Changing the international monetary system

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THINK ASIAN By ANDREW SHENG

ON Oct 5, 2011, the Triffin International Conference celebrated the 100th year of birth of Robert Triffin, a Belgian economist who was trained in Harvard, worked in the US Fed, taught in Yale and then returned to Europe to help work on European monetary integration.

He was of course famous for the Triffin Dilemma, defined as the inconsistency between the domestic needs of the reserve currency country and the external needs of the world that uses the reserve currency. Put in another way, Triffin identified that the reserve currency country would have to run a current account deficit in order to provide the world with greater liquidity.

Over the long term, running cumulative current account deficits becomes a large debt overhang that is called the Global Imbalance.

Triffin wrote about the Dilemma in the late 1960s, when the United States was struggling whether to maintain its peg to gold, which it abandoned in 1971. This removed the anchor of the Bretton Woods system of fixed exchange rates, which had been in existence since 1947.

The succeeding Bretton Woods II, or non-system as some critics call it, has become a system of flexible exchange rates, plagued by financial crises every decade in the 1980s (Latin America), 1990s (Mexico and East Asia), 2007-9 (US subprime) and today, the European debt crisis.

Today, there is sufficient awareness that the shift from a unipolar world to a multipolar global financial system carries with it great risks and unknowns. The unipolar world of dominance by the US dollar had a lot of advantages, as long as the US remained the unchallenged hegemonic power. The US dollar became not only the standard unit of account for global trade, but also the deepest and most liquid market and an important store of value.

The price of oil, gold and other important commodities are all measured in US dollars. The US Treasuries market is the most liquid and efficient clearing system, which is one fundamental reason why the dollar remains superior to the euro, which does not have a single eurobond market, being divided into different national (German, French, etc) bond markets.



According to the BIS (Bank for International Settlements) April 2010 survey data, the US dollar today still accounts for 85% of global foreign exchange trading, compared with 39% for the euro, 19% for yen and 13% for sterling (because FX transactions are paired, total turnover sums up to 200%). By contrast, the Hong Kong dollar accounts for only 2.4% and the yuan 0.9% of turnover.

Because of its dominance in international trade and payments, the US dollar still accounts for nearly two thirds of total foreign exchange reserves. China alone reputedly holds roughly US$2 trillion in US dollar assets in the foreign exchange reserves and holdings by Chinese banks and state-owned enterprises.

In 2009, People's Bank of China Governor Zhou Xiaochuan called for the use of the SDRs (International Monetary Fund's Special Drawing Rights) as a possible global reserve currency. The logic for a globally issued reserve currency as opposed to a nationally issued reserve currency is impeccable. Nationally issued reserve currencies are subject to the Triffin Dilemma, because countries, however strong, will sooner or later go into deficit.

In other words, the whole global financial system is stable when the national reserve currency country is strong, but it will go into crisis, when the national reserve currency country goes into crisis. This is the current state of affairs.

The four reserve currency countries (US, euro area, Britain and Japan) accounting for just under 60% of world GDP are all in deep trouble. The US is running a current account deficit in excess of 3% of GDP and a fiscal deficit over 9% of GDP in 2011. At the end of 2010, the US had a gross foreign liability of US$22.8 trillion or 157% of GDP. Thank goodness that most of the debt is in US dollars, so that it can devalue its way out of debt.

The euro area as a whole has a smaller current account deficit of 0.5% of GDP, but if you look deeper, there are deep imbalances within the eurozone. Germany, the Netherlands and a few are in surplus, whereas the smaller countries like Greece, Portugal, Ireland and Spain all have net foreign liabilities exceeding 50% of GDP, an indicator of crisis using the Asian crisis experience as rule of thumb.

Britain has a fiscal deficit of 8.8% of GDP and gross debt of 81% of GDP. Its one advantage relative to the Euro is that it can devalue its way out of debt.

Japan, on the other hand, has a net foreign surplus of 50% of GDP, being a major net lender to the rest of world, since it runs a current account surplus of 2.3% of GDP. Its vulnerability is, however, its large domestic gross debt of 220% of GDP, growing larger every year with fiscal current account deficit of 8.3% of GDP in 2011. This means that the domestic debt is vulnerable to bubble implosion, because if interest rate rises, the debt becomes unsustainable.

In sum, the reserve currency countries are in a double trap. They have to run loose monetary policy to keep interest rates low, so that their fiscal debt will not run out of control. But their central banks also know that exceptionally low interest rates are distorting not only global financial markets, they also have very distortive impact on their domestic resource allocation.

