When will the strong Australian dollar end?

In an earlier column on the perils of forecasting, I spoke about the use and abuse of economic forecasts, including the way it creates something of a herd instinct among economists.

This creates the business problem I addressed in that column. How can you use the forecasts when they are so often and so dramatically wrong? In this regard, the last months of 2012 and the first part of 2013 were quite remarkable.

First China was seen to be growing, then contracting, then growing. Something similar happened to forecast iron ore prices and to forecasts on US economic growth. This type of yo-yo effect creates a further and more serious problem for business, policy instability. It is very difficult to plan, especially for businesses dependent in some way on the Government marketplace, when Government is so unreliable.

In all this turmoil, what can we say with a reliable degree of certainty?

The developed world is awash with money as a consequence of central bank action. All that cash will have to be sterilised at some point, but not immediately. This means that the Australian dollar is likely to stay higher than it would otherwise be, if only because our interest rates are higher.

This situation will turn round. Indeed, we saw recently how the currency dropped at just a hint of the end of quantitative easing. But for the present, now remains a good time to invest overseas or just take that trip. Not so good, of course, if you are an exporter or suffering import competition.

The present evidence is that the global economy is growing again, growth that is likely to continue for the immediate future. Barring unforeseen shocks, that will maintain demand for Australian exports. However, we have had our windfall gain.

The big mining investments that have taken place around the world mean that new supply is starting to come on stream. Our export volumes will go up, but there is likely to be downward pressure on prices, accentuated by rebalancing in the Chinese economy. So we should still see medium term export growth, but at a more subdued level.

For Australia, one critical issue is the timing of the required global cash sterilisation measures.

As global growth picks up, all that cash sloshing around is likely to feed into higher inflation and potential asset bubbles. Interest rates will rise as central banks refocus on inflation targets and on reductions in the now very high liquidity levels. In turn, the Australian dollar is likely to fall as the present real interest differential narrows.

The timing? Who can say! My feeling is that it’s likely to be sooner than most people expect.

So far, the impact of quantitative easing has been muted. No matter how much extra cash is made available, it doesn’t help if people or businesses don’t want to spend or invest. However, once expectations shift, the cash feeds rapidly into economic activity.

I suspect that the tip point will come well before the end of calendar 2013. I say this because so many businesses have cut every cost they can, have reduced head count, have deferred every piece of spend they can. As business picks up, they will be forced to spend to meet new demand.

Note to readers: This column appeared in the March/April 2013 edition of Australian Business Solutions magazine. It's not on-line, so I have re-published it here.

The end of growth?

The end of growth has suddenly become a fashionable topic. You see it in books and magazine articles, all arguing that we can no longer expect growth of the type once taken for granted.

Sustainability provides one thread in the discussion. Its proponents argue that growth has become unsustainable on resource and environmental grounds. A second thread focuses on technology. The great technological gains that began with the first industrial revolution and which drove economic growth and transformed life have been exhausted. Demographic change and the consequent aging of the population in many countries provide a third thread. We have fewer workers relative to the size of the population, further dragging on growth.

In combination, these forces reduce the return on all types of investment. The golden days are behind us. It’s quite enough to make one splutter into the morning coffee! But are the arguments right? The short answer is partially yes, but mainly no.

There was always something a bit silly about our overall obsession with short term growth. Just adding together all the growth targets set in executive offices and board rooms across the country should have shown that. There was no way that the economy could grow fast enough to allow all or even a majority to achieve target. It just couldn’t happen. Yet we persisted in insisting that the emperor had clothes, that somehow targets would be achieved.

The current emphasis on sustainability is actually a useful corrective to those past excesses. But does this mean that the age of growth is over? I think that the answer is clearly no.

Just at present, the global economy is marked by two dominant changes, one short term, the other long.

In the short term, global economic activity is being dragged down by the need to clear the excesses of our immediate past. Low growth is the price we have to pay for those excesses. This isn’t new. The stagflation that marked the 1970s was the price paid for the excesses of the previous decade. The indigestion that resulted was painful, but it did ease. The same thing will happen now.

The longer term trend is far more profound because it involves a fundamental rebalancing in the global economy. It’s a structural shift as the rest of the world starts to catch up with the growth previously experienced in the west. Growth in the mature economies will be low simply because the economic base is so much larger. Further, those countries are also the ones most affected by aging populations. But, overall, longer term global growth is likely to continue at much the same average levels that we have seen over the last one hundred years.

Will the composition of that growth be the same as it has been? Almost certainly not, but then it never is, for the pattern changes all the time.

And what does this mean for Australia? Again, we are in the right place at the right time. The food and raw materials we produce will continue to be in demand. Our service sectors will benefit from proximity to higher growth areas. In all, we remain the lucky country!

Note to readers: This column appeared in the November/December edition of Australian Business Solutions magazine. It's not on-line, so I have re-published it here.

Global economic woes not all bad news for Australia

I have previously discussed the ending of the mining boom and the consequent weakening of the Australian economy. The first mining boom, the price boom, laid the basis for the second, the investment boom. It was always going to be the case that the end of the first would finally end the second. It’s just happened a lot faster than was generally expected.

