Hale hale whats next; unconventional wisdom on the future of the world economy (2011)

WHAT’S NEXT? WHAT’S NEXT? Unconventional Wisdom on the Future of the World Economy Edited by David Hale and Lyric Hughes Hale Chapter 21, "The Future of Corporate Compliance" is reprinted from "Corporate Compliance Practice Guide: The Next Generation of Compliance" with permission Copyright 2009 Matthew Bender and Company, Inc., a member of the LexisNexis Group All rights reserved Copyright © 2011 by David Hale and Lyric Hughes Hale All rights reserved This book may not be reproduced, in whole or in part, including illustrations, in any form (beyond that copying permitted by Sections 107 and 108 of the U.S Copyright Law and except by reviewers for the public press), without written permission from the publishers Yale University Press books may be purchased in quantity for educational, business, or promotional use For information, please e-mail sales.press@yale.edu (U.S office) or sales@yaleup.co.uk (U.K office) Set in Galliard Old Style type by Westchester Book Services Printed in the United States of America Library of Congress Cataloging-in-Publication Data What’s next? : unconventional wisdom on the future of the world economy / edited by David Hale and Lyric Hughes Hale p cm Includes bibliographical references and index ISBN 978-0-300-17031-3 (pbk : alk paper) Economic history—21st century David II Hale, Lyric Hughes Economic forecasting I Hale, HC59.3.W47 2011 330.9—dc22 2010053413 A catalogue record for this book is available from the British Library This paper meets the requirements of ANSI/NISO Z39.48-1992 (Permanence of Paper) 10 For our children, who have allowed us to travel the world : Aria, Erin, Devin, Harmony, Jennie, and granddaughter Cadence CONTENTS Preface Lyric Hughes Hale Introduction David Hale i western hemisphere economies The US Recovery David Hale The Canadian Economy: Prospects and Challenges Joshua Mendelsohn Mexico’s Interminable Transition—2011 and Beyond Timothy Heyman Is Latin America Changing? Pedro Pablo Kuczynski ii europe The World Bets on Europe, but the United States Will Probably Win Anatole Kaletsky iii asia Asia’s Paradigm Shift Louis-Vincent Gave Japan: Return to Normal Robert Madsen Japan: The Interregnum Goes On Richard B Katz iv southern hemisphere economies Prospects for Sub-Saharan Africa in 2010–2011 Keith Jefferis 10 South Africa After 2010 Iraj Abedian 11 It Didn’t Have to Be That Bad—The Counterexample of Australia Saul Eslake v reserve currencies 12 The Future of the US Dollar as a Reserve Currency John Greenwood 13 Will the Gold Rally Continue? David Hale vi the geopolitics of energy 14 In the Shadow of Peak Oil, Peak Carbon, Iraqi Nationalism, and Paper Barrels: The Oil Markets of the 2010s Albert Bressand 15 In the Aftermath of Iran’s Latest Revolution Narimon Safavi 16 Climate Change: Feasible Policy and Future Carbon Markets Brian Fisher and Anna Matysek vii crisis and reform 17 Were Banks Bust in 2009? And Did They Really Need Much More Capital? Tim Congdon 18 The Tobin Tax: Creating a Global Fiscal System to Fund Global Public Goods Andrew Sheng 19 Fiscal Imbalances, Economic Growth, and Tax Policy: Plucking More Feathers from the Golden Goose Jack Mintz 20 Dodd-Frank Financial Reforms Have a Broad Scope, and Will Likely Have a Modest Impact Michael T Lewis 21 The Future of Corporate Compliance Carole Basri viii neuroeconomics 22 The Human Side of Investment Decision-Making Thierry Malleret 23 The Diminishing Returns of the Information Age Mark Roeder Glossary Contributors Index PREFACE The current global financial crisis has exposed the limits of economic forecasting Or has it? Was it simply that the best voices