The course Shinzo Abe is following is not unique to Japan. Central bankers, by following Japan, are making the same mistake over stimulus and reforms. Stimulus alone without the most important part, reforms, is simply a recipe for trouble
Has the Japanese prime minister Shinzo Abe found the secret formula? After almost two decades of stagnation, Japan looks like it is recovering. The growth rate has not risen above 2% since 1993, but the first quarter of 2013 the rate was 3.5%. The stock market, even after its recent tumble, has risen almost 70% in yen terms over the last year, an astonishing rise. Even the demand for high-end sexual favours, “highly technical” massages costing 60,000 yen ($600) a session, has gone sky high. What has Abe done to perform this miracle? Actually more of the same.
Abe’s plan, generally known as Abeconomics, is very similar to what Japan has been trying since its stock market collapsed in 1990. They provided monetary stimulus by keeping interest rates near zero. They also provided fiscal stimulus that has increased their debt to the highest in the world, about 240% of GDP (gross domestic product). They even tried quantitative easing, a program they considered a failure.
Abeconomics also involves these elements. It just does so, on a massive scale. Abeconomics requires a 10.3 trillion yen fiscal stimulus. The new governor of the Bank of Japan, Haruhiko Kuroda, appointed by Abe intends to double the monetary base through an unprecedented program of quantitative easing. These are two parts of Abe’s plan, which he calls the three arrows, after a Japanese fable. The third arrow is regulatory reform. The problem is that he has the order of the policies wrong. For the program to work, the hardest part, the regulatory reform has to work. Without the legal reform, the first two arrows will end in disaster.
But the course that Abe is following is not unique to Japan. It is being followed by central bankers all over the world. But they all are making the same mistake. Stimulus alone without the most important part, reforms, is simply a recipe for trouble.
Japan’s prosperity was built by its export prowess, but its local business climate has ossified. It is the home of six of the world’s oldest continuous businesses going back over 1,000 years. Japan ranks 24th in World Bank’s Doing business rankings behind countries like Georgia and Malaysia. It ranks 127th for paying taxes and 114th for the starting a business.
Like many countries it has outdated labour laws. Its lifetime employment system favours older workers. These laws make firing full-time workers almost impossible, so Japan relies on part-time workers. Part-time workers are not worth the cost of training and less expensive than better educated university graduates. Changing jobs is difficult and productivity per worker is between 60% and 70% of US levels.
Another common complaint is the retail sector. Like India, Japan has a large number of small stores. In the US most of these stores would have been replaced by larger chains. They are not prohibited as they are in India, but a combination of zoning laws, taxes and subsidies keep the retail sector inefficient to the detriment of consumers.
Land use and agriculture are also hampered by restrictive laws, taxes and subsidies which distort the sector. Japanese farmers produce 4.6 trillion yen ($45 billion) a year, but consume 4.6 trillion yen in subsidies. The average age of Japanese farmers is 66 and they farm postage stamp plots of 1.9 hectares. Zoning and tax laws make houses difficult to build and expensive to sell, so almost all Japanese houses are one of a kind constructed by small firms using non-standard materials and methods.
Attempts to reform these and other laws is not something that started with Mr Abe. But any reform in Japan, and almost every other country, is up against powerful vested interests. These vary between jurisdictions. In Japan they include unions, older rural voters, business organizations and especially Mr Abe’s own party—the LDP. The LDP has been in power almost continuously in the post war period. Its dominance was built on this coalition and it will be loath to take it apart. Additional stimulus either fiscal or monetary in such a rigid environment only temporarily masks the problems and blunts the urgency of reform.
The Japanese problems would be very familiar to Europeans. France has a vast regulatory structure and exceptionally restrictive labour practices. France also has closed markets for goods and services in areas such as energy and the professions. Its socialist president, François Hollande, was elected on a platform that rejected changes necessary to cope with globalization and has little interest in remodelling a system that benefits his supporters.
Countries in Europe that are making the largest reforms are the ones that have to, Spain, Portugal and Greece. Spain has made a start in changing its labour system that like Japan favours older workers. Portugal is trying to speed up its courts and licensing system and free smaller employers from collective bargaining obligations more suited to larger businesses. Greece has closed its competitiveness gap for its labour market by 50%.
But these reforms may not result in growth for the countries that need it most, because the Eurozone has not moved on centralizing its banking system. Until it gets a unified regulator and cross-border deposit guarantees, it will, no doubt, experience another financial crisis. Germany has made it very clear that such reforms are not in the foreseeable future.
