Wednesday, February 17, 2010

Conundrums in the Australian economy

The release of the minutes of the Reserve Bank Board monetary policy meeting of 2 February 2010 contained no real surprises.

In terms of the economic outlook, the global economy was strengthening, if with some downside risks; underling Australian inflation was declining; while the medium term outlook for the Australian economy was good, the immediate picture was still mixed. In these circumstances, the Board felt under no immediate pressure to shift the official cash rate.

While the minutes are interesting and provide a useful summary of the current economic position, the 16 February speech by the Bank's Guy Debelle (Assistant Governor (Financial Markets)) is far more interesting.

In that speech Guy Debelle discusses the unfolding of the global financial crisis and the Bank's response. Certainly the Bank had a far easier time of it than its overseas counterparts simply because the crisis was less here. However, it also appears that the Bank's operating mechanisms - its experience, policies and processes - proved to be more robust. Crisis it may have been, but it could still be managed.

I found the description quite fascinating.

Looking to the longer term, Debelle made a clear distinction between the financial markets in the major Northern Hemisphere economies and those in Asia. To his mind, To his mind, there was still some distance to go before the effects of the asset bubble (my words) were fully unwound. This was likely to affect the US financial system outside the major banks. By contrast, Asian was expanding faster, while bank balance sheets were better there.

This brings me to the first conundrum in the Australian economy, China.

Reading Michael Pettis, I get the strong impression that Chinese banks are by no means as secure as Guy Debelle's analysis would suggest. The huge expansion in bank credit has been associated with something of an asset bubble, especially in real estate much loved by so many Chinese. The numbers I have seen quoted are staggering.

I just don't feel confident about China.

The second conundrum lies in the Australian data itself. Some economic data is good, some not. What does seem clear, but subject to China, is that a two stream economy is re-emerging again.

Monday, February 15, 2010

Management Perspectives - most popular posts 6

It is again a number of months since I looked at the most popular posts on this blog. Then the economics posts dominated because of the global downturn.

Looking at the last 100 visits, the most popular post by a considerable margin was Problems with computer lock-in, an economics/management post explaining what I meant by computer lock-in and its implications.

A way behind came two equal posts:

Then came three equal posts, again a bit behind:

In all, a reasonably mixed bag combining economics, management and public policy.

Friday, February 12, 2010

Friday Economics and Management Review 12 Feb 09.

This post reviews some of the economics, management and professional issues that have interested me over the last week.

The announcement of the opening in Australia of UK law firm (here and here) interested me because of the sheer size of the raid (14 partners) on Australian national firm Clayton Utz. While I don't expect A&O's opening to have the same impact on the Australian marketplace for legal services as some of the breathless commentary would suggest (the story made the front page of Australia's Financial Review, for example, with supporting material later), it is still an interesting development.

I spoke of the troubles affecting Australian environment minister Garrett in Insulation, pressure cookers and Minister Garrett.

While the problems that have arisen in the national home insulation scheme are in fact an example of the type of systemic problems that I have been talking about in current public administration, I am more sympathetic to Minister Garrett than you might expect. The genesis of the trouble lay in the pressure cooker atmosphere of Canberra at the time the scheme was developed, decided and first rolled out, a time when people feared an economic Armageddon.

Just looking at the economic stimulus side of the package, this one pumped money into employment far more quickly than any of us (me included) expected. The very speed of take-up was central to later problems.

Unfortunately, one outcome is likely to be a reinforcement of concerns about risk as opposed to risk management. I still see this as a major impediment to improved management, especially in the fish-bowl world of the public sector.

This links to the post I wrote on Will proposed international bank regulations cost all Australians?.

Most business people are worried about the increasing burden of regulatory compliance. There are two different types of costs here. One are the transaction costs directly associated with compliance. Apart from costs to individual firms, the higher the proportion of national resources tied up in this, the lower the proportion available for directly productive activities. The net result is reduced growth. The second costs are those that flow from distortions to the market place and economic activity more generally.

My problem with the proposed international bank regulations lay in the possibility that they might increase interest rates, while actually increasing sector vulnerability, I accept that this was based on very simple, some may say simplistic, analysis. Still, it at least there is a basis there for further thought.