were not heard over the media cacophony? Perhaps the data itself were misleading and inaccurate Perhaps as economic actors, bureaucrats, and politicians, we are too focused on immediate events to take the future into account, even though we know that we should Regulators might have underestimated the greed and cunning of Wall Street operators Or we, as human beings, just might not be wired to understand and predict the future Throughout this period of economic turbulence, my husband, economist David Hale, and I have been exposed to other voices that have helped us to make sense of the enormous changes that have taken place on a global basis since 2008 We have been informed by commentators whom we believe to be some of the best thinkers in the world Most of them are independent intellectuals, with no loyalty or responsibility to financial institutions, who are not well known outside of their area of expertise Our realization that not everyone has had access to these authors was the impetus for this book We began the grand task of asking these authors, many of them friends, to write about their vision for the future, based upon their respective fields of knowledge We hope this kaleidoscope of information and opinion will create a triangulated perspective that will allow our readers to formulate their own version of “What’s Next?” As the global financial crisis became a juggernaut, the public appropriately raised the question, why didn’t anyone, economists in particular, see this coming? What is the value of economic research? Two new closely allied fields, behavioral economics and neuroeconomics, have attempted to bring the human factor to bear on neoclassical theories Nobel Prize winner Paul Krugman has also blamed a reliance on what he calls mathematical elegance in economics Doubts about statistics, once largely confined to third world countries, and in particular China, have surfaced in first world countries The herd mentality, the weakness of financial regulatory bodies, and institutional deficiencies are now commonly discussed Seemingly benign technological advances are also seen as having a detrimental effect, due to the speed and interconnectedness of markets And globalization has created efficiencies and contagion effects simultaneously The small town in Norway, which lost its savings to international bankers selling “sure” investment instruments, would be an example of financial asymmetry As Berkeley economist Barry Eichengreen has said, “We now know that the gulf between fiscal imbalances, 256–263 fiscal policy: in Australia, xxiii, 147–149; in Canada, 21–22; in Europe, xx, 58–64; in Japan, xxi, 98–100; public debt and, 259–260; in South Africa, 138; in Sub-Saharan Africa, 120– 121; trends affecting, 258; in UK, 58–71; in US, xvii, 6, 10–11 fiscal stimulus, 12–13, 147–148 Fisher, Brian, xxvi flexible exchange rates, 250 food prices, Japan, 111 foreign direct investment (FDI): in Canada, 26–27; in Sub-Saharan Africa, 120 Foreman, Richard, 293 Foucault, Michel, 206 450 scenario, 190 Fox, Vincente, 35–37 fragile states, 123–124 France, 66 Frank, Barney, 264 Freddie Mac, xxviii, 265–266 free trade, 79 free trade agreements (FTAs), 5, 111, 112, 121 Fukuda, Takeo, 105 Fukuda, Yasuo, 105 full recourse mortgages, 16–17 Gabon, 119 Galicia, Joaquín Hernández, 34 gas glut, 194–195 Gave, Louis-Vincent, xx–xxi, 77 Gazprom, 192 GDP See gross domestic product (GDP) Generally Accepted Accounting Principles (GAAP), 280 Germany, xv, 9, 12–13, 57; federal deficit in, 68; government debt, 159–160; productivity losses in, xvi Ghana, xxii, xxv, 119, 127, 184–185 Gillard, Julia, 150 Gladwell, Malcolm, 276, 277 Glass-Steagall Act, 264 global economy See world economy