Friday, 29 February 2008

The Person or the Organisation


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.

Sunday, 24 February 2008

Slicing and Dicing the Vote


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!

Friday, 22 February 2008

Six Word Manifesto

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?

Friday, 15 February 2008

Choosing a Government

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.

Sunday, 10 February 2008

The Writing on the Wall

10th February 2008

The Malta Independent - Friday Wisdom

All 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.


Friday, 8 February 2008

Off to the Races

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?

Sunday, 3 February 2008

Tug of War

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.

Friday, 1 February 2008

Billboard Battle


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.