*Modern Chinese proverb

31^st August 2012

There have been a number of interesting insights into the inner workings of both the Chinese and Vietnamese governments lately due to, on the one hand, the defenestration of Bo Xilai in China along with the show trial for murder of his wife, Gu Kailai, and the arrest last week of the powerful banking mogul, Nguyen Duc Kien, in Vietnam for “financial violations.”

The wealthiest 70 members of China’s legislature added almost $US90 billion to their bank accounts in 2011, according to the Hurun Report, which tracks China’s wealth. This increase alone is greater than the combined net worth of all 535 members of the US Congress, the US President plus his cabinet and the nine Supreme Court justices. Why bother starting a technology company, study science or work in finance, Bloomberg asks, when the riches are to be found by rising within the party? (For an excellent account of this, see here).

Bloomberg even playfully suggests, “If the rich keep getting richer at the expense of the poor, China may actually need to go communist.”

The same might be said of Vietnam. If anything the situation in Vietnam – an emerging South East Asian tiger until recently – is even more dire, leading one commentator, Roger Mitton, to optimistically predict the regime’s imminent demise.

One of the key challenges facing the ruling elites of both countries is the pivotal role state-owned enterprises (SOEs) play in economics and politics. While dominating both economies, at the same time they act as the glue that holds the system together. They do this through the patronage networks at the heart of political power.

SOEs monopolise access to credit (invariably at below market interest rates) through the state-controlled banking system, but fail to generate any meaningful return of this money. It is the scale of the resulting wealth destruction that is threatening the social contract between the rulers and the ruled of these two societies.

At the same time, their central role in the maintenance of political power through the favours both up and down the chain of authority that makes them indispensable, and makes reform of the system almost impossible.

This is one problem Cambodia is fortunate not to be facing.

For a start, because of its late entry in the global marketplace, SOEs never really got going here following the collapse of the Khmer Rouge regime of the late 1970s and simply do not play the same role in Cambodia’s economy. Instead here we have a curious hybrid that owes something to the systems prevailing in both the country’s two immediate neighbours, Vietnam and Thailand.

In these countries, patronage networks are systemic and institutionalised, but Thailand’s has been “democratised”. Voranai Vanijaka, who has a weekly column in The Bangkok Post, describes in The Godfather Tradition Lives On how Thailand appears on the surface to be a democracy, “but the constitution, the legal and theoretical frameworks have little to do with day-to-day realities dictated by feudal governance. Words on paper do not dictate what we do. The belief system ingrained in our psyches does. In practical terms, you can’t get things done without joining and playing in the system. It’s a matter of not just prosperity, but survival.”

Increasingly this appears to be the case here in Cambodia. To operate a business, gain a contract or even secure a job, you need to be part of the programme both to have a chance to prosper and for protection against the predations of the more powerful.

Of course there are multiple patronage networks in each of these societies. In China and Vietnam there are based on the various factions within the party. In Thailand, it is much more complicated. There are competing parties, factions within parties, as well as in the army and the bureaucracy. Then there are the rural Godfathers out in the provinces. The most powerful of all of these networks is the one centred on the palace.

It has even been suggested that these multiple loci of power are why corruption in Thailand greases the wheels of commerce rather than, in most other Asia countries, devolve into a zero-sum game that prevents their economies from meeting their full potential.

Similarly, control of power is far from monolithic here in Cambodia. Perhaps the biggest divide is between provincial networks and those centred on Phnom Penh. This has lead to a number of internationally embarrassing situations where the central government’s remit clearly doesn’t extend far into the hinterland.

However, the party here is reaching out and, through both covert and overt means, trying to bring everyone into the fold, based on the allegiance to the personality of a central deity. In this light, recent attempts to burnish the personality of this deity by ensuring every Cambodian has their own boxed set of five hours of distilled wisdom of our glorious leader will be interesting to watch.

While there is much to suggest the political and social superstructure remains fragile in a number of ways, it does appear that our dear leader’s position at the top of the greasy pole is currently unassailable. After years of turmoil up until the millennium, most Cambodians are content to quietly get on with their lives in comparative peace.

However, the same dynamic as applies in China, Vietnam and Thailand is equally in play here. Peoples’ expectations have been raised and as long as a bright future continues to beckon, they will likely be forbearing in the face of the relatively minor indignities of life in society that becomes more unequal by the day.

Cambodia is currently enjoying an investment-led boom but the economy is still remarkably exposed to vagaries of both the weather and rapidly changing global market conditions. With power more centralised, the blame if things go wrong will also be more focused.

