29th February 2008
The Malta Independent - Friday Wisdom
Feedback from readers
about my recent contributions in this series shows a measure of disappointment
from many who would expect me to give specific recommendations to those who are
still weighing their vote. I respect the intelligence of my readers too much to
be so paternalistic.
Ultimately the vote should be the result of personal
judgement and while expressing opinions and indicating strengths and weaknesses
of the options available, I think that columnists like me should not go beyond
guiding their readers to choose sensible criteria on which to base their
judgement.
While I have often expressed my natural inclination for the
left of centre of the political spectrum and while appreciating that true
democracy demands occasional alternation of executive power, if for nothing else
to water down the accumulation of arrogance and staleness that long tenure of
power inevitably produces, in the end I am a firm believer that change should
not be merely for change’s sake and parties should be elected to power on their
own merits rather than on the demerits of others.
As we enter the final
week of this election campaign and as this is the last contribution where I can
comment on the issue, next Friday being the silent day on the eve of the
election, I propose to analyse how the campaign has progressed so far and who is
building or losing momentum.
There is little doubt that among those who
had made up their mind already at the start of the campaign Labour were then
scoring a wide margin over the PN. However, given a wide swath of voters who
were still undecided, it was also clear that the final success depended on very
strong performance during the election campaign.
With a week to go, my
best judgement is that while the size of undecided voters has now reduced to a
mere few thousands, their final choice is still decisive to determine the final
outcome as among those who have already decided the substantial gap at the start
of the campaign has now dwindled to nothing.
The obvious conclusion if
this assessment is correct is that the PN have gained much better momentum than
Labour during the campaign. This is hardly surprising given that the undecided
voters at the start of the campaign were mostly those with traditional
allegiance to the PN. Still it speaks well of the efficacy of the PN’s campaign
in bringing back into their fold a great majority of these undecided voters but
Labour have helped them well and in no small measure.
Proof of this is
that the agenda is being dominated by the faults, contradictions or outright
confusion perceived in the main measures proposed by Labour rather than the
fatigue of the PN in government and the inadequacy of their performance. The
lack of coherent policy in Labour’s strategy is too obvious to allow any
reasonable doubt that Labour arrived at this campaign much less prepared than
they pretend.
Probably the biggest judgement error made by Labour is they
departed too willingly from their best trump card, the government’s fatigue and
arrogance of major exponents of the PN who are clearly suffering from an
overstay in power, and made their own life unduly difficult in defining specific
measures rather than general objectives. Objectives like achieving real growth
of six per cent p.a. average over the next five years have little to disagree
with and would allow wide freedom of operation once they accede to government.
Specific measures to reduce the utilities surcharge by half within the first
week in government raises more questions than answers.
What if Labour
find a much worse financial situation than they presently know about as happened
in 1996? What if the price of oil in the international market doubles? Would
they be raising the basic utility rates so as to make the surcharge irrelevant?
Would they be funding this by raising other taxes? Would they compromise our
commitment to maintain a balanced budget as from 2010? And those already exempt
from the surcharge – aren’t they feeling left out from such a measure that would
ease the burden for the well-off who can afford to overuse energy whatever it
costs while leaving social cases in the cold?
With the backing of
friendly media and Labour’s inability to provide credible answers (who can
believe that even if the price of oil goes to $1,500 per barrel the surcharge
would still be cut in half?) the PN have been successful in changing the
headline agenda of the campaign from the demerits of the government to the
demerits of Labour’s measures. Instead of discussing why the reconstruction of
Manwel Dimech bridge is still work in progress, we discuss whether the reception
class year would also apply to private schools who do not support
it!
However, while the PN have more reason to feel satisfied with the way
the campaign has proceeded so far there is nothing to suggest that the final
election outcome is in any way secured or compromised.
Ultimately the few
thousands who are still weighing their vote could prove decisive. And the very
fact that having come so far and are still undecided means that these decisive
voters are those who are convinced that a change is needed but are not yet
convinced that Labour is sort of change they aspire for. They will have to make
up their mind within the next week whether their desire for change is greater
than the risk they perceive in mandating the wrong sort of change.
A week
is a long time in politics and it could well be that Labour have saved the best
for last. The exposition of serious but hidden consideration given to
introduction of co-payments for health services under the next PN administration
gives an indication that this last week Labour could regain control of the
agenda.
In the final week of the election campaign you can rest assured
that the dominating theme will be whether the undecided voters should choose
between Gonzi or Sant or between the PN and Labour.
24th February 2008
The Malta Independent on Sunday
Ham and cheese can be
sliced and diced. Financial risk can be sliced and diced. This being my last
contribution before the general election I thought it right to explore with the
as yet uncommitted voters how their vote can be sliced and diced.
