Quotulatiousness

April 11, 2011

Election bombshell in leak of Auditor General’s report?

Filed under: Cancon, Government, Law, Media — Tags: , , , — Nicholas @ 13:01

The Winnipeg Free Press has a potentially explosive article about a leak of part of the Auditor General’s report:

The Harper government misinformed Parliament to win approval for a $50-million G8 fund that lavished money on dubious projects in a Conservative riding, the auditor general has concluded.

And she suggests the process by which the funding was approved may have been illegal.

The findings are contained in the draft of a confidential report Sheila Fraser was to have tabled in Parliament on April 5. The report analyzed the $1-billion cost of staging last June’s G8 summit in Ontario cottage country and a subsequent gathering of G20 leaders in downtown Toronto.

It was put on ice when the Harper government was defeated and is not due to be released until sometime after the May 2 election. However, a Jan. 13 draft of the chapter on the G8 legacy infrastructure fund was obtained by a supporter of an opposition party and shown to The Canadian Press.

This could be the big break that the opposition parties have been waiting for: the leak is just about perfectly timed for maximum effect (just before the first debate), and the Auditor General has refused to discuss the news story or to give any interviews during the election campaign.

April 5, 2011

China’s High Speed Railways: not for the masses

Filed under: China, Government, Technology — Tags: , , , , — Nicholas @ 12:07

Reports of corruption among top officials and soaring costs for China’s HSR network:

. . . question-marks have been raised over these plans after the sacking in February of Liu Zhijun, the minister responsible for building the high-speed network. He was accused of skimming off as much as 1 billion yuan ($152m) in bribes and of keeping as many as 18 mistresses. Zhang Shuguang, another top official in the railways ministry, was later dismissed for corruption. Separately, on March 23rd, state auditors reported that $28m had been embezzled from the 1,300km high-speed line between Beijing and Shanghai, the highest-profile of China’s many rail projects.

Public support for high-speed trains is muted. The trains may reach 350km per hour but fares are proportionately eye-watering. That is all right for well-heeled travellers, happy to have an alternative to flying. But tens of millions of poor migrants who work far afield and flock home for the Chinese new year are being priced out the rail market and have to go by bus (the number of bus journeys is soaring).

The sacking of top officials may be the result merely of one of China’s periodic anti-corruption campaigns. Or it may be the upshot of a high-level factional or personal battle, in which corruption charges are often a favourite weapon. If so, the dismissals would not necessarily affect railway development.

The Wikileaks view of Indian politics

Filed under: Government, India, Media, Politics — Tags: , — Nicholas @ 09:03

Pankaj Mishra talks about the ongoing release of information on India and the political and mercantilist string-pullers who infest every government function:

Food prices become intolerable for the poor. Protests against corruption paralyse the national parliament for weeks on end. Then a series of American diplomatic cables released by WikiLeaks exposes a brazenly mendacious and venal ruling class; the head of government adored by foreign business people and journalists loses his moral authority, turning into a lame duck.

This sounds like Tunisia or Egypt before their uprisings, countries long deprived of representative politics and pillaged by the local agents of neoliberal capitalism. But it is India, where in recent days WikiLeaks has highlighted how national democratic institutions are no defence against the rapacity and selfishness of globalised elites.

Most of the cables — being published by the Hindu, the country’s most respected newspaper in English — offer nothing new to those who haven’t drunk the “Rising India” Kool-Aid vended by business people, politicians and their journalist groupies. The evidence of economic liberalisation providing cover for a wholesale plunder of the country’s resources has been steadily mounting over recent months. The loss in particular of a staggering $39bn in the government’s sale of the telecom spectrum has alerted many Indians to the corrupt nexuses between corporate and political power.

February 18, 2011

The internet in China: hidden powers of persuasion

Filed under: China, Government, Technology — Tags: , , , , — Nicholas @ 08:52

A look at how the internet in China has the power to (sometimes) punish corrupt officials and influence the government:

Corruption and viral marketing has provided the Chinese government with a powerful tool for controlling public opinion. It all began when Chinese companies realized that they could hurt competitors by planting damaging rumors on the Internet. This, even in China, is illegal. But the corruption in China being what it is, there was little risk of getting the police to hunt down and punish the perpetrators. This was partly because the marketing firms, hired by companies to burnish their image, or defame competitors, was careful to have other small outfits get on the Internet to actually do the work, and be careful to not be traceable. So the cops, when forced by companies to do something (often because the owner of the offended firm was well-connected politically), were stymied at first. But the police, declaring it a national security issue, eventually discovered how this was done. But this did not stop all these negative campaigns. To defend themselves, companies that were attacked by these Internet disinformation campaigns, fought back.

