On Thursday, I joined John Humphreys of the Australian Taxpayers’ Alliance and Professor Chris Berg of RMIT University for an ATA livestream discussion on productivity (see Productivity ideas with Chris Berg). One of the most interesting parts of the conversation was on artificial intelligence (AI), which I’ve repurposed for my latest Economics Explored podcast episode.
Thankfully, the Australian Government has so far resisted pressure—particularly from unions and lobby groups—to introduce heavy AI regulation. Instead, it has adopted a wait-and-see approach, unlike Europe, where regulation is already slowing the rollout of new AI tools. Chris welcomed this hands-off stance, seeing it as giving Australia a chance to capture the benefits of AI adoption more quickly.
One of the more provocative points from Chris was his description of AI as providing “effectively infinite intelligence.” I challenged this idea, suggesting that while AI can synthesise vast amounts of existing knowledge, true intelligence involves solving new problems. Nonetheless, I share his view that AI represents an extraordinary advance.
We also discussed who wins and who loses in an AI-driven economy. Contrary to the usual automation story, Chris argued that it may be highly educated professionals who face more disruption than low-skilled workers, since AI excels at writing, analysis, and other cognitive tasks. At the same time, concerns remain about those unable to use the technology being left behind effectively.
Beyond work, AI raises broader social and ethical questions. We talked about AI companions, therapeutic uses (such as support for people on the autism spectrum), and risks of parasocial relationships or loneliness. The potential benefits are real, but so are the challenges.
Finally, one of the more imaginative suggestions was that low-skilled work in developed economies could in future be done by humanoid robots remotely operated from overseas. This would create a new twist on globalisation and migration policy—an idea worth thinking through further.
Overall, it was a fascinating conversation, with plenty of optimism from Chris about AI’s productivity potential, tempered by my own caution about the risks and unknowns.
If you’d like to watch the whole conversation with Chris, you can check it out on the ATA YouTube channel. In addition to discussing AI, we also discuss Australia’s Economic Reform Roundtable.
This article is cross-posted at queenslandeconomywatch.com. Please send any comments or questions to show host Gene Tunny at contact@economicsexplored.com.
As hybrid work becomes the new normal, organisations are rethinking what makes a productive workplace. One surprising insight? It’s not the ping pong tables or open-plan lounges that matter most—it’s control.
In a recent episode of the Economics Explored podcast, award-winning American architect Kevin Kennon told show host Gene Tunny that what people truly value in an office is the ability to shape their working environment. “We all want greater control over our environment,” Kennon explained. That desire for autonomy, he argued, has a more profound impact on productivity than any trendy workplace perk.
Kennon’s experience designing large, complex buildings—from corporate headquarters in Manhattan to adaptive reuse projects—gives him a unique perspective. He emphasised that productivity-boosting design isn’t about adding bells and whistles, but about providing workers with environmental control over temperature, lighting, space, and air quality.
One key issue is thermal comfort. Office workers often complain about offices being too hot or cold—rarely right. Kennon argued that this stems from overly centralised heating and cooling systems. Smarter design allows different zones within an office to be independently adjusted, allowing occupants to fine-tune their surroundings to suit their needs. This flexibility can reduce discomfort and distraction, enhancing concentration and well-being.
Lighting is another factor. Access to natural light is known to support circadian rhythms and reduce fatigue. Kennon suggested designing workspaces that maximise daylight exposure and enable users to adjust lighting levels within their immediate environment. These adjustments, though small, can cumulatively improve focus and reduce workplace stress.
Beyond lighting and temperature, the layout of office spaces also plays a critical role. In hybrid settings, where not all employees are present daily, offices must offer a mix of quiet zones, collaborative areas, and shared desks. Giving workers a choice of where and how they work within the office helps replicate some of the autonomy they enjoy at home, making them more willing to return.
This flexibility extends to building infrastructure, too. Kennon highlighted that operable windows or semi-outdoor spaces in some climates can enhance comfort and reduce air conditioning costs. Such designs can also help reconnect workers with nature, an increasingly important consideration in post-pandemic office design.
According to Kennon, from an economic standpoint, these features are not luxuries—they’re investments in productivity. When workers are comfortable and empowered, they perform better. Businesses benefit from higher output, and decision makers should take note. As Kennon observed, architects can offer valuable insight into how people interact with space, and should be included in conversations about workplace design and economic performance.
Recent research from Japan reinforces the importance of thoughtful office design on worker productivity and well-being. A 2023 study published in Building and Environment by Japanese researchers analysed data from 1,644 workers across 29 Tokyo office buildings to quantify the economic benefits of optimised office environments. The researchers found that interior furnishings, airflow, and overall building sanitation had the most substantial impact on perceived work efficiency, while desk lighting was most strongly associated with reducing presenteeism–that is, where employees are physically present at work but are not fully productive due to illness, injury, stress, exhaustion, or other health-related or personal issues. Their findings suggest that improving—or even just removing negative elements of—the office environment can generate substantial economic gains, with benefits exceeding ¥200,000 (approx. AUD 2,000) per employee annually in some cases. These results align closely with Kevin Kennon’s observations on Economics Explored, further highlighting that investing in user-focused design is not just about comfort—it’s also good economics.
In short, better design leads to better business outcomes. As hybrid work reshapes how we think about offices, thoughtful architectural design prioritising user control, comfort, and flexibility can help bridge the gap between home and office—and ultimately, support higher productivity.
Listen to Kevin Kennon’s full interview with Gene Tunny on the Economics Explored podcast:
This article is cross-posted at adepteconomics.com.au. Please send any comments or questions to show host Gene Tunny at contact@economicsexplored.com.
Transcript: Rethinking Property and Taxation: The Georgist Approach w/ Kevin Kennon
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Kevin Kennon 00:03
The misconception about architects is that we just sort of solve spatial problems or esthetic problems. But I think that if you, if you really sort of broaden that and understand that, I think what we do best sometimes is imagine the future. And if that sounds a little utopian, on my part, I am guilty as char I think we need a better future.
Gene Tunny 00:30
Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny, I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show.
Gene Tunny 01:02
I Hello and welcome to the show. This episode is all about the future of cities, housing affordability and the role that architecture plays in shaping urban life. My guest is Kevin kennen, an award winning architect. He’s known for landmark projects, especially in New York City, including the Sotheby’s and Barclays headquarters and the renovation of Macy’s Herald Square. In our conversation, Kevin highlights the importance of a smarter approach to density, the strategic blending of residential, commercial and community spaces into vibrant, integrated neighborhoods. He challenges traditional zoning practices that segregate city functions, arguing instead for flexible, mixed use developments that foster both livability and economic vitality. In our conversation, Kevin also shares his insights on the economic forces influencing urban design, the challenges and potential of modular housing and why architects should have a greater role in shaping public policy. Special. Thanks to Lumo coffee for sponsoring this episode. This top quality organic coffee from the highlands of Peru is packed with healthy antioxidants, economics explored. Listeners can enjoy a 10% discount. Details are in the show notes. Now let’s jump into the episode. I hope you enjoy it.
Kevin Kennon 02:20
Kevin Kenan, welcome to the program. Thank you, gene for having me. It’s a pleasure to be here. Of course,
Gene Tunny 02:25
Kevin, it’s great to have you on the show. You’re a very distinguished architect, so you’ve won various awards, and you’ve been finalists in important competitions, such as for the redeveloped World Trade Center, the start of the World Trade Center in New York City, and I’m keen to get your thoughts on what drew you to architecture in the first place. To start with, I’m interested in that because I mean architecture something I think a lot of us, we get interested in, but I’m just wondering what, what got you interested in at a at a young age, and what led to your career?
Kevin Kennon 03:01
Well, you know, I, even though I’m headquartered in New York City, I grew up just outside of Los Angeles, and I think that I was always fascinated by these houses that were built kind of right on the edge of cliffs and and just the the magic that that it took to do that, and living in that sort of landscape, which is certainly not dissimilar to the east coast of Australia, in many ways, it’s the same general Geography and Climate. But you know, just that idea of kind of Building With Nature and sort of on the precipices was one of the first things that drew me to architecture. And, you know, I kind of continue to develop that. I went to college here on the East Coast and have stayed in New York, even though my foundation was sort of in that sort of more of a agrarian, almost rural type of landscape, I just was fascinated by New York City for different reasons. And have, you know, built my career, you know, really first in New York, but also all over the world, and I’ve been fortunate in that regard. Yeah, yeah,
Gene Tunny 04:25
just on the difference between saying, I mean, New York’s obviously very dense, and, LA, you’ve got more room to how important are the economic considerations in the design? Can you speak to that at all, please? Kevin, well,
Kevin Kennon 04:38
well, New York, if you understand anything about the city is really, it’s almost built like a chess board for real estate. It’s it’s meant, it’s a very rationalized sort of system. And, you know, it’s so economics. Is the primary driver here. You kind of understand that, especially working as I do, and mostly into the commercial part of architecture. So you’re attuned to how that works. But at the same time, in order to make that work, you have to be able to navigate a lot of different community issues, regulatory issues, understanding who exactly is going to be occupying the buildings that you do. And then I think even a larger purpose. You know, what are the goals to make New York a better city, or in the case of LA, where I’ve done, actually done some work as well. You know how to understand what those conditions are. And then they vary, obviously, by location. Yeah,
Gene Tunny 05:53
gotcha, gotcha. And what are some of the buildings that you’ve designed in New York City? For example, is it? Is it Sotheby’s? Did I get that right? You’ve got some
Kevin Kennon 06:01
of these headquarters, the Auction House. Actually, the world headquarters is in New York City. I’ve done that building, Macy’s Herald Square. I completely redid that from top to bottom, and it was kind of an interesting job, because we had to keep that building running at all time. It could never go dark. And and then the Barclays North American headquarters in Times Square, which is a large skyscraper here. And I’ve also done some more sort of smaller projects. There was the original American Express building, which was built in 1864 as a historic building in Tribeca. And then we completely, I co developed that, reimagined that entire building for a kind of bespoke group of investors who actually became the occupants of the building. And we designed those as luxury apartments.
Gene Tunny 07:02
Gotcha, gotcha. And I don’t know if you’ve Have you, uh, read, or the the fountain head at all, or seen the film. I just thought I’d ask, given that it’s a, you know, economic show, and I’ve there are a lot of people who are a lot of economists, who may not necessarily be fans of Ayn Rand, but are familiar with Ayn Rand, and I just wonder, as an architect, how much, how much freedom do you have to bring in your own individuality and creativity, given that you have to do work for clients and you’ve got the economic overlay, like, how do you, how do you think about those, those considerations?
Kevin Kennon 07:39
Well, from the perspective of somebody who designs large, complex building projects across multiple different types, I can attest to the fact that it is very much a collaborative enterprise, despite how it’s portrayed in the movies, the founder being the first and then lately, the one that people probably are most aware of would be the brutalist. And it’s not a solo sort of enterprise. Now, I’m typically the guy they bring in at the very beginning of projects as design architect. I’m the sort of point of the spear, so to speak, and then. But, you know, there are 1000s of people, obviously, who are involved in a building, say, the scale of Barclays headquarters, which is a million a half square feet and over 600 feet tall. You know, to do that kind of project, there’s a cast of 1000s, and so you have to be able to understand how to work with a variety of expertise, both in design and construction engineering, economics. You know that that obviously, when you have a financial firm as the client, that building was actually originally designed for Morgan Stanley, when they they sold it to Lehman Brothers, which had been displaced after the World Trade Center. And of course, we know what happens to Lehman Brothers. So it is, it is, it is. It became sort of the, essentially, the poster child of the financial crisis. And so every time they show footage of that time, it’s usually people coming out of the building, repairing cardboard boxes. Yeah. So anyway, so it so understanding the complexities of all the different ways in which that goes together has given me kind of a unique perspective, not just on architecture, but really the architecture engineering, construction and development industry. Yeah,
Gene Tunny 09:57
that makes sense. I wish I’d seen the brutalist before i. I had this interview, I have to check it out. I haven’t seen it yet. I mean, brutalism is, is something I have mixed feelings about, because I think we’ve like in Brisbane here, we’ve got some great brutalist buildings, particularly on the south bank. We’ve got our Performing Arts Center and our museum, which I think is one of the really great examples of brutalism. But then there are other sort of buildings, particularly at our universities, which are just ugly really, or they haven’t lasted. They haven’t sort of stood the test of time. So yeah. So yeah, what are your general thoughts on brutalism? Kevin, well,
Kevin Kennon 10:37
you know, I mean, I think I like to think of because I’d like all kinds of architecture, I having re imagined a really prominent historic building in the city, actually, to Macy’s was from 1902 which in New York is pretty old, and obviously this 1864 building the American Express Company, was also quite interesting and challenging. So I like working with those types of buildings, and I think you have to assess each building on its own merits. There are lots of terrible historic buildings, there are lots of terrible modern buildings, and there’s certainly a lot of terrible brutalist buildings, but you know, occasionally they can be repurposed and reimagined in ways that I think you know, kind of transcend just the stylistic definitely.