The Chinese economy continues to slow. Chinese economic growth has been built on the twin pillars of heavy infrastructure investment and exports. Domestic consumption has been a remarkably low percentage of the economy, remarkably low because China is still a poor country, remarkably low by global standards. This pattern has been unnatural, one enforced by Government fiat. A painful restructuring is now underway.

Germany, the economic powerhouse of Europe, is going through a related process. Germany and, to a lesser degree, France gained hugely from the Euro. Had Germany retained its own currency, it would have faced significant appreciation that would have reduced the exports on which German growth depended. The wider Euro effectively gave Germany a currency advantage in the same way the undervalued renminbi gave China a currency advantage. To a degree, the rise in debts in peripheral Euro countries was a mirror image of Germany’s trade surplus. One could not exist without the other. Europe now struggles with the restructuring consequences.

Europe’s economic woes feed into China’s problems. Now add another factor.

Anybody in business knows that debt levels can become a problem when business contracts. Loan and interest repayments that could be comfortably met become a burden. Painful restructuring or even closure may be forced upon us. This is reinforced where our main customers face similar problem. They cut, we cut, and the economy goes down, creating the need for further cuts.

Europe is going through exactly the same process, adding to collective woes. It’s very easy to become depressed.

In fact, we have been through all this before. The long growth cycle that began at the end of the Second World War seemed immutable, likely to continue for ever. Then the oil shocks, the uncontrolled rise in US spend associated with the Vietnam War, brought things to a shuddering halt. The result was a decade of slow growth while the imbalances worked their way out of the system. This, I think, is just where we are now.

What does this mean for Australia? Must we share the pervading sense of gloom? The answer is no.

We still have a strong export base. As the mining boom enters the tailings stage, the pressures it has placed on other parts of the economy and on regional infrastructure will ease, will ease. Interest rates will fall. Falling interest rates with lower export prices means a lower dollar.

Barring economic catastrophe, and this seems unlikely, lower interest rates plus a lower dollar will cushion us from at least some of the economic effects. In the longer term, this period of adjustment will position us for further growth,

Note to readers: This column appeared in the September/October edition of Australian Business Solutions magazine. It's not on-line, so I have re-published it here.

Australia chokes on its regulatory mess

In my last column, which was written just before the federal budget was announced, I pointed to some of the strengths of the Australian economy as well as a couple of its weaknesses. Since then, the economic news has been all over the place, with international gloom warring with unexpected strength in the domestic economy. It all goes to show – as I have argued in previous columns – that businesses are better off ignoring the daily and weekly economic news.

Recently the PM’s Economic Summit has spoken of the need to improve productivity in this country, and about the importance of economic reform. And I agree. When I speak of economic reform I am not talking about taxation reform or the size of the Government, although both may be important. My focus is much simpler; I am talking about the need for immediate steps that will improve economic efficiency.

The Australian economy is choking on regulation. From schools to universities, to doctors to ordinary businesses, more and more resources need to be devoted to reporting and compliance. To help navigate the mess, we need ever more lawyers and accountants, as well as specialists in OH&S and a myriad of other fields. And while we make payment after payment, things don’t seem to get any better.

We have a taxation act of which its size exceeds the total number of pages of the entire Commonwealth economic legislation only fifty years ago. We also have a Corporations Act that seems to be the longest piece of legislation of its type in the whole world. Yet we have seen no proper national estimate of their costs. My best guess is that the direct cost is around 10 per cent of GDP. And that’s only the direct cost. We also need to consider the indirect costs.

For every dollar of direct costs, there is probably another dollar of indirect costs in terms of the scarce executive time that needs to be devoted to considering and responding to the compliance burden. There are also the costs associated with slowed decision-making and the need to get all the required ‘ticks’ across the compliance process. Recently the Business Council of Australia identified this as one of the three cost drivers that is making Australian project cost the highest in the world. We all know these things and we talk constantly about the need for change, but yet nothing happens.

Some years ago I was a member of a high-level Commonwealth taskforce that had been set up by the PM to address the question of deregulation. As we worked our way through all the Commonwealth laws and regulations affecting business (and even then there were hundreds), we found that every single regulation had its supporters who argued that it was in some way critical to the public interest. Every single abolition or reduction involved a political fight with one vested interest or another. So it’s no surprise that nothing happened in the end.

In many ways, the business community is its own worst enemy. As a community and as individuals, we demand regulation and controls to protect things that we consider to be important. Yet we complain when the cost of protecting it affects us.

If the business community really wants regulatory reform then it has to be prepared to address the problem across all aspects of Australian life, and to argue for abolition or at least simplification. I see little sign of this happening.

Note to readers: This column appeared in the July/August edition of Australian Business Solutions magazine. It's not on-line, so I have re-published it here.

The future for the Australian economy

In my last column I spoke of the economic forecasting mess. Since then, the International Monetary Fund has released its latest forecasts on global growth. This was greeted by some in the Australian media with glee - “Australian economy leads the world” screamed one headline.

The reality is a little different, for the IMF is actually a good example of what I have been taking about. In recent years, its forecasts have been all over the place like a dog’s breakfast! So what did the IMF actually say? Well, not quite what the headline would suggest.