This use of negative tactics soon fell out of favor, as all those tarnished companies lost sales. So these Internet based opinion manipulation turned to praising your own products. About this time, the government discovered what was going on, and began to use these marketing companies, and their subcontractors, to change opinions towards government policies. There was a pressing need for this, because all this Internet opinion manipulation had started out, over the last decade, as a popular uprising against government corruption, mistreatment and media manipulation. This “online army” was not organized, except by outrage at government, or individual, wrongdoing. For example, many government officials, and their high-spirited offspring, injure or steal from ordinary citizens, and get away with it. These officials have enough political clout to make the police leave them alone. But once the online army gets onto these stories, everyone in the country knows, and is angry. There are over 400 million Internet users in China, a country of 1,400 million. When a lot of people on the Internet get angry enough, the story, and anger, explodes through the Chinese Internet community. China carefully monitors Chinese Internet use, and tries to block unwelcome information or discussions. But when the outrage on a particular item becomes too large, it’s better to just arrest and punish the guy whose misbehavior got the online army going in the first place.

Who knew that sockpuppeting would be such a valuable online tactic in China? It might not just be limited to China, however:

If the Chinese wanted to use this tool in other countries, they would require posters who are familiar with the language and culture of the target population. That’s difficult skill to acquire, especially for at least a few hundred posters required (to hit, regularly, hundreds of message boards, chat rooms and so on). Done right, you can shift opinions among millions of people in a few days. Done wrong, you fail. And if you’re operating in a foreign country, you might get found out. But the opportunity is there.

February 17, 2011

Victor Shih interview on China’s economy

Filed under: China, Economics, Military, Politics — Tags: , , , , — Nicholas @ 07:35

The Browser interviews Victor Shih:

What do people get most wrong when they think of the Chinese economy?

The biggest misperception about China is that it’s a dynamic market economy — it isn’t. It’s a fast-growing, state-dominated economy with some dynamic, private-market aspects. If you look at investment, a main driver of growth, much of it is going to state-owned enterprises (SOEs) or shareholding companies dominated by state entities. Or it’s going directly to government investments carried out at a central or local level. The misperception has abated recently following Richard McGregor’s book on the Chinese Communist Party. People are realising that the party is still behind much of what happens in China.

[. . .]

Your first choice is Yasheng Huang’s Capitalism with Chinese Characteristics. I believe this book successfully demolishes the idea that China is developing a new economic model called ‘market authoritarianism’.

I think Yasheng goes a little too far with some of his claims. But the broad outline is correct. There was a period of healthy organic growth in the 80s, driven by the de facto private sector. Many township and village enterprises were collectives or owned by the local government. But in reality they were private enterprises. This changed in the mid-90s, especially with the adoption of the ‘grasping the large and letting the small go’ policy that circumvented the special interests in the state sector. When Deng Xiaoping was alive, his executive vice premier, Zhu Rongji, wanted to bankrupt or merge many of the smaller state-owned enterprises into larger ones. It was a political tactic to further reform. And it worked.

The problem was that it created these giant, state-owned enterprises. Recent statistics reveal the state sector made a profit of 2 trillion renminbi last year, of which the 122 largest SOEs made 1.35 trillion. They have combined assets of over 10 trillion dollars and have become an enormously resourceful and powerful interest group. Their CEOs have numerous ties with top political leaders and sit on the party’s central committee. Most bank loans, issued bonds and stock-listing proceeds in the system go to these conglomerates. There’s still a private sector but it has been squeezed tremendously, especially in the last two years.

[. . .]

Most investment bankers like to talk things up, but that’s not something we can accuse Carl of doing.

By the late 90s, China’s banks were technically insolvent because the non-performing loans ratio was 40 to 50 per cent. Carl’s still a big fan of Zhu Rongji, the former prime minister. One of Zhu’s greatest achievements was to ‘solve’ the problems in the banking sector by setting up asset-management companies and recapitalising the banks. Today, of course, the banks are still lending very recklessly despite a lot of reform — the formation of credit and risk-management committees, for example. The banks continue to require bailouts and recapitalisation from the Chinese government, which props them up so that they can sell these bank shares to the public in Hong Kong or Shanghai. Carl sees this process as a kind of Ponzi scheme.