The biggest challenge to the status quo here in that the country’s present economy simply is not capable of absorbing the burgeoning number of young people entering the workforce. The stresses this produces may yet generate social unrest on a scale that can’t be ignored or suppressed easily.

And there is currently no obvious Plan B.

29^th August 2012

In an opinion piece in yesterday’s New York Times, David Scheffer, the U.N. secretary general’s Special Expert on United Nations Assistance to the Khmer Rouge Trials complains bitterly that ”it is inconceivable that the international community would imperil this historic trial midstream and undermine justice for the estimated 1.7 million Cambodians who perished under Pol Pot’s rule from 1975 to 1979.”

He says that starving it of funds would fly in the face of the “no impunity” message that has developed over nearly two decades of international criminal tribunals, “an outcome would send entirely the wrong message to would-be perpetrators of international crimes.”

The answer to this is that justice relayed has effectively been justice denied, as the present defendants are now too old for any punishment to be meaningful. Most Cambodians alive today were also born or came of age after the Khmer Rouge period, so the proceedings have little relevance for them and in fact, for many are an embarrassment.

Secondly, the government is determined to thwart any efforts by international court officials to broaden the court’s mandate beyond the few remaining leaders already on trial. The UN has demonstrated its complete ineffectualness in the face of this resistance.

Scheffer notes that “once a tribunal is given a mandate and launched by the UN, it has a life of its own,” without recognising the irony of this statement. Rather than “months of riveting testimony” (that Scheffer claims), the trials have degenerated into little more than a circus, bringing the proceedings into disrepute for most observers here in Cambodia.

Saying the costs of the Tribunal are “remarkably small,” Scheffer claims that could do its job much better “if it were not dangling on the financial precipice.” He blames the pressures of “donors’ fatigue,” saying at least $US4 million was needed to cover November and December’s expenses and then there is concern about next year’s budget that must be faced immediately.

$US30m to convict one defendant – who actually pleaded guilty! This don’t represent chump change here and fails miserably by Cambodian standards to represent value for money. The only beneficiaries of the whole farce seem to be the foreigners who staff the Tribunal.

Scheffer also rather plaintively suggests “A modern-day Andrew Carnegie also could help fund it,” citing the example of the Peace Palace in The Hague that Carnegie contributed $US1.5 million (equal to about $US35 million today) towards in 1903.

Hum, actually I have just the land for this to be built on. Only slightly used and the signs saying “New International School of Phnom Penh Coming Soon” have already been taken down.

I await your call.

27^th August 2012

One of the major changes of the last forty years has been in attitudes over how economies worked. The victory of ideas emanating from the Chicago School (or the Austrians – take your pick) successfully supplanted the previous dominant meme that preceded it: that the state should be the dominant player in determining how resources were allocated.

In 1989, Francis Fukuyama proclaimed “the end of history.” The next two decades saw Capitalism rampant, supremely confident in its moment of triumph.  This new meme of allowing the private enterprise’s “animal spirits” free rein became so dominant in fact, that even politicians and their supporters on the Left felt obliged to support it, even if they saw the Capitalist model as merely a means to an end. Talk of social equality became passé in polite circles.

One of the results of this change was the growth in the importance of the financial industry and derivatives in particular. John Lanchester characterises this as an attempt to understand, control and make money from risk – part of a humanitarian attempt to abolish the idea of an incomprehensible fate and replace it with a rational, quantifiable study of chance and probabilities. Finance underwent a profound change in the process, a shift Lanchester describes as “equivalent to the emergence of modernism in the Arts – a break from common sense, a turn towards self-referentiality and abstractions and notions that couldn’t be explained in common English.” 

In a rational world, derivatives would be used solely to mitigate risk, but today they are more often used to increase risk – magnifying it – in the hope of increasing the reward. By their very nature however, they were not capable of recognising the unexpected, such as one of Nassim Nicholas Taleb’s “black swan events.” As a result, they became, as Warren Buffet so aptly named them, “weapons of mass destruction.”

When the Global Economic Crisis of 2008 hit due to the implosion of the house of cards that derivatives had become, it started to look as if Capitalism was being hoist by its own petard. Rather than being self-correcting via the market’s “invisible hand,” it had evolved into something that seemed to herald its own self-destruction, the victim of the very type of innovations Capitalism was meant to foster.

The financialisation of the markets, using technological sleights of hand to squeeze of fractions of a cent out of temporary arbitrage opportunities, managers looting companies by gaming the bonus system at the expense of shareholders and not being checked by fund managers – you name it – the crisis revealed a host of problems thrown up the deregulation of markets, touted as ‘necessary’ if you wanted economic growth.