I need
not explain how ham and cheese can be sliced and diced. But perhaps readers need
some explanation on how financial risk can be sliced and diced before applying
the same analogy to votes. I am sure however that most readers are aware of the
financial turmoil in the Anglo-Saxon financial markets caused by the US housing
problems, which led to a near breakdown of the international financial system
since it started last August and is still dragging on today.
Most of
these problems arose from the process of slicing and dicing of financial risk in
what are known as financial derivatives. Like most other things, financial
derivatives could be a good thing or a bad thing, depending on whether they are
used or abused. If properly used, they could be very clinical and effective
instruments to manage financial risks. If abused they become speculative
instruments that can blow up with severe consequences.
When the US
property market bubble was burst by the very speculation that inflated it,
leading many borrowers to take on mortgages they could never service, the
financial derivatives that had been used to slice and dice risks (with such
esoteric names such as Collaterised Debt Obligations or Mortgage Backed
Securities) become hard to value and harder to dispose of. This is leading to
the tons of billions of dollars in provisions that are forcing major banks to go
cap in hand collecting fresh capital.
How can this concept of derivation
be applied to the vote of people who are as yet unsure about which party to vote
for? It can, but I stress it is only for those who are not yet committed. Once a
voter makes up his or her mind who to vote for, there is pretty little to derive
from such a vote, which becomes plain vanilla.
Suppose you traditionally
vote for Party A but are unhappy with their performance for whatever reason you
can dream of. You know that there is a high probability that if Party A is not
elected to govern then Party B will be mandated to do so either by an outright
or relative majority, which is gained by merit or by default. It is also
possible, yet improbable, that the votes for the small parties and independents
this time will gather enough momentum to squeeze in an elected candidate, which,
unless Party A or Party B get an outright majority of valid votes, will mean
that the small party will become the king or at least the king maker.
You
obviously have no idea what is going to happen, and with a large swathe of
voters who still register their intention not to vote or not having made up
their mind who to vote for, there is no way that you can feel comfortable that
by not voting for Party A you have always voted for, you will not in effect be
facilitating the election of Party B that you cannot stomach. How can you
structure your vote to get as close as possible to what you wish, that is giving
the small parties a chance to elect a candidate, without compromising the
chances of your party to govern if the small parties fail to make it to
Parliament this time too?
Try this! Find the candidate on the Party A
list who is most unlikely to make it beyond the first few counting rounds and
give him the number one vote. In each district both major parties include names
on their list that do not really contest to get elected but purely join to make
the number, collect some personal votes and give moral support. You will not
have to try very hard to find such a candidate. Then you should give the
subsequent preferences to candidates of the small parties with whom you feel
comfortable if they could win a seat in parliament to trim the wings of your own
Party A, which you hope will still get elected over Party B.
By so doing
you would be ensuring that your vote would count for your preferred Party A in
the count of first preferences, which our Constitution gives all importance to
in case of a parliament where only two parties are represented.
However,
by voting for the candidate who is most unlikely to get beyond the first few
counts you will be ensuring that effectively your vote is inherited by the small
party with which you feel comfortable having a seat in Parliament and probably
forcing your party to a coalition arrangement. If this does not materialise in
spite of your best efforts, you will still be contributing to putting your
preferred party in government rather than contributing to elect Party B in
government by default against your own wishes.
Whether you continue with
further preferences by switching back to your party’s candidates, after voting
for the small party candidates, is really immaterial for the final
outcome.
For those who care to understand our voting system, the single
transferable vote, with the constitutional provisions regarding the decisive
sanctity of the first count preference, permits slicing and dicing of the vote
to really meet the voter’s preferences. There is no other voting system in the
world that permits such flexibility!
If the promises being made to lure
borrowers would in fact be executed, public finances will not only be sliced and
diced, they will be shredded. Parties are outperforming themselves in promising
tax cuts, reduction of charges, tax-free allowances, eternal free medical care,
and continued free education and stipends. Many richer countries cannot afford
anything coming anywhere near this and unless we really believe in Santa Claus,
we should be careful in having our votes swayed by empty promises that are not
supported by long term reliable financial projections showing that we can still
sustain a balanced budget after 2010. Our Central Bank governor and his
colleagues at the ECB must be scratching their head whether they admitted an
irresponsible child to the Euro club that does not mean to stick by the
rules.
They are wondering whether this is a mere temporary reversion to
irresponsible financial housekeeping or something more serious than that. It is
the same question I am asking myself as I look out of my office window and see
the new skateboard park at the uncovered basement level of the university
roundabout, where young skateboarders and BMX enthusiasts leisurely inhale the
exhaust fumes in this extremely busy traffic junction. We must be going
crazy!