Gene Tunny 11:35
Okay, great. Now, recently, you’ve become concerned, or it seems you’re concerned about housing, of affordability, the availability of housing. What can you? Can you tell us, what are your thoughts on, what’s the current housing situation? What is What have you been thinking about recently? Please. Kevin, well,
Kevin Kennon 11:55
I think obviously top to mind with everybody these days are tariffs and the impact that there have on on housing. And, you know, it’s, there’s a lot of similarities to the automobile industry and or aviation in that, you know, a great deal of materials that we use here in New York come from other places, and, you know, we essentially have had a more or less free market, and that’s been one way we’ve been able to control costs. You know, the the impact is potentially has on interest rates and inflation. You know, that’s also part of the equation, because, as as developers and housing any anything that, especially having to do it on a sort of mass scale, you know, the slide is tick one way or the other, and interest rates can make or break a project, because it’s all done with leverage. And, you know, and I I understand that in Australia, you know, a lot of the private houses go through auction, which is quite different than the way which we tend to broker housing here, you know, which I think has its sort of, you know, pluses and I guess minuses, and that, at least it sort of has a transparency to it, which I can appreciate and like, but we’re just talking in general, just housing. And how can we increase the affordability of housing? You know, I think that really has to do with making, in my mind, it has a lot to do with sort of free trade and keeping those avenues open to allow people who are in that space the maximum ability to at least make some kind of a profit, And at the same time be able to produce market rate or below market rate affordable housing,
Gene Tunny 14:07
right? Yep. So are you already seeing? Have you seen the impact of the I mean, these tariffs, the we had, the Liberation Day ones, and then I think, I can’t remember the timing, but he’s also imposed tariffs on Canada and Mexico. So have they started to affect the cost of inputs, and that’s been factored into building projects? Kevin, have you seen that? Well,
Kevin Kennon 14:30
you know, we already had a problem with supply to begin with. So it’s a complex, you know, problem, because we had had so historically low interest rates for quite a while, since, really about 2011 and a lot of people who bought homes at that point were paying, you know, three, three and a half percent interest rates. So all of a sudden, you. Even though they may have been looking, you know, to sell or and they weren’t necessarily looking to refinance, and they weren’t necessarily looking to to sell and then go into a higher rate mortgage. So, you know, there was a sort of a pause in general, buying and selling, where there wasn’t a lot of movement. And then the problem, of course, is like there’s a phenomenon housing, and I’m sure it’s the same in Australia, where, if you have a housing development, and let’s say it’s mostly done on spec, and there’s some kind of a pause, and people’s demand. You know, if you wait too long, that housing goes scale. Nobody wants it anymore, because they feel it’s, it’s already, you know, if I’m going to buy something, I want to buy something new, yes, and, and so it’s a, it’s a tricky thing to do to be able to control inventory, make sure you’re, you know, purchasing the right way. And then, on top of all this, we’ve had a huge influx of private equity capital into the housing market, where essentially they would base look for for deals and just buy up the land and essentially freeze a lot of buyers, you know, smaller buyers, out of the market. So it’s, you know, it’s a strange, strange conglomerate of different forces here that have really to some degrees, but put a toehold on the market. And of course, now it’s everybody’s sort of sitting around waiting to see what’s happened. So you know, when you have an environment where already things are slowing down, there was the, just the logistics of getting material, we kind of just sort of managed to get over that hump. So the lead times on building materials wasn’t quite as long. And then also you slap these tariffs on and and then you take them away, you know, it’s, it’s, it’s very, very difficult as a certainly, as a developer, to know exactly what to do. Yeah,
Gene Tunny 17:26
yeah. There’s a lot of uncertainty at the moment. I think there’s the point Paul Krugman and and other economists have made, and just how disruptive that is, how, how negative an impact that will have on investment, on capital investment. So absolutely, and you mentioned the disruption. So the disruptions associated, the disruptions to supply chains associated with the pandemic, I presume you you’re talking about,
Kevin Kennon 17:52
yeah, yeah. And I you know, so we get a lot of lumber from from Canada, a lot of aluminum from Canada as well and so. But, you know, there’s the whole host of other products that we rely on the supply chain, but in order to, you know, put our houses together. And that, when I say houses, I mean everything from multi family housing that you find in more urban and denser neighborhoods and to single home family that you find more in places like Los Angeles, yeah,
Gene Tunny 18:32
our restrictions on development, restrictions on the Growth corridor of cities, restrictions on what Greenfield developments you could have, and also character restrictions or heritage protection. Are they? Are they factors affecting housing supply in the US? Kevin, well,
Kevin Kennon 18:53
you know what we call NIMBY issues, not in my backyard, those, those those play into a lot of development. So not only do you have sort of regulatory issues and zoning restrictions that, for example, New York the zoning is quite complex. And if you cannot invest in New York City, if you don’t know what you’re doing, or you don’t hire experts who understand the zoning in New York although, you know, one of the good things about New York City is that, over the historic long run, it’s a very valuable investment, and usually a safe harbor For international investors as well. So that plays a huge factor into timing and knowing how to to essentially navigate those regulatory environments. Is is really key. Now, what’s happening in places like Los Angeles is. Or in Miami and Florida, I think certainly places near Sydney Australia right now is probably have insurances coming in, and those areas where there have been catastrophic damage. And essentially, either, you know, making the premiums so out of reach that most people can’t afford it anymore. Or, you know, putting some so many restrictions on that that that has an impact on where people are able to afford to live. Yeah,
Gene Tunny 20:36
that’s definitely having an impact on in North Queensland, the insurance premiums have just risen massively because they’re they’re more subject to cyclones. Sydney has had some significant flooding. So yeah, I’ll have to see. We’ll have to see what that does to their insurance premiums. But yep, that is definitely one of the big issues, as is the, you know, just the high, high price of land. Kevin, can I ask us, as an architect, how can you, how can better architecture, better design, or better urban design, improve housing affordability, please?
Kevin Kennon 21:10
Well, you know, I think the the thing about, and this is where I would say my colleagues who were working in Los Angeles now are doing some very interesting development there. That is, you know, I think there’s a number of factors that that work very well if you have a climate that is fairly temperate like Los Angeles, is it’s easier to create, I think, kind of more livable spaces where there’s a connection between indoors and outdoors, and that allows for, you know, the It gets around the kind of big urban block, sort of eyes stores that we think of, especially sort of brutalist examples of urban housing that we know they don’t work, and they become, ultimately, sort of places that people really don’t want To live, and if they do, they’re usually not managed well. So there’s a lot of examples of that. I think the best housing tends to be some kind of a blend of what we call public and private. There are certain relaxations and say, regulations in exchange for private development to make at least the margins work, so that if you know what you’re doing and you can plan it the right way, you should be able to create better, better housing, more livable housing, And in particular, what we are all looking for as architects these days is finding ways to connect people to the outdoors. There’s an effort right now to especially New York City, and there’s incentives in that regard to create more green areas make our streets less dependent upon cars, more pedestrian friendly, you know, and as we do that, I think the opportunity to connect to nature and really turn the whole city into much more of A kind of landscape than just a concrete jungle, not to mix my metaphors, but yeah, I think you understand what I’m saying. Yeah,
Gene Tunny 23:48
gotcha. Gotcha. So that’s interesting. So does that mean lower density, in some cases, in New York City? Is that what you’re pushing for?
Kevin Kennon 23:57
Well, I think it’s it’s smarter density is pushing. The biggest problem that we have in New York City with our zoning code is it’s very it just it takes certain areas of the city and defines them as, these are residential areas and these are commercial areas, and sort of, to some degree, segregates the living areas from the more commercial. This happened with a lot of cities. And, you know, I think the thinking nowadays is that now the best and most vibrant communities have a mix of everything, you know, sort of shops, people can buy and galleries and and then also smaller offices, small manufacturing, co working spaces, different types of living conditions, green areas. You know, the sort of a more vibrant mix that happens. It can happen across the streets. It can happen adjacent, you know, but to each other. Or it can even happen if you have a building big enough in the single building where, you know, you might have a variety of uses, but actually occur within one building. And those are the things that I’m most excited about, not just for New York, but all over the world, where we can sort of build in to any development that sort of more vibrant mix of different uses.
Gene Tunny 25:35
Gotcha. Gotcha. So that that makes sense, because I was just wondering, hang on, we because we’ve got, we’ve got growing populations, then we don’t want to necessarily decrease density. What we’re talking about a lot here in Australia is, well, there’s a movement I’ve had one of the guests on the people involved in it, Natalie Raymond. She’s part of this group called yimby Yes in my backyard. And you know, she talks about gentle density. Have you heard of that concept? Is that compatible with what you’re talking about? Yeah, I think
Kevin Kennon 26:07
it’s a, it’s a, it’s a, it’s another sort of offshoot of what I’m talking about, which is, you know, being smart about density. And there are areas in New York City where, frankly, are hyper dense, but, you know, but because they’ve been treated a certain way, there’s a certain sensitivity to it there, there. You don’t really feel overwhelmed by the density. You just have to have the right infrastructure for it, and you have to understand the you don’t want to throw out really, what might be very good bones are great buildings that may have been us their utility as a particular type of use, but can be reimagined into something, you know, vibrant and new. I mean this the American Express building that I keep referring to had been, over the years. It started as the American Express. Is like the Pony Express you’ve ever read anything about the Wild West, which was it? You know, the base of it was a stable, so all the horses above that were offices, and that had had, you know, by the time we started develop it, it was, it was virtually unrecognizable, almost as ability had become, you know, painted on with graffiti. It had been used a long time as the studio of the mid century modern artist Alex sculptor Alexander Calder. That was his studio. And, you know, it was just that kind of rediscovery of some really amazing architecture that more or less almost hidden, so that, that kind of, you know, priority of well first, before we decide to build something new, let’s see if we can’t simply re imagine what’s already there.
Gene Tunny 28:09
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 28:44
now, back to the show. I liked what you’re saying about mixed use, or not having these rigid if I’m interpreting you correctly, not having these rigid definitions or delineations of what should go, where in a city. And I think one of the issues we’ve got here, and I know you, you haven’t been to Brisbane, so you may not this is good, but I’m interested in generally, like, What the What principles we should be thinking of, rather than you diagnosing. Well, this is the problem with Brisbane, and this is what I recommend, like, we’ve got, it’s not very dense outside of a few little few areas, so in our CBD. And then there are some former commercial areas that we’ve allowed intensive high rises in. And then there are these other suburbs. It is city suburbs. We’ve got these old Queenslanders. There’s this iconic style of house, a tin and timber house in Brisbane with verandas and and which I think is is good from the point of view you’re talking about, about connecting you with the outdoors. I think they’re wonderful for that. The issue is that there are a whole bunch of them, and we’re protecting they’re very hard to it’s very hard to redevelop those sites. And it means that we’re you. There’s a lot of there are opportunities for increasing density, even just to a mild sort of level of general density that we’re missing out on in Brisbane. So I’m just wondering, how should what are some without asking you specifically about Brisbane? Well, what are some principles we should be thinking about if we’ve got this situation where we’ve got a growing population and we’ve got very scarce land. Well,
Kevin Kennon 30:23
yeah, I mean, that’s a, it’s a, it’s not an easy, you know, problem. And I would hate to over generalize, because I always believe that fundamentally, real estate is local and has its own sort of conditions. And understanding what those needs are, understanding also what the response is from the community as a whole. But you know, so the and the thing you have to watch out for is, you know, you could say, well, we’re going to preserve some of that, and we’ll keep that, but you don’t want to turn it into sort of a, sort of a museum or artifact or life list, you still want, you know, those things to be vibrant. But, you know, I think that the way to do something like that is you start to sort of nibble a little bit around the edges and carefully insert some sort of larger scale buildings that that serve, you know, the needs of the community. And then ultimately, I think, you know, you can start to to help to generate something that’s positive in there, you know, by by, simply by trying to provide the right kind of housing for the kind of the demographics that you’re looking for, the demographics there, you know. So if it’s younger people coming in and and entrepreneurs coming in to set up vibrant not just, you know, to live there, but also invest in that community, help it grow. Those are the kinds of incentives that would be, you know, I think very useful. Gotcha, are
Gene Tunny 32:12
there any examples that come to your mind, Kevin, about of developments that have been done well, of cities that are that are providing the right incentives, or the right policy settings.
Kevin Kennon 32:22
I think Austin is probably the one that most comes to mind, you know, which is it was always a very interesting city to begin with, and I think the fact that it has a connection to the university, University of Texas there, but they, you know, they’ve done a lot to attract startups and technology and those types of enterprises and so, you know, research center areas where there is that connection, tends to be places that I see, I think the most exciting kinds of newer development happening. Same thing around in Silicon Valley, there’s been some Santa Clara, the city I know pretty well. In California, there’s, you know, that that same, similar type of thing was some fairly low density areas, but increasingly have densified in I think, a thoughtful way that that generally enhances the the Community and brings more investment that benefits not just the immediate location of wherever you’re building a development, but in the general area as well. Gotcha,
Gene Tunny 33:51
okay, I have to try and check out some of these, some examples of residential developments that are that are doing it well. Do any come to mind? I mean, you mentioned a couple of cities, but are there any specific developments that are worth checking out?