To begin with, the IMF suggested that there was some strengthening in the global economy, although this was heavily qualified in some ways with recognition of the various risk factors. But what did the IMF think of Australia? The IMF actually projected some further weakening in the Australian economy. We are still forecast to do relatively well by the standards of other developed nations, but hardly well enough to suggest that the Australian economy leads the world!

But in all this confusion what can we actually say about the Australian economy? The first and most important point is that world commodity prices will continue to weaken, reducing returns on our major exports. Why do I say this? It’s simple. The structural imbalances that developed in the global economy over the long boom are still there. They will take time to unwind. So long as they continue, global economic growth will continue to be weak. In turn, this means weakened demand for commodities.

Yet despite the fall in commodity prices, the Australian mining investment boom will continue, if at a lower level than previously forecast. Work already under way guarantees that. This means, in turn, that pressures on the non-resource sectors will continue. However, it’s not all doom and gloom.

A very significant proportion of the inputs required for all those new mines and supporting infrastructure, over 40 per cent, will be imported. With lower export prices, the current account deficit will grow. This will place downward pressure on the Australian dollar.

The Australian dollar may not go lower than now, but it will go lower might otherwise have been the case. Both export and import competing industries will be better off as a consequence. There will be more time to adjust.

But the story doesn’t end here. World growth may be slow, but it is still positive. This means that the total marketplace for Australia’s non-resource exports will grow. Importantly, the fastest growing marketplaces will continue to be in our immediate region, which gives us an advantage. The decline in commodity prices will also increase the relative return on non-mining investments, encouraging investment outside mining.

Taken together, we are likely to see a smaller resource sector than would otherwise have been the case, a larger non-resource sector.

For the present, the Australian economy should continue to grow if below the trend rate - and the biggest immediate economic risk? It’s actually the budget!

By the time you read this, we will know what Treasurer Swan has in mind. Looking at the numbers, the size of the apparent spending cuts required to return the budget to surplus will place considerable downward pressure on economic activity. That pressure will be felt most by the non-resource sectors of the economy, just those sectors adversely affected by the mining boom. That would be a pity.

Note to readers: This column appeared in the May/June edition of Australian Business Solutions magazine. It was written just before the budget. It's not on-line, so I have re-published it here.

Navigating the economic forecasting mess

It is extremely difficult to keep a level head in the face of current economic forecasting and reporting. One minute it’s all doom and gloom, the next things suddenly seem better.

The gyrations have been quite remarkable, beyond anything in my own experience. They have also continued for some time now - since the onset of the global financial crisis, in fact. Measures of consumer and business sentiment have followed the gyrations.

From a practical business perspective, both economic forecasting and reporting have become a burden. They affect, but do not inform.

So how do you navigate your way through this mess? The first thing to remember is that forecasts are just that - forecasts. In all cases, they rely on past data and incorporate assumptions about the structure of the economy and of the relations between different types of economic activity.

But there is a further problem. Most prominent business economists work for financial institutions. Because their primary internal role is to provide advice on what might happen in financial markets, the economic reporting that follows from their public utterances is also markets’ focused. This means that both forecasts and reporting often do not provide the type of longer term information most businesses require.

Business wants answers to questions like: What’s happening to my market place or to my costs? By contrast, many forecasters and reporters are concerned with the immediate market impacts of changes in longer term expectations. How will it affect the dollar or shares, or the financial markets in general?

Perhaps the best course may just be to ignore the whole lot unless there is something there that seems directly relevant to your business! If this sounds extreme, consider all the reporting of interest rates over the last twelve months. How much of that has actually been in any way useful to the majority of Australian businesses?

I am not saying that you should ignore economic conditions or all economic reporting. I am saying that you should be selective and focus on information relevant to your needs.

Say that you an engineering business that provides components to certain firms in certain sectors. It is safe to say that you have a direct interest in developments in those sectors and especially in your own customer base. This includes the likely demand for your own products or services, as well as payment patterns. It is critical that you know if your customers paying more slowly and, if so, why?

If, like most businesses, you have borrowings, then you are interested in interest rates. But, more importantly, you are also likely to interested in the availability of credit.

Each business needs to define the economic information that is directly relevant to their needs. A lot of people in business do not focus properly on the economic and industry conditions that are relevant to their businesses. They will tell you how awful the economy is when, in fact, their business is doing just fine. These perceptions about the economy can affect actions, and the results can be quite damaging.

Note to readers: This column appeared in the March/April edition of Australian Business Solutions magazine. It's not on-line, so I have pre-published it here.

How do we break free from the ratings entanglement?

In December, Treasury Secretary Dr Martin Parkinson took a swipe at the global ratings agencies.

They were, he is reported to have said, “becoming mechanistic and excessively simplistic, running the risk of moving from excessive optimism to excessive pessimism every time they look at a country or firm.”

It’s worse than that. The global credit rating agencies have become a cancer eating away at the global economy, one that affects every business.

In the lead-up to the global financial crisis, they gave triple A credit ratings to institutions and securities that were clearly not. That helped fuel a global financial bubble.

As the crisis unfolded, the variations the agencies made to country and institutional rankings added to market instability.

We saw the same thing in the unfolding crisis with the Euro.

