low actual and potential growth and protracted high unemployment. Moreover, the debt overhang, the investment shortfall in recent years and slowing total factor productivity could hurt growth in the medium term if they are inadequately addressed by structural reforms, resulting in an extended period of low growth. Deflation is another serious threat.

As regards the U.K., although the economy is in a recovery phase, household indebtedness is high and the fiscal position weak. Experts have noted that additional growth may be held back by continued difficulties in generating a trade-led recovery in addition to the austerity measures that will be needed. While the recovering economy is boosting tax receipts for the government, high levels of spending are keeping the deficit high.

U.K. economic growth slowed in the third quarter of 2014, with the economy expanding by 0.7 percent, weaker than the 0.9 percent expansion recorded for the second quarter, according to the Office for National Statistics.

Added to this is the uncertainty posed by the 2015 general election, which many expect to result in a hung parliament. That would be a challenge, more so as its relations with the EU are becoming increasingly strained.

Gloomy situation

Meanwhile, the disappointment continues in Japan, where Prime Minister Shinzo Abe has emerged stronger after the snap polls, even as the economy entered into technical recession amid growing concerns that the government is failing to pull the country out of decades of stagnant growth and deflation.

Japan’s economy shrank an annualized 1.6 percent in Q3 2014, confounding expectations of a modest rebound after a severe contraction in the previous quarter.

Less than two years into Abenomics ― a three-pronged strategy to pull Japan out of two decades of stagnation through monetary stimulus, fiscal flexibility and structural deregulation ― the program has yet to spark sustained growth. As he currently holds a comfortable majority in the parliament it is likely that he will give a greater push to his policies. It needs to be seen whether the Bank of Japan’s second round of quantitative and qualitative easing will result in substantial boost to the economy.

It is highly likely that Abe will turn his attention to designing a 3 trillion yen ($25 billion) fiscal stimulus package to help to revive growth, but the economy will continue to turn in a subpar performance this year.

Analysts note that the continuation of loose fiscal policy and aggressive monetary easing could cause a loss of confidence in Japan’s ability to maintain debt sustainability. So we’ll have to wait and watch.

Shaky foundation

The situation in BRICS is a mixed bag, and the foundation appears a little shaky.

Brazilian President Dilma Rousseff was reelected by a small margin in the October elections for a second four-year term, even as the economy technically exited recession. However, virtually no growth in 2014, double-digit interest rates and inflation breaching the government’s own target bands all paint a grim picture.

Brazil’s economy officially exited recession with growth of 0.1 percent in the third quarter of 2014.

It is expected that fiscal discipline and growth-enhancing measures will take priority, even though Rousseff pledged further support for subsidies and social programs during her election campaign. A stable government, and a new finance minister operating with a greater degree of autonomy, could just ensure that the framework is in place for a more authoritative and credible response.

Economists have noted that the widening fiscal and current account deficits will require both policy adjustments and market-driven asset price corrections. On the other hand, weaker labor market dynamics, softer Chinese demand, slower credit growth and a failure to advance structural, growth-enhancing reforms are risks that would undermine growth. Stimulating growth while getting the country’s finances in order will take up much of the year. There is no doubt that the Brazilian economy will remain fragile as a new team introduces policy adjustments to build confidence.

Meanwhile, Russia’s energy-dependent economy has suffered a severe economic shock over the past few months, largely because oil prices have tanked. The conflict in Ukraine and the international sanctions have also weighed heavily on the economy, which is forecast to be flat next year. The weaker ruble and Russian countersanctions on Western food imports are likely to push up inflation and hold down household consumption. The ruble has already lost close to 50 percent in value as we enter the new year.

Economic growth in Russia slowed to 0.7 percent in the third quarter of 2014. Falling oil prices and sanctions should continue to be headwinds going forward.

The Russian government, in an official statement that was hurriedly withdrawn, has warned the economy will fall into recession next year as Western sanctions, in response to its role in eastern Ukraine, and falling oil prices begin to bite. Household disposable income is also forecast to decline.