Monday in Problems with computer lock-in I looked at some of the effects of what I call computer lock-in, the way in which past investment in IT and all the systems based on It could adversely affect economic performance. This discussion was triggered by question on an earlier post by one of my old Commonwealth Public Service colleagues Winton Bates, formerly a senior official with the Australian Productivity Commission.

Winton suggested that I should look at some of the later material on institutional economics for another economic explanation of some of the things that I have been talking about. As I admitted to Winton, I am very out of touch here, but he has given me some leads to follow up to re-educate myself.

One of the points I made about IT and communications technology is the way they could facilitate cost shifting as compared to cost reduction. Your costs go down, but this is actually at the expense of someone else, often the customer. Measured by cash and opportunity costs for all, overall system costs may not fall at all and may even increase. 

In the commercial case, this type of cost shifting may yield immediate profits after taking into account any adjustment costs. However, the sustainability of the profit then depends upon customer and competitor response. Where customers make some gain, then they are more likely to accept the costs and frustrations involved.

A related problem is that one set of costs can be seen and measured, the other less so. This can be a significant public policy problem, for in cost shifting associated with the delivery of centralised services you have defined gains to the taxpayer on one side, sometimes hidden if unmeasured costs to taxpayers on the other. The issue is further complicated.

I became interested in the Bellingen Hospital case because I noticed a new Facebook page Tuesday this week. I have been interested for quite some time in the way that different social networking tools can be used and the dynamics associated with them. In this case, an un-official Save Bellingen Hospital Page was started Tuesday morning asking people to say why the Hospital should be saved. By the time I noticed it later that day,  it had already gathered over 200 fans.

To provide some background information, Bellingen is a small town on the New South Mid North coast with a population a bit under 3,000. Health authorities are considering closing certain service there requiring people to travel instead to the bigger Coffs Harbour hospital. This is a bit over half an hour away from Bellingen by road.

I know Bellingen quite well, was sympathetic and very interested in the comments. So on Thursday morning I wrote a sympathetic supporting story about it on my New England Australia regional blog, Bellingen organises to save hospital. By this morning, the Facebook page had 812 fans, and I followed up with a second story,  Bellingen Hospital, Facebook and the costs to the community, looking at some of the community cost issues.

These are the type of cost issues that are generally not measured. One side effect - and this is not unique to Australia -  is the way that service centralisation has in fact had a quite devastating on the economic and social life of many smaller communities.

    As I finish, the number of fans on the Save Bellingen Hospital Facebook Page has just reached 1,046.

Thursday, February 11, 2010

Australian unemployment falls to 5.3% in January 10

unemployment Jan
Figures released today by the Australian Bureau of Statistics show a fall in the Australian seasonally adjusted rate of unemployment to 5.3% on a steady participation rate. Aggregate hours worked also increased slightly.

The numbers suggest a continued strengthening in the Australian economy. The Treasury November forecast of 6¾ peak unemployment that I mentioned yesterday in  Australia's financial outlook February 09 sure looks a long way away!


A number of commentators have suggested that aggregate hours worked have fallen, whereas I said they have increased. The reason lies in the difference between the trend numbers (just up) and the seasonally adjusted numbers (down).

Overall, commentators appear to be correct when they suggest that average hours worked had declined slightly (no of jobs worked, aggregate hours much the same).

Will proposed international bank regulations cost all Australians?

There have been several things that have caught my eye over the last day when it comes to interpreting the economic entrails. This post deals with one.

Jaime Caruana, general manager of the Swiss-based Bank for International Settlements, is reported as saying that Australian banks could not expect to be quarantined from changes taking place across the global system.The thing that really caught my eye is the requirement that mortgage lending be funded using long-term debt.

Now depending on the meaning attached to this, this would actually lead to a fundamental change in Australian banking. Older Australians will remember the Australian savings banks, banks who used generally short term deposits to fund housing. This is actually the Australian pattern.

In system terms, short term funds withdrawn from one bank simply went into another, so there was no system wide risk associated with short term lending. There could, however, be risks for individual institutions that might then translate into system wide risks if everybody tried to store their money under the bed. We saw this in the 1890s' crash and the associated asset bubble.

Now looking at the implications for Australia from the proposed change and working just from first principles. I stand to be corrected, of course, if I get things wrong.

If Bank A cannot use its retail deposits for mortgage activity including housing and has to borrow longer term, then on the surface it will pay more for funds, a cost that will have to be passed on.