22nd February 2008
The Malta Independent - Friday Wisdom
Ernest Hemingway was once
prodded to compose a complete story in six words. His answer, personally felt to
be his best prose ever, was “For sale: baby shoes, never used.” Some people say
it was to settle a bar bet. Others say it was a personal challenge directed at
other famous authors.
As we try to grapple with the surfeit of verbosity
that typifies an election campaign I set myself a challenge whether I can
imitate Hemingway in suggesting six word manifestos of the main forces vying for
our attention in their pursuit to persuade us to tick their box on the ballot
paper come 8 March.
Starting with the small political forces their
six-word manifesto reads as follows:
If not king then
king-maker
Little or no attention is being given to the
proposals of the small political forces in their own right even though some of
the measures, like the introduction of flat rate taxation, is quite daring and
deserve detailed analysis if not careful consideration. Most of the voters who
are not yet committed to one of the two main political streams do not look at
the small political parties for their own intrinsic merits. They quite often
look at them as a medium to protest against the party they traditionally voted
for, either because of fatigue or because of perceived non-performance, but
without swinging outright to the other political camp regarding whom old
prejudices are still strong and probably unbridgeable.
Many times such
disgruntled voters are not keen to see the opposite party in power but are
seeking to clip the wings of their own party either by giving it a mere paper
thin majority or by hoping they would have to make a coalition with the middle
parties which could put discipline on their own party in government in areas
where excess has damaged their reputation.
Whether this move would be
strong enough to enable one of the new forces on the political scene to
accumulate 16.67 per cent of the votes on any one district before their
candidates get eliminated in the counting of our single transferable vote
system, is an open question. Clearly the PN are more worried that even if they
inherit all small parties’ votes and finish electing a majority of seats in the
first instance they can still finish in opposition if the small parties do not
elect a candidate and the PN scores fewer first count votes than Labour. So
whether they mean it or purely by political accident, the small parties can be
the king (if they elect a candidate in a hung parliament) or the king-maker (if
they do not elect a candidate and none of the big parties get 50 per cent plus
one of the first count votes).
Consider this six-word manifesto for
Labour:
Only total change delivers the bacon
Labour’s main thrust to regain executive power after nearly
21 years in opposition, save for a brief ill-doomed 22 months period between
October 1996 and September 1998, is the public’s fatigue with the PN in
government. Strictly speaking the public wanted this change in 2003 but Labour
forced their hand by making its availability to govern conditional to non-EU
membership.
Voter fatigue with a PN government is consequently even
stronger now that the PN have five further years of executive power under its
belt. Labour are hoping, and the public opinion surveys seem to support this
although with reservations, that this fatigue will overcome shortcomings in
their credentials to govern and some evident contradictions in the few instant
specific measures that they are setting as pillars of their electoral
programme.
Labour must be hoping that voters would only afford face value
attention to these proposals without getting into the nitty-gritty problems of
their execution. I would just add that I find it very unappetising to give tax incentives only to those who have
the opportunity to work overtime or to subsidise
profligate energy users rather than extend the pool of social cases that are
exempt from the surcharge in the first place.
The PN’s manifesto can also be summarised in a six-word essay as follows:
Gonzi: all the change
you need!
In running a presidential style campaign based on
the personality and performance of Dr Gonzi in office
for the last four years the PN’s manifesto is trying
to freshen up the party’s image to fight back voter fatigue by pretending that
they have only been in government for four years. Dr Gonzi is portrayed as a good listener and a forceful
decision maker who has been capable of working through the heavy liability
baggage he inherited. Bringing down the deficit while stimulating economic
growth is probably a double whammy any politician would be proud of and validly
expect re-endorsement if one were not operating under the stress of inherited
fatigue.
Progress on long neglected problems that had accumulated heavy
baggage, like the completion and migration to Mater Dei (irrespective of the
undoubtedly excessive project costs accumulated along the way – mostly before Dr
Gonzi’s charge), small but important steps to address
the pensions reform for sustainability, Maghtab
rehabilitation, easing of direct tax burden for middle income earners and
attraction of substantial foreign investments in engineering, health care
industry and IT services, all speak well of Dr Gonzi’s
performance, if seen in isolation.