The World Bank stated in its economic outlook that, “In the baseline scenario, investment is projected to contract for a third year in a row in 2015, because of continued uncertainty, restricted access to international financial markets by Russian companies and banks, and lower consumer demand.”

The situation is different for India. Confidence in the economy has soared in recent months under the leadership of its new prime minister Narendra Modi, who appears to be genuinely working to pull the country out of the economic mess brought about by his predecessor. However, there is concern about economic growth, as the pace of reform has been slower than expected. To facilitate rapid economic growth, structural reforms would be necessary, but the ruling party’s weak position in the upper house limits the scope for any major change. Experts note that growth is still uneven and weak overall and remains susceptible to many downside risks.

However, they do agree that, with economic activity buoyed by expectations from the newly elected government, India is benefiting from a “Modi dividend.” Structural reforms related to land, labor and tax would support the economy’s growth. Private investment is expected to pick up thanks to the government’s business orientation, and declining oil prices should boost private-sector competitiveness.

GDP growth in the third quarter of 2014 slowed to 5.3 percent from 5.7 percent in the previous quarter. However, this was better than expected.

As for Asia’s largest economy, China is having trouble maintaining the kind of growth it has become accustomed to in recent years. The most recent readings suggest that its economy could grow at roughly 7.5 percent this year, down from the 10 percent growth it averaged for two decades before the slowdown began three years ago.

As Goldman Sachs pointed out in a recent note, it’s been a bumpy ride for China’s economy in 2014, with multiple growth scares followed by bouts of policy stimulus, and this year will be no different.

“A housing market adjustment, decelerating credit growth and an advancement of difficult structural reforms in areas such as local government debt management and interest rate liberalization, will present continued headwinds,” Goldman Sachs reported.

The real estate sector, of course, remains a key uncertainty, and as weakness builds up it will pose a risk to the economy.

Having said that, on the bright side, the continuous reform and opening-up of China’s economy may help the country transition into a more sustainable and market-driven economy. The government has already started implementing many financial-sector reforms, which are only going to increase this year.

The Chinese economy grew at 7.3 percent during the third quarter of 2014 compared with a year ago, slightly exceeding expectations.

South Africa for its part is battling strikes, higher interest rates, rising inflation and weak demand, which will weigh down its economy. The risk of strikes will remain high, exacerbated by the political power of the trade unions and high unemployment. Sound fiscal and monetary policies, and infrastructure investment may facilitate overall activity, and economic growth could gradually pick up pace.

Last year, a prolonged strike in the platinum sector and other labor actions disrupted the mining and auto sectors. This has hurt business confidence and the impact is still being felt, although economists think growth has a good chance of rebounding.

The GDP in South Africa expanded 1.4 percent in the third quarter of 2014 over the previous quarter.

Recently President Jacob Zuma said that through Operation Phakisa, the country is poised to reach the ambitious economic growth target of 5 percent by 2019. Operation Phakisa focuses on unlocking growth and new jobs in the country’s ocean economy.

A mixed bag

Coming to the ASEAN heavyweights now.

The World Bank has projected that Thailand will generate the lowest economic growth in the region next year because of structural problems in the export sector and unresolved political issues. Domestic demand in Thailand remains weak despite the government’s efforts to boost growth by increasing budget spending. In addition, tourism is being negatively affected by the imposition of martial law, which is not expected to be lifted any time soon. Recently, the government declared that democratic elections, which were originally planned for late-2015, will be postponed to early 2016 as the new constitution will not be ready in time.

Southeast Asia’s second-largest economy grew 1.1 percent in the third quarter of 2014, from the previous three months, and 0.6 percent from a year earlier.

On the bright side, military rule could improve political stability and it is expected that big infrastructure projects will lead to a slight uptick in economic growth this year.

Malaysia is likely to remain on a sustainable growth path. On Dec. 1, fuel subsidies were officially dropped and prices are now linked to global rates. This is the latest in a series of moves designed to trim the fiscal deficit, and comes just months before a new goods and services tax will be introduced.

Malaysia’s economy posted growth of 5.6 percent in the third quarter of 2014 from the corresponding period a year ago, slowing down from the 6.2 percent in Q1 and 6.5 percent in Q2.

