Do we still live in a federation? Should we care?

The High Court handed down an important judgement today on the legality of the federal government's industrial relations legislation. As expected, they found that it was legal. It doesn't really take a lawyer to see that the Constitution fairly explicitly gave power to the federal government in the relevant area. There is only one section (51xxxv) that refers to state powers in relation to industrial relations and that refers only to the settlement of disputes that don't extend outside state boundaries, not to the establishment of the framework in which such disputes might take place. My guess is that the only point of discussion is over what constitutes a 'corporation'.

Commonwealth Of Australia Constitution Act
Chapter I. The Parliament.
Part V - Powers of the Parliament

51.The Parliament shall, subject to this Constitution, have power to make laws for the peace, order, and good government of the Commonwealth with respect to: -
....(xx.) Foreign corporations, and trading or financial corporations formed within the limits of the Commonwealth...
...(xxxv.) Conciliation and arbitration for the prevention and settlement of industrial disputes extending beyond the limits of any one State...

Chapter V. The States.
109. When a law of a State is inconsistent with a law of the Commonwealth, the latter shall prevail, and the former shall, to the extent of the inconsistency, be invalid....

From Wikipedia:
In the first two decades of its existence, the High Court adopted a doctrine of reserved State powers combined with "implied inter-governmental immunities". The essence of the first part of the doctrine was that grants of power to the Commonwealth in the Constitution should be read in a restrictive way so as to preserve as much autonomy as possible for the States. The essence of the second part of the doctrine was that the Commonwealth and States were immune to each other's laws, and could not mutually regulate each other's governmental apparatus: for instance, they could not tax the wages of each other's employees or force each other's employees to submit to compulsory industrial arbitration.

There was little basis in the text of the Constitution for this doctrine although the judges who developed it had all been active members of the Constitutional Conventions and believed that it was implied in the nature of federalism itself.

...The doctrine was swept away in the 1920 decision in the Engineer’s case (after changes in the composition of the Court).[NB: another industrial relations case] The Court now insisted on adhering only to the language of the constitutional text read as a whole in its natural sense and in light of the circumstances in which it was made: there was to be no reading in of implications by reference to the presumed intentions of the framers. In particular, since there is no mention of "reserved State powers," only one express inter-governmental immunity (regarding property taxes: section 114), and, an express provision asserting the superiority of valid Commonwealth laws over inconsistent State laws (section 109), there was no longer any room for the doctrine previously asserted in favour of the States.

While the new IR legislation certainly demolishes a lot of rights that workers have gained over the past century, it isn't at all clear to me that the latest ruling on the Constitution is disadvantageous. At the moment we have Labor governments in all states and a Liberal federal government. It could just as easily go the other way. The states do not have a good historical record in protecting human rights - particularly those of Aborigines. What we need to do now is change the government at the federal level to get rid of this rotten legislation.

At a deeper level, it isn't clear that trade unions have much of a future in their present form. One consequence of the IR system we've had for the past century is that the unions have become part of a tripartite club revolving around the Industrial Relations Commission. Since wages and conditions were largely settled in a legal environment, membership and activism became secondary to the raison d'etre of the unions. Basically unions only survive in the diminishing proportion of large-scale units (especially the public service). Now that casualisation of the workforce has taken hold in a big way, it is difficult for them to recruit members - there has been a massive swing in bargaining power towards the employers and the destruction of the old arbitration system is merely a reflection of this, not its cause.

One could also make a point about the Prime Minister's interpretation of 'Australian values', which for most people includes the notion of fairness. The way Howard interprets this is extremely narrow - the Act in question is called the 'Workplace Choices' Act. This effectively means that employers get more choice over hiring and firing, while workers get more choice about whether to accept low pay or starve. The PM is clearly against the idea of workers being 'coerced' by unions into accepting high wages and protected working conditions. One of the biggest changes that the legislation brought about was the abolition, for businesses employing fewer than 100 workers, of the 'unfair dismissal laws' which, according to the government, were unfair to employers because they couldn't just get rid of anybody without having a good reason. In PM-speak, employers were being 'harrassed' by court cases over unfair dismissal. Under the new law, they won't be harrassed anymore and they can probably harrass their workers as much as they like. All's fair in love and class war.