Whether this is enough to overcome
voters’ apathy for the PN is questionable. Voters have a habit of needing change
for change’s sake as Churchill himself experienced when he was booted out of
office soon after he was a celebrated war hero. Voters tend to develop strong
apathy to whoever takes them for granted and they see too many culprits of
arrogance lurking in the wings of Dr Gonzi to believe
he will really cleanse his cabinet of such arrogance. If Dr Gonzi is to be more persuasive on his assurance, rather than
do a deal in a light hearted TV programme, he needs to assure us that his
cabinet will be substantially reduced and staffed with people who are prepared
to work as hard as he does.
So how about a six word synthesis of this
electoral campaign? Try this:
Voter fatigue vs.
Fear of change
It is sad that this
election seems destined to be decided on the respective negatives rather than
the force of the positives. When will we have a chance to elect a government on
its own merits rather than on the faults of its opponents?
15th February 2008
The Malta Independent - Friday Wisdom
This is not meant to
suggest to any of my readers, whose vote may still be up in the air, which box
they should tick on the ballot paper. In the end that is a decision everyone
should take for themselves.
What I suggest is to analyse what realistic expectations we should have from our
central government and what attributes we should look for in choosing one that
can be expected to deliver best on our expectations.
Being the first
election post EU accession and post euro adoption it is appropriate to reflect
that the role of central government, while still important and decisive for our
well being and development, is not as all embracing as it used to be.
The
area of manoeuvre for central government has been
substantially curtailed and will continue to be eroded as government gets
slimmer, leaving more space for private initiatives.
EU rules are putting
discipline on government as to what it can and cannot do. The government is no
longer free to decide on administrative matters which go against the working of
the single market or other EU principles.
As temporary derogations
approach their expiry it is very doubtful if any of these can be renegotiated or
extended unless we can trade them for our consensus on some crucial EU decision.
Such events can hardly be pre-planned but have to be exploited as and when they
arise using the necessary combination of negotiating skill and
diplomacy.
Euro adoption has removed from government’s tool box monetary
and exchange rate policy decisions, while fiscal policy has to be kept oriented
towards reaching an overall neutral budget position by 2010. This leaves little
room for traditional fiscal largesse for governments who over-promise to get
into power.
At the other end of the spectrum local government has been
eroding, with considerable benefit to the citizen, many of the capillary
decisions that are best taken at local level. Governments are not only being
compressed from the top and bottom but also from the sides where operational
space has also been encroached by the forces of globalisation. These have forced governments throughout the
free world to privatise many of the functions which
traditionally were the domain of central government.
The need to allow
free competition means that whole swathes of public services in sectors such as
banking, telecommunications, postal services, logistics (port and airport
operations) and gaming among others have migrated from the sphere of influence
of central government to the private sector which is largely outside its
influence (except for its regulatory functions). Such private operators
generally tend to look more favourably to conservative
governments who consider lower taxation as more effective than increased social
spending for generating economic growth, although the strict divides between the
left and right of the political spectrum have broken down as many parties
attempt to occupy the central strip.
So given this reduced room for manoeuvring for central government and the prospect that
exploitation of our economic potential to its maximum is likely to demand
further roll out of the privatisation process (rather
than whole corporations of which there are little left to privatise the next privatisation
wave is likely to involve processes that currently reside with poor
accountability and consequent low efficiency within the maze of central
government) what attributes should undecided voters look for in choosing a
government that could be expected deliver the highest level of economic growth
on a sustainable level?
I propose three criteria for this purpose –
freshness; inspirational vision; management ability to execute effectively. I am
not sure whether these criteria could be prioritised
by level of importance as essentially they are attributes which depend on and
reinforce each other and are all critical for delivery of continued growth and
stability.
Let me devote a short paragraph to each. Freshness is
important for a government to carry on its work with enthusiasm and to shed off
prejudices against new approaches for solving old problems. The eye has a habit
of getting used, warts and all, to its normal environment and after sometime
problems which stick out like a sore thumb to a fresh pair of eyes, become
accepted normality to the accustomed eye. The chaotic situation of the approach
to City gate is possibly the best example for this reality. So undecided voters
will have to decide who can bring more freshness to government’s working. Is it
Dr Sant who has been training for the job for sixteen
years or is it Dr Gonzi who has already been at it for
four years?
Vision is important for a new government.
Governments have to make up for the reduced space for operational manoeuvrability by being inspirational visionaries in order
to stimulate private productive investments without which no government can
deliver what is expected of it. Governments without vision or with the wrong
vision could make a mess even if blessed with substantial natural resources.
Venezuela and
Zimbabwe are mere contemporary
examples. Singapore in contrast,
notwithstanding its lack of natural resources, has through inspirational and
visionary leadership developed a go-go economy at the cutting edge of
technology, shipping and financial services.