February 13, 2011

Egypt’s long road to reform

Filed under: Bureaucracy, Middle East, Military, Religion — Tags: , , , , , , , , — Nicholas @ 11:50

Strategy Page lists some of the many difficulties facing Egypt:

Although deposed dictator Mubarak officially maintained the 1979 peace treaty with Israel, Mubarak also had the state controlled media constantly criticize Israel for real and (mostly) imagined crimes against Moslems. Mubarak allowed Hamas to bring in Iranian weapons and cash (for an eventual attack on Israel). Mubarak did what any dictator does, he found an external enemy to blame things on. But all of Egypt’s problems are internal, mostly in the form of corrupt government officials and most of the economy controlled by a few hundred families. It’s as the Russian czar said once, when asked about his great power, “I do not run Russia, 10,000 clerks do.” It’s the same in Egypt (or any other country). Replacing enough of the several hundred thousand officials (government and business), to really be in power, will be difficult for any reform politicians. Replacing all the current “clerks” with honest ones will be impossible. Eliminating corruption takes a generation or more, assuming you really try. There are centuries of history with that sort of thing, but Arabs tend to consult their own special history book, one found in the fiction section, and full of tales of imaginary Arab accomplishments, and a long list of self-inflicted injuries blamed on others. The fact is that Egypt, like most Arab nations, has long neglected education and economic opportunity. Literacy is only 71 percent, and corrupt officials make it impossible to start a legal business. Economic activity is monopolized by the several hundred families who see nothing wrong with crippling the economy for their own gain. The wealthy have not hesitated to use thugs and death squads to maintain their power. While often at each other’s throats over business or personal matters, the several hundred thousand officials and business leaders will largely unite at any attempts to dismantle their economic arrangements. Bribes, threats and all sorts of enticements will be offered cripple the reform efforts. While most Egyptians demand reform, those benefitting from the current arrangements know that they have thousands of years of Egyptian history on their side. Occasionally, foreigners would take advantage of this culture of corruption, which extended to the army, and invade. But the Egyptian ruling class would soon absorb the invaders, and the business of running Egypt would return to its normal ways.

Israel knows well how corrupt the Egyptian armed forces are. Except for a few years before the 1973 war, when a highly efficient Anwar Sadat was running the army, the Egyptian armed forces have been allowed to wallow in their usual incompetent self-delusion. Peacetime armies have long been seen as perfect sources of wealth for corrupt politicians. Thus, in the last three decades, the Egyptian forces have done their job in this department. A new Egyptian government, seeking to gain domestic and foreign popularity by cancelling the peace treaty with Israel, would restore the threat of Egypt foolishly starting another war they would lose. Israel would have to redeploy its forces to deal with this. That would cost money, and weaken the edge Israel has in the north against Hezbollah and Syria. All this would not really change the balance of power. What might do that is reforms in the Egyptian military, to eliminate corruption and raise standards. Good luck with that.

Egypt may achieve reform, to include a sharp reduction in corruption and true rule of law. What is less certain is dealing with the effects of three decades of anti-Israeli and anti-Semitic propaganda in the state controlled media. But the biggest problems are internal, and solving those are a long shot.

Many Egyptians have doubts that democracy will work in Egypt. They point to Lebanon and Iraq as examples of what happens when you allow Arabs to use democracy to rule themselves. The 22 year old Lebanese democracy fell apart in 1975, followed by fifteen years of civil war, then a peace deal that left the country divided into the “democratic” north, with the south ruled by a Shia religious dictatorship (Hezbollah) financed by Iran. Iraq has a barely functioning democracy that many Arabs despise because it was facilitated by an American/British invasion to remove an Arab dictator. What Arabs really find discouraging about Iraq’s democracy is that it reveals how difficult it is to run such a government. But as Westerners constantly point out, freedom isn’t free and democracy isn’t easy. If you want the goodies, you have to make the effort.

Update: Lawrence Solomon thinks that the path to democracy is even harder, and less likely to succeed:

In Egypt, the ends that democracy would bring are more likely death, submission and the pursuit of jihad, as defined by the country’s Muslim Brotherhood. “The Koran is our constitution, the Jihad is our way, and the Death for Allah is our most exalted wish,” it proclaims. The word Islam does mean “submission.”

Most Egyptians — three-quarters of its overwhelmingly Muslim population, public opinion polls say — want “strict imposition of Sharia law” and a larger proportion wants policies that most in the West would view as human rights abuses — 82% would stone adulterers and 84% want the death penalty for Muslims who leave their faith.