Sustainable poverty

I actually wrote this some time ago, but I'm still seeing congratulatory notices about the award of the Nobel Peace Prize to a banker, Mohammad Yunus and his Grameen Bank. What most of these notices are suggesting is that, while criticisms can be made, the development of Grameen-type microfinance schemes has really achieved something towards poverty reduction.

Much of the criticism of the Grameen Bank and its numerous clones has been of the high interest rates charged. I don't actually have a problem with these rates. Sure, the rates are above those available from the rest of the banking system. But the trouble is that lower rates are simply not available to the poor. While the poor have a very high demand for credit, they normally have to resort to even higher interest rates from informal sector money lenders. From the banks' point of view, the poor are not creditworthy since they have no collateral to offer, their loans are too small and require too much administration (no economies of scale), etc. The risks of default are high. From the money lenders' point of view, they are creditworthy in so far as they can be induced to accept permanent indebtedness. For example, as long as they keep paying interest, they may not be required to repay the principal - the equivalent of endlessly renewing the loan. If they cannot pay the interest in money, there are ways to extract it in kind - a common example being the provision of labour. In some countries you can find people repaying the debts of their grandparents.

What Yunus has achieved is to demonstrate to the bankers that people without physical collateral can be rendered more creditworthy through the mechanism of 'social capital'. To be eligible for microfinance you have to be part of a group that guarantees your loan repayments. If one person defaults, the group has to cover the debt - so the majority of microfinance programs also try to encourage the groups to save. However, the savings schemes are less than successful, for the simple reason that poor people generally aren't able to save money. What happens is that many borrowers, in order to meet their repayments to the Grameen and other banks, have to borrow from the informal sector - either from moneylenders, in which case the payments required are regular and probably higher than those from the bank, or from family and friends, where they are likely to be less regular and can often be delayed.

Thus Yunus' great discovery was to find a way to transfer some of the income stream from money lenders to the formal banking sector and, to a lesser extent, to the poor.

Whether this actually has any impact on poverty reduction is another question altogether. For those who have to resort to moneylenders and others to meet their debt service requirements to the Bank, the answer is clearly no. For others, the answer is still moot. Loans available through microfinance schemes are very tiny (typically in the range $50-$200). This might be enough to establish a micro-enterprise, but it is scarcely going to enable somebody to accumulate sufficient capital to climb out of poverty. Successful micro-entrepreneurs might enter the realm of sustainable poverty, meaning the kind of poverty that is not going to kill them as early as it would otherwise have done. The risks remain very high: if your chickens die, or you suffer a bout of illness, you can still lose everything. Generally speaking, you're probably better off if you can find a factory job since regular wage income is generally higher than incomes from micro-enterprises. Regular wage jobs are in short supply, however, so Yunus' scheme of providing financial intermediation at lower rates than the money lenders is probably better than nothing. What it is not, is economic development.

Moreover, microfinance schemes are not themselves independently sustainable. The low default rates are a reflection of the continued dependence of the customers on the informal sector. The much vaunted 'social capital' of the borrowers is in fact simply a method of imposing discipline on them - forcing them to repay even when they cannot. Otherwise, microfinance has to be sustained by the subsidies from the commercial banking system - which is only possible when the banks are directed by the government. In Vietnam, for example, the Social Policy Bank (formerly known as the Bank for the Poor) is able to charge low rates of interest because its capital is supplied directly by the Agriculture Bank and others. The same applies to the large microfinance scheme operated by the Vietnam Women's Union which also obtains its capital from the Agriculture Bank. This system generates problems of sustainability for the banking system as a whole.