Kevin Kennon 34:06
You know, that’s a good question. I don’t you know. I know, just in general, and so you kind of put me on the spot, specific ones, but I think I there’s a lot of interesting work being done in Austin right now. And and Texas tends to be an area that’s the at least the governmental regulations are a little more relaxed. And, you know, as a result, it’s, it’s, you know, I think that it’s grown very rapidly over the past 15 years, and more or less consistently. And, you know, so it’s if you wanted to look, you know, at what I think is a successful model, I think that’s a really good one. Okay, I’ll have a look. It sounds a lot like what you’re how you’re describing. Of investment,
Gene Tunny 35:00
right? Okay, okay. I’m wondering about social housing, or in the UK, they’d call it council housing. I don’t know what the term is in in the States, well, to what I’m not sure to what extent is provided, but we’ve got a growing homeless problem here in Australia, and we’ve never really had significant homelessness. Well, we didn’t historically, at least for the in the 70s, 80s or 90s, and suddenly it’s become a problem. And I’m wondering to what extent do we need public investment in in social housing to try to help the people who would otherwise not be able to get get housing in the private market. And do you have any thoughts on that and how design principles for social housing? Yeah,
Kevin Kennon 35:49
again, I would look New York is a challenge, and mainly because, in order to do what we call low income housing, it’s is typically has to be done at scale before actually makes any economic sense. So major investments, whereas I think in in places like Brisbane or other places I know more specifically so outskirts to Sydney or Melbourne. You know where you have it’s, it’s a little bit more like LA and I think there’s some amazing examples of really very, very good low income housing that’s been and sort of medium low to medium density, low income housing. That’s been done very, very well, and La embarked on, but it’s very been a very ambitious project where they insisted that the developers there in exchange for government assistance. I think it’s mostly tax abatement. Is tax credits. Is how it works that they hire very top level architects. And architects work at a below rate, you know, their normal rate. They said there’s a sort of a trade off there, but that’s really helped a lot. And what’s interesting is, because you have so many fantastic architects in Australia, I’m always jealous, because i i Look, I tend to look at a lot of architecture AU, so the you know, so I, and I see so many fantastic things going on there. I’ve always wanted to do something in Australia, because it seems like such a great place to work, but, but you have so many amazing architects there that I think if you were to really look into the same program that they have in LA for low income housing, it was. It’s a definite model that you could follow. Okay,
Gene Tunny 38:04
I have to check that out. And what’s the role of of urban transport, of public transport in in better design. How do you think about that? How do you think about the cost of it? What the right, you know, I mean, is that just something that is exogenous to what you’re doing, or do you like, how does it come into your to your thinking?
Kevin Kennon 38:28
Well, you know, the New York just changed its own in recently, and it’s it has allowed for greater density in certain areas, depending on your proximity to local transport, and specifically the subway lines or rail lines. And, you know, so it’s it does it kind of the two are tied together, you know, because if you’re trying to attract sort of new, new blood and new talent into those areas. Generally, they’re not people who have a lot of money, but, you know, they have a lot of ideas, a lot of energy, and so, you know, if you can provide lower income housing and connect that to transportation that’s going to ensure better success for those developments, because more people are going to be, you know, looking for places to live that’s near a place that they can easily commute into wherever they Need to go around the city,
Gene Tunny 39:40
yeah, yeah. Just wondering about it, because it’s one of the big issues seen in the cost of of housing or apartment buildings. Here in Australia, is the cost of providing car parks. And this is it’s become contentious. So in Melbourne, in Melbourne, in I forget if which Council it was. I. In the Melbourne area, they they lowered the number of car parks that you needed for development to go ahead, which is lowered the cost, and meant that you’ve had additional development in places like, I think it’s Richmond in in Melbourne, but then you’ve got a lot of the locals say, Well, hang on. Well, they’re going to end up parking on the street, and that’s no good. There’s a reason we have those, those restrictions. Do you have any thoughts on car parking and how we handle car parking? Well,
Kevin Kennon 40:28
la had the same problem. You know, I remember, I did a project for a major department store that was going to be located in Beverly Hills, California, and in order to make this work, we were going to have to build a five level underground, you know, multi level garage, and have all the loading and everything. Yeah, it just become cost prohibitive to do that. So, yeah, it’s, I think, you know, easing the restrictions on development of car parts is a big plus. A lot of what I’ve seen, the solution to what you’re talking about is, you said, essentially building off site community garages, you know, so that to take care of those, you know, additional parking. And these can, again, we always think of these as being large, but they can actually, you know, be a relatively small size, as long as you have enough of them that are sprinkled around so they don’t become, you know, cumbersome, and they’re not essentially creating more traffic problems or environmental problems than you already have today.
Gene Tunny 41:49
Yeah, that’s an interesting idea. So would you have several developers? Would several developments use the same off site community garage, so they’d all contribute to the cost of it, or the construction costs, right? Okay?
Kevin Kennon 42:02
And usually, if they’re and just having done my fair share of parking garages, yeah, is that a small paper to build above ground than it is to dig into the ground for just about anything or anywhere? And obviously, if, if the ground consists of bedrock, which is a lot of what New York is, it becomes prohibitively expensive. Interestingly enough, in Manhattan, there are no parking requirements for new building. So Ron sometimes it’s demand, but there’s nothing that says you have to build parking, to build a new building this moment, yeah, gotcha.
Gene Tunny 42:46
Gotcha. Okay, has New York instituted a congestion charge? Is that something that’s coming? It has, yeah, because London has one. How’s that gone? What do you have any thoughts on that?
Kevin Kennon 42:57
Well, somebody who was a pedestrian and a car owner, yeah, and it was in the congested price area. It there’s definitely less traffic. So it’s noticeable. And so I think to some degree, it’s a it’s a good thing. I and so far as I can tell, people aren’t really complaining about it too much. They were a lot beforehand. And I do think the people that penalizes are generally people who, you know, they’re more moderate income, individuals who live outside of the city and are dependent on driving their automobile into the city. But even those people that I know who do that are now parking their cars, but they live in New Jersey, they park it on the other side of the river and then just take the train and from there, and that’s usually five, five to 10
Gene Tunny 44:06
minutes. Yeah, gotcha. Gotcha. Okay. Now, just to finish up, I’d like to ask, Have you done any work, or do you have any thoughts on modular housing, for pre fabricated housing that’s seen by some as a bit of a a magic bullet for housing affordability. Is that true? Do you have any thoughts on modular housing, please? Kevin, yeah, okay,
Kevin Kennon 44:31
so there’s two things I want to separate on this. I have a lot of thoughts, and I have studied it extensively, and mostly from an economic perspective. So the problem with modular construction and and, you know, there’s, it’s, it’s certainly come a long way from, you know, what we, I think, in the US tend to have thought of modules being equivalent to mobile. Homes. These are, these are essentially almost complete houses that are fabricated inside of a factory. So the benefits are, you know that your workers can work year round, under control conditions you have theoretically better quality control. The only disadvantage of them, and it’s a big disadvantage, is they have to be able to fit on a lap bed tractor trailer and and typically, they have to be located within a I think it’s, it’s almost like a 300 mile radius from where the factor was. So it actually limits the service area that they can where they can build the the other thing that I like are prefabricated components of housing, which are also delivered on flat beds, but they’re all in packs, and so it’s all the components are sort of stacked, and they’re delivered at the site. There’s a lot more site assembly, but you the range is much longer. The time is actually shorter. And typically, these things go together pretty easily, so you don’t need a ton of skilled labor just to assemble those units. Yeah, yeah, I like the component type of prefabrication better than just the complete modular verification, yeah,
Gene Tunny 46:46
yeah. Gotcha, okay, yeah. Because I think they’re seen as a bit of a Yeah, magic bullet. But yeah, from what my investigation show, that look, they’re not, probably, they’re not going to make the big impact that that you think here in Australia, at least. I think that’s that’s reasonable. One question. There was one more question that just occurred to me that I think I’ll regret not asking you if I don’t ask you, because economists always sort of talking about productivity. And it’s occurred to me that, and it’s occurred to me that the design of workplaces, or the design of of offices, or, I guess factories, is more obvious, how the layout can contribute to productivity. What are your thoughts on that? I mean, how do you how do you think about the design of of buildings, of workspaces to try and improve productivity, is that? Is that top of mind? And also, there’s the new issue of like, how do we get people back to the office? How do we encourage? How do we make people want to come back to the office, given so many people are working from home now, do you have thoughts on that to wrap up, please? Kevin, yeah, no,
Kevin Kennon 47:57
I think, I think people have to lie. And here’s the trend, we all want greater control over our environment period. You know, it doesn’t matter. You know, if you’re at home, you want better control, and we have better technology that, you know, that allows us to do that. I think. You know, if you start from that basis, you don’t need to throw in ping pong tables or coffee bars, or you just need to give people greater sense of control, and that’ll help always help productivity more than anything else.
Gene Tunny 48:32
A greater sense of control got you so does that mean not having, well, providing people with spaces that they can break. They can go to to work on their own, to, yeah, okay, there’s
Kevin Kennon 48:47
that, but also providing them the ability, you know, if there are certain areas, they can control the temperature directly, they don’t have to worry about, I’m in this area, I’m cold, and we’ve got to, we suddenly have to kind of crank up the entire air conditioning, or, you know, for the entire office, that we can actually locate these in different places, anything that allows me to have at least some greater sense of that. Same goes for lighting. Is another thing. How much daylight I have in can I control the sunlight directly around my space. Yeah, my so yeah for myself, or my teams, or whatever that nucleus is, that we’re able to do that, I
Gene Tunny 49:34
have to ask a follow up on the control in the temperature, because this is a perennial problem, because we were in a subtropical climate here in in Brisbane, and we need to use, well, a lot of I mean, we use air conditioning extensively in our commercial and our office buildings. And every office that you tend to go to, there’s an area it’s either too warm or it’s too cold a. It’s almost impossible to to get it right. I don’t know what’s going on. I mean, it just seems to me, it seems to be an intractable, unsolvable problem. But are you saying that there’s a way of designing buildings so you can get that so it can be tweaked, as you were talking about, so people are comfortable? Oh,
Kevin Kennon 50:20
yeah, oh, yeah, absolutely. You know, it’s really just how, how you deliver the various mechanical systems, or in some cases, they can be natural systems. You don’t need a lot of fans and things like that to control it. So there it starts with, fundamentally, how do you design that space? Increasingly, you know, people like being able to say, if it’s on a nice day, open the windows, you know, or have an area where you can sort of flip over the wall and you can just have sort of, you know, a nice summer breeze, you know, coming through your space. That doesn’t always happen in in, you know, humid climates, but I’m sure there are amazing days where you live that, yeah, and wouldn’t that be great if you could just have these, you know, a certain lounge or conference area that you could just open the window. Yeah,
Gene Tunny 51:22
I think we want, yeah, I think that’s a good idea. I’ve just noticed that there are a lot of lot of buildings where, yeah, the air con. I mean, it’s, it’s good. I mean, we need it in in the summer particularly. But you know, sometimes it’s either too cold, it gets too cold, or it gets too too warm, it’s just not doing the job in particular parts of the building, whereas in others, it’s fine. So yeah, but yeah, I’m sure there are ways to engineer, to design around that. Kevin, thanks so much for your time. It’s been terrific. Are there any thoughts, anything you’d like to leave us with, anything you think would have been good to cover in the conversation. Oh no,
Kevin Kennon 52:03
I listen. I This has been a fascinating conversation. And, you know, I think, I think the thing that I’d like to leave your listeners with is hopefully a different understanding of what architects actually do and the the are, are able, you know, we’re able to contribute to a lot of thinking about how to adopt, really, how to sort of imagine the future and and Actually, we have a lot of tools at our disposal to help make all of our lives a little bit better. And I think if we start to understand that that’s a value that we bring, that is not just simply an esthetic value, but basically one in which we can increase things like the topic we were discussing about productivity, or more affordable places to live, and that’s all part and parcel about how we make our future a better place for all of us. Absolutely.
Gene Tunny 53:14
That makes me wonder, I mean, to what extent I suppose that you know, top architects are being dealt into the policy conversations. I have to check. I’m pretty sure they are. But is that what you’re talking about? We need to have architects talking to the policy makers, to the to the bureaucrats, to the politicians, so make sure you’re in your part of the conversation.
Kevin Kennon 53:36
Yeah. I mean, I think that’s I think that’s true. I think you know, we know what, how bureaucrats design our city, not very well. And I think that the misconception about architects is that we just sort of solve spatial problems or esthetic problems. But I think that if you, if you really sort of broaden that and understand that, I think what we do best sometimes is imagine the future. And if that sounds a little utopian, on my part, guilty as char, I think we need a better future.
Gene Tunny 54:12
Yeah, absolutely, I totally agree. Kevin Kenan, thanks so much for your time. Really enjoyed the conversation, learning about your perspective as an architect and talking through a lot of these issues, I think I’ve got some great insights, so I’ll definitely share with with people around around Australia. And yeah, because I think they can get a lot out of them. And yeah, thanks. Thanks again for your time, and look forward to connect with you again in the future.
Kevin Kennon 54:39
Oh, that’d be great. Gene, I’m happy to come back anytime you want me to very
Gene Tunny 54:42
good. Thanks, Kevin, thank you so much. Bye, bye, righto. Thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.com or a voicemail via. Speak pipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you, then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week. You
Speaker 2 55:33
thank you for listening. We hope you enjoyed the episode for more content like this, or to begin your own podcasting journey, head on over to obsidian-productions.com, thank youyou.
Credits
Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.
Is there a brilliant ‘Art of the Deal’ strategy behind Trump’s tariff policy? It has been a big failure for the US so far, as attested to by the 7% fall in the US share market since inauguration day (see the chart below) and a 12% fall in consumer confidence from January to March, according to the Conference Board. The US has inflicted more harm on itself than its trading partners.
Theoretically, there is the possibility a large country like the US, as opposed to a small country like Australia, can impose an ‘optimal tariff’, as Nicholas Gruen and I explain in an article published in Crikey: Why Trump’s tariffs are better than you think — and much worse. We note:
“When large countries trade, they move prices. That means foreigners do effectively pay some of their tariffs.”