While most of the urban generation in Cairo’s Tahrir Square desires a modern Egyptian state of some kind, the Egyptian majority does not: 91% of Muslims want to keep “Western values out of Islamic countries.” For the vast majority outside the main cities, the outrages perpetrated by Mubarak lie mostly in his suppression of Islamic fundamentalist values, such as his ban on female genital mutilation and his moves to phase out polygamy and child brides. Most Muslim Egyptians not only oppose a modern Egyptian state, they would dismantle the existing Egyptian state, two-thirds wanting instead “to unify all Islamic countries into a single Islamic state or caliphate.”

But even with all of that said, he points out that things are not totally hopeless:

But traditional Egypt need not forever prevail. A poll just released by the Washington Institute for Near East Policy, taken between Feb. 5 and Feb. 8 of residents of Cairo and Alexandria, the two centres of protest, shows both how different the major cities are from the rest of the country, and how much hope there is for a modern Egypt in the future.

The protest was mostly driven by the economy, with 37% citing either “poor economic conditions” or “Unemployment/Job conditions.” Corruption came in next, at 22%, followed by “poor delivery of services like electricity and water” at 5%. The social causes touted by the Western media were all but non-existent: Just 3% cited “political repression/no democracy” and another 3% cited “abuses by security services/arrests/torture etc.” Neither are the populations in these urban centres motivated by fundamentalism. Only 4% complained of a “Regime not Islamic enough,” only 4% of a “Regime Too Connected to the U.S.,” and just 3% of a “Regime Too Supportive of Israel.” In a hypothetical election for president, one-third of the residents of these cities favoured either Mubarak (16%) or his vice-president, Omar Suleiman (17%), compared to 26% for Amr Musa, a prominent diplomat.

Mohammed ElBaradei, a diplomat endorsed by the Muslim Brotherhood, would receive just 3% of the vote.

February 7, 2011

Blameshifting, subcontinental style

Filed under: Asia, India, Media, Politics — Tags: , , , , — Nicholas @ 09:37

Strategy Page talks about the common belief in Pakistan that suicide attacks are not really the fault of other Muslims:

While the Islamic terrorist attacks in Pakistan have created a lot of hatred against Islamic militants, many Pakistani government officials, and media executives, blame non-Moslem foreigners for all the Islamic violence. To Westerners, this is bizarre, but to more than half the population of Pakistan, blaming India and Israel (and the West in general), for Islamic suicide bombers killing Pakistanis, has some traction. The basic theme is that India, with the assistance of those clever and diabolical Israelis, are deceiving Moslems to become suicide bombers. In some cases, where there are no bodies left behind, the Indians or Israelis can be blamed for doing the deed themselves. This sort of thing is regularly reported in Pakistan.

Since India and Pakistan (literally, “the land of the pure.”) were created out of British India in 1947, Pakistan has seen India as preparing to invade and conquer them. There followed four wars with India, all of which [were] started by Pakistan. While many Pakistanis have figured out that India has never had any interest in taking over Pakistan, especially as Pakistan slid into a malaise of corruption and economic decline. But those who ran the Pakistani government (a very small group, be they politicians or generals) found it convenient to blame someone else, and India was always a convenient scapegoat. Israel was added when because Israel has long been considered the archenemy of Moslems, and especially since Israel became a close ally of India. The West is blamed because their economic success must have, somehow, come at the expense of the morally superior Islamic world.

On the national level, as at the personal level, having a shadowy “nemesis” to blame for your misfortune allows you to avoid looking for the actual root causes of your situation.

Update: A writer at The Economist reports on revisiting Pakistan after five years away:

Much of the news we read from Pakistan is a grisly catalogue of suicide-bombs, sectarian slaughter, political assassination, grinding insurgency and collateral damage from the war in Afghanistan.

So, on a first visit to Islamabad and Lahore in nearly five years, my initial response was to think how the relentless tide of such reporting obscures another truth about the country: how pleasant it can be; how helpful and hospitable the people; how many well-informed, articulate and enlightened cosmopolitans there are to talk to. In the past I have always argued that Pakistan has a tolerant, flexible core that is far more resilient than it is often given credit for. Surely, that remains true.

A second response, however, was to acknowledge how much worse things had got in those five years. Three sorts of decline stand out—the linked problems of worsening security and the spread of Islamist extremism, and the economy.