The problem of sustainability of microfinance has often been referred to in the literature, not only in the Vietnamese case. There have been many attempts to clone the Grameen Bank, but many, if not most, of them are unsustainable because they rely on subsidies to survive, basically because they do not generate savings deposits and, despite the high interest rates, their lending margins are insufficient to generate increases in loanable funds.

Intel in Vietnam

The Wall St Journal reports today that Intel has received permission to increase its initial investment in Vietnam to up to $1 billion. The original license, granted in February, was for $605 million - it is using this to build a chip manufacture and testing plant in Ho Chi Minh City, scheduled to open next year.

In 2005, computer and electronic equipment exports from Vietnam rose 34% to $1.44 billion, while imports of computers and electronics rose 26% to $1.7 billion.

China's role in the third world

Had an interesting discussion at work yesterday about China's role in Africa and other underdeveloped regions. It was prompted by an article in The Economist on Chinese investment in Africa. It discusses the new Chinese presence in Africa in typical Economist terms:

China already buys a tenth of sub-Saharan Africa's exports and owns almost $1.2 billion of direct investments in the region.... A Chinese diaspora in Africa now numbers perhaps 80,000, including labourers and businessmen, who bring entrepreneurial wit and wisdom to places usually visited only by Land Cruisers from international aid agencies.

I mean wow! How big is the European 'diaspora' in Africa by comparison? Who bought the Landcruisers? "In the cold war Maoists dotted Africa with hospitals, football stadiums and disastrous ideas." And, if I remember correctly, infrastructure projects (the TanZam railway). Now China only wants access to raw materials. The West, of course, never tried any such thing. 'We' never undermined African efforts with our protectionism and our support for apartheid, Ian Smith, Mobutu, the Nigerian junta or Tubman "our aircraft carrier in Africa".

Sadly, China's success is an obstacle, as well as an inspiration. Its rise has bid up the price of Africa's traditional raw commodities, and depressed the price of manufactured goods. Thus Africa's factories and assembly lines, such as they are, are losing out to its mines, quarries and oilfields in the competition for investment....

China is doing its bit to improve infrastructure, building roads and railways. But it could do more to open up its own markets. China is quite open to yarn, but not jerseys; diamonds, but not jewellery. If it has as much “solidarity” with Africa as it claims, it could offer to lower tariffs on processed goods...

Competition from whom? Here we get to the nub of the question, which is: how dare those Chinese upstarts encroach upon our territory? How dare they not lower their trade barriers while demanding that we lower ours? The hypocrisy astounds me.

Discussion of the Economist article segued into a discussion of Burma, one of our pet topics. China (also India and Thailand) are playing an increasing role in that country, to the detriment of Western efforts to boycott the regime. Asia Times has this to say:

Foreign investment into Myanmar surged to a record high US$6 billion in the fiscal 2005-06 year that ended in March, up from the paltry $158.3 million recorded the previous year...

That's five times the amount of Chinese investment in the whole of Africa!

Myanmar has significantly managed to bypass the Western-controlled multilateral lending agencies, including the World Bank, which has in the main observed the US and EU sanctions, and accessed capital investment directly from private-sector Asian sources. While various US and European companies closed down their Myanmar-based investments because of the sanctions, Chinese and Indian - mainly energy - companies have rapidly filled the gap.

Western sanctions' failure to achieve economic collapse and political change in Myanmar significantly underscores both the United States' and Europe's waning and China's and India's growing economic influence in the region. As Asia's economies become more integrated, particularly through greater Chinese- and Indian-inspired trade and investment links, Western-led economic threats clearly no longer strike fear into the region's roguish regimes.

Myanmar's ruling junta last year abruptly moved the national capital from the coastal city of Yangon to the inland, mountainous redoubt of Naypyidaw. Ironically, perhaps, the junta is now pumping profits earned from China and India into building up a new military-industrial complex, where the ruling generals are living comfortably and hunkering down against a possible US military rather than economic threat.