A member of Keynes’ Cambridge Circus, Richard Kahn, wrote the best and most lucid paper on the so-called optimal tariff, Tariffs and the Terms of Trade, published in 1947. Based on Kahn’s optimal tariff formula and plausible values for the parameters, an optimal tariff for the US could be around 20%. However, this calculation is based on a theoretical model without retaliatory tariffs or macroeconomic implications. The benefits of the terms of trade improvement can be quickly outweighed by the costs of retaliation and a global trade war, as well as the fact that tariffs increase the tax burden on American consumers and businesses and will have adverse macroeconomic impacts. Nicholas and I aren’t defending the Trump tariffs. Indeed, we’re supporters of free trade, as you would expect economists to be, but we are pointing out that the terms of trade impact must be considered when assessing the tariffs. Based on the fall in the S&P 500, American investors have judged that the adverse macroeconomic effects of tariffs will outweigh any possible terms-of-trade benefits.
Earlier this week, I spoke about Trump’s tariffs, the federal budget, and the Olympics with fellow Queenslanders Damian Coory and Dan Petrie on Damian’s The Other Side Unplugged show. You can watch the interview here:
I’ve included the time stamps below so you can jump to my remarks on the latest federal budget, the Olympics, and Trump’s tariffs, if you’re interested:
Federal Budget Overview and Critique (0:00)
Jim Chalmers’ Values-Based Capitalism (5:38)
Structural Deficits and Bracket Creep (10:56)
Government Spending and Debt Concerns (13:55)
Olympic Games Plan for Brisbane (30:52)
Trump’s Tariffs and Their Economic Impact (41:15)
Alternatives to Promote Economic Growth (54:39)
Final Thoughts and Future Directions (55:57)
This post has been cross-posted at Queensland Economy Watch. Please comment below or email Economics Explored host Gene Tunny at contact@economicsexplored.com.
In this installment of “From the Vault”, we revisit a compelling 2019 episode on antitrust featuring a conversation with Danielle Wood. At the time of the interview, Wood was a director at the Grattan Institute, a leading Australian public policy think tank. Since then, she has ascended to the influential role of Australian Productivity Commission Chair, marking a significant journey in her career dedicated to economic reform and policy innovation. You can listen to the interview wherever you listen to your podcasts (e.g. Spotify) or via the embedded player below.
This episode dives into the intricate world of antitrust laws, fueled by a renewed interest in scrutinizing the massive market power wielded by big tech companies such as Google, Facebook, and Amazon. Danielle Wood, with her expertise as a former principal economist and mergers director at the Australian Competition and Consumer Commission (ACCC), offers invaluable insights into the evolution of antitrust laws from their inception in the United States in the 1890s to their critical role in today’s digital economy.
The conversation illuminates the historical roots of antitrust laws, born out of a desire to combat the influence and economic power of “trusts” in sectors like railroads, energy, and steel. This backdrop sets the stage for a deeper exploration of the challenges and complexities facing contemporary antitrust enforcement, especially in an era dominated by digital platforms and the unique economic dynamics they present.
Wood’s analysis provides a nuanced perspective on the “hipster antitrust” movement, which advocates for a broader interpretation of antitrust enforcement, beyond traditional economic harms such as price gouging, to include considerations of impacts on innovation, privacy, and political power. This movement, symbolized by figures like Lina Khan and Tim Wu, underscores a growing concern over the adequacy of current antitrust frameworks to address the multifaceted influence of tech giants.
Reflecting on Australia’s own regulatory environment, Wood highlights the work of the Grattan Institute in assessing market concentration and the effectiveness of competition law. Despite not identifying a systemic market power issue, Wood acknowledges sector-specific concerns, particularly in technology, where the enforcement of existing laws, rather than the introduction of new ones, might be key to addressing competitive imbalances.
This episode serves as a timely reminder of the ongoing debates surrounding market power, competition, and the role of policy in ensuring a competitive, dynamic, innovative, and fair economy. As we continue to navigate the complexities of the digital age, revisiting conversations like these provides valuable context and guidance for future economic explorations.
Transcript of Episode 22: Antitrust with Danielle Wood
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 0:08
The Economist magazine published an article last October titled dismembering big tech. The massive market power of the big tech companies such as Google, Facebook, and Amazon has prompted a renewed interest in antitrust laws. To help us understand antitrust, I’ve invited Danielle Wood from the Grattan Institute onto the programme. The Grattan Institute is a leading Australian public policy think tank based in Melbourne. Danielle is the budget policy and institutional reform programme director at Grattan. Later this year, she will take up the CEO role at the Institute. Danielle is well qualified to talk about antitrust, as she once worked as principal economist and mergers director at the ACCC, the Australian Competition and Consumer Commission. I hope you enjoy our conversation.
Danielle Wood from the Grattan Institute, welcome to the podcast.
Danielle Wood 1:17
Thanks for having me, Gene.
Gene Tunny 1:18
Excellent. Danielle, today, we’re going to be talking about antitrust. And this is a topic that has had a resurgence of interest, particularly due to the market power of the big tech companies such as Google and Facebook. Could we begin with you explaining what is this concept of antitrust? And where does it come from, please, Danielle?
Danielle Wood 1:47
Yes, sure. Well, this is a concept that’s been around a very long time, even though as you say, it’s recently had a resurgence, which is always very nice when something you’re interested in, finally comes to prominence in the debate. But people have been worried about the impacts of market power and concentration of big firms going back a long time. So the first antitrust laws were introduced in the United States in 1890. And at that time, there were a number of big firms known as trusts, they dominated particular sectors: railroads, energy, steel, and sugar. And people were worried about the power they had, their economic power. So because they were in a dominant position they were able to price high.
They were worried about the impact that had on societies, and on groups like farmers who were suppliers, on inequality, and on the political power that those firms had. So, in response to that, they introduced some antitrust laws. And during the 20th, the early 20th century under Theodore Roosevelt, they started to be quite strongly enforced. So the government actually use the powers that were there in the laws in order to break up those trusts in a number of cases.
So, from there, many other countries got on board. And now almost every major developed country, and most developing countries have some form of law that controls the actions of firms. So normally, there’s some component that says they can’t get together with their competitors and do things like fixed prices. And then there’s rules around firms with market power, how they behave. So essentially [there are] regulations to stop them misusing their market power.
Gene Tunny 3:25
Okay. And the big concern back in the late 19th century and early 20th century in the US…you mentioned a number of industries, but particularly, big oil, is that correct? With Standard Oil?
Danielle Wood 3:40
That’s right. So the railroads and the oil companies were really a couple of the really big trusts. And they had almost entirely monopoly positions. There was particular concern. Theodore Roosevelt was very worried about the amount of political influence they held. And so breaking up those trusts was really one of the defining features of his presidency. He was referred to as a Trust Buster, and also an octopus hunter, which I love–the idea of these kinds of firms having their tentacles in all sorts of different markets and being being reined in by the exercise of these powers.
Gene Tunny 4:19
Yes, yes. That’s a really good metaphor, isn’t it? And I think Standard Oil was broken up, wasn’t it? That was broken up into, I think, was it Exxon? Esso?
Danielle Wood 4:35
Many of the companies that we still know today, were broken up from the original trust of Standard Oil.
Gene Tunny 4:42
You mentioned an act in the US. I think it’s the Sherman Act. Is that correct?
Danielle Wood 4:51
That’s right. So, the Sherman Act went through in 1890, and then it sort of sat there unenforced for more than a decade. And it’s one of those laws that could have just withered on the vine if someone didn’t pick it up and use it. But Theodore Roosevelt, who I mentioned before, was particularly concerned about the amount of political power that these firms were exercising. So he took, I think his first case was against JP Morgan and the railroad trust, but then went on to take on Standard Oil and a number of others. And I think he filed more than 40 cases, during histerm as president, so he really enlivened that law by using it very actively. And that, you know, really sort of set the precedent for future administrations.
Gene Tunny 5:40
Right. Okay. Now, why I approached you on this topic, Danielle, was that you wrote an article on hipster trust busters last year, which I thought was very good. And I’d just like you to explain, if you could, who the hipster trustbusters are and what they’re concerned about, please.
Danielle Wood 6:07
It’s one of those terms that really catches the imagination, but it was originally used, actually, as a pejorative. And it was simply directed at a group of young scholars that are the ones that have really led this push to revive antitrust laws. So there’s a group of them, Lina Khan is probably the best known. She wrote a very well known paper on Amazon and why she believed it was misusing its market power, while she was still at law school, and she got a huge amount of prominence for that. Tim Wu, who’s recently written a book called The Curse of Bigness, is another one that sort of gets lumped in as a hipster.
And really, the main contention is that antitrust laws have not been enforced to their full capacity. They are particularly worried about the dominance of the big tech companies, as you mentioned in your introduction, and they would like to see a return almost to those early days of the Sherman Act. We were just talking about it. In those days, really, the laws were enforced quite strongly. And they were enforced, not just with reference to potential economic harm through market power, so that the normal things we think about there: no firms are in a dominant position, so they might be able to up their prices, somewhat.
They say no, no, that’s certainly not the only harm we should be worried about. It doesn’t even make sense to talk about that kind of harm, particularly for products like Google and Facebook, where it’s free. You know, we should be thinking more broadly about the harm that these firms do to the competitive process. And even things like their sort of dominant political position, their impact on inequality. So they have a very broad ranging set of complaints about how the economy is functioning. And they would like to see a stronger antitrust policy help deal with those.
Gene Tunny 8:00
Okay, so they think that we don’t have strong enough laws already. Do they give any examples? Are they able to point to cases where governments haven’t had the powers that they’ve needed?
Danielle Wood 8:19
It’s less about that the laws aren’t there. And certainly, the antitrust laws are cast quite broadly. it’s more a critique of the way in which they’ve been enforced. So it’s a view that, in recent decades, that people have taken too narrow a view on what sort of harm antitrust law should be concerned with. And certainly the case they put, if you go back to the early case law, there was a lot more going on than concern just about price increases. So they say, you know, the law is fine, but it’s how we enforce it that needs to change.
Lina Khan, who writes a lot about Amazon, says we have this firm that we have allowed to become really dominant in terms of online and retail. Yes, it’s priced at a low [price] but if you look at things like its price-earnings ratio, it’s pretty clear that it’s buying market share and at some point in the future, people are expecting it to start upping its prices to take advantage of its dominant position. We’ve let it vertically integrate so now that it’s both a platform where people buy products, as well as a supplier of those same products, and this has all sorts of implications for how retail markets function. So the thesis there is we should have first of all stopped it taking over other competitors, we should have intervened early to limit its behaviour, or we should get involved at this point to try and break it up in some way just like happened with Standard Oil as well as a lot of the other big trusts back in the day.
Gene Tunny 10:04
What did you mention with Amazon? Would that be an example of predatory pricing? Is that what you’d call that, that they’re charging a price that’s lower than the cost just to gain market share, just to try to crush their competitors?
Danielle Wood 10:22
I’ll say this is the challenge. So I mean, how does the behaviour fit into the normal economic models? And what the hipsters are saying is the normal economic models are broken. So if I was normally thinking about predatory pricing, it’s quite a specific conduct, which is really the firm setting the price below cost. It is making losses in the short term in order to drive out competitors in order to later up the price and it would recoup those losses. So normally, that’s the kind of framework that we think about something like predatory pricing in.
Here, it’s difficult to say that it would meet that technical definition of predatory pricing. They are probably pricing close to costs, certainly not being a company that’s posted a lot of profits. But they’re not necessarily making losses. But they have clearly been aggressively chasing share. And clearly the market does expect some kind of recoupment at some point. But the sort of time horizons we’re talking about are pretty incredible. And it’s been doing this for more than a decade. Normally predatory pricing models expect a short drop in price, and a year or two later prices jump up again. It looks very different. And I think partly what they’re picking up there is the standard economic models have struggled to cope with quite a different paradigm.
Gene Tunny 11:48
It would be good to talk about what economists have traditionally thought about antitrust. What have been the different schools of thought on it? Because opinion amongst economists has changed over the decades. Is it fair to say that there have been times when economists have been more in favour than less in favour, and maybe economists are more in favour again? Are you able to tell that story, Danielle, please?
Danielle Wood 12:16
Yeah, sure. Look, so really, the resurgence of economics, really the point at which antitrust became a very economic discipline. And I’ve always said to people, I really think of it as where Economics and Law meet, was in the 1970s, with the emergence of the Chicago school. So the Chicago School, in an antitrust sense, was really almost a single person at the University of Chicago, Aaron Director who went on to lecture a lot of people that became prominent antitrust scholars in their own right, like Richard Posner, and Robert Bork. And the idea they introduced was that this was an economic law. So we shouldn’t be worried about all those other considerations I was talking about around political power, or the impact of market power on inequality, or other types of concerns. We should be sort of narrow, really looking at this question of market power through the lens of consumer welfare. So the only question we need to answer when we’re looking at conduct is does it enhance consumer welfare? Or is it hurting consumer welfare? And so that was very much an economic approach to bring.
From my perspective, I think that was a good thing to introduce more of a structure and certainly put economic considerations foremost in the enforcement of the law. I think it’s arguable that in the decades prior to that, there was a lot of inconsistency in cases. And there were certainly some cases that by today’s standards would be viewed as very unusual, intervening in mergers where firms were going to reach 2%, market share and things like that. So they said, let’s focus on this, will there be consumer harm?