Given the banks control over deposits, and excluding international borrowing, Bank A will actually need to access funds held by other banks, say Bank B, directly or indirectly. Bank B also wants to lend for housing, but also cannot use its deposit base. So Bank B will, directly or indirectly, lend Bank A money on a longer term basis, in turn borrowing from Bank A. We have a round robin in which interest rates go up, inter-bank dependency increased.

I accept that this may be simplistic, so please correct me if I have got things wrong.     

Wednesday, February 10, 2010

Australia's financial outlook February 09

In November 2009 in its mid year estimates, the Australian Treasury was forced to alter its its projections to take into account better than expected economic performance. Even then, Treasury was forecasting that unemployment would still peak at at 6¾ per cent in the June quarter 2010.

Since then, the economy has continued to strengthen. As a consequence, the Australian Government financial statements for December 2009 show  a further strengthening in the Government's financial position with expenses lower, revenue higher than expected. That's good.

There were two especially interesting things in all this.

The first was the increasing probability that the Government would run up against the 2% real spending cap far sooner than anyone had expected. As I understand it, once Australian economic growth returns to trend, then the Government has committed to capping increases in real Government spend at 2% to speed the return of the budget to surplus. Given other pressures, this is going to be interesting to say the least!

Quoting Peter Martin from the Sydney Morning Herald:

Speaking to central bankers from around the world gathered to celebrate the Reserve's 50th birthday Happy Birthday RBA), Mr Stevens speculated about how monetary policy should be handled if governments restrained spending to pay off debts, creating a drag on economic growth. ''The straightforward answer is presumably that it would remain more accommodative than otherwise,'' he said.

Apparently in this speech, the RBA's Stevens mused about the problems that might arise should the combination of Government fiscal restraint, low inflation and consequent low interest rates encourage future asset bubbles. Perhaps the RBA should take this into account in setting rates, taking pre-emptive action?

I remember a speech a number of years ago from Australian economist Don Stammer in which he suggested that now we had entered a period of sustained low inflation, we could no longer expect the increased asset values of the past. Ha!

Don's arguments actually made a lot of sense. It was a bit hard to forecast the way in which plentiful liquidity in combination with low interest rates might lead instead to asset bubbles. Mr Stevens' comments make a degree of sense.  

Tuesday, February 09, 2010

Rudd Government's problems with green policies

Nick Perry had an interesting post on New Matilda, Another Rudd Green Plan Bites The Dust?, that gives some further examples of the type of thing I have been talking about in my reforming Australian public policy series. A post on my personal blog, Education and Australian skilled migration: a policy catastrophe? gives a further example.

Oddly since it is such a big failure, I am a little cautious about arguing that the skilled migration example necessarily supports my case that we have a pattern of systemic failure in Australian public policy and administration. I suppose I say this because as a former senior public service manager, I am not sure that I would have spotted the particular outcome from the 2005 expansion of  MODL, the Migration Occupations in Demand List, while I might well have argued for hard responses in dealing with the problem.

To the degree that I might use this example in future, then I will be looking at three things:

  • the nature of and reasons for the lag in recognising that a major problem was emerging.
  • the wording of this announcement and the way this affected events.
  • the extent to which the Government has plans in place to respond to the problems likely to emerge from this decision.  

Monday, February 08, 2010

Problems with computer lock-in

In a piece on my personal blog, Sunday Essay - why it's hard to break out of the box, I said at the end:

If I was asked what was the biggest single impediment to change today I would say the computer.

The adoption of computers and IT more broadly has been one of the greatest causes of economic growth because it allowed existing things to be done more efficiently, new things to be done that could not be done before. Yet, as any IT professional knows, there is a considerable difference between simply computerising existing systems (this will certainly make them more efficient) and the design of completely new systems likely to yield the greatest benefit from the new technology.

I first came across the problem of computer lock-in a number of years ago when facilitating the development of a strategic plan for the Australian subsidiary of a global IT company.

Everybody at the workshop agreed that the company's IT and knowledge management systems no long properly reflected either company needs or the marketplace. Everybody also agreed that the sheer cost of changing the system meant that senior management would not agree. They just had to work around it.

You see, once entrenched, the computer protects what is at the expense of what might be.