All this raises interesting questions. Burma has become the new locus of competition between local powerhouses - China, India and Thailand. The West seems to have an outdated notion of its own importance, but its sanctions no longer work - if they ever did. What is the right way to go in a situation like this? From the realpolitik point of view, the only possibilty is to compete. In this argument, Aung San Suu Kyi might ask us to boycott, but she has no power and the boycott has no effect. An alternative scenario is that we invest in Burma with as much vigour as China and India do. Not in extractive industries, but in manufacturing and services that require education - it would encourage them to reopen schools and universities. I don't believe in the mantra that markets create democracy, but if you look at Korea, Taiwan and Brazil, economic development does bring about changes. The mechanism here is not markets => democracy. On the contrary, the mechanism is more likely to be economic development leads to shortages of educated labour and this gives the educated part of the population the power to demand a share of political power.

The Burmese generals are bent on enriching themselves, but in the long-run they cannot succeed without the co-operation of the people. To date their opposition has mainly come from the university-educated class - so they closed the universities. But I think their ability to control the mass of the population stems from the fact that there is no shortage of unskilled labour. From the point of view of the regime, it's easy to replace people you have killed or locked up. Once you start to depend economically on an educated class of people, you can't just get rid of them and you have to make compromises with their demands for more democracy. I think that greater economic security is the fundamental reason that democracy has made progress in South Korea and Taiwan (not to mention earlier in the West itself). You can stave off the inevitable by importing skilled workers, creating a more competitive labour market and making life for the indigenous workers more insecure (as in Singapore, for example). So there's no necessary and inevitable causation between increasing wealth and democratization, but it does seem to help. It will be interesting to see how long the Burmese generals will want to see the top jobs going to immigrant Chinese and Indians rather than provide the necessary middle class education and jobs to their own people.

There are, however, other ways to view the road to democracy in Burma. After all, there are serious moral considerations in dealing with a regime like that and a boycott seems the right thing to do. As noted above, moreover, there is more to democratization than just growing wealth and an expanding middle class. A more appropriate comparison might be, not Taiwan or South Korea, but Saudi Arabia - a regime that managed for half a century or more to grow extremely wealthy without generating any resemblance of trickle down to the masses (Indonesia under Suharto presents a similar, if less stark, case). Most of the Burmese generals' wealth today does seem to come from resources (oil and gas) rather than the labour-intensive manufacturing that stimulated growth in East Asia. In such a case, the only possible route to democracy is overthrow of the regime. Period.

Not just cheap labour

From the Financial Times:

Intel, the world's largest microchip maker, is seeking to set up a $605m (€500m, £355m) plant in Vietnam to design, assemble and test chips, a project that would be a huge boost to the Communist-ruled country's fledgling high-tech industry....

In addition to the assembly and testing plant, Intel is also said to be interested in tapping Vietnamese engineers for the design and development of specialised embedded systems chips.

With a population of more than 80m and an economy that grew 8.4 per cent last year, Vietnam is south-east Asia's fastest-growing personal computer market, with ownership climbing to more than 1.5m this year from a mere 288,000 five years ago.

Domestic sales of computers and related products rose by about 30 per cent last year from 2004.

Who should be in the G8?

The discussion has come up again due to some people wanting to exclude Russia over the Ukrainian gas business, gaoling of Khordukovsky, press suppression, etc. The advocates of this point of view argue that the G8 members are the largest economies that are also liberal democracies. The Russian counter-argument is that it is a grouping of the world's most influential economies. Both are right in a way, but in order to preserve the safety of all of us, I'd rather lean towards the Russian view.

The G8 was once the G7, originally set up to manage the consequences of the 1970s oil shocks in the capitalist part of the world economy. Since neither Russia nor China were then capitalist economies they could, by definition, not participate. The extent to which the group operated as an instrument of US economic power is illustrated by the fact that Bill Clinton could, virtually unilaterally, invite Russia to join during the latter's early post-Communist phase. In this earlier format, while the G7 was always about attempting to generate economic co-ordination, it was at the same time an exclusive club of basically like-minded politicians - a method by which they could negotiate with each other over the solutions to their inevitable economic tensions. Thus the 'largest industrial democracies' argument is right up to a point.