China’s rapid recovery from the recession has been based on a wall of money. Starting with a tripling of new loans in 2009, Chinese banks have been providing massive stimulus but thanks to a system dominated by entrenched interests, including the most entrenched of all, the Communist Party, the money has become less and less beneficial. China’s rate of growth has been falling steadily since late 2009. It now takes nearly 3Rmb of credit to generate 1Rmb of growth. State owned enterprises (SOEs) in China produced 358.9 billion yuan of dividends. But 330.9 billion yuan was remitted back to these SOEs on top of 173.6 billion yuan in government subsidies. Chinese stimulus not only hides the problems, but stores up massive amounts of bad debt for a future catastrophe.
Central bankers in their heart of hearts truly believe that they are the great and wise, a force for global good. The reverse is true. By sparing the rod of recession they have delayed the efficiency of the creative destruction process at the heart of capitalism. They have allowed governments and politicians with a sufficient illusion of growth to delay unpopular, but necessary reforms. Without reform the additional stimulus is simply allocated to ever more inefficient parts of the economy stifling growth, slowing the economy and bringing the moment of collapse ever closer.
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)
Justifying the decision to treble LIC’s investment limit, Financial Services secretary Rajiv Takru said the insurance major was sitting on trillions of rupees which have to be invested
The government will soon notify the increased equity exposure limit for Life Insurance Corporation of India (LIC) to 30% following green signal from the Insurance Regulatory and Development Authority (IRDA), a top finance ministry official has said.
“The issue (of increasing equity investment cap for LIC from 10% in a listed company to 30%) has been taken up with the regulator and it will get notified soon. It was addressed to IRDA at the last broad meeting,” Financial Services secretary Rajiv Takru told reporters over the weekend, after the board meeting of the insurance giant.
Justifying the decision to treble LIC’s investment limit, Takru said the insurance major was sitting on trillions of rupees which have to be invested.
“There is an urgent need to develop an in-house capacity for proper assessment of investments. This is also needed to ensure that LIC can meet expectations of its policyholders”, he added.
As part of its efforts to meet the Rs 30,000-crore divestment target, the government last November had trebled the investment cap of LIC to 30% from 10%.
However then IRDA chairman J Hari Narayan had opposed the move.
Hari Narayan went public with his opposition to the government plan saying the move is ‘imprudent’ and would trigger take-over code norms under the existing SEBI norms, which in turn would make the insurer a majority stakeholder in companies which are not directly related to its core business.
He had further argued that insurers and pension funds should be ‘conservative’ in investing in corporates unlike VCs (venture capitalists) that are allowed by SEBI to invest up to 30% in a company.
According to new takeover code norms, any company acquiring 25% in another firm has to make an open offer for buying another 26% from the public.
LIC has been the last resort for the government to salvage its divestment efforts. For instance, when the government sold 5% in ONGC last year, it was LIC that came to the rescue of the issue at the last minute.
By February, meanwhile, IRDA allowed LIC and other large private insurers could invest up to 12%-15% in a listed company, depending on the size of the controlled funds which include only non-unit linked funds and shareholder funds.
While nearly all private insurers have most of their investments in unit-linked funds, LIC has over Rs12.5 lakh crore in traditional funds.
“IRDA believes that this is commensurate and appropriate given the size of funds under consideration without adversely affecting the prudential management of investments,” the regulator had said in a statement.
LIC has also been seeking higher investment caps. The state-owned insurer had said that given its portfolio of over Rs14 lakh crore, limiting its investment to 10% of the investee company will force the corporation to shun several blue chips where it was close to the investment cap.
Despite over two dozen private players, LIC still enjoys 83% of the domestic insurance market, Takru said, adding that it shows there is no real competitor in the market.
He also said, as part of growth strategy LIC has been asked to open 1,800 branches this year mostly in those areas with over 10,000 population.
Far too many glitches in banks' IT systems affect consumers adversely. Who checks whether redressal systems exist and operate in a fair and equitable manner? RBI should work at depositors' protection instead of sitting in an ivory tower and producing reports on "disincentivising cheque usage" by penalising depositors
One of the many issues that Moneylife has taken up with the Reserve Bank of India (RBI) is the need for a technology audit of banks and the systems and processes that they adopt. While RBI’s department of supervision inspects banks, it is not clear if this covers the core banking technology that now drives all big bank operations. Over the years, individual banks have often configured systems in a manner that hurt depositors’ interest. And, since technology changes are complex and outsourced, the process of incorporating even small, but necessary changes is both cumbersome and expensive.