In a comment, my old friend and now blogging colleague Winton Bates sought further clarification of just what I meant by computer lock-in. I started to respond by way of comment, and then decided that I should discuss the matter here because it is an important and interesting issue from both a management and economics perspective.

The discussion that follows does not address the claim that I made above that the computer has become the single greatest impediment to change today. My purpose is purely explanatory. 

Meaning of Computer Lock-in

By computer lock-in, I simple mean the way in which existing IT systems and approaches can actually impede change, reducing efficiency by locking in past approaches.   

This type of lock-in can occur in different ways.

To begin with, lock-in occurs when the cost of making the changes to systems exceeds the costs associated with system dysfunctionality. Lock-in can also occur where computer based standardisation across the organisation impedes organisational flexibility and response. Lock-in may occur or be intensified because of the interaction between systems, decision processes and budget structures. Finally, because systems affect the way we think, the term might also be applied to thought patterns created by or at least maintained by IT systems.

A Simple Amplification

To begin our discussion, cast your mind back into the past and consider computerisation of existing systems.

  The processing power of the computer allowed existing systems to be standardised and automated with consequent savings. This helped drive major gains in productivity, leading (among other things) to faster economic growth.

No system is perfect. Needs also change over time.

The computerisation of existing systems may have allowed substantial savings, but it also locked in systems as they stood at a point in time. Administrative and processing systems moved from people to capital intensive. Future changes to processes whether to remove existing weaknesses or to meet changing needs now faced a new cost, the cost of altering IT systems.

Fundamental process re-design had to take into account the write-off of existing investment, as well as new investment costs. This made incremental changes at the edges easier. Where fundamental change did occur, then those changes were locked in in the same way because of the capital and other costs of future change.

A Big Enterprise Example     

In the case I was referring to above, a large global IT company, we had a very large, integrated enterprise wide information system that had given the company significant advantage at the time it was introduced. As marketing, production and distribution needs changed over time, the system had been altered at the margin, patched.

At the point in time we are talking about, a growing gap had opened between business needs and system performance. This was recognised. However, the sheer costs involved (cash plus business disruption) in what would be an enterprise wide system replacement made action difficult.

The position was further complicated by the fact that the enterprise, then a household name in computing, had recently been acquired by another, much larger, organisation.

The two enterprise information systems were very different. Both organisations were wrestling as well with just how the two systems might be merged or, at least, interfaced.

Impact on Mergers and Acquisitions

This is actually an example of another lock-in effect, the way in which differing computer systems affect mergers and re-structuring. This one is quite important because system differences have become a significant reason for the failure of mergers to achieve the expected benefits.

To amplify, consider a professional services example, two law firms. Each has different IT systems covering accounts, time keeping and precedent management. Effective merger requires common systems to ensure integration. This comes at a cost, since one single system (new or existing) must be selected. Existing investment must be written off, new investment made, the cost of disruption accommodated.

The sheer size of these costs has been sufficient to prevent some mergers.

Interface with Conventional Economics

In one way, the type of effects that I have dealt with to this point that link to the rise in capital intensity fall within the field of conventional economics, although the focus on physical capital may have made economists initially slow to recognise the rise of capital intensity intensity in the services sector.

Take my law firm example. At one level, this is no different from one box manufacturer taking over another. The box manufacturer faces similar choices in deciding when, if and how to rationalise its expanded production capacity.

  I will return later to the issue as to whether IT investment has different effects from other types of investment. For the moment, I simply note that expressed in conventional terms, the new computing and communications technologies shifted the production function to the right. However, now that the IT investment has taken place and in the absence of further technological change, my analysis suggests that returns on future investment will be more akin to moves along the production function rather than shifts in the function. This is part of the reason I have argued that future productivity gains from IT are likely to be lower.

Cost, Benefits and Standardisation    

Another example of lock-in arises where costs and benefits are not evenly distributed or perhaps even properly identified.

Consider, for example, a case where a particular unit has a need that is not being met by the existing information system. They have the need and will benefit from the change. However, the cost for any such change must come from another budget bucket, while the proposed change itself must meet standardised enterprise requirements, including the need for protection of the existing network.

Here we have an example where the lock-in effects lie in the need to maintain a degree of central control over systems once established. We can think of these effects along a number of dimensions. I accept that one can argue as to whether these should truly be classified as lock-in effects in the way I am using the term. However, I would argue that we need to consider the effects in combination.