The credit rating agencies provide no new information to the market. The standard of their economic and financial analysis is clearly suspect. Yet despite all this, a shift or threat of a shift in a county’s credit rating can have damaging or even catastrophic market effects even though it tells us nothing that we didn’t already know.

It’s actually our own fault, yours and mine. Let me explain.

Our problem, and it is our problem because it affects us all, lies in the way that we awarded the ratings agencies authority without responsibility. We created the cancerous monster.

Back in a now dim and distant past when I was working in the Commonwealth Treasury, I remember discussions on the possibility that Australia might get a triple a credit rating for the first time. We did, lost it in 1986, then finally got it back in 2003.

Australia’s original concern with its credit rating at state and Federal level made a lot of sense.

In those days, both State and Federal Governments borrowed to fund infrastructure. We needed access to global capital for both private and public purposes. A high credit rating made it easier for a small relatively remote country like Australia to access funds and at a lower cost.

Sadly, from being a means to an end, the maintenance of a triple A credit rating became an end in itself. All Australian Governments preached this as a badge of honour.

Those in the business community nodded their heads and made approving noises, even though it was obvious even to Blind Freddy that much of the ratings shifts actually didn’t matter very much.

Governments throughout the world then did something worse. They built the ratings into policy, procedures and regulation. Business and especially the finance sector followed.

This institutionalisation of agency ratings, their incorporation into so many regulations and arrangements, meant that variations in credit ratings had direct flow on market effects in ways that no-one had foreseen. The ratings system itself had become a direct cause of market instability and on a large scale.

You would think that we would learn, but no! Even as Treasury Secretary Parkinson is complaining about the agencies, we see Federal Treasurer Swan, NSW Treasurer Baird, quoting rating changes approvingly as evidence of their good economic management.

Politicians respond to their electorates, that’s part of their job. But surely it’s time for the Australian business community as a whole to say enough is enough, that Australia and the world must break free from the ratings entanglement that we have created?

Note to readers: This column appeared in the January/February 2012 edition of Australian Business Solutions magazine. It's not on-line, so I have pre-published it here.

Management Perspectives merges with Managing the Professional Services Firm

Note to readers: I have left this post up for reference purposes, but posting on this blog has resumed!

I have been mulling over how best to maintain my professional blogging. I have found it increasingly difficult to maintain two professional blogs with any semblance of regular posting.

After a lot of thought, I have decided to merge this blog with Managing the Professional Services Firm.

The two blogs were intended to serve two different purposes, one a specialist blog, this one with a broader management and economics focus. Given that I can't do both, I have decided to broaden my professional services blog. I hope that this will add interest without completely losing the professional services focus.
Feel free to visit.

Problems with maintenance

I had hoped that Paul Barratt as a former head of the Australian Department of Defence would comment on this one. However, while he has tweeted on it, he has so far not said anything substantive.

The Australian Navy faces a problem, quite a large one. Maintenance on its main transport ships was so neglected that it is now too expensive to fix them, so that they have to be taken out of service. While the Minister is, rightly, blaming the Defence organisation, the Navy's problems are a symptom of a bigger issue.

Let me illustrate with two Australian examples.

When funds for social housing were reduced, Housing NSW diverted funds from maintenance to new supply. That was fine, it maintained its performance measures for new housing stock. Then, suddenly, the maintenance backlog go so large and so urgent that the Department had to seek special funding.

Or take the University of New England. There funding cut-backs led the University to divert money from building maintenance to other activities. The university now faces a a huge bill for back maintenance for its residential colleges that it has no way of funding.

These are public sector examples, but I am sure that you can think of private sector equivalents. The electricity industry comes to mind.   

As managers at whatever level, we all face immediate short term performance demands. We also face budget constraints and cut backs. The problem with periodic maintenance is that is is one of those areas that is easy to cut back, to defer to meet an immediate need. Gain now, pay later.

I mention this one now because it seems to have become something of a pattern over the last ten years.

Changing hats and looking at it from the perspective of an investor whether private or business, it creates another uncertainty in judging immediate business performance that has to be properly investigated.

Google targets Australian web service providers

I see from IT Wire that Google Australia is offering free training in its products and free AdWords advertising to companies and individuals that offer web services to SMBs in a bid to get them promoting Google's offerings to their customers. I quote:

In a blog posting, product marketing manager, Richard Flanagan, said: "If you're a webmaster, digital agency, freelancer, IT consultant, or provide any other web services to Australian small businesses, you can apply to join the program starting today.

I am a bit surprised that Google hasn't tried this before. The web has become a very crowded place. While Google dominates the search marketplace in Australia, the range of competitor offerings on different platforms grows all the time. Facebook is an obvious example.

Back in January 2008 in Google's growing market share I made a passing reference to Google's business model, including the way that Ad Sense arrangements provided a pool of working capital. I have a strong feeling that Google's revenue from Ad Sense has been under a degree of pressure.

Blog performance November 2010

The attached graphic shows visitors (yellow) and page views ) yellow plus red) for the year to the end of November.