The criticism of that approach is that, perhaps it was a little too narrow. So, in defining consumer harm, there was a lot of focus on price as an indicator of harm. What we know, of course, is that in markets where firms have market power, they may choose to exploit that through monopoly pricing, but there can be all sorts of other detriments as well and maybe poor quality. It may be that they are asking us to accept terms and conditions that we might not otherwise accept. So, for example, diminishing privacy would be an example. Or it can just be that they’re enjoying the quiet life. So they’re not pushing to find ways to cut costs or to innovate their product in a way that firms in competitive markets do. So there’s a whole lot of harms that I think are rightly considered economic harms that were perhaps not really emphasised by that narrower Chicago school approach. So I think the Chicago School was good at taking the discipline forward and putting economics front and centre. But at the same time, the criticisms that it’s too narrow in approach do have some validity.
Gene Tunny 15:22
Okay. So you mentioned the risks of monopoly power. There’s also risks from oligopolies. When you have just a small number of companies in an industry, there are risks of the oligopoly companies coordinating their prices and effectively having some sort of cartel and conspiring to raise prices and rip off consumers. There’s that risk. Now, can I ask you about the view that came in the early 80s or late 70s, early 80s, from William Baumol, that contestable markets view. Was that influential in how we thought about monopoly power and antitrust?
Danielle Wood 16:07
Yes, it absolutely was. So, previously, perhaps people were very keen to look at indicators of market concentration. So how many firms are there in the market? If there’s not very many, well, then we should assume that there’s a market power problem. So the idea of contestable markets is that, so long as there is a threat of entry, that could be sufficient to constrain the behaviour of the firms in the market. So even in a market where you might have only two or three players, if barriers to entry are low enough, if they tried to either get together, or they found a sort of non-cooperative way to increase prices, then they know that someone’s going to come in and compete those margins.So that kind of keeps prices down.
So, when when economists are talking about market power, they always have an eye to that question of barriers to entry.
But I think, perhaps we’ve, in a lot of cases assumed that barriers are lower than what they’ve turned out to be in practice. So often, I think it can be harder than people might expect for firms to enter the market. So if we look at the big tech firms as an example, what’s the entry barrier there? It turns out to be a lot about the data that they already have, and the fact that they’ve collected such deep profiles on all of us, it’s just simply harder for someone to come in and build an equivalently good product.
Gene Tunny 17:46
Absolutely. And there’s that strong network effect, too, isn’t there, the fact that I mean, Facebook has 2 billion people on the platform already. So it’d be very difficult to set up a social media platform in competition with Facebook.
Danielle Wood 18:05
Right. So, for some of the platforms, network effects really matter. And Facebook is definitely the most obvious example of that. So, network effects, really, that I get more benefit from being on that platform when other people are already there. So when I’m on social media, and I want to see what my friends are doing, the fact that they’re there on Facebook already adds value to my experience going on Facebook. The same arguments don’t necessarily apply in the same way on something like Google. You can imagine a new search engine coming in. The fact that there’s not a whole lot of other consumers or advertisers, that might not bother me if I’m just there for organic search. But we do know that people prove to be a lot more sticky than we might expect. So even something like changing your search engine, which is a pretty low cost thing to do, there’s literally zero price, you just need to go to a different website to what you’re used to. Even then people prove to be very kind of path-dependent in their behaviour, and they’ll tend to just keep going back to the one that they know.
Gene Tunny 19:15
Okay, Danielle, I know that Grattan has done some interesting research on market power, the concentration in different markets. Would you be able to give an overview of that research, please? What you found in Australia in the US, I mean, what what industries are the most concentrated overall, how much concentration is there? And is it something we should worry about? So if you could just give us a flavour of what Grattan’s found, please, that would be great.
Danielle Wood 19:49
Sure. So this is actually work done by my former colleague Jim Minifie and another former colleague Cameron Chisholm. And so they were sort of I’m interested in this claim that markets had got more concentrated over time. So they went to have a look at the data for Australia. And the picture is a bit more nuanced than I think a lot of people might expect. So, you know, they found that there were a lot of concentrated markets in Australia. And perhaps if you think about, supermarkets or insurance or a lot of manufacturing, that’s probably not going to be a surprise to people.
When they compared market concentration in Australia by market to overseas, they found that we didn’t actually look that bad by international standard, although there were some markets in Australia that were particularly concentrated. So things like supermarkets, mobile phone networks and life insurance,were three that looked particularly more concentrated in Australia than elsewhere.
In terms of concentration over time, there was no clear pattern. So some industries, like banks have become more concentrated over the past 15 to 20 years. In others, like supermarkets, its concentration has actually fallen. And nor could they really find evidence that profitability, had substantially increased over the last two decades. So sometimes, when you’re trying to measure market power, you look more at profit margins than market concentration, because of some of the limitations with market concentration as an indicator we were talking about before.
The one thing that they did find, though, that I think perhaps suggests that all is not well is that, in more concentrated sectors, profit margins were higher, and that those profits tended to endure. So if you looked at the 20% of most profitable firms, a decade later, about a third of those were still in the top 20%. So, if you think that markets are contestable, you would expect to see these sorts of excess profits eaten away over time, by new people coming into the market. We seem to have a segment of markets where that didn’t occur over as long as a decade, and they were able to maintain high profit margins. So it suggests there might be parts of the economy where competition isn’t working as well as it should be.
Gene Tunny 22:20
Yes. And in Australia, that’s probably in banking, is that fair to say? The big four banks have a privileged position in the marketplace, for, well, a variety of reasons. One of which might be the government of the day appears to favour the big four banks and gives them special deals. Remember, during the last financial crisis, for the big four banks, it was much cheaper for them to access the government borrowing guarantee, than second-tier banks. So is that an issue, that we have regulations that favour particular market players? Is that one of the things that’s driving concentration in some sectors?
Danielle Wood 23:14
It certainly can be. So, we certainly found that firms in heavier, more regulated industries tend to have higher returns than those in less regulated industries. It can be a bit hard to unscramble that observation, because, of course, we tend to regulate more in concentrated industries. So natural monopoly industry is a good example. The reason governments are in their regulating is because it is, by definition concentrated, and it’s trying to sort of mimic competitive market outcomes. But there are certainly examples, and the banks might be a good one, of where the regulation itself can create an entry barrier, and are an advantage for a particular group of firms, which can increase returns.
So high-regulation firms definitely stood out as tending to be more concentrated and having higher returns, as did innovative firms. This is a pretty consistent finding across the world. So a lot of the work in different countries has suggested that returns have gone up over time, but they’ve gone up only for a segment of the market. And that’s tended to be the firms that are heavily exposed to innovation. So tech firms, platforms, and pharmaceutical companies, tend to be the ones that have been making higher returns over time.
Gene Tunny 24:39
Could that be a good thing, Danielle?The fact that these firms are being rewarded for innovation, that’s probably what we’d want to see, isn’t it? It might be necessary to have those higher awards to provide the incentives to undertake that innovation. What do you think about that?
Danielle Wood 25:03
Sure. I would say that this is the idea really that our law is based on. So, under Australian law, it is not illegal to have market power. And the reason it’s not illegal to have market power is you want market power there as an incentive. So if a firm has got there by competing on its merits, so it’s designed something better than its competitors, or it’s just done something, it’s played hard, or whatever it is, if it’s got there on its merits, and then it stays there on its merits, then it has done absolutely nothing wrong. And that is really the fruits of that work, and what creates the incentive for firms to innovate in that way. What the law says is that’s fine.
But you can’t misuse that market power when you’re there to maintain your market position. So, if you are doing things like predatory pricing, or bundling your monopoly product with another product to leverage into another market, there’ll be certain circumstances in which those things are being used in order to maintain or grow a dominant market position. That’s when you’ve got a problem, not with the market power, per se.
Gene Tunny 26:16
Absolutely. You just reminded me with that example of using your product, bundling it with something else. You’ve got a monopoly in one area, and then you bundle it with something else to try and get into another market. That reminded me of what happened with Microsoft in the 90s. And that’s why the US Department of Justice went after Microsoft, over the Internet Explorer browser, if I remember that correctly.
Danielle Wood 26:42
Exactly. Right. So I mean, it’s interesting, another tech example. And probably the last time the Department of Justice went in really hard on a big company and a big tech company. And the browser was free. So it wasn’t an issue of price. But it was a question of leverage. Were they using their dominance in the PC market in order to get a dominant position? And what they saw was the next big thing, which was the browser market, and that really drove their major competitor at the time who were getting out of the browser market at the time, because everyone ended up using the Microsoft browser that came with the computer.
Gene Tunny 27:26
Yes, I think it was Netscape if I remember.
Danielle Wood 27:29
I was trying to remember whether Netscape was Microsoft’s or the competitor. That’s right. Yes.
Gene Tunny 27:33
Because I remember the first time I ever saw the internet, it would have been second or third year uni. And we were taken to the library and shown this wonderful new tool. And Netscape was the browser of choice at the time.
Danielle Wood 27:49
It’s so funny to think back to those days as well. It was it was high school for me. And there was one computer in the library that you could access the internet from. And your librarian had to sit with you and supervise. And I always thought, Gosh, why would anyone want to use the internet when we’ve got this perfectly good library here? All these books. Goodness me!
Gene Tunny 28:07
Absolutely, Danielle. Before I ask the last question, could I just ask you to tell us where we can find out about your work on the internet, please?
Danielle Wood 28:17
Yes. So if you go to the Grattan website, and you’re interested in our work on market concentration, there’s a report called Competition in Australia: Too Little of a Good Thing? That’s the place to look. If you’re interested in the article that I wrote on the hipster trustbusters and how things are changing, that’s an article on the Inside Story website called The Hipster Trustbusters.
Gene Tunny 28:45
Very good. Now, to wrap it up, Danielle, I’d like to ask how concerned are you overall about market power? And what do you think needs to be done? Do we need specific measures to rein in these big tech companies?
Danielle Wood 29:06
Look, so as an overall proposition, I think it’s not clear to me that there is systemic market power issue, but I think there are clearly concerns in particular sectors, and Tech is one of those. Do we need special measures is an interesting question. And you know, the ACCC has just spent more than a year doing an inquiry on the power of the digital platforms. And my reading of their findings there is, really, that they’re not looking for new powers. They believe that existing powers will generally be enough perhaps with some tweaks.
I mean, I think if we reflect back on how we got here, in terms of the tech companies, there may have been some decisions around mergers. that you would have hoped would go a different way. So if we look back, we know that Facebook bought Instagram, it bought WhatsApp, Google bought YouTube. I think there is a fair contention that perhaps the major US regulators were too relaxed about those acquisitions. And what looks to be, you know, acquisitions in different markets have actually helped enhance their power in the core markets in which they operate because of the sort of data advantages that we’re talking about. So I think we could be stronger. And this is largely for the US regulators, because obviously Australian regulators can’t control those types of mergers or future acquisitions.
The ACCC has pretty clearly signalled that it will be looking very closely at all sorts of behaviour by the tech companies under existing laws. So things like trying to leverage power into other markets. So Google, using its search results to favour its phone product, and it’s already been taken on by the European competition authorities over that sort of behaviour. All of that can be done under existing laws.
And probably the next question is should we see a break up? Again, that’s not a proposition for Australian regulators and Australian regulators do not have the same divestiture powers that they have in the US. Could you envisage a world where at least they reverse the impact of the mergers? A breakup only makes sense if you can kind of find units, self sufficient units to break these companies into, but I could certainly see an argument that you could go back and reverse some of those problematic mergers which occurred in the past. And I think that’s a really interesting proposition, whether a future US government and the US regulators will have the appetite to do that. And that’s certainly come up as a big issue during the Democratic primary race. Candidates are really expected to have a position on whether or not the big tech companies should be broken up, which I think is a pretty interesting development.
Gene Tunny 32:19
Right, absolutely. Okay. I’ll have to go back and have a look at what some of those candidates have said. I know there have been a lot of debates on health care and on tax. Now that you have mentioned it, I am recalling some of that discussion. So I might go back and look at that. Thanks, Danielle.
Danielle Wood 32:39
Elizabeth Warren, in particular, as she has a very long history of advocacy around antitrust law. So she’s got very well-thought-out positions, but certainly, others have thrown their views into the races.
Gene Tunny 32:54
And before we conclude, Danielle, are there any other points you’d like to make? Is there anything you think we might have missed in our discussion, our broad overview of antitrust?
Danielle Wood 33:06
Look, I would just say that I think even though this hipster antitrust movement has been very critical of both the courts and regulators in the US, it’s not clear to me that the problem is anywhere near as acute in Australia. I think we have a real history and a record of pretty robust antitrust enforcement. There’s a reason why the chair of the ACCC tends to be a household name in this country. They’re out there and pretty heavily using the law. The thing I think we should look out for in Australia is what further powers they might seek.
So the ACCC has been pretty successful in campaigning for law changes where they don’t think they have enough power. And the kind of beefed-up misuse of market power provisions that came out of the Harper review is an example of that. At the moment, they are saying that perhaps the mergers laws aren’t sufficient to block anti-competitive mergers. So I think it’s ‘watch this space’ on whether we actually do get some further beefing up of our laws, but not necessarily to do with the tech companies, but to deal with the fact that the ACCC’s struggled to win mergers cases in courts.
Gene Tunny 34:26
Okay. So it sounds like the ACCC, the Australian Competition and Consumer Commission, has been doing some great work, but you mentioned it has struggled to win in the courts. So I guess the big corporations can hire the top QC’s; perhaps that’s the issue.