Lastly the government needs
to have the ability to translate its vision into effective execution with
management attributes of accountability and transparency through rigid
application of governance rules. We need a government that does not shy away
from taking the right decision rather than the most popular one. We need a
government that explains the raison d’ etre of its
decisions and commits itself to firm targets that can be measured. We need a
government that makes its decisions based on meritocracy rather friendships and
allegiances. We need a government prepared to appoint only a handful of
ministers rather than a whole army of them, and then proceed to pay these few a
salary commensurate to top jobs in the private sector but insist on full and
total accountability of their operations so that corruption gets truly
eradicated. Paying ministers peanuts and forcing them to give up their lucrative
private practice bodes poorly for such prospect.
Choosing a government
should go beyond emotions and be subjected to a process of rationality.
Unfortunately we have quite often to choose from the lesser evil.
10th February 2008
The Malta Independent - Friday Wisdom
A
ll through the next
month one topic will dominate party talk, office talk and ordinary gossip. Who
is going to win the next election?
Some will rely on published and
unpublished surveys, with little ability to distinguish between the professional
and the amateurish and with scarce sensitivity to the fact that the difference
between the two main parties is often so small as to fall within the margin of
error of even the best surveys. Others will reach their conclusions on the basis
of the amount of trepidations or relaxation they perceive in the personae of the
main party exponents. Some would even read their coffee grounds or their cards
disregarding the fact that the brain is geared to see what it really wants to
see.
I had already expressed the view early in the new year that this
time, by a hair or by a mile, the electorate’s fatigue with the PN in government
is too strong for anything to stand in the way of a Labour victory, irrespective
of any reservations about Labour’s own merits to fit the bill.
Though
commanding no scientific value whatsoever, I also tend to search for
contemporaneous events that can be linked casually to the outcome of past
elections when similar events also existed.
Is it not odd that Labour
always seems to be elected to power at a time when the international economic
environment starts to worsen and the prospect of an international recession
becomes the dominating talk of the day?
It happened in the early
seventies, first with the breakdown of the then prevailing exchange rate system
followed by the 1973 oil price shock.
This plunged the world into a
dangerously inflationary environment, which was compounded by the second oil
price shock following the Iran revolution of 1979 and the tightening of monetary
policy. This led to a very deep recession that only started lifting just before
1985 in time for the changeover to a Nationalist government in 1987.
The
upswing continued until 1994 when inflation started to go up again and interest
rates had to be suddenly raised. By 1995 the world faced a major financial
collapse due to the Mexican sovereign default crisis. When Labour took over in
1996 the economic scenario had darkened so much that by 1998 the whole world
financial system nearly collapsed through the Russian default, the Asian crisis
and the bankruptcy of LTCM.
As soon as government was back in PN hands in
September 1998, what seemed an intractable international financial chaos
gradually fizzled away and the world resumed its upward trend, so much so that
world markets were roaring again at the turn of the millennium.
We had a
small exception to the rule with a short shallow recession in 2002-2003 but the
world economy has been roaring ever since… until now that is, when we could be
just about to vote Labour into power. The international scenario has darkened so
suddenly that US growth at four per cent plus per annum in the third quarter of
2007 has changed to a near certainty of a US recession in 2008, which cannot but
negatively impact on the economy of the rest of the world.
Another
curiosity is that whenever the PN are about to be voted out of power they always
seem to enjoy a shouting match with the GRTU. In 1996 the issue was VAT. Today
it is the issue about the reliability of GDP growth figures being published by
the NSO, which seem to be flying in the face of the hard reality faced by the
small enterprises mostly represented by GRTU membership.
GRTU have
commissioned professional studies by Professor Joe Falzon who, in a very
convincing and well argued report, questions the methodology being adopted by
the NSO for deflating the consumption components of the GDP to iron out the
inflation element out of the nominal figures and arrive at real growth. Prof.
Falzon has concluded that the deflators used to arrive at the real GDP figures
for the second and third quarters of 2007 seem totally unrelated to the retail
inflation percentages published for the same period by other NSO reports. The
perfect correlation that long existed between these figures (the GDP consumption
deflators and the retail inflation) suddenly broke down without any valid
explanation in the second and third quarter of 2007.
It is regrettable
that the NSO has ignored requests for publications of the methodology it used to
arrive to the strangely out-of-line deflators. So out-of-line in fact that
instead of ironing out inflation from the nominal figures they add to the
nominal figures as if consumer prices were in fact falling rather than rising!
The suspicion is that if false deflators were used the economy actually grew
nowhere near what the government has claimed in 2007.
Until the 8 March
election there is no calendar for the publication of important economic figures.