Over the last month, the most popular posts were:

• The Importance of Demography and Demographic Change - update 84 page views
• Slow posting 39 page views
• Economic implications of the Australian Government's Nation Building package 27 page views
• Hilary Clinton and web 2.0 24 page views
• Digital Intelligence 20 page views
• Changes in Public Administration and their Impact on the Development of Public Policy 1 - Introduction 18 page views
• Common Management Problems Series 1 - managing up 16 page views
• A thought for Andrew Laming  14 page views
• A continued apology for slow posting 14 page views
• Paul Kelly's The Hawke Ascendancy 14 page views

A thought for Andrew Laming

Andrew Laming is the LNP member for Bowman in the Australian Parliament. Checking my stats, I found a visitor from Andrew's site. Checking, I found that Andrew had listed one of my posts, The Rudd Stimulus Package - Andrew Laming's view, under the In the Press segment on his web site.

I was very pleased. Let me explain why.

Back in February 2009, More economics 101 - the economics of Malcolm Turnbull looked at the differing economic approaches of the Rudd Government and the opposition. I said then that I was not especially interested in the differing rhetoric of the two sides, just trying to understand the variations in the economics.

This post drew a long and thoughtful comment from Andrew, so thoughtful that I actually turned it into a guest post without inserting my own views. This was the post listed above. Andrew then, rightfully, included it in his In the Press segment.

Now from my experience it is fairly unusual for a politician to treat a blog post sufficiently seriously to engage in discussion. As a blogger, I am obviously pleased. However, I also have a thought for Mr Laming.

He clearly has ideas. He is also prepared to support individual causes such as home birth. I wonder whether it might not be worth his while to do more writing.

I wonder whether Mr Laming is aware of the case of the NSW Parliamentarian Davis (Bill) Hughes. First as a back bencher and then as Leader of the NSW Country Party, he found it a little difficult to get publicity in the Sydney media. However, he did not respond with a multiplicity of press releases of that short form we love so well. Instead, he focused on more substantive material.

He did not get immediate publicity, indeed he wasn't seeking it. What he did do, was build a reputation with journalists as a thoughtful man who actually had something to say.

Later, when he wanted publicity he got it because he had built a reputation.

Just a thought.       

Australia capex stats September 2010

Yesterday the Australian Bureau of Statistics released Private New Capital Expenditure and Expected Expenditure, Australia, Sep 2010.

This graph shows volume estimates. You can see how the numbers climbed and then dropped, only to recover.

On the surface, the expectations data also shows strength.

The release includes a range of other information that I am currently working through. However, to cut straight to the chase.

On the surface, the numbers are good. However, the growth appears to be driven pretty much just by WA.

More later.

State of the Blogosphere 2010 a note

Just a short note so that I can delete the email and not lose the link.

Technorati has release its annual survey of the blogosphere, in this case State of the Blogosphere 2010. From a quick scan, the survey's results contains a range of interesting material.

Paul Kelly's The Hawke Ascendancy

I use the term train reading to describe the reading I do travelling to and from work. This applies even where the travelling is by bus!

The thing about my train reading is that, quite consciously, I use it as an opportunity to read things that I might not otherwise look at. Inevitably, this translates into a series of posts under the train reading banner.

My present train reading is Paul Kelly's The Hawke Ascendancy: A definitive account of its origins and climax 1972-1983 (Allen & Unwin, Crows Nest, paper back edition, 2008). I originally bought this book as a present for my wife because I knew that she would be interested; she worked as one of the advisors to Minister John Button, a key player in the events of the time.

Originally published in 1984, the book itself is a  gripping account of the rise to power of Bob Hawke as leader of the Australian Labor Party and then, from March 1983, as Australian Prime Minister. It is also the story of the rivalry of three men: Hawke, Liberal leader and PM Malcolm Fraser and Bill Hayden, leader of the Labor Party before Mr Hawke. I found the book especially interesting because it is entwined with elements of my own life, providing a very personal perspective. 

I will write about some of the personal elements in due course in a post on my personal blog. Here I want to deal briefly with two professional elements: the way in which our differing positions affect  our perceptions, along with the rise of professional campaigning and what it means.

I have spoken before about the way our position in an organisation affects our views.

For the individual manager, I have emphasised the need to manage up and sideways as well as down. In so doing, I have also emphasised the need to understand the perception from the other side.

For the senior manager, I have emphasised the need to recognise that their perception of the world is almost certainly not shared, or shared only in part, by their staff. They actually need to know what their people think, not just assume.

How does this fit with Paul Kelly's book? Well, for part of the time I was a player in events.

In 1976, for example, I was an acting branch head in the Commonwealth Treasury when Malcolm Fraser decided to split the Department into two. In my acting role, I attended the last drinks put on by Secretary Sir Frederick Wheeler for senior staff of the combined department. I still remember Sir Frederick's distress and anger.

Later I was Assistant Secretary Economic Analysis in the Department of Industry and Commerce. Here my role was to act as a sort of Treasury in Exile for our Minister Sir Philip Lynch, a former treasurer who still wished to play an economic policy role. When Paul Kelly talks about the mining boom of 1980 and the way it affected policy, I was there as one of the official players.

By contrast, at other times I was a mere external observer, back at University undertaking post grad studies. Here I saw events from afar.  

Reading the book, I realised just how little I knew of certain developments, but was also struck by the way my varying positions affected my perceptions of the time. 