Danielle Wood 34:49
Well, look, I think that’s probably partly true, although the ACCC’s got some pretty good QCs on the payroll as well. I think there is a particular problem with mergers cases that courts struggle with because it’s prospective, trying to work out what might happen in the future with and without a merger. It’s quite a different exercise to the normal exercise the courts are going through, which is trying to establish something that’s happened in the past. So I think there’s inherent difficulties in that prospective nature of the mergers tests, which has made it really hard for the ACCC to win. And I think the stat is that they haven’t actually won a mergers case in court in 20 years.
Gene Tunny 35:30
Oh, no. Okay. Well, we might have to come back to that topic. I haven’t, haven’t looked at mergers for a while, but that doesn’t sound good. And that sounds like something we should look at in the future.
Danielle Wood 35:43
Yes, so the agency took one to court, the Vodafone Hutchinson one to court last year, and I think if they lose that, we’ll be hearing a lot more on the topic.
Gene Tunny 35:54
Yep, absolutely. Okay. Danielle Wood from the Grattan Institute. That’s been terrific. I’ve really enjoyed our conversation, and I’ve learned a lot. So thanks again for coming on to the programme.
With aggressive fiscal and monetary policy responses to the 2008 financial crisis and the COVID-19 pandemic, new evidence has emerged of the unintended consequences of activist macroeconomic policies. This article considers the impact of Quantitative Easing (QE) on wealth inequality. It is cross-posted on www.adepteconomics.com.au.
QE is an unconventional monetary policy used by central banks such as the US Federal Reserve, Bank of England, or RBA to stimulate the economy. It was widely employed in the aftermath of the 2008 financial crisis and during the COVID-19 pandemic. QE involves the central bank purchasing government bonds and other financial assets with newly created money and is intended to lower long-term interest rates. While it is designed to benefit the overall economy, there is a debate about its impact on wealth inequality.
Some argue that QE has primarily benefited the wealthy, as it has increased the value of financial assets, such as stocks and bonds, predominantly owned by the rich.1 This has resulted in a significant boost to the wealth of the wealthiest individuals and households.2 However, proponents of QE contend that it has prevented a deeper economic slump and reduced income inequality by preventing larger increases in unemployment.3 The distributional effects of QE are complex, and its impact on wealth inequality remains a topic of ongoing research and discussion.
Professor Gerald Epstein of the University of Massachusetts Amherst is one of those who argues that quantitative easing primarily benefited the wealthy. At the same time, its effects on employment and the cost of capital for borrowing were relatively modest. Professor Epstein expressed this view in an interview on his new book Busting the Bankers’ Club in Economics Explored episode 226. You can listen to the conversation wherever you listen to podcasts (e.g., Spotify) or use the embedded player below.
Professor Epstein suggests that the main impact of QE in the United States was an increase in the wealth of the wealthy. This is because the rise in asset values, resulting from the central bank buying up these assets, primarily benefited those who already held significant assets, such as banks and other wealthy individuals. On the other hand, the cost of capital reduction for borrowers and investors was relatively modest.
Professor Epstein does not argue that the Federal Reserve intentionally pursued a policy to benefit the wealthy primarily. Instead, the impact of the policy was an unintended consequence of quantitative easing. The increase in asset values and wealth accumulation for the rich due to QE can further widen the wealth gap. At the same time, the modest impact on employment and borrowing costs may not effectively address the needs of the bulk of the population.
The findings mentioned in the podcast conversation align with studies conducted in other countries during the same period, which also found that QE had a greater impact on asset values and wealth accumulation for the wealthy than on employment and borrowing costs. The European Central Bank (ECB) published a study showing that QE in the Eurozone primarily contributed to an increase in the wealth of the richest 20% of the population.4Additionally, a report by the UK Parliament’s House of Lords Library stated that QE is likely to have exacerbated wealth inequalities in the UK. However, it noted Bank of England analysis concluding the effect was relatively small.5 Research published in the Oxford Bulletin of Economics and Statistics found that expansionary QE via asset prices led to net wealth inequality increases on some (but not all) metrics for most countries under review.6
These findings suggest evidence broadly supports the claim that QE has disproportionately benefited the wealthy and exacerbated wealth inequalities. However, it may only be a small net impact as there are effects in both directions. While many households benefit from house price growth, those at the top of the wealth distribution disproportionately benefit from financial asset price increases.
Regarding the Australian experience, the Housing and the Economy study by UNSW and University of Glasgow researchers surveyed experts and found that two-thirds of economists either agreed or strongly agreed that “ Monetary policy reliance on low interest rates and Quantitative Easing has exacerbated inequality by boosting the prices of housing and equities.” However, this was based on a sample of fewer than 50 economists, so we should note that it would be subject to substantial sampling error.
In a 2021 Agenda paper, leading Australian macroeconomist Stephen Anthony identified the contribution of QE to “the enormous widening of inequality across advanced economies.” Anthony saw some value in QE as an “expedient remedy for short-term crisis management”, but he was mindful of its adverse longer-term consequences, such as impacts on inequality and economic efficiency. The adverse efficiency impact can occur because cheap money can end up directing significant resources to “lower-valued activities.” These could include the activities of some tech companies that saw valuations soar as ultra-low interest rates meant that speculative gains in the distant future had higher expected values in the present (see Investopedia’s explainer How Do Interest Rates Affect the Stock Market?).
While some studies suggest QE has primarily benefited the wealthy, some research has also found evidence to the contrary. For instance, a study by the European Central Bank (ECB) indicated that its QE program increased the net wealth of the poorest fifth of the population by 2.5 percent, due to QE lowering the interest rate paid by this group on their debts, compared with just 1.0 percent for the richest fifth.7 However, it’s important to note that the overall consensus from multiple sources and studies suggests that QE has exacerbated wealth inequalities and primarily benefited the wealthy.
This article was authored by Economics Explored host Gene Tunny. For further information, don’t hesitate to contact us via contact@economicsexplored.com.
There is mounting evidence of the superiority of the Superforecasting approach, which Economics Explored hosts Gene Tunny and Tim Hughes discussed with Warren Hatch, CEO of Good Judgment, on an episode earlier this year (see How to be a superforecaster, or at least a better forecaster). Superforecasting is an approach to forecasting that, as the blurb for the 2015 book Superforecasting notes, “involves gathering evidence from a variety of sources, thinking probabilistically, working in teams, keeping score, and being willing to admit error and change course.”
The success of Good Judgment’s superforecasters in forecasting the US Federal Reserve’s policy decisions was profiled in the New York Times last month. Good Judgment has been asking its superforecasters an ongoing series of questions about the upcoming three meetings of the Fed, asking if they will cut, hold, or raise. For the four meetings so far in 2023, the superforecasters were spot on with their probabilities for three hikes and a pause. For the next three meetings, they forecast two hikes followed by a longer pause.
Good Judgement data scientist Chris Karvetski has prepared an analysis showing the superforecasters extraordinary performance in forecasting the Federal Funds rate targeted by the Fed (see Superforecasting the Fed’s Target Range). He has calculated Brier scores of forecast accuracy, where 0 denotes perfect accuracy and 1 denotes perfect inaccuracy, for different sets of forecasts. The Superforecasters are doing 3x better than CME futures for the Federal Funds rate, with far less volatility.
Separately, superforecasting pioneer and Good Judgment co-founder Philip Tetlock and his research colleagues just released a study on existential risk with interesting approaches to generate forecasts for low probability but high impact events, such as an AI apocalypse (see Results from the 2022 Existential Risk Persuasion Tournament). This study was summarised by The Economist earlier this month: What are the chances of an AI apocalypse? Thankfully, as The Economist observes:
Professional “superforecasters” are more optimistic about the future than AI experts.
For more information on the superforecasting approach, check out the Economics Explored podcast episode from earlier this year:
Several clips from the video of the interview are available via YouTube. The first clip is “What Makes a Superforecaster?”:
It identifies the importance of being cognitively reflective and having good pattern recognition skills. Incidentally, one way to identify people with good pattern recognition is to test them with Raven’s progressive matrices, as noted by Warren Hatch in this clip:
Another clip covers how we can overcome our own prejudices and biases to make better forecasts:
Tips from Warren in this regard include:
self-awareness;
getting feedback; and
forecasting teams in which members can interact with each other anonymously so everyone’s views are considered solely on their merits with no prejudices.
While in Hobart, Tasmania for the 2022 Australian Conference of Economists, show host Gene Tunny caught up with Dr Leonora Risse and Dr Cameron Murray to reflect on the big economic issues covered at the conference. The Conference was framed in the context of adjusting to the so-called new normal. It dealt with issues such as government wellbeing budgets, the housing affordability crisis, the pandemic, and nowcasting, among others. Hear from Gene, Leonora, and Cameron regarding conference highlights and takeaways, including the risk of unintended consequences of government policy interventions.
About this episode’s guests – Leonora Risse & Cameron Murray
Dr Leonora Risse is an economist who specialises in gender equality. She is a Research Fellow with the Women’s Leadership Institute Australia, and recently spent time in residence at Harvard University as a Research Fellow with the Women and Public Policy Program. Leonora is a co-founder of the Women in Economics Network (WEN) in Australia and currently serves as the WEN National Chair. Leonora earned her PhD in Economics from the University of Queensland, and previously served as a Senior Research Economist for the Australian Government Productivity Commission. She is currently appointed as a Senior Lecturer in Economics at RMIT University in Melbourne, Australia. Her Twitter handle is @leonora_risse.
Dr Cameron Murray is Post-Doctoral Research Fellow in the Henry Halloran Trust at The University of Sydney. Cameron has taught a number of courses including UQ’s MBA economics course, macroeconomics, globalisation and economic development, and managerial economics. He writes for MacroBusiness, IDEA economics and Evonomics. Cameron has a PhD from the University of Queensland on the economics of corruption. He hosts the podcast Fresh Economic Thinking and his Twitter handle is @DrCameronMurray.
Links relevant to the conversation
Greta’s articles at the Lowy Institute Interpreter:
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:01
Coming up on Economics Explored.
Leonora Risse 00:04
I think we also need to clarify that a well-being budget doesn’t mean just spending more, like spending more on feel-good items. I think there is some misinterpretation out there. I think it’s more about proper reallocation.
Gene Tunny 00:17
Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues.
I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is episode 148 on the 2022 Australian Conference of Economists, or ACE as we call it. The conference was held on 11th to 13th July in Hobart, Tasmania.
In this episode, I reflect on the highlights of ACE with my colleagues, Dr. Leonora Reese, and Dr. Cameron Murray, who I was lucky enough to catch up with at the conference.
Leonora is the chair of the women in Economics Network, and she’s a senior lecturer at RMIT, the Royal Melbourne Institute of Technology. This is Leonora’s third appearance on the program.
Cameron Murray, however, is appearing on the program for the first time, and I’m delighted that he agreed to share his thoughts on the conference with me. Cameron is postdoctoral research fellow in the Henry Halloran Trust at the University of Sydney.
One of the big takeaways for me from the conference was the risk of unintended consequences from government policy interventions. And I give some examples of those in this episode.
The show notes, you can find relevant links and details of how you can get in touch with any questions, comments, or suggestions. Please get in touch and let me know your thoughts. I’d love to hear from you.
Right oh, now for my conversations with Leonora, who’s on first, and Cameron who’s on second on ACE 2022.
Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it.
Leonora, good to be chatting with you again.
Leonora Risse 02:00
Thanks, Gene for having me.
Gene Tunny 02:02
Oh, it’s good to catch up here at the conference in Hobart. So, how have you found the conference so far?
Leonora Risse 02:10
It’s great to be back in person. This is the first Annual Conference of Economists in Australia since the pandemic. So, it’s wonderful to be surrounded by people again, seeing people face to face, hearing the latest research. In some ways, it feels like time hasn’t really passed. You know, we’re seeing everyone again. And there’s some great research that’s really timely reflecting on COVID. But also thinking about climate change, politics, immigration, the labor force, So, many highly topical issues are being covered.
Gene Tunny 02:49
Absolutely. And we just had this amazing presentation via Zoom last because he couldn’t make it by Martin Wolf, one of the editors at the Financial Times. And he was talking about a number those issues and the crisis of democratic capitalism, which I found really a fascinating presentation and gave us a lot to think about and their issues I’ve tried to cover on the program in the past. I was grateful for that presentation. Were you involved in the organization of this conference?
Leonora Risse 03:19
This year, I wasn’t. So, the way that the conference works is each state or territory branch usually takes carriage of organizing it. So, this year, a big shout out to the Tasmanian branch of the Economic Society who organized it. I’m part of the Economic Society Central Council, a representative of the Women in Economics Network. So, we were involved in organizing the wind sessions of the conference. So, I was involved in that part.
Gene Tunny 03:48
Okay, good one. So, what were those sessions, Leonora?,
Leonora Risse 03:52
Each year, since WEN was created, that’s the Women in Economics Network, that was created in 2017. So, WEN has been a part of the program, we’ve held a special session where we’ve discussed some of the issues that are confronting women in the economics profession.
This year, we talked about what WEN had achieved in its first five years. We looked back at what action we had taken to deal with this problem of women’s under representation in economics. So, we were sharing some statistics as well as some examples of the initiatives that WEN had embarked on in that session, and it was more it was broader than just talking about gender inequality. It was talking about diversity and inclusion in the economics profession. So, we held that special session.
We made sure that there were females amongst the keynote speakers, we had Angela Jackson, talking about the well-being budget. And Angela is a member of our WEN committee, but a very distinguished speaker in her own right and that was wonderful to make sure we had females amongst the keynotes. And tomorrow, we have a lunch for WEN members to come along and network and meet and talk about some topical issues.