Experts have noted that while the government is showing strong commitment to improving its financial standing, there is concern that these measures will put a damper on private consumption in the following year. Weak demand for Malaysia’s commodity exports and falling oil export revenues due to the current global price slump also pose an important risk to growth in the near term.

In Indonesia, the new government led by President Joko Widodo increased the price of subsidized fuel by one-third recently, in a bold move that bodes well for efforts to reduce the fiscal and current-account deficits. It will also free up public funds for infrastructure development and expanded welfare services.

Indonesia’s gross domestic product grew 5.01 percent in the third quarter of 2014 from a year earlier, its slowest in five years.

Future growth will largely depend on whether the country’s new government is able to push through policy reforms. These include boosting infrastructure development, improving regulatory certainties in doing business and reducing the country’s poorly targeted energy subsidy spending.

A tepid and uneven global recovery tempered Singapore’s economic growth last year, which was also affected by the government’s push to reduce a politically unpopular reliance on foreign workers. That has led to a tight labor market and raised business costs. In addition, Singapore saw its fourth antigovernment rally in less than two years, in an indication that Singaporeans are becoming more politically engaged.

The country’s economy expanded by 2.4 percent in the third quarter of 2014, unchanged from the previous quarter.

According to economists, externally oriented sectors such as the manufacturing and transport and storage sectors are likely to slow while growth in the construction sector will continue to be weighed down. However domestically oriented sectors like business services are likely to remain resilient.

Bright Down Under

Australian Prime Minister Tony Abbott has successfully repealed carbon and mining taxes and has concluded free-trade agreements with Japan, South Korea and China. Despite fiscal tightening, the economy is expected to strengthen as mineral export volumes rise and consumers regain confidence.

Australia’s economy, though, grew at a slower-than-expected pace in the third quarter of 2014, at 2.7 percent, underscoring growing concerns about its outlook and calls for the central bank to undertake easing measures.

According to economists, macroeconomic policies are appropriate for the current juncture while long-term prosperity depends on ensuring that structural settings boost all forms of economic activity and promote broad-based productivity growth.

At the same time, lower commodity prices could weigh on profits and wages, while also reducing both company taxes at the federal government level and royalties at the state level. This would in turn constrain consumer spending and business investment, and lead to an extended period of weaker-than-usual growth in public demand. On the whole, however, the prospects are bright.

Millennium Development Goals: Not there yet

First published in The Korea Herald.

The New Year is significant when it comes to the issue of sustainable economic growth and the promises made by world leaders 14 years ago that have not been fully kept.

World leaders, in adopting the United Nations Millennium Declaration in 2000, pledged to create a more equitable world by 2015. However, today, more than ever before, it seems that the wealthiest individuals have become wealthier while the relative situation of people living in poverty has improved little.

Disparities in education, health and other dimensions of human development still remain large despite marked progress in reducing the gaps. Various social groups suffer disproportionately from income poverty and inadequate access to quality services and, generally, disparities between these groups and the rest of the population have increased over time.

The implications of rising inequality for social and economic development are many. There is growing evidence and recognition of the powerful and corrosive effects of inequality on economic growth, poverty reduction, social and economic stability, and socially sustainable development.

The many adverse consequences of inequality affect the well-being not only of those at the bottom of the income distribution, but also those at the top. Specifically, inequality leads to a less stable, less efficient economic system that stifles economic growth and the participation of all members of society in the labor market.

According to a new report by the OECD, the situation is so bad now that global income inequality has returned to levels recorded in the 1820s ― when the Industrial Revolution produced sizable wealth gaps between the rich and poor.

The study uses historical data from eight world regions to examine 10 individual dimensions of well-being, tracking them over time and space, then pulls them together in a new composite indicator. The dimensions covered reflect a broad range of material and nonmaterial aspects: per capita GDP, real wages, educational attainment, life expectancy, height, personal security, political institutions, environmental quality, income inequality and gender inequality.

It reveals that great strides have been made in some areas, such as literacy, life expectancy and gender inequality, but while income inequality, as measured by pretax household income among individuals within a country, fell between the end of the 19th century until around 1970, it began to rise markedly at that point, perhaps in response to globalization.