I have also written a fair bit on organisational change, most recently in Scoping the decline in organisational performance. As part of this, I have looked at the professionalisation of politics, and the way that this has adversely affected public policy. Many of these posts have been on my personal blog where I can be more opinionated, less objective.

As I write, NSW Parliamentarian Joe Tripodi has announced his intention to resign. Mr Tripodi is a NSW Labor numbers' man, part of the group that has effectively controlled the party and has led it to almost terminal decline. He is, in fact, the fifteenth NSW Labor Party Parliamentarian to announce retirement in recent months. Everybody knows that this Government will go in next March's elections, but the scale of retirements is still staggering.

In his book, Paul Kelly reports approvingly of the strength and professionalism of the NSW right. He also reveals clearly the way in which opinion polls plus qualitative research including focus groups affected policy and approaches. Mr Hawke became leader because polls showed that he had the best chance of winning.

Reading the book, I was struck not by the rise of professionalism in politics, but by the way each of the key protagonists had different views and values.

Each was an ambitious man, each wanted to win, but their views and values affected their approach. Professional political approaches including market research set a context, but the outcomes were determined by the interaction between individuals and the market research. This is very different from an environment where the market research itself comes to set, to control, the political and policy agenda.

I will finish here. I know that I will have more to say later.

Hilary Clinton and web 2.0

A short post to record something for later reference.

Over at Club Troppo, Nick Gruen has long been banging the drum for web 2.0 as a way of making more Government information available and in a more useable form. For reasons that I will discuss in a later post, I think that the work done by enthusiasts such as Nick is very important.

At this point, I simply want to note that that Danielle Cave's post on the Lowy Institute blog, Chasing Hillary Clinton,  provides an interesting example of the use of various web tools for political and public policy purposes.  

Digital Intelligence

Last month Thomas, one of my blogging colleagues, discussed in The future the possibility of doing a PhD on digital intelligence. Thomas wrote:

Howard Gardner’s multiple intelligences theory has always had me interested and somewhat of a believer. I certainly believe in the essence of the theory as he wrote it, but I feel that the theory has been abused and diluted and manipulated in wrong ways over the past few years (having read research about it for the past 6 years). But, yes, I do subscribe (as many probably do) with the notion of different intelligences.

What I would like to investigate is whether with this massive explosion in technology in people’s (see; children’s) lives, is there a new branch of the ‘intelligences’ that Gardner came upon emerging that we could term ‘digital intelligence’? That is to say, are people now developing new and distinct ways to comprehend technology, the new ways technology is creating and presenting information, and the way the digital world works?

For those who don't know Thomas, he is just completing an honours degree in education at the University of Sydney. I promised to provide a comment.

Much of the focus on the application of computing and communications technology in the classroom or in business has been on ways to better use the technology. I say computing and communications technology rather than just digital because the focus appeared well before the internet.

You can see this focus in the various Australian school curricula. There acquisition of various types of computing skills, the use of technology to do things, is built into every subject and every stage. You can also see it in teacher's blogs such as that of Maximos62 who is an enthusiast about the possibilities opened up by the digital technologies.

The actual impact of the technologies on the way that students, and people in general, think is less well understood.

We already know that technology shapes thought in often unseen ways. The rise of the motor vehicle is a classic example. It fundamentally reshaped the structure of life in country, town and city. It also changed the way in which we look at the world. It actually altered our mind settings, imbedding new perceptions of space and time.

We know that computing and communications technology is having similar effects. Indeed, we talk about it all the time. Yet the actual affects on the way we think are not well understood.

The initial stages of the computing and communications revolution focused on the storage, transmission and dissemination of data. Initial applications were business focused. The rise first of the PC and then the internet, added access and presentation to the original focus; the concept of interactivity emerged; the digital world became personal.

There are considerable tensions between the old and the new.

The use of the new computing and communications technologies in organisations, the desire to achieve uniformity and processing efficiency, led to the emergence of what I call command and control organisations. The bounds of individual authority were reduced, replaced by central decision rules and various types of performance measurement. My last post, Scoping the decline in organisational performance, is concerned in part with what I see as the adverse effects of these changes.

The internet and the associated new tools including social networking pose a fundamental challenge to the command and control paradigm because they transfer power from the organisation to the individual. To a degree, organisations including Governments that have used the technology to improve processing efficiency and to assert central control now struggle with changes that threaten that control. You can see this play out in, for example, the debate over internet filtering.

At individual level, people are still coming to grips with just what this new world means not just in terms of the use of the technology itself, but also in the impact of the technology on ways of thinking and acting. The debate over Facebook and privacy is an example.

Whether all this translates to a new type of intelligence, digital intelligence, is open to question. My problem here lies in the use of the word "intelligence". Quite clearly, new ways of thinking and acting are emerging. Quite clearly, people's ability to access and use the new technology varies enormously; the digital divide originally foreshadowed in this country by people like Barry Jones is here. However, does this constitute an "intelligence" in the way referred to by Gardner? It may, but it's also a question of definitions. 

To my mind, the more interesting question is the way the technology is actually affecting the way children think. If you look at the debate in this area at present, it seems to be generally problem focused. Cyber bullying is an example. There is, I think, much less focus on changes in structures of thought and of perceptions, on the way this affects learning and behaviour.