Gene Tunny 05:12
Oh, good one. And So, Angela is a co-author of Yours. On a paper, I’d like to talk with you about; so, you had a look at how COVID affected the economy here in Australia and how it had differential impacts by agenda. So, would you be able to tell us about that, please, Leonora?
Leonora Risse 05:32
Thanks so much for the opportunity to share this with you, Gene. We looked at the workforce impacts of the first year of the COVID pandemic in Australia, where we had very strict lockdowns as well as the direct effects of the pandemic. And at the time, there was obviously a lot of interest from the news, from the media, from the government, what exactly were the impacts, and we knew that women were generally being more severely affected on average than men, because of the gender patterns that exist in industries of employment. So, we know that the types of industries that women are employed in, they tended to be the ones that were most affected by the direct lockdowns, particularly in the state of Victoria. But then, also women were potentially dropping out of the workforce, because they were responsible for homeschooling; schools were closed. Childcare wasn’t necessarily available through out that duration.
So, we wanted to produce a systematic and statistical based analysis of what exactly happened in terms of labor force indicators. So, employment, unemployment, labor force participation; and break it down by gender, because I think there was a lot of talk, and there’s potentially some misinterpretation about what exactly those effects were, and generally, we saw a dive, a plunge in women’s employment, that was steeper than men’s. Then towards the end of the first year of the pandemic, women’s jobs did start to pick up again, which was a positive thing. And we were concerned that that was giving the impression that things were okay again, and even though there were huge numbers of women who dropped out of the workforce, just looking at those numbers climb again, it potentially led to people assuming that that time out of the workforce hadn’t caused any damage for women being detached those interruptions losing your job, and perhaps coming back again, but not being the same job that you had before; losing potentially, your eligibility for leave entitlements. It’s what we call scarring effects of economics.
Gene Tunny 08:05
Is this hysteresis? Is that the old term for it? Or am I thinking of something else? Was that related to it? There was that idea that if you had a period out of the workforce that reduced your; well, you lost the attachment, it can affect your marketability in the future, So, it can have these long run consequences.
Leonora Risse 08:27
Yeah, that is a concern about people sort of, getting stuck in that state of unemployment or labor force detachment. That’s exactly right. So, we were looking at net numbers, aggregate numbers. We weren’t necessarily following the same individuals to see potentially, people who dropped out of the workforce who lost employment and didn’t reenter. But that would have been a concern behind the scenes. When I presented the paper here at the conference, there was an excellent question about long term unemployment, people would become entrenched in unemployment or drop out of the workforce and don’t reenter. So, that’s part of that concern about hysteresis as well, people getting stuck. And that skill erosion and perhaps that lack of confidence to reenter again, some of the dynamics that can explain what you’re describing there.
Gene Tunny 09:14
Right. So, I’ve got a couple of questions. You looked at the Australian data, do you know if this happened in the US and the UK as well? Was this the xi session that they talked about?
Leonora Risse 09:26
Yes. This was very much a global picture. You’re right. We were hearing this from the US, from Europe and the UK, from many other countries throughout Asia, Canada; that there were terms like it was a she-session, a play on the recession, but emphasizing the gender element of it. And the thing is that this is very different from past economic downturns. So, in our analysis, we look at what happened with job losses during the 1990s recession in Australia and during the global financial crisis around 2008. And what you see with the economic downturn, the recession that occurred as a result of COVID, women share those total job losses was a much higher proportion than what had occurred in previous economic downturns. And why that matters is because, it meant the policy responses needed to be different.
Gene Tunny 10:24
That was stunning. So, I was struck by just the proportion of the jobs lost in the early 90s recession here in Australia that were lost by men; what was it? 90% or something. I guess that makes sense because at the time, the industries that suffered were manufacturing industries or construction, because we had the colossal property boom in the 80s, and then the crash. So, they were industries dominated by men, but this time, and this is what you found, I think, isn’t it? that it was those sectors where women were disproportionately employed such as hospitality.
Leonora Risse 10:58
Yes, that’s right. So, it was the preexisting patterns of employment. For instance, at retail trade, what are the types of jobs within retail trade that women tended to be employed in things like clothing stores, Ford fronting customer service roles, waitress or waiter jobs in hospitality, whereas males tended to be employed in things like in retail, but in electronic stores, or building supply and hardware stores, which actually were all booming during the pandemic, because of all the incentives for people to stay at home or invest in these other things and things like shell fillers, or deliveries and transport behind the scenes rather than face to face customer service.
So, these preexisting gender patterns of employment, as well as who’s doing the bulk of caring duties at home and who takes on the majority of the homeschooling responsibilities, meant that there were demand side factors as well as supply side factors, putting a lot of pressure on women’s capacity to retain their attachment to the workforce as well.
Gene Tunny 12:12
Okay. I might ask you about your highlights of the conference. I can tell you mine so far. I mean, one highlight was definitely Martin Wolf’s presentation, which made me think a lot about, how do we get that balance between having a market system which provides the goods and services we want that’s dynamic, that allows for you know, that is compatible with individual liberty, but at the same time, avoid a system where we have monopolization, where we have money getting into politics and corrupting it and inequality widening for various reasons, including monopoly, because of the big tech platforms, the big tech giants, people being able to earn money globally because of these platforms. And then if you’ve got an advantage that can be magnified by the technology, also skill biased technological change all those reasons. How do we deal with that in a way that keeps the incentive to innovate, but means we don’t have inequality that could be politically devastating? And I mean, I don’t know the answer to that. But I’m just saying that I thought that was a great presentation and Hal Varian, I mean, that was amazing. Talking about how they’re using all of the Google Trends data to Nowcast the economy, so, unemployment claims just based on people searching, where’s the local unemployment office in Michigan or wherever. So, I thought that was great. But how about you, Leonora? What were your highlights?
Leonora Risse 13:41
Oh, I haven’t been able to see everything on the program, which is frustrating when there’s so many options, you can’t see them all. The keynote speakers have been fantastic this year, because they’ve been so timely. The topics, the issues that they’ve been delving into, I thought hell variants, illustration of how we can use Google data for economic analysis, really enlightening. There’s so much capacity there. I’m looking forward to hearing Joseph Stiglitz speak tomorrow. So, we haven’t come to the end of the program. And he’s, he’s obviously an eminent voice in terms of inequality issues. I really enjoyed Angela Jackson’s keynote address at the start of the conference. And Angela talked about a well-being budget and put a lot of thought into what would be the dimensions of well-being.
And also, she brought up some really potentially confrontational issue. She did talk about how do we handle domestic violence and family violence? And I think that was an indication that these are some hard topics that economists and policymakers and researchers need to deal with. And I mentioned that as a highlight, because I really don’t think in past conferences, we’ve been empowered or bold enough to bring up some of these confrontational topics.
Gene Tunny 15:02
I think that’s true. I want to see how this wellbeing budget is implemented in practice. I mean, as a former Treasury bureaucrat and someone who worked in Budget Policy Division, I’m just not sure what it’s going to mean. Is it just another chapter in the budget, enhance more work for Treasury analysts? Or is it a fundamental rethinking of how the budget process works and how the all of these policy measures are assessed? Will there be an explicit wellbeing score? I don’t know; we have to see exactly how the government is going to implement it. And whether it is something that really will mean that the budget is reformulated or rethought of as something that’s explicitly dedicated to improving well-being and therefore you would look at the whole range of government expenditures and activities.
Is it that or is it just something that is just going to be another glossy budget document or something that the government of the day can sort of, wax lyrically about, but doesn’t have any real practical implications? That’s just my natural skepticism. So, I’m not knocking it. I just want to see how it’s implemented.
Leonora Risse 16:10
Yeah, I think that’s a really healthy degree of skepticism to have with any government. I sense that this government is really sincere and actually quite well informed by the research because as your listeners have known, there are very deep and comprehensive streams of research looking at measures of multi-dimensional poverty or disadvantage, which is really part of that literature on what constitutes a well-being and life satisfaction. And I think the takeaway here is when we think about a well-being budget, it’s about broadening the suite of indicators that we monitor, and we care about. So, it’s not just GDP, or inflation or wage price index. But we include a wider and fuller list of economic indicators, including measurements of inequality. So, I imagine that if you’re constructing a well-being budget, you’d want to compute a Gini coefficient, for instance. So, at least inequality is going to be on the minds of your policymakers, it becomes more salient, so that when they’re developing their policies, they’re not just thinking about how do we increase GDP, but what is the distribution of those prosperity benefits?
Gene Tunny 17:19
So, they could ask how do these particular budget measures affect inequality, affect the Gini Coefficient? Is that what you thinking?
Leonora Risse 17:26
Potentially along those lines, that’s right. So, it’s thinking about measuring success along a broader spectrum or dimensions of real world impact.
Gene Tunny 17:37
Yeah. Okay. So, every budget, as well as providing the economic outlook in terms of GDP and talking about what the budget aggregates are, you could have a reflection, the government could reflect upon what’s happening with some of these other indicators, such as inequality. Angela mentioned a whole range of things they could be interested in targeting in the interests of well-being, mental health, reducing domestic violence.
Leonora Risse 18:04
The budget contains a lot of that already. And it’s about pointing out; actually, a lot of that contributes to GDP, which we know like, if you invest in your mental health and physical health and community inclusion in your population that are all in federal ingredients was making people or supporting people to become more productive as well. But I think it will probably find that there are a lot of government initiatives that are in place that are supportive of well-being and this is, I guess, perhaps justifying that expenditure in a broader set.
I think we also need to clarify that a well-being budget doesn’t mean just spending more, like spending more on feel good items. I think there is some misinterpretation out there. I think it’s more about proper reallocation. So, you could say, well, let’s not go ahead with this hypothetical, say tax cuts for a higher income bracket, because that’ll have a negative effect on the Gini Coefficient. It will detract from income equality.
So, we then have another benchmark of impact you consider some of these redistribution or reallocation decisions, it doesn’t mean spending more, it just means spinning things in different ways.
Gene Tunny 19:23
Yeah, fair point. Okay, Leonora thanks so much. Great to catch up with you here in Hobart.
Leonora Risse 19:27
Thanks, Gene. And thanks for running such a great podcast.
Gene Tunny 19:30
Thank you.
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 20:07
Now back to the show.
Cameron Murray, good to be chatting with you.
Cameron Murray 20:13
Thanks for having me,Gene.
Gene Tunny 20:14
It’s a pleasure. We’re both finished the Conference of Economists for 2022, here in Hobart. We just had the lecture by Joseph Stiglitz. And, yes, it’s been a busy, few days. How have you found the conference, Cameron?
Cameron Murray 20:30
Yeah, pretty good. Pretty broad range. I’ve been to this conference many times, I like it because you, you will find a few people that study related topics, and you can catch up with your mates who researched your area, and then you can sit in on the random ones. Your session was called what, Miscellaneous? Which is actually pretty good. I think most people enjoyed, you know, a variety of discussions that you just don’t really get a lot of smart people in one room to chat about that often. Yeah, it was a good time.
Gene Tunny 21:01
Thanks. Yes, that was an interesting session. And we can touch on that a bit later. I thought it’d be good to chat about highlights of the conference and also what the themes of the conference have been. So, I guess on the themes, there was a big theme, it seemed to me of Economics in the New Normal; I think that was actually the designated theme of the conference, something about the new normal. And there was that speech by Martin Wolf, where he’s talking about the crisis of democratic capitalism. And then Joseph Stiglitz, today was talking about the Post-Neoliberal Order. So, there seems to be this general recognition that things need to change. I still don’t know exactly what they’re proposing.
Cameron Murray 21:54
Yeah, I got the same impression. There’s a lot of; we’re at the end of some era, and something’s happening. And I wasn’t clear what specifically is not working? I’m not a big believer in labelling of things; oh this is proper capitalism. I’m like, well, you can have capitalism and a good welfare state and good public services and, you know, all of those functions well, together. It’s not clear that we need a new label. I think we do have a lot of things right. I found that a little bit unusual, I thought Stiglitz was right, in terms of Economics as a discipline evolving. And I can observe that I’ve been involved after the financial crisis in that rethinking economics and those groups trying to add some color and flavor to your economics education, because it can be a bit dry, like it’s straight with the neoclassical view on things. But in terms of actual policy, yeah, it’s wasn’t super clear to me where it’s going, but it was kind of unusual to get that feeling that everyone thinks there’s some change happening..
Gene Tunny 23:03
So, you’ve got a blog, haven’t you? Fresh Economic Thinking, and I found that interesting, what you were saying about the teaching of Economics and you said that you’ve tried to give it a different flavor. What sort of things have you done? What have you tried to emphasized in your teaching and your writing?
Cameron Murray 23:20
Yeah, well, maybe let me give you an example. Because Joe Stiglitz, one of the last things he talked about was, well, we use Robinson Crusoe as this example of production. And when Friday comes, we talk about specialization. And I use that to say, well, that’s one element of the coordination problem when you’ve got two people. Someone pick the coconuts and someone go fishing. That example allows us to think more broadly? Why is someone better at picking coconuts? Who taught them? Who has the fishing net? And why do they have it and not the other person? Can they be more productive if the two of them go fishing on one day using a net holding one end each, and then the two of them pick coconuts the next day by helping them climb the tree? Like these, the coordination problems are much broader than I guess the way we’re trying to think about it. And I think in Economics training, we can think more broadly as issues come up, we can maybe see where there’s these net improvements on the status quo. And that’s kind of, what my blog is; is there a different angle to this problem? Is this really a coordination problem? Is it really specialization? Is it this? Is it that?