  • communications: emails provided an enormous initial productivity boost, but the sheer volume of email traffic created storage demands, risk management issues and retention and access issues. This meant that after the initial gains, organisations then faced added costs in managing and maintaining its email systems. There are also continuing problems with the inappropriate substitution of emails for other forms of communication including the telephone, personal contact or simply a hand-written note. 
  • internet and intranet: the increased use of the internet and internal intranets for communication and to access information yielded substantial productivity gains. Like the email, these gains have peaked with the need for rules on use, greater filtering against inappropriate use and network protection adding to complexity and costs.
  • access and retention: the ever increasing volume of often useless data, along with storage on individual hard drives, has created real problems for access and retention. In extreme cases that I have seen, up to forty different versions of the same document can be found. Just knowing which is the latest version is a problem, let alone the pain of key word searches as the computer chugs away trawling through the mass of material.
  • protection: the need to protect networks means that all organisations have had to develop rules as to what can be attached to networks and by whom. While necessary, this has its own costs such as delay and support costs, as well as individual frustration.

Cost Shifting vs Cost Reduction

A very particular problem has arisen with IT systems that I call cost shifting.

We all know about things such as call centres that centralise client service. This is actually cost shifting because it reduces the paid time to required to service customers, while increasing the amount of time the customer has to spend accessing the service. Of course there are cases where the customer benefits, but anybody who has spent long times trying to get an answer will know what I mean.

What is less well recognised is that cost shifting is alive and well within organisations from the measurable to the not so easily measurable.

Consider, for example, the replacement of word processor operators by individual authors. This does offer productivity gains. However, for certain types of documents, a word processor operator is far more skilled and can produce a document quicker and at a higher standard than any individual author. The problem here is that the costs of the word processor operator are easily measured in budget terms, the opportunity and quality costs of author production less easy to measure.

Very similar issues arise in other areas such as the substitution of on-line HR kiosks for HR staff. This can be far more efficient. However, it can also result in highly paid managers spending time on tasks that could be done more quickly by a lower paid HR person.

All this is in fact testable. However, and this is the connection to computer lock-in, once the on-line system has been set up, it can be very difficult and expensive to introduce an alternative.

Computer Lock-in and Innovation

All successful organisations depend upon a combination of people who do their ordinary job as well as possible with innovators who bring about change.

There is always a balance issue here. Too many of the first and the organisation will struggle to really improve. Too many of the second, and the organisation may become unstable, unable to deliver efficiently. 

The problem with the computer is that it in facilitating standardisation and control it has switched the balance between the two.   


Returning now to my point as to whether IT investment has different types of effects to other investments, I would argue that it does because it is just so pervasive.

The nearest equivalent that I can think of is the invention of the production line. Its impact on industrial efficiency was huge, yet it also had costs. The production line is still with us, but has now been part replaced by far more varied production systems in themselves based on computers.

I wonder whether the same thing will happen now with computer based systems themselves. Certainly I feel the current computer lock-in is past its use-by date.                    

Sunday, February 07, 2010

Australian wholesale bank guarantee to be withdrawn from 31 March 10

A bit over twelve months ago, on 19 January to be precise 2009, I was fulminating over Access Economics dire predictions on the Australian economy. On 5 February I wrote Are all the Australian economic forecasts wrong? I followed this on 23 February with A very odd recession.

My problem at the time lay in the fact that I was struggling to match the economic data with the dire predictions, something that had been worrying me for a little while. I was right, of course.

As the economy turned, Australia was one of the first if not the first major economy to start raising interest rates, full-stopping a sharp shift in economic perceptions. Now the Government has announced the withdrawal of its Guarantee Scheme for Large Deposits and Wholesale Funding to come into effect on 31 March 2010.

Simply put, the Government feels that Australia's banks can now borrow internationally without that support. This would have been inconceivable last February.

The guarantee has been a sweet little income earner. The Government was not required to make any payments, so the $A1.1 million collected from the banks to this point for the guarantee is straight profit. This is expected to rise to $A5.5 million over the life of existing guarantees. This represents a small but useful offset against the total cost of the various stimulus packages.

When I wrote  A very odd recession last February I had no idea just how odd a downturn this was going to be. At this point, it is as though the Global Financial Crisis did not exist so far as Australia is concerned.