This is, of course, a huge topic. It may be that the use of Gardner's concept, a discussion of what constitutes digital intelligence and how we might measure it, is one way in. Whichever way Thomas goes, the topic is an important one. 

Scoping the decline in organisational performance

Sunday Essay - why who signs what is important, a post on my personal blog,  discussed two examples of changing approaches to management that I thought had contributed to declines in organisational effectiveness over recent decades. This drew a comment from an old friend and colleague, Winton Bates.   

Winton was a senior official with the Industry Assistance Commission/Productivity Commission. There was, he suggested, some improvement in public service management in Australia during the 1980s and early 1990s when there was effective delegation of responsibility to a more appropriate level. Unfortunately, this had not been maintained.

For background purposes, I have repeated the post and the comment below in full. In this post I want to make a few general points and then ask for help.

One of the points about management theories and concepts is that their validity or otherwise finally depends on their practical application. Anybody who has worked for an organisation, or started a new business for that matter, knows this. It is the nuts and bolts, the systems and practices, that finally determine effectiveness.

My continuing discussion about what I perceive to be a decline in organisational effectiveness in the private as well as public sectors rests rests on this point.

So far as the public service is concerned, I think that Winton is right in suggesting that there was some improvement in public service management in Australia during the 1980s, although I would put both the start and end dates earlier than  he does. So we had improvement, and then decline.

I am not alone in talking about this perceived decline. Just at present, a considerable number of my older colleagues are are following similar lines, although the reasons given vary. One could argue that we are just getting old, but I think that it's more than that. There is a feeling of general unease, nor is this limited to the public sector, although it seems to be most pronounced there.

This brings me to the help I am seeking.

I would be interested in comments from fellow managers. Do they also perceive a decline? If so, when and why did they first form this view? Here I am especially interested in specifics, actual dated cases or examples, that might allow us to both test the argument and plot the process.

My original post follows:

"As a manager and adviser over a now considerable period, I have worked through a number of different sometimes overlapping management fashions. I think of them in my own mind as authoritarian, delegated, entrepreneurial, corporatised and now command and control.

I mention this because of a conversation last week over lunch during which those present returned to a common theme, a perceived decline in both the efficiency and effectiveness of modern organisations.

Organisation and management always takes place in a social context set by the society or societies within which the organisation works. That context plays an important role in the decline as we see it. However, put that aside. In this short essay, I want to look at just two features internal to organisations themselves.

I asked one of my colleagues, a former senior public servant, at what date he stopped being responsible for pieces of paper going to the Minister. He blinked, and said he always remained responsible. I rephrased the question: at what date when you were a branch head were you first required to get your Division Head's signature on it before you could send a piece of paper to the Minister? He then took the force of the question, and thought that it was around 1992.

A year or so back, I first had cause to do some work inside the NSW Public Service system. I found a multiple signature system on briefing notes, author, manager, branch head, division head, even CEO. 

So what do we have? In the period that I was a Commonwealth Public Service branch head or acting division head (1980-1987), I made the decision as to who signed the piece of paper to the Minister. My ability to sign myself was critical to getting things done. By around 1992, my colleague at the same level had lost that ability. By 2008 in NSW you had multiple signatures.

A small thing? Maybe, but let me ask you two questions.

First, on this type of paper, who has final responsibility? I think that the answer has to be the highest signature level appearing. As organisations have become more centralised, more command and control, final responsibility for many decisions has moved up the line. The practical effect is a reduction in flexibility, in the capacity of the organisation to respond quickly to the myriad of changes taking place in the world around.

Secondly, on this type of paper who now has ownership? Ownership is important because it is directly related to another question: who is going to make things happen? No sense of ownership, no drive. The problem with multiple signature systems is that no one in fact may take ownership. At one end of the chain, the nominal originating staff member may feel no ownership because he/she is just a drafter whose words and ideas may have been changed many times. At the other end of the chain, the final signatory is likely to be just too busy to take real ownership.

The second related feature that I want to look at is formal systems of delegation. Delegation systems are very important because they determine who has authority for what. They also provide part of the basis for financial control.

One of the things that I did in the two years I was CEO of the Royal Australian College of Ophthalmologists was to introduce new budget systems along with financial delegations that gave the CEO power to approve things within budget, subject to monthly management reporting. This replaced the previous system where individual expenditure items no matter how small required Finance Committee approval. The net result was a considerable improvement in College efficiency.

I make this point because I am in fact a strong supporter of properly structured systems of delegation. They can really aid efficiency as well as accountability. 

One of the things I have noticed over recent years, and this parallels the process I was talking about in regard to who signs what, is an apparent rise in the detail and complexity of formal delegation systems. This gives rise to several problems.

One is simply the time and complexity added to decision and reporting processes. A second is a growing disconnect in some cases between formal statements as to who can approve what and the realities of authority and responsibility in centralised organisations. No matter what the formal delegations say,  managers will not approve something where they feel that decisions might conflict with the realities of decision making power within the organisation. They will try to shift it upstairs.