global financial crisis: Australia and, xxiii–xxiv, 140–141, 149–150; causes of, 274–275; corporate compliance and, xxviii–xxix; end of, 3; government intervention in, 3–4; in Japan, xxi, 92; in Latin America, xix–xx, 50–51; in Mexico, xviii; as North Atlantic crisis, 139–140; public debt and, 256–257; in South Africa, xxii–xxiii; in Sub-Saharan Africa, xxii, 117 Globalive, 26 globalization, 79 global public goods, 254–255 global warming See climate change gold market, 170–171 gold prices, xxiv–xxv, 166–175 gold reserves, 168–169, 171 gold standard, 154 government-sponsored enterprises (GSEs), 264, 265–266 Great Moderation, 77, 78, 235 Greece, 122, 166 Greek debt crisis, xv, 9, 57 greenhouse gases, 219, 227 See also climate change Green Movement, 209–211 Greenwood, John, xxiv gross domestic product (GDP): country comparison, 30, 64; Latin America, 50–51; Mexico, 30, 36 H1N1 flu, 29 Hale, David, Harper, Stephen, 13, 16 Hatoyama, Ichiro, 105 Hatoyama, Yukio, 103, 105 health care expenditures, 258, 260 herd instinct, 288–289 heuristics, 287, 289 Heyman, Timothy, xviii, xix, 29 Hezbollah, 212–213 Highly Indebted Poor Countries (HIPC), 121 HIH Insurance, 142 Hinton, Les, 300 home mortgage interest deduction, 17, 144 Hong Kong, 164 housing sector: Australia, 143–145; Canada, 19–20; US, HST, 20 Hungary, 262 hydrocarbons, 181–183 income taxes, 6, 260–262 India, 204, 257 Indonesia, 7–8 industrial policy: Japan, 106–107; South Africa, 130–131 industrial production, country comparison, 65 infant industries, 106–107 inflation, 51, 82, 95, 166, 256 information: diminishing returns of, 292–301; freedom of, 295; processing of, 292–294; role of, xxix; selective consumption of, 295–297 infrastructure, 83, 131–132, 148 Institutional Revolutionary Party (PRI), xix, 29, 31, 35, 38, 43–45 interest rates, 166; Australia, 147; Canada, 22–23; gold prices and, 173 Intergovernmental Panel on Climate Change (IPCC), 219 international currency, 155–156 International Energy Agency (IEA), xxv international financial institutions (IFIs), 119, 121 International Monetary Fund (IMF), 119, 154, 162 Internet: impact of, xxix, 292–301; multilayer structure of, 295; perceptions of reality and, 298–300 investment banks, 239 Investment Canada Act, 26–27 investment decision-making, xxix, 285–291 Iran: 2009 election in, 205–209; civil society in, 208; economy of, 211–214, 217–218; Green Movement in, 209–211; military-industrial complex in, 212–213; modern, 204–206; political situation in, xxvi, 203–218; revolutions in, 206–208 Iranian citizens, 208–211 Iraq, oil production in, xxv, 186–189 Ireland, 166 Israel, 213, 217 Italy, 262 Japan: agricultural sector in, 110–112; current account surplus, 93; economic problems in, xxi, 92–101; economic reform in, 104; electoral changes in, 109–110; exchange rate policy, 98; export markets, 94, 95; fiscal deficits, 93, 98–100; fiscal policy, 98–100; government debt in, 160, 167; impact of financial crisis on, 92; industrial policy of, 106–107; labor rigidity in, 112–114; monetary policy of, 9, 96–98, 101; policy response in, 95–96; politics in, xxi–xxii, 102–114; productivity losses in, xvi; reforms needed in, 110–114; savings rate in, 88, 92–93; US demand and, 93–94 Japan Agriculture (JA), 110–111 Japan Air Lines (JAL), 113–114 Jefferis, Keith, xxii job losses, xvi Joint Oil Data Initiative (JODI), 183 Jones, Lupita, 35 Journalism Online, 301 Kahneman, Daniel, 289 Kaletsky, Anatole, xx, 57, 78, 82 Kan, Naoto, xxi, 97, 103, 105 Katz, Richard, xxi, 102 Kedrosky, Paul, 295 Kenya, xxii, 119, 126 Keynesian economics, 68–69 Kishi, Nobusuke, 105 Koizumi, Junichiro, 103, 108–109 Kosmos, 184–185 Krugman, Paul, 299 Kuczynski, Pedro Pablo, xix, 48 Kuhn, Thomas, 204–205 