For instance, a few years ago, HDFC Bank insisted that it could do nothing about the fact that its system was configured to deduct TDS on fixed deposits from the principal, if the accumulated interest was insufficient in the quarter that it was deducted. Another bank auto-debited one more EMI (equated monthly instalment) when a loan was closed through pre-payment. It saw nothing wrong in dipping into the customer’s funds because its systems were badly configured. Such problems continue to be detected and depositors are left to the mercy or goodwill of the concerned banks to set things right. Here are a few issues that cropped up in the month of May 2013.
On 10th May, Moneylife reported how “a human error in setting parameters” at the State Bank of India (SBI) led to a 40% tax deduction at source (TDS) from tens of thousands of special term deposits. The reversal process is complex because its automated systems had done a lot more than merely deduct tax at source. When accumulated interest wasn’t sufficient to cover the TDS, the deposits were prematurely broken. The process cannot be reversed automatically by re-creating the deposits, since the principal was already credited to the respective savings accounts without informing customers.
Most of us expect our banks to be accurate in their calculations and do not even check for errors. But Moneylife reader Naresh Nayak, a techie, says, he got SBI to reverse a wrong deduction of nearly Rs52,000 in 2010 and has found similar errors earlier too. Mr Nayak says, “The TDS deduction system has a glitch. It cannot ascertain the amount of interest accrued for a financial year for deposits that span across financial years. In these cases, it incorrectly calculates a higher amount of gross interest accrued.” We checked with TCS Limited, which has supplied the core banking software to SBI, its officials pin the blame on bank officials for entering wrong parameters.
On 12th May, clients of a payment gateway received this email: “This is to inform that, due to a technical issue we are facing fluctuations in processing transactions in SBI & HDFC Net banking payment options. This will impact customers who try to avail products/services on your website and choose to use SBI or HDFC Net banking payment option… We are in communication with the bank teams and we will update you once the issue is resolved. Inconvenience caused is deeply regretted. Feel free to get in touch with us, in case of any queries or clarifications.”
We checked. SBI told us that “there were no fluctuations” but its Internet banking was not available until Sunday for a planned upgrade. HDFC Bank took the issue more seriously and insisted that the payment gateway company must clarify the issue. So, on 13th May, it sent out an email saying, “earlier communicated fluctuations in processing payments using HDFC Net Banking payment option has been resolved. We apologize for the inconvenience caused.” So it confirms the technology issues, right? Well, think again.
Even more furious, HDFC Bank demanded a further clarification. So, on 14th May, there is a third clarification from the payment gateway saying that the 12th May email about fluctuations in HDFC Bank Net banking payment option “due to a technical issue, was erroneous. There was no technical issue and unavailability during that period was due to scheduled downtime. Inconvenience caused is deeply regretted.” Since Moneylife was asking the questions, we know why three emails were sent, but won’t other customers be totally flummoxed?
An e-voucher is a wonderful way of offering discounts and benefits for most companies. But, when it comes to a bank, is there a danger that the idea will become a phishing-magnet? What happens if cyber criminals produce authentic looking e-vouchers where the net banking details, PIN and password are captured by hackers? This is a question we asked HDFC Bank which sent out e-vouchers for Rs250 each earlier this month. The Bank accepted that the fears were genuine and that it could be misused and decided to drop the idea. But should such experiments be a matter of trial & error when it exposes customers to risk and hardship?
At Moneylife, we think that RBI as a banking regulator needs to have a crack IT team that is constantly monitoring the various tricks deployed by cyber-fraudsters to dupe gullible and not-so-tech-savvy people. This group must be mandated to conduct a technology audit of bank systems and software. It must also investigate all technology-related complaints including ‘unstable systems’, wrong deductions and excessive vulnerability to phishing attacks.
And, it must be the first on the scene when new kinds of tech crimes are reported so as to provide direction to the banking ombudsman on complaints relating to hacking, misuse of credit and debit cards through cloning, loss of customer data and the constant innovations in phishing techniques. RBI should work at depositors’ protection instead of sitting in an ivory tower and producing reports on “disincentivising cheque usage” by penalising depositors.