While it all ended in tears, there is now a vacuum, no consensus as to the way forward. Instead the Right and the Left are equally determined to use the crisis as an opportunity to remodel the world economy in ways that suit their preferences. Moreover, both sides are in equipoise and determined to thwart the other.

The gridlock of the US Congress has been the major feature of American politics over the last three years. While the Democrats tried to move to centre (so that Obama governed in effect as a moderate Republican), the Republican leadership itself decided early not to co-operate. It figured if the stimulus succeeded, for example, Obama stood to get all the credit. If it failed, the Republicans could portray themselves as having been on the side of fiscal prudence. So committed was their opposition that they even opposed things that they supposedly supported, such as the Recovery Act’s deep tax cuts and emphasis on infrastructure. The Republican Senate leadership decided their primary goal was beating Obama by any means.

What really angered the Republicans was how the stimulus bill would be used as a tool to transform American society by promoting a low-carbon future, school and healthcare reform, and in creating government-sponsored jobs. Republicans believed all these should be left to the market, not picked by bureaucrats, while the latter should have been left to individual states. They are wedded to the belief that the American way was to let market forces do the repairs.

This goes to the heart of their philosophy: that it is business, not governments that creates wealth. Supply-side economists argue for example that it was WWII, not the New Deal that rescued America from the Crash of 1929 (which seems to ignore that the war itself acted as a giant government stimulus). In fact, the Republican base believes the Twentieth Century, at least following the advent of the New Deal, was a huge mistake, despite this being the period of America’s economic ascendancy. They wish to return to what they believe was a golden age when laissez faire Capitalism was unshackled from any social obligations.

Of course, success with the Federal Reserve’s quantitative easing has proved elusive for the Obama administration. This was the orthodox solution but it hasn’t worked as the panacea it was supposed to. Along with the bailout, it was meant to encourage the banks to start lending again. Instead they worried about new capital adequacy rules and raised the bar for borrowing to almost impossible heights for most (especially small) businesses. Lots of people felt the audacity of hope was over-promised and under-delivered without acknowledging that things could have be so much worse. They expected miracles and when the president failed to deliver many who voted for Obama last time lost the faith.

Conservatives reject the conventional wisdom that the answer to a severe economic contraction is government spending. As proponents of “free market Capitalism,” they say the Federal Government should have no role in bailing out failing firms and banks and instead should have allowed creative destruction free rein because without government intervention, businesses and markets would have recovered much more quickly. Conservatives also worry that increased spending will be supported by either printing money (leading to inflation) or borrowing money (driving up debt even more). They fear the time when all these bills will become due, and refuse to accept the idea that economic growth will solve the problem.

Given the rate of technological change, no modern economic crisis is the same as the last, but inevitably the only tools we have to use are the ones devised following previous crises. ‘We are always fighting the last war’ despite it being obvious things have changed. The situation in 1931 was also different as manufacturing facilities were idle where people could be employed and quantitative easing then helped with buying food, which meant farmers could buy farm equipment made by American workers in factories, triggering the start of a virtuous cycle. In 2009, however, there were no idle factories where people could be employed. Instead money was largely used for importing consumer goods from China – which benefited the most – while commodity prices boomed, benefiting the countries that produced them.

Today’s “anaemic” growth, meanwhile, is entirely due to private deleveraging over the past four years. While conservatives like to blame “regulatory uncertainty” for the low rate of growth, lack of demand is the real problem. It is ordinary folks, faced with the uncertain prospect of keeping their jobs that have been sitting on their wallets.

The single biggest issue that enrages conservatives is that the Obama chose to spend the money on trying to transform the American economy while trying to cushion the inevitable transition rather than on a flight to the moon, for example (something they might have supported). Republicans basically demanded that if any money came from government should be used for tax cuts.

There is also a strong suspicion that they would really have preferred a full-blown depression (which was missed by a whisker), as this would have allowed complete reform of the entitlement system. However, the problem with entitlements is that once they are in place, they are almost impossible to dismantle.

With the entry of Paul Ryan as Mitt Romney’s running mate, the upcoming US presidential election is starting to shape up as a real battle of ideas following the phoney war it has been up until now. It should help clarify what the important issues are between the visions of the two parties. While Romney has specialised in bland homilies and assumes new positions depending on what his pollsters told him, Ryan is unabashed in his ideological beliefs. (The accepted narrative is, however, that this is not entirely Romney’s fault; he had to go out to the extreme Right to secure the nomination and now has to try and segway back to the centre to win over the independents.) Ryan’s message meanwhile, energises the Republican base and the Tea Party with its small town, Norman Rockwell-view of America because it taps into visceral dislike of Washington, or any big city for that matter.