Kuwait, 184 Kyoto Protocol, xxvi, 222–224 labor costs, 69, 74, 85–87, 89–90 labor market: Canadian, 17–18; Japan, 112–114 Latin America, xv, 48–54; commodity boom and, 52–54; demographics, xx, 51; diversity of, 48–49; economic growth in, 51, 53, 257; financial crisis in, xix–xx; impact of financial crisis on, 50–51; reforms, 49–52, 53–54 See also specific countries LDP See Liberal Democratic Party (LDP) Legorreta, Eduardo, 34 Lehman Brothers, 3, 139–140, 234, 268 Lewis, Arthur, 86 Lewis, Michael, xxviii Lewis turning point, 87 Liberal Democratic Party (LDP), xxi, 102–114 Liberia, 127 Libya, xxvi like-minded communities, 296–297 liquefied natural gas (LNG), 194, 197 low-carbon energy economy, 189–191, 193–194 Lozano, Javier, 45 Lujambio, Alonso, 45 Madsen, Robert, xxi, 92 Malaysia, 204 Malleret, Thierrey, xxix Matysek, Anna, xxvi Mbeki, Thabo, 128 media, 297–301 Medicaid, Medicare, 5, 63 Mendelsohn, Joshua, xvii, 12 Mexico, 48, 50; under Calderón, 37–39; climate change and, 221; drug war in, 37, 38, 43; economic growth in, 51; economic recovery in, xviii–xix, 29–34; as emerging market, 45– 47; financial system of, 46–47; under Fox, 35–37; GDP per capita, 36; inflation in, 51; oil industry in, xviii–xix, 31, 32, 39–41, 52; politics in, 29, 31, 32, 34–38, 43–45; public finance in, 42–43; real GDP growth, 30; reforms needed in, xix, 39–44; under Salinas, 34– 35; security issues, 43; tax revenues, 42–43 Mintz, Jack, xxvii Molinar, Juan, 45 monetary policy: Australia, 147; Canada, 22–23; China, 10; differences between East and West, 83; Europe, 72–74; Japan, 9, 96–98, 101; US, 7–10 money supply, 72, 246–248 mortgage-backed securities, 237–239, 267, 268 mortgage insurance, 17 mortgage market: Australia, 143–145; Canadian, 16–17; Mexico, 47 Mota, Josefina Vázquez, 45 Motlanthe, Kgalema, 128 Movement for Democratic Change (MDC), xxii Mugabe, Robert, xxii Multilateral Debt Reduction Initiatives (MDRI), 121 multitasking, 293–294 NAFTA See North American Free Trade Agreement (NAFTA) Nass, Clifford, 293–294 National Action Party (PAN), 29, 31, 44–45 National Iranian Oil Company (NIOC), 206 national oil companies (NOCs), 186, 187–188 national savings, 88–89, 245–246 natural gas investment, 192 natural gas liquids (NGLs), 197 natural gas prices, 179 natural gas reserves, xxv, xxvi, 180–181, 204 Nava, César, 45 Negroponte, Nicholas, 296 network effects, 157–158 network externalities, 157 neuroeconomics, xxix, 285–291 neuroplasticity, 298 news media, 297–301 Nieto, Peña, 45 Nigeria, xxii, 126–127, 183, 184 North American Free Trade Agreement (NAFTA), 34, 35, 46 Obama administration: climate change and, 224–225; environmental policies of, xviii; fiscal deficits and, 10–11; Iran and, 207; policies of, 5; tax policy, Obrador, Andrés Manuel López (AMLO), 36–37, 45 OECD countries, problems facing, 80–82 Office of the Superintendent of Financial Institutions (OSFI), 15 offshore oil drilling, xviii–xix, xxvi, 41, 185–186 oil exploration, 182–183 oil industry, 179–202; aboveground constraints on, 183–185; in Brazil, 41–42; climate change and, 189–191; gas glut and, 194–195; Gulf of Mexico oil spill and, 185–186; investment in, 191–194; in Iran, 211–212; in Iraq, 186–189; in Mexico, 31, 32, 39–41, 52; in Nigeria, 126; oil demand and, 197–198, 201n34; peak oil and, 180–181; short-term factors in, 195– 197; technology and, 181–183 oil prices, 179–180, 195, 197, 198 oil reserves, xxv, 40–41, 180–183 online media, 297–298, 300–301 Organization of American States, 49 Organization of Petroleum Exporting Countries (OPEC), 187–188 Ortega, Jesús, 45 Oullier, Olivier, 289 overconfidence, 287 Ozawa, Ichiro, 104, 112 Pahlavi, Shah Mohammad Reza, 206 Pakistan, 204 Palestine, 217 PAN See