The GDP for the fourth quarter of 2007 will be published on 10 March and
government finance figures for December 2007 will be published in April 2008.
Just as 26 October 1996 was chosen with a purpose, to avoid revealing the true
state of government finances in the budget for 1997, could it be that the 8th
March date was chosen with the economic calendar in mind? The writing is on the
wall.
8th February 2008
The Malta Independent - Friday Wisdom
So finally the expected
happened. A month today we will be choosing a national government for the next
legislature.
What was less expected is the sense of trepidation that
seems to have gripped the PN. It started with desperate appeals by pro-PN
popular columnists seeking to stem defections of disgruntled voters from the PN
to AD. It is now flowing directly from the heart of the PN
organisation.
Signing off press adverts as gonzipn is clear sign of the
unpopularity wrapping the rest of the cabinet. It is the most overt admission by
the PN, coupled with the positive billboard campaign centred entirely on the
likability of Dr Gonzi, that marginal PN and floating voters are evidently
inclined to deny their backing to the PN on the basis of the arrogance and
perception of corruption which pervades the workings of most government
departments and organisations outside Castille.
It is the nearest the PN
could come to signing an apology to the electorate for treating us like idiots
in pretending that corruption is alien to the workings of government, that the
Lm250 million spent on Mater Dei were all correctly spent, that privatisations
were handled in the best interest of the nation and that our experience in the
EU is reaching the expectations we legitimately hold.
And if we needed
any proof that such implied apology is purely skin deep we were offered on the
very same day that the election was called by news which is nothing short of a
scandal dressed up as fake achievement.
The Freeport 30-year concession
was extended by contract to 65 years against a mere promise of additional
investment of e130 million by the operator. It is always dubious when such
strategic long-term contracts are signed by a caretaker government which should
be only in charge of routine matters of administration until a newly-elected
government takes possession.
But it is doubly suspicious and highly
unethical for such contracts to be signed as if drinking a glass of water when
the original contract was subject to public bidding in a highly advertised
privatisation exercise. By whose authority does a caretaker government more than
doubles the term of the privatisation concession rather than stick to the
original term giving the government the chance to renegotiate the terms in our
children’s lifetime? By this extension it will be when our grandchildren become
great grandparents that the government will have the chance to renegotiate and
this for the mere promise of an investment which over such a long term amounts
to less than e2 million per annum.
This is a project in which the nation
has invested since its 1981 origin something in the region of e3 billion (three
thousand million euro!) at today’s money worth and all we are getting from its
privatisation is an operational fee linked to the throughput of business. No
capital outlay was paid by the operator for enjoying the super long term right
to use these facilities and the revenues government gets from the operator are
hardly sufficient to service the interest cost on an international bond that
went to finance a very small fraction of the total project outlay.
To add
insult to injury, for those who have memory and care to use it, when the
Freeport was run as a publicly owned corporation under the first, second and
third PN administration until 2003 we were always bombarded with propaganda on
how successful the Freeport was operating and what a fantastic contribution it
was making to the economy. Many will remember the open days for the public, the
ferry loads of people brought free of charge from Gozo for the occasion and the
freebies and glossy brochures given to all who dedicated their weekend to pay
homage to the brilliant management of Freeport Corporation that was achieving
such great success that once the then Prime Minister suggested that we should
render tangible the nation’s gratitude by erecting a permanent monument in their
honour.
Then somewhere after the 2003 elections the music changed.
Suddenly the Freeport was incurring losses, had no funds left to replenish and
upgrade its investment assets and we were told that without privatising its
operations it had very grim financial prospects. Locked into long term contracts
at sub-optimal rates the privatisation process was a mere mis-en-scene for the
transfer of the operation to the main users of the Freeport who had contributed
to its commercial downfall by contracting cheap rates and blocking out other
shipping lines through the preferential treatment it always got from the
management of Freeport who seemed keener to defend the interest of their client
rather than the organisation they were supposed to lead.
Compare our
dismal leverage of the nation’s assets to the brilliant experience of Singapore.
Not only its publicly owned Port Authority turned its port into vibrant hub for
the region but it became a strong international port networking player taking
strategic positions in the operations of other ports round the world.
I
well remember that when in 1998 Singapore Port Authority were given the
opportunity without commitment by either side to make an operational audit of
the Malta Freeport their resultant lack of interest to pursue discussions was
primarily based on the difficulty to leverage performance when the capacity was
contracted out on a long term basis at uncompetitive rates.
Given this
background how can anyone avoid suspecting that the scandalous extension of the
Freeport concession from 30 to 65 years by a caretaker government is anything
but a final attempt to grab before power passes and in the process hypothecating
the operational manoeuvrability of successor governments?