[. . .]

One of the commonplaces of analysis in Pakistan is that the roots of extremism lie not just in the war in Afghanistan and the “Islamisation” of public life introduced by General Zia ul-Haq a generation ago, but in economic hardship and lack of opportunity. The economy is lurching along on IMF-provided crutches, just a few months from the next crisis. Most people also agree about some of the basic reforms needed—in particular a broadening of the tax base. But the political parties want to make sure that it is the other parties whose voters’ pockets will suffer from the broadening. So reform is deadlocked.

Pakistan is indeed still not as bad as you might think from the newspaper headlines. And when Mr Hoodbhoy, for example, talks of an impending bloodbath it is still possible to think he exaggerates. But Pakistan is bloody enough already, and it is for now a depressing and frightening place. It is not just that the decline seems unimpeded by the end of Pervez Musharraf’s inept, corrupt military dictatorship and the advent of Asif Ali Zardari’s inept, corrupt and army-reliant civilian administration. It is that the arguments of those who claim the trend is remorseless and heading for disaster seem more persuasive than those I have deployed over the years to refute them.

January 27, 2011

Viewing the new plutocrats: Indian and Chinese variants

Filed under: China, Economics, Government, India — Tags: , — Nicholas @ 07:40

The Economist has a compare-and-contrast piece on how the ultra-rich are viewed in India and in China:

India’s movers and shakers all seem to know each other. The Indian elite have created their own islands, frowns a cabinet minister: “It’s a bit unhealthy.” They send their kids to private schools. They have their own water and electricity. So they barely notice how bad the government is at delivering power, water and schooling to the other 1.2 billion Indians.

Yet to many Indians the nation’s tycoons are heroes. A few made their fortunes corruptly, but the software moguls of Bangalore created a huge export industry out of nothing, and many others helped to spur India’s galloping growth. Ratan Tata, the soon-to-retire boss of a conglomerate that produces everything from tea to cars, lives modestly and treats his employees well. The brothers Anil and Mukesh Ambani are more controversial, but they have turned the family business into two global giants, with interests from chemicals to entertainment.

Some Indian gazillionaires are flashy. Mukesh Ambani’s house has 27 stories, three helipads and three floors of hanging gardens. Vijay Mallya, a beer-and-airlines magnate, constantly amuses the newspaper-reading public with his speedboats and sports teams. But for most of the country’s elite the most conspicuous item of consumption is sending their children to university in America.

India’s super-rich are very different from their Chinese counterparts, however:

The relationship between rich and poor in China is different. China’s stellar growth has lifted some 500m people out of poverty. Much of the credit belongs to Chinese entrepreneurs. Since Mao’s boot was lifted from their necks, they have built marvels, from the skyscrapers of Shanghai to the factories of Guangdong. Yet mainland Chinese business leaders operate in the shadow of a secretive and unaccountable ruling party. To get on, many join it. Some do so reluctantly, to avoid being crushed. Others do so gladly, hoping to use the power of the state to enrich themselves.

Individual party members are not entirely above the law. If a local bigwig behaves so appallingly that the resulting protests are heard in Beijing, the party may cut him down to size. In October last year the son of Li Gang, a senior police officer in Baoding, killed a pedestrian while allegedly drink-driving. He sped off, shouting, “report me if you dare; my dad is Li Gang!”

News of the incident went viral in the Chinese blogosphere. Pop songs with the refrain “My dad is Li Gang!” quickly circulated. Li Gang was forced to make a televised apology. His son was arrested. China’s leaders would like the 95% of the population who are not members to think that the party cares. But the most revealing fact is that Mr Li junior evidently thought he could get away it.

January 23, 2011

Lawrence Solomon on the coming crash in China

Filed under: China, Economics, Government — Tags: , , — Nicholas @ 12:17

If you think I’ve been too chipper and dismissive on the medium-to-long term issues that could cause a Chinese meltdown, you’ll enjoy Lawrence Solomon’s article:

In China, the resentments are palpable. Many of the 300 million people who have risen out of poverty flaunt their new wealth, often egregiously so. This is especially so with the new class of rich, all but non-existent just a few years ago, which now includes some 500,000 millionaires and 200 billionaires. Worse, the gap between rich and poor has been increasing. Ominously, the bottom billion views as illegitimate the wealth of the top 300 million.