The notion that America faces a debt crisis caused by a government that taxes and spends too much is central to this, although the underlying premise of his ideas is not so much fiscal rectitude as small government. Ryan’s ideology was essentially shaped, as is often the case in America, by reading Ayn Rand when he was an adolescent. Neither philosophy or economics and, frankly, pretty dismal literature, Rand’s books paint an idealised picture of individual self-reliance: the iconoclastic businessman as James Dean. This goes to the heart of the debate about wealth, because both Rand acolytes and conservatives hold up rich people as the embodiment of American dream, which is why they see the Democrats threats to soak the rich as “class warfare.”

Ryan’s position is principled but also ideological. Even Newt Gingrich of all people, characterised Ryan’s budget ideas as “right-wing social engineering.” Rand’s ideas have had an enduring appeal amongst people who cleave to the notion that politics should be guided by clearly defined principles that transcend the petty compromises that usually plague politics in practice.

Like all ideologues, they are appalled by any necessity to compromise their ‘principles’, which will make their experience in governing – if they win – likely to be painful. This may well mean they end up disillusioned with democracy because it always involves messy compromises. If or when their programme fails, they will look around for someone to blame for “sabotaging” it. The tumbrels won’t be far behind.

We are now living in interesting times, as the Chinese curse attributed to Bill Clinton goes. The Global Economic Crisis hit the Western world in 2008, and despite momentary pauses, appears far from over. The question is whether this is just a momentary blip in the ever onwards trajectory of economic progress or whether we are facing something more profound.

Some, like The Economist magazine, have suggested this time is unlike previous corrections both in scale and scope. We now appear to be stuck in an interregnum between stages of the Industrial Revolution, between mass production and something entirely new. How long the new phase with take to be fully realised is almost impossible to guess, as a lag is inevitable.   

In the meantime, systemic risks remain. The financial system is still broken, with finance companies continuing use similar methods to make money out of money. The crisis of 2008 casts a long shadow. Not only did it show that financial companies can quickly implode, but that subsequent government rescues are highly unpopular with voters. Recently it was Knight Capital that almost hit the wall, exposing the new threat from high-frequency trading.

As The Economist magazine notes, “society needs a stock market to allocate capital efficiently, rewarding the best companies with higher share prices…but high-frequency traders are not making decisions based on a company’s future prospects; they are seeking to profit from tiny changes in price. They might as well be trading baseball cards. The liquidity benefits of such trading are all very well, but that liquidity can evaporate at times of stress. And although high-frequency trading may make markets less volatile in normal times, it may add to the turbulence at the worst possible moment.” And what if it had been a much larger firm? Politicians might hesitate before bailing out another big financial firm, especially if the cause was reckless trading.

Then if Romney and Ryan win the election, which they stand a reasonable chance of doing, their withdrawal of the stimulus could plunge the US into the deep depression it has so far managed to avoid.

Meanwhile the American elite fiddle as the US economy burns. But then maybe they are being smart. The wealthy always do best out of a financial crisis – the deeper the better – because even if they lose half their wealth, they are usually sufficiently cashed up to buy cheap at the fire sale that follows.

25^th August 2012

Around 17% of all malaria cases in the Cambodian-Thai border area of Pailin were drug-resistant in 2011, up from 10% the year before, according to Char Meng Chuor, director of the government’s National Malaria Centre. Chuor warned that the drug-resistant disease has also spread to other border provinces in Cambodia’s north and west, such as Preah Vihear and Pursat. The battle against it could have global ramifications if this parasite were to spread beyond the region.

On Thursday, health officials from Cambodia, Burma, Thailand and Laos gathered in Siem Reap province for a two-day meeting sponsored by the USAID to exchange information to try to come to grips to contain the threat from drug-resistant strain.

The challenge of drug-resistant malaria is more daunting in Cambodia than anywhere else in the world, according to the World Health Organisation’s malaria team leader in Cambodia, Steven Bjorge. With conventional treatment, it can take three days to eliminate the parasite from the patient’s blood, but in drug-resistant cases, it can take anywhere from five to 28 days to flush out the malaria parasite.

Drug resistance occurs when patients infected with the Plasmodium falciparum parasite fail to take a complete course of anti-malarial drugs allowing the parasite to evolve resistance to that medicine – a problem rife in Asia where people frequently stop taking medicine as soon as they feel better, often without consulting a doctor.

“Since then, every new drug seems to first become resistant in Cambodia or on the Thai-Cambodian border before anywhere else in the world,” Bjorge explained, saying drug-resistant malaria first evolved in Cambodia in the 1950s and 1960s.