National Action Party (PAN) Panama, 48, 49–50 paper barrels, 197–198 paradigm shift, 204–205 Parsi, Trita, 216 Party of the Democratic Revolution (PRD), 29, 45 payroll taxes, xvii, 261–262 Paz, Octavio, 35 peak oil, 180–181 Pelosi, Nancy, 11 Pemex, xix, 40–41 Peru, 8, 48, 49, 51–52 Petrobras, 41–42 police force, Mexican, xix, 43 political reform, in Mexico, xix politics: in Australia, xxiv, 150; in Brazil, 33; in Iran, xxvi, 203–218; in Japan, xxi–xxii, 102– 114; in Mexico, 29, 31, 32, 34–38, 43–45; in South Africa, 128; in US, 5–6, 269–270; in Zimbabwe, 125 pound sterling, 153–154, 161 power supply problems, in Southern Africa, 124–125, 131 PRD See Party of the Democratic Revolution (PRD) PRI See Institutional Revolutionary Party (PRI) productivity gains, xvi, productivity lags, in Canada, 26 Project Kuwait, 184 protectionism, 24–25, 27 public debt, xxvii–xxviii, 81; global financial crisis and, 256–257; US, 5–6 See also fiscal deficits purchasing power parity, 245 Qajars, 206 quantitative easing, xvii, 7–8, 24, 96–97, 173 rand, 136, 137 rating agencies, 267, 268 rational choice theory, 286 reading skills, 293 real estate market: Australia, 143–145; Canadian, 16–17, 19–20 reality, perceptions of, 298–300 regional economic communities (RECs), 121–122 regulatory reform, 120 Rengo, 112 renminbi (RMB), 163–164 Republican Party, xvii, 6, 12–13, 63, 269–270 Reserve Bank of Australia, 144, 146–147 reserve currency, xxiv; alternative, 158; decline of British pound as, 153–154; euro as, 158– 160; requirements for, 156–158; RMB as, 163–164; synthetic currency as, 161–163; US dollar as, 153–165 residential construction, resource nationalism, 185 Ricardian equivalence, 71 Rich, Frank, 299 risk assessment, 276–277 RMB See renminbi (RMB) Roeder, Mark, xxix Rosenberg, David, 285 Roubini, Nouriel, 285 Rousseff, Dilma, 33 Rudd, Kevin, xxiv, 150 Rueff, Jacques, 82 Russia, 184, 192, 194–195 Rwanda, 126 Safavi, Narimon, xxvi sales taxes, 262 Salinas, Carlos, 34–35, 47 Santos, Juan Manuel, 33 Sarbanes-Oxley (SOX), 271–276 Sarkozy, Nicolas, 81 Saudi Arabia, 189, 192–193, 195, 257 savings rates, 88, 92–93, 245–246 Scandinavia, 113 Schäuble, Wolfgang, security, in Mexico, xix, 43 shale gas, xxvi, 181, 186, 194 Shanghai, 245–246 Sheng, Andrew, xxvii Shiller, Robert, 285 Shirakawa, Masaaki, 97 Sierra Leone, 127 Simon, Herbert, 286 Simpson, Alan, 11 Singapore, 93, 221 social safety net, 113 Social Security, 5–6, 63, 258 solar power, 125 Soltan, Neda Agha, 205–206 Somalia, 126 South Africa, xxii; cabinet structure, 134; economic growth in, 128–129; economic recovery in, 125; federal deficit of, 137–138; FIFA World Cup in, 124; finance sources for, 119; fiscal policy of, 138; fiscal reforms in, 129–130; government failures in, 133–134; impact of global financial crisis on, xxii–xxiii; lack of infrastructure in, 131–132; macroeconomic policies in, 135–137; policy failures in, 130–132; politics in, 128; power supply problems, 124–125, 131; reforms needed in, 133–134; structural challenges in, xxiii, 128– 130; under Zuma, 134–137 South African Revenue Services’ (SARS), 129 Southern African Customs Union, 125 Southern African Development Community (SADC), 122, 125 South Korea, 88, 111–112, 221 Spain, 257 Special Drawing Rights (SDR), xxiv, 158, 161–163, 165 SSA See Sub-Saharan Africa sterling, 153–154, 161 stimulus program: Australia, 147–148; US, 4, 13 stress tests, on banks, 63 subprime mortgages, xxviii, 17, 94, 143 Sub-Saharan Africa (SSA): banking system, 120; Chinese influence in, 122–123; economic integration in, 121–122; economic outlook for, xxii, 117–127; economic recovery in, 118– 119; finance sources for, 119–120; fiscal reforms in, 120–121; problems of conflict and fragile