Another OECD report suggests that reducing income inequality would boost economic growth. It found that countries where income inequality is decreasing grow faster than those with rising inequality.

“The single biggest impact on growth is the widening gap between the lower middle class and poor households compared to the rest of society. Education is the key: A lack of investment in education by the poor is the main factor behind inequality hurting growth.”

Rising inequality is estimated to have hold back growth in Mexico and New Zealand by more than 10 percentage points over the past two decades up to the Great Recession. In Italy, the United Kingdom and the United States, the cumulative growth rate would have been 6-9 percentage points higher had income disparities not widened, and inequality also reduced growth in Sweden, Finland and Norway, although at low levels. On the other hand, greater equality helped increase GDP per capita in Spain, France and Ireland prior to the crisis.

The impact of inequality on growth stems from the gap between the bottom 40 percent and

the rest of society, not just the poorest 10 percent. Anti-poverty programs will not be enough. Cash transfers and increasing access to public services, such as high-quality education, training and health care, are an essential social investment to create greater equality of opportunities in the long run.

The report also found no evidence that redistributive policies, such as taxes and social benefits, harm economic growth, provided these policies are designed, targeted and implemented well.

So is the situation really that bad?

Over the past 14 years, since the adoption of the Millennium Development Goals, the U.N. has stated that there has been important progress, with some targets already having been met well ahead of the 2015 deadline.

The MDGs are the world’s time-bound and quantified targets for addressing extreme poverty in its many dimensions ― income poverty, hunger, disease, lack of adequate shelter and exclusion ― while promoting gender equality, education and environmental sustainability. They are also basic human rights ― the rights of each person on the planet to health, education, shelter and security.

They are eight goals that all 191 U.N. member states have agreed to try to achieve by the year 2015: eradicating extreme poverty and hunger; universal primary education; promoting gender equality; reducing child mortality; improving maternal health; combating HIV/AIDS, malaria and other diseases; ensuring environmental sustainability; and developing a global partnership for development.

The 2014 MDG report notes that several targets have been met. According to it, the world has reduced extreme poverty by half, efforts in the fight against malaria and tuberculosis have shown results, access to an improved drinking water source became a reality for 2.3 billion people, disparities in primary school enrolment between boys and girls are being eliminated in all developing regions and the political participation of women has continued to increase. It also states that development assistance rebounded, the trading system stayed favorable for developing countries and their debt burdens remained low.

Having said that, while claiming that substantial progress has been made in most areas, it also agrees that much more effort is needed to reach the set targets.

Major trends that threaten environmental sustainability continue, also, more efforts are also needed to decrease chronic undernutrition among young children, reduce maternal mortality and improve sanitation. None of these goals can be achieved in the last year left for the MDGs.

Continued progress toward the goals in the remaining year is therefore essential to providing a solid foundation for the post-2015 development agenda.

The opportunities that 2015 presents for bringing the countries and people of the world together to decide and embark on new pathways forward are historic and unprecedented. These decisions will determine the global course of action to end poverty, promote prosperity and well-being for all, protect the environment and address climate change.

The actions made this year are expected to result in new sustainable development goals to follow the eight MDGs. This post-2015 development agenda is expected to tackle many issues, including ending poverty and hunger, improving health and education, making cities more sustainable, combating climate change, and protecting oceans and forests.

Governments are in the midst of negotiating, and civil society, young people, businesses and others are also having their say in this global conversation. World leaders are expected to adopt the agenda at the Special Summit on Sustainable Development in New York in September 2015.

Hopefully, there will be speedier progress in 2015.

Tuesday, December 16, 2014

Korea should rethink trickle-down policies

First published in The Korea Herald.

It is no secret that the Park Geun-hye administration and the ruling Saenuri Party are vehemently against raising corporate taxes, arguing that higher taxes could affect economic growth. They instead want to go easy on the corporate sector and the wealthy, all in the name of trickle-down economics ― a theory closely identified with Reaganomics, which states that decreasing tax rates especially for corporations, investors and entrepreneurs can stimulate production in the overall economy.