Migration also contributes to the spread of the disease as people move from provinces where it is already drug-resistant and then are bitten in the new location resulting in the mosquito acquiring the parasite before passing it on to other victims.

One concern is that the proliferation of counterfeit medicines that are becoming a major problem in the region, according to Christoph Benn, director for resource mobilisation and donor relations division a the Global Fund to Fight Aids, Tuberculosis and Malaria.

“In the case of malaria, we should be serious about countering fake drugs in border towns. Some malaria-affected people buy drugs from the black market and these drugs may lead to the higher risk of artemisinin-resistant malaria. It’s dangerous and could spread to other areas,” Dr Benn said.

In the last two months, the WHO has been using a drug called Malarone in Pailin to stay ahead of the parasite, according to a report in today’s The Bangkok Post.

Another issue is the fall-off in funds dedicated to this battle as donors gradually become less willing to support programmes where significant amounts of the money are siphoned off by local officials. The Global Fund model, for example, is based on the concept of country ownership, but only offers continued financing on the condition that verifiable results are achieved based on audited results, but here are questions of how sustainable this approach is in practice.

This raises the difficulty that these local officials become the gatekeepers who are willing to prevent the roll out of programmes that have significant public – if not global – benefits if they cannot personally profit from it. Too often the local patronage networks prove stronger in determining the outcome, so that these international agencies find themselves forced to compromise if they want to see their strategy succeed.

Unfortunately, this simply perpetuates the problem.

The results of the Global Fund’s most recent audit of Cambodia have still not been released publicly, suggesting that it is probably highly politically sensitive, just as the annual donor round has proved.

24^th August 2012

International staff at the Khmer Rouge Tribunal have been reassured that the great boondoggle will continue virtually indefinitely.

The long-stalled attempt to indict additional top former Khmer Rouge cadres for alleged war crimes should gain some traction when a new American investigating judge is added to a UN-backed court in September, the United Nations Secretary-General’s Special Expert on the U.N. Assistance to the Khmer Rouge Trials, David Scheffer said in a recent interview in Bangkok, according to a report by Richard S. Ehrlich.

To be brought before the court are “former military commanders and former provincial chiefs, or leaders,” who were part of the Khmer Rouge regime between 1975-79, now all retired, who are currently being investigated for “war crimes and crimes against humanity,” Scheffer told reporters. These additional suspects – former second-tier military commanders and former provincial chiefs –  “are not yet indicted, so they are not defendants yet, they are just suspects, but they are under investigation,” he said.

“With the resignation of Laurent Kasper-Ansermet from Switzerland in March, effective early May, our choice was two-fold. One, we could walk away from Cases Three and Four, which some members of the Cambodian government were voicing their desire we do, or we could appoint a new international co-investigating judge and keep at it. And it is the latter that the UN decided we would do… If there are disputes, it will be in the hands of the pre-trial chamber. And we’ll let the court work its will.”

“So we put forward Mark Harmon of the United States to the Cambodian government for official appointment by the Supreme Council of the Magistracy to sit as a judge on this court,” Scheffer told the news conference. Harmon, regarded as a heavy hitter, had “an 18-year career as a top prosecutor of the Yugoslav tribunal. Prior to that that, he was a prosecutor in the United States” and is scheduled to arrive in Cambodia in September “as the new international co-investigating judge.”

Harmon and the other judges are now expected to determine how to proceed against these additional suspects in “Cases Three and Four.” This will likely set up another confrontation with the government here, which has strenuously, and largely successfully, stymied attempted to broaden the remit of the UN-backed tribunal.

Even Case Number Two is complex as it has three phases, and could possibly be spun on forever.

“We have the evacuation of people from the cities in 1975…and all the crimes against humanity that are related to that,” Scheffer said. “We have phase two, which is basically the detention camps and everything that happened in those camps. We have phase three, which is the genocide [committed] against the Cham, the Muslim population of Cambodia. How many years does it take to prosecute all three phases, of Case Two, against these three men?”

Scheffer didn’t say if they had figured out how to keep the case alive after the defendants died or succumbed to dementia but no doubt sharp legal minds are working on this.

To fund the court, Washington paid $US11.2 million from 2009 to June 2012, and has “already committed $US5 million for the 2013 cycle,” totalling more than $US16 million, Scheffer assured the Tribunal’s foreign staff, and that no one knew when the Tribunal would conclude.

The Japanese can always be pressured into giving more money and the pot of iron ore and coal at the end of the Australian rainbow can always be tapped to show that they are “responsible” members in the region.

Apparently a frisson of exciting passed through the international legal fraternity in their luxury apartments in BKK1. New SUVs have be ordered and new maids and drivers hired.