How did so many become so rich so quickly? For the most part, through corruption. Twenty years ago, the Communist Party decided that “getting rich is glorious,” giving the green light to lawless capitalism. The rulers in China started by awarding themselves and their families the lion’s share of the state’s resources in the guise of privatization, and by selling licences and other access to the economy to cronies in exchange for bribes. The system of corruption, and the public acceptance of corruption, is now pervasive — even minor officials in government backwaters are now able to enrich themselves handsomely.

[. . .]

The corruption extends to the enforcement of regulatory standards for health and safety, which few in China trust. In recent years China has endured a tainted milk scandal and a tainted blood scandal, each of which implicated corrupt officials in widespread death and debilitation. In a devastating 2008 earthquake, some 90,000 perished, one-third of them children buried alive in 7,000 shoddily built “tofu schools” that skimped on materials. Nearby buildings for the elites that met building standards, including a school for the children of the rich, were largely unscathed.

[. . .]

China is a powder keg that could explode at any moment. And if it does explode, chaos could ensue — as the Chinese are only too well aware, the country has a brutal history of carnage at the hands of unruly mobs. For this reason, corrupt officials inside China, likely by the tens of thousands, have made contingency plans, obtaining foreign passports, buying second homes abroad, establishing their families and businesses abroad, or otherwise planning their escapes. Also for this reason, much of the middle class supports the government’s increasingly repressive efforts.

Compared to my rather milder criticisms, this is strong stuff indeed.

H/T to my former virtual landlord for the link, who referred to this as my “hobby horse in full gallop”.

December 7, 2010

Chinese official acknowledged that official data is unreliable

Filed under: Bureaucracy, China, Economics, Railways — Tags: , , , , — Nicholas @ 07:32

I’ve been saying this for years now: China’s official GDP and associated economic numbers are just not reliable:

A senior Chinese official said in 2007 that much of the country’s local economic data are unreliable, according to a leaked diplomatic cable published by the WikiLeaks website.

The official, Li Keqiang, was at the time Communist Party secretary of the northeastern province of Liaoning, and has since been promoted to vice premier. Since landing that position, he has overseen many of the central government’s efforts to improve the quality of its economic statistics, which continue to face many questions over their accuracy and consistency.

[. . .]

China’s Foreign Ministry has said it will not comment on the content of the diplomatic cables published by WikiLeaks. The leaked cable reports comments Mr. Li made in a dinner in Beijing with then-U.S. Ambassador Clark Randt on March 12, 2007. His remarks focused on the challenges of administering the province of Liaoning, which because of its legacy of failed state-owned enterprises was burdened with a large number of unemployed workers.

“When evaluating Liaoning’s economy, he focuses on three figures: 1) electricity consumption, which was up 10% in Liaoning last year; 2) volume of rail cargo, which is fairly accurate because fees are charged for each unit of weight; and 3) amount of loans disbursed, which also tends to be accurate given the interest fees charged,” the cable says.

“By looking at these three figures, Li said he can measure with relative accuracy the speed of economic growth. All other figures, especially GDP statistics, are ‘for reference only,’ he said smiling,” the cable reads. “GDP figures are ‘man-made’ and therefore unreliable,” the cable paraphrases Mr. Li as saying.

As I said back in February, the reason for the made up numbers is inherent in the Chinese system:

In this way, the PLA stopped being just the customer/end user. They cut out the middleman and absorbed the entire supply chain. The PLA became a significant economic player in the Chinese industrial economy . . . and this is still true today. The generals aren’t formally in charge, but they own the companies that do military production.

So what? So let’s look at how a civilian corporation’s incentives differ from one owned directly by the army. In a civilian corporation, the CEO runs the business with an eye to generating the largest profit possible while staying (for the most part) within the law. A CEO who deviates from this to ride a favourite hobby horse will eventually face the wrath of the stockholders who want that maximized profit. There are natural limits on how much freedom to invest in uneconomic activity any CEO will be given. Sensible stockholders don’t try to micromanage the firm, but do raise questions if too much of the company’s efforts are devoted to things clearly not related to the company’s long term benefit. Company accounts can be rigged, for a time, to show misleading results, but eventually (Enron, Worldcom, etc.) the truth will out.

A Chinese firm that’s owned by the army? Profit may be nice, but the “CEO” reports to a different master: the guys with the guns. The company accounts will show exactly what the guys with the guns want them to show . . . and the oversight and auditing committee members carry submachine guns. You’re told that your target is 10% growth? Don’t you think that the reported result will be at least 10%? Because your life may depend on the reported results being acceptable.