So it may come as a surprise to them that the latest OECD working paper released on Dec. 9 strongly denounced the trickle-down theory while pushing for higher taxes on the rich and policies aimed at improving the lot of the bottom 40 percent of the population. Coming from an organization of the “elite” countries, it must really mean something for the Korean policymakers.

Drawing on harmonized data covering the 34 OECD countries over the past three decades, the econometric analysis in “Trends in Income Inequality and its Impact on Economic Growth” suggests that income inequality has a sizable and statistically significant negative impact on growth, and that redistributive policies achieving greater equality in disposable income have no adverse growth consequences.

Further, it suggests that it is inequality at the bottom of the distribution that hampers growth. Additional analysis suggests that one key channel through which inequality negatively affects economic performance is through lowering investment opportunities ― particularly in education ― of the poorer segments of the population.

These findings have relevant implications for Korea, which is grappling with slow economic growth.

“On one hand, it points to the importance of carefully assessing the potential consequences of pro-growth policies on inequality: focusing exclusively on growth and assuming that its benefits will automatically trickle down to the different segments of the population may undermine growth in the long run inasmuch as inequality actually increases. On the other hand it indicates that policies that help limiting the long-run rise in inequality would not only make societies less unfair, but also richer,” according to the report.

“In particular, the analysis highlights the importance of two pillars of a policy strategy for tackling rising inequalities and promoting equality of opportunities. One policy avenue to reduce inequality involves reforms to tax and benefit policies,” the paper notes.

“As top earners now have a greater capacity to pay taxes than before, governments may consider reexamining their tax systems to ensure that wealthier individuals contribute their fair share of the tax burden.”

It adds that the unequal tax treatment of income from different asset classes increases inequality in some cases and distorts the allocation of capital.

Undoubtedly, this is very valuable advice for Korean policymakers, and something they should heed.

That is not all. A recent survey by Statistics Korea found that from 2011 to 2013, more than 3 million people fell into relative poverty, with their households earning less than half of the median income. In addition, according to the OECD Economic Survey 2014, Korea’s middle class is shrinking and its relative poverty rate is the eighth highest among the 34 member countries.

As some experts have noted, the major sources of rising income inequality are closely related to the neoliberal transformation of the Korean economy. The neoliberal reform of the labor market over the past decade and a half produced a sharp cleavage between regularly employed workers and nonregular workers. The Korean working class, which used to be relatively homogeneous in terms of the job market and wage conditions, has become internally divided, and this reflects growing income inequality in the country. It is therefore essential to address the underlying causes by reducing the share of nonregular workers.

Furthermore, in recent years, the significant income disparities that have long existed between the chaebol and SMEs have become even greater.

Due to economic structural problems, the rigidity of the regular labor market and an environment that favors temporary employment, the creation rate of stable, decent jobs has waned.

Also, factors pushing fundamental inequalities are increasing while Korea’s redistribution remains poor due to weak welfare policies. Although the government has long talked about redistribution, and President Park has long touted her welfare pledges, the pace at the ground level is really slow.

Ignoring the widening income inequalities in Korea, the government appears to be only paying lip service to income redistribution and social welfare while focusing on efforts to reinvigorate the economy.

Park recently pledged to expand social welfare programs without raising taxes, something that is not feasible. The government and the ruling party should not be afraid that introducing excessive welfare measures and tampering with tax rates will rein in economic growth.

Korea should focus on inequality at the bottom income bracket in an earnest way. As has been widely acknowledged, the size and nature of the Korean welfare system is currently unsatisfactory, and there certainly is a need to expand and improve it. This should go hand in hand with strengthening the progressive tax and expanding the sources of taxation ― not just by raising taxes for the poor smokers.

Public welfare spending takes up 10 percent of GDP, close to half of the 21 percent average among OECD members. The prospects for declining economic inequality in Korea in the near future are very dim and over the years the welfare cost will increase. On the other hand, the tax rate is equal to 20 percent of the GDP, lower than the OECD average of 25 percent.

Clearly, it is time the government took a hard look at its trickle-down policies.