However, the situation has changed somewhat since the early 1990s. China has emerged as an economic superpower and, if its current growth rates continue, is likely to overtake France, the UK and even Germany within the space of a decade or two. Moreover, it is by now the world's 4th largest trading power. These facts would suggest that, from an economic co-ordination point of view, China should be included in the G8 (or whatever number is chosen). But then China is scarcely a lickspittle of the US - the like-mindedness of the old G7 would be out the window. Life would get more uncomfortable, as it already is with Russia about to take up the presidency of the group. Arguably a new kind of Cold War is already beginning - between the dominant western economies (the 'old' imperial economies) and the newcomers like China.

Russia is in the group, probably because the Clinton administration assumed that shifting from an authoritarian, centrally planned economy to a market democracy would be a simple thing and therefore underestimated the extent of the Russian economy's post-Soviet collapse. While Russia has begun to recover and Putin is obviously anxious to flex economic muscle - the only muscle they have left to flex is the natural resources one - it hardly qualifies as one of the world's largest industrialized economies, let alone democracies. I searched 16 countries in the World Bank's database and Russia came in last on the size of its Gross National Income (same on GDP). Other non-G8 countries ahead of it in economic size are Spain, India, Korea, Australia and the Netherlands. Anyway, it's economy is only half the size of Canada's (the next smallest in the G8). Moreover, while it exported 35% of its GDP in 2002, it ranked 11th in terms of the total volume and the share of exports in its GDP has declined since then. Russia does, perhaps, have a disproportionate influence on European energy supplies - which means the Europeans will be keen to keep them in, at least while the current energy scares continue. But as in 1914, it seems the weakest of the current group by a long way.

Canada has recently been overtaken by Spain on GDP, but not yet on GNI. The reason is that GNI includes external resources (e.g. foreign capital inflows and outflows) which increase the size of the US and Chinese economies relative to GDP, but reduce those of all the others. GNI is a better measure to use for G8 purposes because it reflects the external clout of the economy, rather than just its domestic production. Spain is, as yet, a slightly less influential international economic player than Canada. In 2002, for example, exports of goods and services amounted to 28% of GDP compared with 42% for Canada. Then, if you look at the growth rates of these economies, there is much more growth in the bottom half of the list than in the top half (excepting China). Canada might be overtaken, not just by Spain, but by Mexico, India and Korea in the next decade (assuming continuation of current growth - which is always problematical).

My prediction is that the G8 will expand its numbers in the coming years. China may push to get in, but then it may also decide that the East Asian Summit is a better way to promote its global influence against the 'old' imperial powers. That would not, on the whole be a helpful development, especially if the like-minded ones (the US' political allies) decided to start up smaller, more exclusive, club too. Imperial blocs are generally not conducive to world peace.

Gross National Income (Atlas method) 2004 (trillion USD)*

1. United States 12150.93
2. Japan 4749.91
3. Germany 2488.97
4. United Kingdom 2016.39
5. France 1858.73
6. China 1676.85
7. Italy 1503.56
8. Canada 905.63
9. Spain 875.82
10. Mexico 703.1
11. India 674.58
12. Korea, Rep. 673.04
13. Brazil 552.1
14. Australia 541.1
15. Netherlands 515.1
16. Russian Federation 487.34
* The Atlas method gets rid of changes that are just due to exchange rate fluctuations.

Exports of goods and services, 2002 (trillion USD)
1. United States 1042.9
2. Germany 715.0
3. Japan 436.9
4. United Kingdom 406.4
5. France 388.0
6. China 368.6
7. Italy 320.2
8. Canada 304.5
9. Korea 191.5
10. Spain 183.4
11. Russia 120.8