More difficult still are cases are where managers are expected or directed to approve something in their power when the actual and specific decision has been made above them. Most sensible managers will simply protect their backs by documenting the decision/direction, "I approve this because", but it remains an issue and a risk.

One of the practical realities of management is that concepts and theories are always tempered by what actually happens on the ground. My purpose in this essay is to document two practical examples that show why modern organisations may, as I and my colleagues argue, have become less effective."

Winton's comment was:

An excellent post, Jim.

The only point I would like to make is that I think there was some improvement in public service management in Australia during the 1980s and early 1990s. For a period I think we had effective delegation of responsibility to a more appropriate level.

It is unfortunate if that hasn't been maintained.

Perhaps it is in the nature of public sector activities that responsibility tends to drift upwards. The success of the program manager is judged on the basis of vague criteria, including protecting the Minister from criticism. It is a lot easier to hold a manager responsible for decisions when she is responsible for a profit centre within the firm.

Blog Performance October 2010

With only 27 posts this year and no post since 15 August, this blog has been a real Cinderella. This is reflected in the stats.

The attached graphic shows visitors (yellow) and page views ) yellow plus red) for the year to the end of October.

The slump in numbers is easy to see. Current traffic is all search engine from previous posts.

Over the last month, the most popular posts were:

• The Importance of Demography and Demographic Change - update 65 page views
• Slow posting 57 page views
• Economic implications of the Australian Government's Nation Building package 24 page views
• Common Management Problems Series 1 - managing up 19 page views
• A continued apology for slow posting 15 page views
• Mechanistic Management - the sometimes fallacy of planning 14 page views
• Global Demographic Trends - Asia 11 page views
• Changes in Public Administration and their Impact on the Development of Public Policy 1 - Introduction 10 page views
• Australian Government's new stimulus package 8 page views
• Increase in the New Zealand cash rate 7 page views.

Pettis, China and the nature of structural imbalances

I have a lot of time for the views of Professor Michael Pettis. However, I am struggling a little with some elements of his analysis: it may be simply a lack of understanding on my part; it may be that we have different perspectives on time horizons; or perhaps a combination. Since I think that the issues are important, I decided to set down my confusions.

Let me start by outlining Professor Pettis's arguments as I understand them. I accept that I may be guilty of gross simplification; readers please correct me.

China has been following an Asian development model. This involves a focus on export led growth combined with a strong focus on capital investment. Consumption is squeezed to fund capital investment. The outcome in the Chinese case has been rapid growth combined with large export surpluses.

All this sounds pretty good, but there are problems. With time, structural imbalances emerge in the economy. Both capital investment and export activities are effectively subsidised from other parts of the economy. With time, these subsidies become more difficult to maintain: real returns on capital investment fall and may in fact become negative; investment and exports become so large relative to the rest of the economy that simple maths make it increasingly difficult to maintain the process; exports themselves become a problem.

By definition, trade surpluses in one country have to be matched by deficits elsewhere. When a country is small, this is not a problem. However, when the volume of exports and the consequent surplus becomes large relative to the size of world trade, surpluses are harder to maintain. In the Chinese case, the very large Chinese surpluses are especially matched with US trade deficits. The Chinese surpluses on the current account then flow into the US on the capital side; China effectively funds US consumption.

The logical answer to the growing structural imbalances is an expansion in Chinese consumption, thus increasing the size of the consumption share of the economy and of imports. The Chinese surplus declines, as do deficits in other countries. However, the sheer size of the structural imbalances makes this difficult to achieve. It is easier in political terms to continue with current policies even though this creates a growing risk of disaster.

Other factors are involved as well. One is the high Chinese savings rate, itself a mirror image of the investment process.

Accepting that my analysis of Professor Pettis' views may be simplistic , the confusion that I have links to the nature of the adjustment process. It is not clear to me that a simple expansion in consumption is the answer.

There are, I think, two very different sets of issues involved. One is the the nature of the structural imbalances that have emerged in the Chinese economy, the second the trade adjustment process. Let's leave aside the structural imbalances in the Chinese economy, focusing instead just on the trade adjustment process.

On the capital side, and as happened with the UK in the nineteenth century when it had a major funds surplus, I would expect long term Chinese overseas investment to rise. This means that an increased proportion of Chinese funds would be invested in specific off-shore activities rather than US denominated securities. This investment will lead to increased economic activity in other countries that will, of itself, affect trade flows. Those countries will buy more international goods and services as a consequence.

On the current side, and again as happened with the UK in the nineteenth century, rising Chinese living standards will lead to increased consumption. However, there is a scale and timing issue here. The sheer scale of the economic transformation including urbanisation taking place in China dwarfs anything seen before. I haven't attempted to run any rough numbers, but if you add an extra 400 million urban dwellers to a regular % increase in Chinese consumption associated with rising living standards, then you get some very large numbers indeed in the medium term.

This process may not shift the ratio between consumption and investment as usually measured as much as might be expected simply because so much capital investment is required. However, it will certainly lead to shifts in the trade balances. My feeling is that current Chinese surpluses may be more ephemeral than people currently realise.

None of this says that the short to medium term impact of structural imbalances in the Chinese economy is not important. I just think, and I am sure that Professor would agree, that we need to look at all the factors involved.