states in, 123–124; regional developments in, 124–127 Sudan, 124 Sunstein, Cass, 291 Sweden, 113 Switzerland, 93 synthetic currency, 161–163, 165 Taiwan, 7, 88, 171 Tanzania, 126 TARP See Troubled Asset Relief Program (TARP) tar sands industry, xviii tax cuts, xvii; in Canada, xviii; in US, taxes: Canada, 20; consumption-based taxes, 261–263; corporate taxes, 260; energy taxes, 260; excise taxes, 262; income taxes, 6, 260–262; payroll taxes, 261–262; sales taxes, 262; Tobin tax, xxvii, 250–255; turnover tax, 253–255; value-added tax (VAT), xxviii, 6, 43, 262 tax policy, xxvii–xxviii; Canada, 20, 26; Mexico, xix, 42–43; public debt and, 259–260; South Africa, 136; US, 6, 60, 260–261 technology: climate change and, 227; hydrocarbons and, 181–183 telecoms, 26 television, 298 Term Asset-Backed Securities Loan Facility (TALF), 277 testosterone, 290 Thailand, Thaler, Richard, 291 Tobin, James, 250 Tobin tax, xxvii, 250–255 “too-big-too-fail” bailouts, 266, 267, 268 total factor productivity (TFP), 87 toxic securities, 238–239 transparency, 280–282 Trichet, Jean-Claude, 237–238 Triffin Dilemma, 252–253 Troubled Asset Relief Program (TARP), 3, 277 turnover tax, 253–255 Tversky, Amos, 289 Uganda, xxii, xxv, 126 unemployment rate, xvi, United Kingdom: climate change policy of, xxvi; domestic demand in, 140; as financial capital, 244–245; fiscal deficit in, 257; fiscal policy of, 59, 71; government debt in, 160– 161; Tobin tax and, 251–252 United Nations Development Programme (UNDP), 184 United Nations Framework Convention on Climate Change (UNFCCC), 220–222 United States: banking sector in, xxvii, 235–241; Canada and, 13–14, 24; climate change and, xxvi, 224–225; corporate sector in, xvi, 4, 8; economic recovery in, xvi–xvii, 3–11, 13– 14, 65–66; as engine of world demand, 96, 140; environmental policies, 5, 27; financial system of, 157; fiscal deficit in, 10–11, 70, 257; fiscal policy of, xvii, 6, 10–11; fiscal stimulus program in, 4; government debt, 160; growth rate in, 5, 13–14; household sector in, 8; housing sector in, 9; industrial production in, 65; monetary policy of, 7–10; partisan politics in, 5–6; politics in, 269–270; productivity gains in, xvi, 4; public policy of, xvi– xvii; stimulus measures in, 4, 13; tax policy of, 6, 63, 260–261 Uribe, Alvaro, 33 Uruguay, 48, 49–50 US consumers, xv US dollar: alternatives to, 158; devaluation of, xvii, 7, 25; gold prices and, 173–174; as reserve currency, xxiv, 153–165; weakening, and commodity prices, 53 US government securities, 160 value-added tax (VAT), xxviii, 6, 43, 262 Van Alstyne, Marshal, 296 Venezuela, 48–49, 50, 51, 183 Volcker Rule, 267, 268 web-based communities, 296 Weber, Alex, 285 welfare expenditures, South Africa, 137–138 Wellink, Nout, 248 West Africa, xxii, 126–127 Westphalian system, 251 World Bank, 119, 154 world economy, 12–14; in 2010–2011, 94–95; recovery of, xv; trends underpinning, 78–80 yen, xxiv, 9, 97, 98, 167 yield curves, 82–83 Yoshida, Shigeru, 105 Zambia, 118, 125 ZANU-PF, 125 Zapatistas, 35 Zedillo, Ernesto, 35 Zimbabwe, xxii, 125 Zoellick, Robert, 169 “zombie” firms, 112 Zuma, Jacob, 125, 128, 134–137 ...WHAT’S NEXT? WHAT’S NEXT? Unconventional Wisdom on the Future of the World Economy Edited by David Hale and Lyric Hughes Hale Chapter 21, "The Future of Corporate Compliance" is reprinted... that one of the legacies of the recent crisis could be a greater willingness to listen to them Mark Roeder analyzes the role of information in the modern economy Roeder notes that the spread of the. .. emergence of three billion new producers, creation of a global economy, and the great moderation of steady low-inflation economic growth, and financial innovation The financial revolution that