Season's Greetings to All

Christmas Eve

I am now signing off until after the Christmas break.

This has been a troubled year in many parts of the world. May you and yours have a very happy festive season and a peaceful and prosperous new year.

The Balance of Payments, Australia and the sub-prime crisis

One of the things that has been puzzling me about the US sub-prime crisis is just why it should have such effects on Australia. Our direct US exposure is minimal, while there is no evidence at this point that the local low-docs loan equivalents suffer from the same problems, yet the effects continue to reverberate.

I could understand it when local home lender RAMS struck trouble because this otherwise solvent firm depended directly on shorter term US borrowings. But why was the US crisis creating domestic liquidity problems, forcing Australia's Reserve Bank to pump funds into the economy?

Thanks to an article by Brian Toohey in the Australian Financial Review (17 December) quoting HSBC Chief Economist John Edwards, I now understand. The answer proved simple but, I think, very serious.

Australia has long had a substantial deficit on the balance of payments current account, a deficit funded by capital flows, mainly through international borrowings by Australian financial institutions. The sub-prime crisis has largely stopped those borrowings.

This created a ricochet effect.

Borrowers such as RAMS dependent on offshore borrowings tried to borrow locally, increasing local demands for funds. More broadly, reduced capital inflows meant that cash stopped coming in to fund the current account deficit, draining cash from the Australian economy. Then, too, there was a reduction in lending between local financial institutions, further reducing the supply of loanable funds.

In normal circumstances, this would have been accommodated in part by a rise in interest rates rationing credit, in part by a fall in the value of the Australian dollar thus choking of imports. However, because of the scale of impacts, the Reserve Bank chose to push liquidity into the Australian economy. This meant, among other things, that we were funding the deficit on the current by reducing the RBA's holdings of foreign currencies. As a consequence, the RBA's official reserve assets fell from $A79.7 billion at the end of June to $A32.7 billion at the end of November.

This is unsustainable in the longer term. If it continues, the RBA will have to borrow internationally to fund the current account deficit, let the currency fall to a new equilibrium level, or some combination of the two. Whichever way it goes, Australia is in a degree of trouble.

When Trust Fails 1 - Introduction

Corruption problems with the NSW Government owned RailCorp have been highlighted during a four week public hearing by the NSW Independent Commission Against Corruption.

Corruption examples included a contracts relationship manager who manipulated the electronic procurement system to steal more than $A500,000; a second contracts scam is alleged to have cost the organisation more than $A4 million; while a third involved secret payments for work of more than $A1 million.

The current inquiry is one a series since 1992 that together suggest major systemic problems within the State owned corporation.

According to the barrister assisting the Commission, Chris Ronalds SC quoted in the Sydney Morning Herald, the core problem lies in the organisation's culture:

The prevailing culture is one of indifference or possibly intimidation, with minimal attempt to investigate.

Where serious breaches of conduct have been exposed....the disciplinary tone has been a slap on the wrist. This approach breeds an entrenched culture of condonation of unethical behaviour, with various scams being able to be run by different people in silos, and a failure of internal system robustness, the culture of cover up is entrenched.

I do not pretend to be expert on RailCorp. However, I do find the case interesting as an example of what appears to be systemic failure. I also find it interesting because I had formed the view that that the approach to the control of corruption in NSW is fundamentally flawed and indeed creates its own problems.

Given this, I thought that it might be interesting to explore some of these issues in a series of irregular posts.

A pause because of travel

Because of travel I am going to be away from my desk for a period. I will continue my demographic series upon my return.

Global Demographic Trends - Asia

Continuing our series on global demographic trends, in 2007 the top ten Asian countries by population excluding South Asia were:

1. China - 1.32 billion
2. Indonesia - 235 million
3. Japan - 127 million
4. Philippines - 91 million
5. Vietnam - 85 million
6. Thailand - 65 million
7. South Korea - 49 million
8. Burma - 47 million
9. Malaysia - 25 million
10. North Korea - 23 million

Jumping forward, the 2050 projections are:

1. China - 1.42 billion
2. Indonesia - 313 million
3. Philippines - 148 million
4. Vietnam - 108 million
5. Japan - 94 million
6. Thailand - 69 million
7. Burma - 54 million
8. South Korea - 45 million
9. Malaysia - 43 million
10. North Korea - 26 million

In the Asian case, we can clearly see the way in which population trends are diverging.

Japan and South Korea face population declines, while the populations of China and Thailand have begun to plateau. The size of the projected Malaysian increase came as a surprise. We would have expected it to be lower, given the country's level of economic development.

Indonesia, the Philippines and Vietnam all reflect current levels of economic development.

In the next post we will look at the Americas.

Note on Sources

Source data can be found at the introductory post.

Posts in Series

Introductory post. Last post. Next post.