As my former virtual landlord says, this is one of my hobbyhorses:

October 17, 2010

New laws aim to reduce military corruption in China

Filed under: China, Economics, Military — Tags: , , — Nicholas @ 11:39

Strategy Page looks at the latest attempt to curb military corruption:

China is enacting new laws that puts additional pressure on the military to maintain quality standards (in the construction and use of military equipment). Why should something like this be thought necessary? It’s all because of corruption, an ancient, and growing, problem in China. There, it is taken as a given that, if you get a government job, you have a license to steal. In the military, this means weapons are built in substandard ways, and equipment is not properly maintained. Military corruption is an ancient Chinese custom, and accounts for most of the poor military performance in the past.

For over a decade, the government has worked to eliminate the worst of the theft and moonlighting by the troops. The most outrageous examples of this have been curbed. Thus military officers no longer use cash from the defense budget to set up weapons factories they run and profit from. Big chunks of procurement cash no longer disappear into the offshore bank accounts of generals and admirals.

It’ll take more than new laws and a few high-profile prosecutions to tackle a problem that has been endemic for generations.

August 10, 2010

Free flight in Indian helicopter? No, thanks, I’ll walk.

Filed under: India, Military, Politics — Tags: , , , — Nicholas @ 07:51

Strategy Page would recommend that you think twice before climbing aboard an Indian helicopter:

The Indian Air Force is being criticized for mismanaging its fleet of over 300 helicopters. It gets worse when you realize that this is not enough helicopters for all of the needs of the Indian armed forces. But despite that, over ten percent of those helicopters are diverted to UN peacekeeping operations and for transporting VIPs (senior government officials). In addition, it’s been publicized that helicopters are often assigned to fly the wives of senior air force officials. That, and maintenance problems, mean that only about 60 percent of the helicopter fleet is available for military needs.

It gets worse. Despite needing a third more helicopters, the helicopters are dying of old age. As in 78 percent of current choppers have exceeded their design life. The aging equipment was no secret, but the navy only began obtaining new helicopters in the last three years (and for the five years before that obtained none.)

August 4, 2010

The costly San Antonio class

Filed under: Bureaucracy, Military, USA — Tags: , , — Nicholas @ 09:08

Strategypage recounts the sad story of the LPD 17 class:

The U.S. Navy is having major problems with its LPD 17 class amphibious ships. Originally, the plan was for twelve of these ships to replace 41 smaller, older and retiring amphibious ships. Then, disaster struck. Five years ago, the USS San Antonio (the first LPD 17 class ship) entered service. Or at least tried to. The builders had done a very shoddy job, and it took the better part of a year to get the ship in shape. The second of the class, the USS New Orleans, was also riddled with defects that required several hundred million dollars to fix. This pattern of shoddy workmanship, incompetent management and outright lies (from the ship builders) continued with the five LPD 17 class ships now in service. Now the order has been cut to ten ships, partly because of all these problems. To add insult to injury, the last ship in the class is being named after politician John P. Murtha, who is generally hated by soldiers and marines for the way he politically exploited and defamed the troops who served in Iraq and Afghanistan. This is particularly painful because the LPD 17s carry marines into combat.

Many consider the San Antonio class as a poster child for all that’s wrong with American warship construction. The ships are being delivered late, and hundreds of millions of dollars over budget. The list of problems with the ships is long and embarrassing. Although the San Antonio did get into service, it was then brought in for more inspections and sea trials, and failed miserably. It cost $36 million and three months to get everything fixed. The workmanship and quality control was so poor that it’s believed that the San Antonio will always be a flawed ship and will end up being retired early.

July 15, 2010

Reasons not to get angsty over China’s growth

Filed under: China, Economics, Government, USA — Tags: , , , — Nicholas @ 10:02

The ever-sensible and highly entertaining Monty points out that Americans fretting over the growth of the Chinese economy are bothered over (comparatively) minor issues:

The angst over China’s economic ascent continues to smell rather strongly of the same panic the US felt over Japan in the 1980’s. I respond to this panic in two ways: 1) I am happy for the average Chinese citizen, who is finally seeing some benefit from their labor after 400 years of failure and ineptitude — they deserve any success that comes their way; and 2) America is in the enviable position of being able to worry about unlikely hypotheticals because we are the world’s largest economy and will continue to be so for much of the 21st century and perhaps beyond. We face severe problems — public spending being #1 among them — but our competitors also have problems, in many cases more dire than our own. We as a people have a habit of overestimating our own problems and underestimating those of our adversaries. Don’t begrudge the Chinese people some measure of success; just hope that they can cast off their Communist government and move towards being a freer people. There may come a time when the US and China square off as enemies rather than just competitors, but that outcome is not inevitable.