It would pay Australia not to forget, of course. But for the moment, everybody is enjoying business as usual.

Wednesday, February 03, 2010

Surprising surprise at the RBA's decision to keep interest rates on hold

One of the most interesting things about the Reserve Bank's decision to leave Australian official interest rates on hold lay in the way it wrong-footed so many commentators as well as market participants. Pretty much everybody, me included, thought a rise was likely. In fact, so likely that the Australian on-line bookmaker Centrebet had apparently refused to take bets on this month's move for the first time since it started covering Reserve Bank decisions because it said the odds were so skewed towards a rise.

Thinking about it, I'm surprised that we were all so surprised. Here Michael Pascoe had a reflective piece in the Sydney Morning Herald that is worth reading. 

By its nature, the RBA operates with a longer term perspective than most commentators or market operators. It has too because of the time lags and uncertainty inevitably attached monetary policy.

The decision by leading Australian banks to raise interest rates by more than the last official rise increased the economic impact of the rate shift. Little has changed in economic terms since the last rise. So a rate hold isn't all that surprising.

I suspect that there may be another issue as well.

The Reserve Bank has been quite clever in managing expectations, something that's important in policy where expectations can be more important than actions. It's dramatic decision to first increase official rates had global impact on economic confidence. Australian opinion certainly swung towards greater confidence in the economic outlook.

Keeping interest rates on hold this time has the useful effect of making market participants a little more cautious when it comes to pre-judging Bank decisions. 

Tuesday, February 02, 2010

Problems with the definition of governance

Towards the end of my introductory post Problems with the concept of governance I said:

I have a particular personal problem with the way that the concept is now used because I find that in some of my professional roles, project management is an example, it actually interferes with effective service delivery. This leads to great personal frustration.

One of the reasons why governance has become such a difficult concept is that there is, in fact, no agreement on the just what the word means. People use it in many different ways. You can see this if you look at some of the definitions of governance on the Web. You can also see why I say that governance has become conflated in some ways to management, in fact a very different concept.  

  • administration: the persons (or committees or departments etc.) who make up a body for the purpose of administering something; "he claims that the ...
  • government: the act of governing; exercising authority; "regulations for the governing of state prisons"; "he had considerable experience of government"
  • In grammar and theoretical linguistics, government refers to the relationship between a word and its dependents. ...
  • Governance relates to decisions that define expectations, grant power, or verify performance. It consists either of a separate process or of a specific part of management or leadership processes. Sometimes people set up a government to administer these processes and systems.
  • The process, or the power, of governing; government or administration; The specific system by which a political system is ruled; The group of people who make up an administrative body; The state of being governed; Accountability for consistent, cohesive policies, processes and decision rights
  • The combination of processes and structures implemented by the board to inform, direct, manage, and monitor the activities of the organization ...
  • Measures put in place in order to ensure smooth functioning and control of a company. Such measures reinforce the importance of transparency of information.
  • Means in which the leading authority, often the board of directors in foundations, guides and monitors the values and goals of its organization through policy and procedures.
  • In the context of SOA, governance defines the model to ensure optimal reuse of services and enforcement of corporate policies (eg, business design, technical design, and application security).
  • issues related to the involvement of stakeholders - scientists, industry, consumers and public authorities - in the process of innovation policy design, implementation and evaluation
  • Governance describes dynamic distribution of power, learning and benefits among firms in a value chain Governance refers to the inter-firm relationships and institutional mechanisms through which non-market co-ordination of activities in the chain is achieved. ...
  • governance Governance is exercising authority to provide direction and to undertake, coordinate, and regulate activities in support of achieving this direction and desired outcomes. Source: Glossary – Framework for the Management of Information in the Government of Canada
  • is the process of overseeing a work activity at a level higher than direct managerial control. Governance processes provide executives and staff with clarity on stakeholders expectations. ...
  • shorthand term for political, social, economic and administrative institutions and policies that affect the supply of public services. ...

If you look at all these definitions, governance is used to refer to both structures and processes. It can be used in a top level sense, or can be cascaded down through the organisation. It can be used in terms of provision of a framework in which decisions are made or the process of making decisions. Or it might include the lot.

From a purely professional viewpoint in the delivery of services to clients or if acting as a manger, if the word governance is used in any of the documentation, then you must clarify just what the word means in that context.