This is the liquidity debt trap that Japan got into in 1990 when its asset market bubble burst following the sharp rise in the yen exchange rate. Japanese GDP growth never fully recovered after that. Reserve country status has not been a privilege, but a curse.

The emerging markets are struggling because the present international monetary system has become unstable and unsustainable. How should this essentially unipolar system be reformed to a multi-polar system where yuan plays a role will be the subject of the next column.

l Tan Sri Andrew Sheng is president of the Fung Global Institute.

Malay Politics Playing a Different Tune!

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Politics playing a different tune

ANALYSIS By JOCELINE TAN

Malay politics is very personality-driven but it is also becoming celebrity-driven and the trend has caught on as both Umno and PAS vie to attract glamorous names to their side.

SOME people imagine that election fever is about to descend on us but for political parties hoping to cover new ground, it has been a case of celebrity fever.

Umno Youth’s latest celebrity connection is via pony-tailed Malay rocker Awie.

Awie and several other entertainment personalities have come onboard Umno Youth chief Khairy
Jamaluddin’s latest brainchild – a sort of Justin Bieber-inspired music talent show where aspiring artistes upload their performances on the Internet.

The established artistes will then pick through the videos and the finalists will vie for the top spot at a finale at the Umno PWTC headquarters.

Khairy described it as a new approach to source for talents in music.

But who is he kidding? It is Umno Youth’s latest attempt to get the attention of the young and it is a pretty cool idea. And if all goes well, Khairy should get the prize for most original idea by a political party to get Generation Y’s attention.



Umno Youth’s effort is a value-added response to Bob Lokman joining PAS in February.

Bob does not have the rocker appeal of Awie but he was famous in the Malay entertainment scene and his grandfather was the revered Tok Kenali of Kelantan.

He acted in a variety of movies including as an ustaz. He had a popular series called Taxi Tunai and his last major showbiz appearance was as a jury in the reality show Raja Lawak. He is also the composer of mega-hit Isabella, made famous by Search.

But Bob, now 47, has walked away from all that and is making waves as a crowd-puller at PAS ceramah. He has helped to modernise the party’s image among the Malay middle ground.

His physical appearance has become more PAS than even the long-time PAS members. He is rarely seen without his white kopiah and now sports a bushy and wiry black beard.

Bob, whose real name is Mohd Hakim Lokman, has been used as the “opening act” at PAS ceramah all over the country. There is no denying his impact.

He is said to have gone through some family crisis and his talks often start with an account of how religion gave him a new lease in life, and how PAS has met his spiritual needs.

PAS considers him such a big catch that he is featured alongside Datuk Nik Aziz Nik Mat on banners.
PAS has come a long way since the day s when it frowned upon music at its functions.

Earlier this week, Bob was hauled up by the Selangor Islamic Religious Department (Jais) for giving a religious talk in a mosque in Hulu Langat without tauliah (accreditation).

Jais does not care whether the speaker is a famous mufti or a celebrity; it is very strict about people from outside the state preaching without tauliah.

Umno Youth’s celebrity hook-up is somewhat different. It is borrowing on the fame of Awie while drawing in the younger cohorts through music and entertainment and via a channel that has become such an integral part of young lives – the Internet.

“It’s a way to attract young and first time voters.

“Young Malays have different aspirations; they are not keen on politics or serious issues, let alone ideology. Music and showcasing people like Awie will help us tap into this group,” says Pasir Salak politician Dr Faizal Tajuddin.

Many celebrities are actually quite wary of being associated with any particular political party. The Malay consumer market is not as extensive as, say, Indonesia; and if the supporters of one party reject you, it could take a huge chunk out of one’s marketability.

However, says Dr Faizal, some of entertainment’s biggest names have no qualms about being associated with Umno.

Film maker Tan Sri Jins Shamsud­din is a Barisan Nasional senator, crooner Jamal Abdillah signed on with Umno recently and songbird Datuk Siti Nurhaliza has performed at Umno gatherings.

Bob is not the first rocker to associate with PAS. Before him, there was the long-haired rocker Akhil Hayy, whom PAS people called the “ustaz rocker”.

But his appearances at PAS events dwindled off after he divorced his first wife to marry another celebrity, Wahida.

Malay politics, already personality-driven, is also becoming celebrity-driven.

Observers of subcontinental In­­dian politics say it is hardly new. Some of India’s most successful politicians were movie stars, such as the late MGR and former leading lady Jayalalita, who is currently the Chief Minister of Tamil Nadu.