Fitch agrees with me about taking the whole “China is taking over the world” thing with a grain of salt. The Chinese are hiding an enormous amount of bad debt. If China hopes to succeed beyond their export-driven economy, their finances are going to have to become more transparent. And when/if this happens . . . look out below. That crash is going to make our little economic vacation of the past couple of years look mild in comparison.

I know that it may appear that I’m anti-Chinese based on some of my past economic postings, but that’s not true. I’m actually quite positive about China in the long term — once they manage to get rid of the last trappings of authoritarian government and overcome the huge dead hand of army-controlled crony capitalism. Most Chinese markets are not yet free, but they’re in most cases far more free than they were a decade ago. That’s wonderful, both for ordinary Chinese people and for the rest of the world. China has immense untapped resources of skills, talents, and ideas that can’t be accessed in a controlled economy. If-and-when their economy becomes as free as typical western markets, sit back and watch all that human ingenuity go to work.

On the down side, while China is becoming a bit more free, many western countries are becoming less so: piling on regulations and creating additional barriers to economic growth (Canada, for the most part, has not been doing this . . . it’s a significant factor in Canada’s escape from recession). If these trends continue, perhaps the worriers-about-China will see the Chinese economy vault into first place as the American government tries to control everything.

June 21, 2010

China’s latest currency move

Filed under: China, Economics, USA — Tags: , , , , — Nicholas @ 10:31

The always entertaining Monty has a few thoughts that are worth considering:

BNP Paribas forecasts parity (and below!) for the poor, unloved Euro. The Euro is like the easy girl in every town: popular enough when she was young and cute, but now that she’s looking like nine miles of bad road, no one wants to be seen with her or has a kind word to say about her.

After insisting for months that they weren’t keeping the Yuan artificially devalued via the dollar-peg, the Chinese lift the peg, shout Squirrel!, and run away.

Meanwhile, a floating Yuan may not work out quite the way the US thinks it will. This happens to be my view — I think the export-driven Chinese economy is a lot weaker than they’re letting on (or may even realize themselves), and they have severe internal economic problems that the authoritarian government has been papering over for years. There will be a huge banking crisis in China at some point when the huge numbers of bad loans come to light — they can’t hide them forever. Further, the recent labor troubles in China may be only the leading edge of a big wave.

Of course, if you’ve been following Quotulatiousness for any time, you’ll know that I’m fully in agreement with Monty about the Chinese economy. In the long term, I’m quite hopeful about China and their ongoing liberalization and modernization, but in the short- to medium-term I think there are many problems that need to be resolved and that will cause a great deal of upheaval and disturbance.

Remember that even with the best good will in the world, China’s economy is still moving painfully from state-run to private enterprise, and the most common stop on that road is crony capitalism (that’s like capitalism without the rule of law but with private armies). The good news is that a greater proportion of the economy is adjusting to free(r) markets, but there’s still lots of zombie corporate entities set up and run by various branches of the government . . . and the army.

In the latest move, the exchange rate change may not be the panacea that too many American politicians are hoping for:

China’s decision to move away from its currency peg might mean the yuan weakens against the dollar instead of strengthens as Washington wants, Nouriel Roubini, one of Wall Street’s most closely followed economists, said Saturday.

China said Saturday it would gradually make the yuan more flexible after pegging it to the dollar for nearly two years, a move that the U.S. government and others around the world have long been calling for.

It won’t fix the underlying trade issues, even if the yuan moves in the “desired” direction, as the problem is much more rooted in American policy than in Chinese currency rates. As long as the American government insists on increasing the debt load, piling on additional regulatory regimes, and directly interfering in corporate decisions, the longer the economy will be unsettled. Stability is a key condition for economic recovery, yet the American government demonstrates a knee-jerk reaction against stability for every opportunity that arises.

Oh, and if you think the US banking system has bad loan issues, wait for the other shoe to drop:

China’s banking regulator warned Tuesday that the nation’s banking system faces risks from bad loans, particularly among those made to local governments and to the real-estate sector.

In its 2009 annual report, the China Banking Regulatory Commission urged banks to use cause and scientific risk analysis in their lending, and warned of dangers to the sector, both from lending in the past year and from development in the future.

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