3rd February 2008
The Malta Independent on Sunday
Bankers who work for
central banks are generally very serious people, serious to the point of being
boring. It is therefore not often that one has an opportunity to witness a tug
of war that is going on between the main central banks of the world, that is,
the Federal Reserve Bank of the United
States and the ECB of the euro
countries.
On the contrary, it is more normal for the two main central
banks of the developed world to co-ordinate their actions in order to re-enforce
their effectiveness, as they did last month when they flooded the financial
system with short term liquidity. They worked together with others to lubricate
the world financial system that was stalling as banks started hoarding liquidity
to cushion the stress of the losses they had to book on their exposures to the
US mortgage
securities.
So what is leading to a situation where the Federal Reserve
is in crisis mode, slashing down interest rates and loosening monetary policy by
taking urgent measures announced outside the scheduled calendar of meetings for
this purpose, just as the ECB continues to talk hawkishly about tightening monetary policy more than it
already is?
Some history would help readers to understand what I am
talking about. In the aftermath of the 11
September 2001 events and the
consequent economic shock resulting from the bursting of the technology stock
bubble in 2000, the Federal Reserve Bank reduced interest rates to a floor level
of one per cent. The ECB moved its rates in sympathy but kept its floor level at
two per cent.
As the economies emerged from the recession, the Federal
Reserve started raising interest rates in June 2004 and 17 consecutive quarter
point rises took the rates up to 5.25 per cent. The ECB, on the pretext that it
had not taken the rates as low as the Federal Reserve, started moving EUR
interest rates up in December 2005 in a series of non consecutive quarter point
rises, which took rates to four per cent by June 2007.
So, as at June 2007, interest rates in the
US were
5.25 per cent and in the euro area they were four per cent. Then a hurricane hit the
financial markets on both sides of the Atlantic. The world financial
markets started to seize as inter-bank money markets stopped functioning
properly. Banks switched suddenly from an aggressive mode to a very defensive
one as the defaults on US mortgage payments started to soar, spreads between
corporate bonds and safe haven Treasuries widened and the market for mortgage
and asset backed paper in the US disappeared almost overnight.
In an
effort to ease the lock jam of the financial markets that risked pushing the
economy into a recession, the Federal Reserve shifted to a rate cutting mode and
in the space of the last six months cut rates in four consecutive instalments for a total shave of 1.75 per cent, reducing
them from 5.25 per cent to 3.50 per cent.
In the same period, the ECB
held steady and only caved in to the extent of cancelling the quarter point interest rate increase that was
pencilled in for September 2007. But today interest
rates on the euro are still at the four per cent level, where they were last
June.
In a globalised world it is difficult to
imagine that Europe can avoid the economic
consequences of a sharp US slowdown or outright
recession. So what economic justification can there be for interest rates in
Europe, which were 1.25 per cent lower than those of the USA as late as last
June, to now be 0.50 per cent above them? There is also the clear prospect for
this gap to continue to increase as US rates seem destined to
fall further just as the ECB continues to dismiss any possibility that it could
be forced to consider reducing euro interest rates at any time in the near
future.
They can’t be both right. Either the Federal Reserve is panicking
beyond reason and being too aggressive in cutting interest rates by
over-estimating the risks of recession, or the ECB is too complacent and is
showing the consistency of those re-arranging the chairs on the deck of the
Titanic denying that it had hit an iceberg which would send it to the bottom of
the ocean.
If time will prove that the Federal Reserve is panicking and
the ECB is right in showing a steady hand, which in the long term will enhance
its credibility as an effective inflation fighter, we will in due course witness
a much stronger European economy as the US will continue to use monetary policy
to inflate and deflate bubbles in boring succession.
If on the other hand
the Federal Reserve will prove that it has acted timely to avoid a recession
just as the ECB continued with its rigid policies, ignoring clear signals of a
slowing economy, which, on its own, will roll back inflation pressures, we will
witness a quick emergence of the US from the current slowdown while the European
economy will be constrained by the weight of an over tight monetary
policy.
As fully fledged members of the euro system we did not have to
wait more than a few weeks to come to the point of practical realisation that our economic growth is largely dependant on
monetary policy decisions taken by the ECB, which cannot be expected to be too
sensitive to the needs at ground zero at Valletta, Nicosia or Ljubljana.
Never before has the ECB faced a situation
where there is such a narrow margin between exiting from this situation either
as heroes or as fools of consistency. Either with a crown as
the most credible central bank on earth or with egg on its face, as it will have
to eat its words and follow the Federal Reserve in crisis
mode.