The White House had Ronald Reagan and California had the Terminator Arnold Schwarzenegger. And who can forget former Philip­pines president Joseph “Erap” Estrada, whose politics was more colourful than his acting career.

The day when a Malaysian artiste makes it big in politics may not be too far away, and as one cynical journalist put it: “After they become politicians, they can continue to entertain us with their antics.”

Can politicians also make the transition into acting? Why not? So many of them are already such good actors.
But the reality is that most politicians are actually quite staid and serious.

Otherwise political parties would not be trying to attract artistes and entertainers to add glamour and glitz to their agenda.

The 1911 Xinhai Revolution, a defining moment for China

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Midweek By Bunn Nagara

The 1911 Xinhai Revolution’s 100th anniversary, more than any other event in China’s long history, marks its modern coming of age.

GIVEN their shared history of war, few events marked by both Beijing and Taipei are happy occasions with common aspirations.

The 1911 Xinhai Revolution and its anniversaries are perhaps the greatest of these exceptions.



The 100th anniversary of this historical event, marked on Monday, shows the mainland and the outlying island at their closest point politically.

Chinese on both sides of the Taiwan Straits hail the Xinhai Revolution for throwing off 2,000 years of oppressive dynastic rule. The event 100 years ago practically created modern China.

In contrast, the 1949 communist revolution is only 62 years old, and merely characterised contemporary China.

Characterisations of a nation, particularly of a large country with a rich history and culture, tend to be more limited in scope and impact.

Besides, the birth of Mao Zedong’s communist movement is celebrated only on the mainland, and even then by a diminishing circle of the party faithful.

It is almost universally rued in Taiwan.

The Xinhai Revolution however, as a defining moment for the Chinese nation, has also become a unifying factor for Chinese history and culture.

Its 100th anniversary in particular shows the event to be the biggest political occasion for both sides of the straits, while acting as a bridge between them.

It also serves as fertile ground for nurturing modern Chinese nationalism. This year’s anniversary pays great tribute to Dr Sun Yat-sen, a leading pioneer of the Xinhai Revolution.



Beijing stressed two key goals for the Chinese nation: rejuvenation and reunification. President Hu Jintao traced the pursuit of national rejuvenation to Dr Sun’s struggle, while his emphasis on peaceful reunification drew from an aspect of China’s “peaceful rise”.



In swift response, Taiwan’s President Ma Ying-jeou identified the Xinhai Revolution as the common heritage of Chinese on both sides of the straits.

Besides endorsing Hu’s call for more cooperation to ensure peace and development, Ma also touched on the common concern that no party should disrupt the status quo.

This accords with Beijing’s two major priorities: that both sides abide by the “1992 consensus”, and that there should be no “Taiwan independence”. These themes are well accepted in Taipei.

Ma’s presidency over the past three years has seen steadily improving relations across the straits. His Kuomintang party is nationalistic, which gels with the mainland’s current tendencies.

Communist ideology is a “product” with declining popularity on the mainland, particularly as a capitalist-based economy continues to make giant strides.

It is a “sunset industry” despite the best efforts of the Communist Party of China, and few others know it better than party leaders themselves.

Hu and his colleagues, more as national than party leaders, realise that the structural integrity of the nation is an even greater priority than the viability of the party.

The main priorities are therefore political stability and national unity, whether this means reviewing some traditional controls or asserting a firmer grip on specific issues.

This has meant party hardliners like former premier Li Peng receding into the background, in terms of both public visibility and government posts.

It also means that leadership style has changed in the context of modernisation.

Deng Xiaoping was a landmark leader who ushered in a new, pragmatic, post-Mao China.

Then post-Deng, China no longer has any charismatic, ideologically domineering “paramount leader”.

Chinese leaders today are professional technocrats tasked with national administration.

Former president Jiang Zemin and former prime minister Zhu Rongji were both engineers, the latter with a good practical knowledge of economics.

Current President Hu and Prime Minister Wen Jiabao are also both engineers, the latter with a working knowledge of geology.

Their successors, respectively Xi Jinping and Li Keqiang, are a chemical engineer and a lawyer-economist.

Next year’s succession also makes the 100th anniversary more significant.

That is why Jiang has appeared publicly with Hu at this week’s anniversary, to emphasise a sense of continuity.

In politics as in cross-straits relations in particular, continuity is crucial because it signifies stability and growth.

They are both cause and effect of improving ties between Beijing and Taipei.