Essentially, the decision of the ECB is uncertain. If the
administrative staff, mostly moulded in the former
Bundesbank tradition, continues to call the shots the
ECB will sit out the situation. If the majority rule applies, considering that
the southern Europeans now have a majority round the ECB board table, we could
soon see the ECB backtracking with its tail between its legs. The entry of
Malta and
Cyprus into the euro could tip
the vote balance at the ECB.
1st February 2008
The Malta Independent - Friday Wisdom
If you still have any
doubt that we are very close to the calling of a general election you were
probably sick at home this week and did not get to see the billboard battle now
going on between the two political parties.
Keen observers cannot help
noticing the different strategies being adopted. Labour’s campaign has a
single-minded focus to exploit the electorate’s fatigue with the PN government
and its desire for a refreshing change to prove that democracy is still alive
and kicking.
Labour’s campaign so far is slick and effective. It does not
denigrate its opponents nor does it make bold claims of Labour’s own merits. It
merely exploits its most powerful trump card by stressing the electorate’s wish
for change and tying it in with a label for a new beginning. While the
electorate desire for change is palpable I am not sure that the electorate is
equally enthusiastic about a new beginning.
The answer to the
electorate’s fatigue is change but a new beginning does not necessarily have
much to do with it. The electorate’s desire to cut out the arrogance that
accumulates with long tenure of power does not necessarily equate to a concept
of a new beginning. On the contrary the electorate wants continuity of policies
but with fresh faces and without arrogance, waste and corruption.
The
concept of a new beginning is in fact somewhat out of tune with the mood of the
electorate who may judge it as just another political attempt to re-write
history as if the sun started to shine on these islands on the first day of
coming to power. Labour should not forget that the success they had in 1996 was
in fact centred on a message of continuity, building on what was inherited and
making all citizens feel comfortable with a new government that would be a
government for all as the slogan was Ic-cittadin l-ewwel (The citizen
first).
On the other hand the message of change is music to the
electorate’s ear and somebody wiser than I recently gave me a reflection that I
wish to share with my readers. He made the point that the desire for change
among the electorate is so acute that Labour can do nothing to foul it up.
Basically Labour cannot lose the election even if they want to. The margin of
manoeuvrability for a new government, following EU membership and euro adoption
and after privatising practically all that could be privatised, is so limited
that whoever is elected cannot do much harm. So the risk of electing a new
government, even if perceived as an unproven experiment, is so small that the
desire for change can easily justify voting for Labour
irrespectively.
The PN’s billboard campaign is by contrast two-pronged.
They are in fact two separate campaigns running in parallel.
The first
is full of bright colours focused on the personality of Dr Lawrence Gonzi and
depicting him as a person you can actually share a beer with in the pub next
door. This is meant to leverage his personal likeability and his being a small
refreshing oasis of fresh water in an otherwise dry desert of personalities who
have been too long in power and who with very few exceptions have promised a lot
and delivered very little.
The second parallel campaign is meant to scare
people off Labour by reminding them of the views expressed by the Opposition
Leader that Malta should have joined the
euro at a more competitive rate. This campaign is wrapped in dull monochromes
with characters in funeral grim faced mode.
The effectiveness of this
campaign is very doubtful as voters are hardly impressed by unreal hypothesis
about an issue which has in any case been sealed by our joining the euro. In
fact we come a full circle to the words of wisdom from my friend that these
issues are no longer relevant as the elected government will not have any
discretion to make such mistakes, if mistakes they were.
From a purely
economic point of view (setting aside political convenience and the lack of
ingenuity by an opposition party to promise to take such measures which are
normally only taken by a new government immediately after being elected so that
they can be blamed on the predecessor) the argument that we have joined the euro
at too hard a rate is a strong one. So strong in fact that John Dalli, a former
PN Finance Minister, expressed similar concerns in his recent
writings.
But arguing that a more competitive rate would have reduced the
amount of Euro we got for our Maltese lira on changeover is an over
simplification.
It ignores the basic fact that the economy is composed
of many moving parts and it is unfair just to plug one moving part and expose it
on a billboard as if the other moving parts would have stayed the same and
therefore do not matter.
If we joined at a more competitive rate and
accompanied it by other measures that I have often referred to in my writings
way back in 2004/2005 we could easily be enjoying a vibrant export led economic
growth exploiting our full potential which would have permitted us to earn more
euro month in month out even if we could have got a bit less euro for our
Maltese lira on changeover.
We could also probably have better values
for our non-financial assets in the form of real estate and local equities which
could have more than made up for the sacrifice of accepting a lower conversion
rate.
Complicated economic arguments do not suit themselves well to
billboard exposition that demands catchy one-liners.