When I look at housing, for example, I was writing about the Shared Equity proposal, I’m like, well, is this the best option? Why isn’t a 100% equity better? This is the proposal where the government will buy 30% of a house for you as an equity partner for first home buyers.
Gene Tunny 24:46
Are they going to go ahead with that, aren’t they? Because they want government here in Australia, right.
Cameron Murray 24:51
And someone at the conference was telling me that the details are being worked out, can’t say anymore. I think we got to think well, that’s one policy, and we can look at it. But we should be tweaking at the edges as well and going well, if 30% is good, why isn’t 40% better? And if 40% is better, why not 100%. And if we’re at 100% equity, where sort of the government owns your house, that’s public housing. Like we should be a bit more expansive in thinking about how things fit together. And that’s what I tried to do.
Gene Tunny 25:22
So, we’re reportedly having a housing crisis here in Australia. And you’ve previously commented, or you’ve recommended a Singapore model, haven’t you? Is that what you’re driving at with a 100%?
Cameron Murray 25:37
Oh, well, my example, for example, in that blog post was the Land and Housing Corporation in South Wales that owns all the public housing stock. And the value of that housing stock went from $32 billion in 2012, to $54 billion in 2019. And like, that’s a really good return on equity for government, if we consider that as an independent entity, making $20 billion in seven years in terms of the value. So, that was my example of well, you know, we’re going to start another fund over here, and it’s going to buy equity in people’s houses; we have a fund here, that’s buying equity, we’re just not conceptualizing it this way, we’re only looking at the costs, and we’re ignoring the fact that what public housing is is an equity investment. So, that’s the expansive way to think about it.
Gene Tunny 26:24
Right. Okay. I’ll put some links to your blog in the show notes, and also some of the reporting on your recommendation regarding that Singapore model.
Okay. What I found were the highlights, and I can ask you about yours. Papers that really struck me as something I wasn’t expecting, or that made me think differently, it was an analysis by this recent master’s graduate from Harvard, Nicole Kagan, not so super. And what she showed was that, that policy during the COVID period here where they let you withdraw $10,000 from your superannuation balance, and it was a lot easier than the normal requirement where you had to demonstrate hardship. And she was making the point that it could actually backfire on the government in the long term due to the fact that it’s reducing their super balance, and therefore the government would have to pay them more pension in the future. She had some calculations that illustrated how that could occur. I thought that was a good analysis, a good paper, and it just shows those unintended consequences and just how there, whenever you’re designing a policy, there’s probably or there’s possibly a lot better way to do it. And So, you should be thinking laterally about the types of policies.
Cameron Murray 27:58
I thought hers was very good as well, because she didn’t just say, this is the result of this policy. She said, oh, here’s another policy of an interest free loan. And what was the other; that she had a third one as well and said, here’s something else. And now I’m going to compare all three of them. And I feel like that’s a really fundamental economic approach of saying, well, this is a good policy I showed you, it’s like, no, what are all the alternatives? And we should be picking the best one, because if we can beat this, we should. Right. So, I thought that was very good. And that was my comment to her as well, there was another. And it might be related to your presentation as well, that the government could have let you take your super or it could have bought your assets from your super and given you the cash and held those assets in its own fund and got their compound growth or whatever. And, therefore, the government would have had those future assets to pay you back when you got the pension, if you know what I mean. So, you could sort of draw a little circle around the super early release program, and take that forward through time by the government owning those assets in its own federal treasury super account, and then paying the extra pensions to you in the future out of that account if it wanted to. So, you know, that’s just another alternative. And she evaluated three and I really liked that approach and was enthusiastic to look at more.
Gene Tunny 29:25
Yeah, I thought it was good. The other papers I liked; Stephanie Schurer who won Young Economist of the Year Award, she looked at a paper, while her paper looked at these anti interventions of various measures in the Northern Territory to a world to reduce alcoholism or to reduce domestic violence and sexual abuse in the indigenous population there. She had this, I think it was some differences model share this methodology to identify what happened in Alice Springs when they introduced a minimum price of alcohol to try to reduce the drinking and the cost of wine. It didn’t have the effect that they necessarily expected. When they looked at what did it mean for babies with the birth way of babies? And what seems to have happened is, well, there was some substitute; they did stop drinking cask wine. There was a big drop in the consumption of that. But then, there was an increase in consumption of beer and other alcohol, to an extent. So, there’s sort of substitution there. But also smoking, smoking increased.
Cameron Murray 30:43
Yeah, it did. That was pretty clear and one of the main results, wasn’t it?
I think that’s actually a result I’ve seen elsewhere of trying to change behavior with the sort of syntax approach where you tax the behaviour you don’t want to get. And I think we get that in cigarettes and marijuana and things like that, if there are substitute ways to get the broader consumption good. Then you’ll find them.
Gene Tunny 31:12
Yeah. I thought that was a good illustration of the possibility of unintended consequences that you can get with policy and as was Nicole’s paper, too. Okay. The other one I thought was great was Warwick McKibbin’s paper on COVID. So, he went over some modelling results of his early in the pandemic. And I mean, Warwick was claiming, I think he’s probably right about this, that he got reasonably; I mean, his estimates were probably better than any ones in terms of the ultimate economic impact. And a lot of it came from voluntary, people voluntarily withdrawing from the labor market.
Cameron Murray 31:58
I wasn’t in that one. Can you? What did he predict? And why?
Gene Tunny 32:03
This was a paper he released in February of 2020. He saw that COVID was spreading in China. And it was going to come to the end; I think it was in Italy at the time. And he used his, what is it, the McKibbin Sachs Global model – MSG model he’s got some global economic model originally built with Jeffrey Sachs at Harvard. And he’s sold it; to all of these finance ministries, I think Treasury had a copy when I was there. How would you describe it? Well, it’s a general equilibrium macro-economic model of the global economy. And he was projecting; he calls them simulations, he’s not calling them forecasts. He made a joke today about how he doesn’t like doing forecasts, because you’re only ever going to be wrong, you never forecast know precisely.
Cameron Murray 33:10
I think that’s very wise.
Gene Tunny 33:12
So, I think that’s very clever of Warwick to do that. And he was showing what GDP deviations he was getting from his assumptions around how COVID would spread. Then he had endogenous policy responses, or actually, they may not have been endogenous, he must have assumed what policy responses would be in terms of fiscal policy, and then monetary policy. He knew that governments would respond and that would help the economy recover. And he was showing that he had the big GDP losses to begin with, but then the V-shaped recovery or the rapid recovery. So, Warwick was claiming that; and it’s probably right.
Cameron Murray 33:56
Did you get the inflation element as well as it’s sort of second half of last year and this year? Because the V-shape recovery; remember, there was a big debate, V-shaped recovery, W-shaped recovery. There was a lot of chatter, and I think obviously he was right on that. But what about the inflation part?
Gene Tunny 34:19
I think he was. He may not have got it to the; he may not have predicted as much as it has occurred, but I’ll have to check that. I think he did say something about that. I just can’t remember off the top of my head. I’ll put links in the show notes to that paper. I found that fascinating.
One thing he didn’t predict and he was surprised by; he was really surprised by just how badly the United States did. But he was modelling the COVID infections and mortality, the COVID deaths, and his prediction for the US was too low. And because in his model he was basing the health response. So, he had the epidemiological development of the disease, the infections and the deaths. He had that related in part to the public health system or the public health response. And because the US, because of the CDC, it came out high in terms of public health effectiveness. So, in his model, US had high public health effectiveness. So, that was reducing his estimate of what would happen in the States. We all know that it just didn’t work. I mean, they may have had the CDC, but for some reason or another, something didn’t work.
Cameron Murray 35:49
Well, you know, the assumptions matter don’t they? One of the standout presentations for me was Hal Varian, the Chief Economist at Google. And I think, simply because he’s got the inside run on all the data, he had a great method of augmenting your traditional time series forecasts that have seasonality and trends with an additional regression that selects for the most useful search terms out of Google Trends, and then uses them as predictors in the regression part of the overall model. And was pretty good at predicting a lot of economic outcomes from Google trends search data, which I thought was pretty impressive, but I guess we kind of, accept that that happens. But what impressed me more is they have a Google survey tool that you can put as like an ad on the news item. And people get credit on Google Play or something if they fill in surveys. So, you can do these really rapid surveys, and it will distribute them to readers of news that meet certain criteria. And it replicates really well, these well-done official surveys that sample representatively across society based on census records of types of people and where they live, it replicates a lot of findings by being completely non representative, and just flooding the internet, essentially, with the survey.
So, the message here is sort of saying is we don’t know if representativeness is that important, but you can find out cheaply and quickly by just doing a Google survey to augment your official survey where you’ve got representative samples from different parts of the country, in different age groups and so forth.
We’re obsessed about sampling and he’s now saying, well, as long as we throw it out to the internet, sometimes it doesn’t really matter.
Gene Tunny 37:54
It’s good enough, the results are good enough. It may not be as precise as a random survey, or a survey done by Roy Morgan or Gallup but it’s got to be good enough for what most people need it for.
Cameron Murray 38:07
Especially picking the trends, right? Is this declining in interest or rising interests, you’ll get that sort of stuff very quickly and cheaply. So, I immediately went back to my computer after that session and looked at housing markets and predictions and tried to catch up with the state of the literature on that, and it’s booming right now. So, I think that’s going to be something we’ll hear more about. And I expect, for example, in the next five years, we’ll probably have a new house price index that is informed by daily Google search trends. Like a live modelled index from this type of stuff, that would be my expectation, given that people are already trying to do that.
Gene Tunny 38:46
Yeah, because CoreLogic put out a daily House Price Index, I think, don’t they?
Cameron Murray 38:52
They do put out a daily index but there’s a lot of assumptions because you don’t know sales data until the settlement and the price was 30 or 60 days beforehand. Over a longer term, it works well. And it seems to pick turning points well. But I think if you’re in the market for producing high frequency index like that, and you can augment that with Google Trends, I think you would dominate that market because people would put more stock in yours, you’d get more press coverage, you’d become very; So, I’d be very interested in if CoreLogic has got people looking at this. They obviously have a lot of data nerds. You might see live daily trackers of many things; could be an interesting new world at the next conference.
Gene Tunny 39:40
Yeah, absolutely. That was great, that nowcasting session and I chatted about that with Leonora. I’ll put a link in the show notes regarding that, too.
So, on housing, Cameron, you presented a paper on housing, didn’t you? Would you be able to tell us about that, please?
Cameron Murray 39:56
Yeah. So, it’s pretty straightforward. There was a lot of very detailed statistical modelling at this conference and mine was the exact opposite. Mine was just, here’s the data on the rate of production of housing from new major subdivisions in Australia. Because the argument that we have at the moment, are planning regulations, stopping supply and keeping the price of housing up. And my question was, how are planning regulations stopping supply? Because we can observe in practice, all these major approvals with three to 20,000, approved housing lots, and we can observe how quickly they supply after the approval. And what you find is that during an economic boom, these property developers will sell at a rate that’s 30 to 50 times faster than when it’s not a boom.
So, they’ll sell five a month, and then they’ll sell eight a month for a few months when there’s a boom. So, if you look at land sales in major subdivisions around Melbourne, when there was that 2015 to 17, boom, you can see, not only did the price rocket, but the sales rocket, and then when the price is up, typically, supply and demand say, well, at higher prices, you sell more, but then it stops once price gets up. So, as prices start rolling over, they stopped selling again.
The main point of that is, there seems to be a built-in speed limit. And then in addition to that, I looked at aggregate company data for listed companies across states where they had eight to 12 different projects. And the question there as well, is that variation I’m observing; does it average out across different areas, if we diversify? And it does, but only to a small degree. And then I looked at council level data for the different councils in Queensland and showed that actually, the variation, even at a whole council level is much the same. So, the point of all that is that there’s some kind of built in speed limit that the market will supply, regardless of planning restrictions. So, if you want to talk about the effective planning regulations, it has to go via this market absorption rate, this optimal rate per period that you would produce new housing.
Gene Tunny 42:20
Yeah, I see what you’re arguing there. So, at any point in time, there is going to be a speed limit. I think that’s fair enough. It’s like with the sale of government bonds, for example. So, they don’t just go and auction off the whole years in one day.
Cameron Murray 42:42
Yeah. The market has a finite depth, right? Especially in property, your local market has a very; it’s very competitive. But in your local area, if there’s only a few buyers rocking up each week, you can’t really sell faster than that. And if you did want to, you’d have to reduce the price dramatically. And that itself might not even work, because who wants to buy something that’s falling in price? Right? You’ve just showed me this is a terrible property asset to buy, because you keep decreasing the price on me. Right? I think property markets function like other asset markets, property developers aren’t in the business of panicking, and to reduce price and selling very quickly. So, if we want to talk about cheap and affordable housing options or systems, we’ve got to acknowledge that limit.
We can’t go around saying oh up zone, and it’ll all be fine, because we’ve got a property boom in the whole world, regardless of local planning conditions. There’s almost no city you can name right now, Regardless of whether they’ve got very generous planning, whether they’ve got height limits, where they’ve got no height limits. Auckland, famous in 2016 up zone the whole city, and then had the biggest boom, I think just about in the world between 2016 and 2021.
So, that was mine. Yours was one of the last sessions of the day, that was just before Joe Stiglitz. I actually really liked your topic because, I have a strong interest in privatizing public assets and accounting trickery.
Gene Tunny 44:26
Yeah. Well, what I thought was bizarre about what Queensland Government did. This is the state government, where Cameron and I both reside; it’s the state government where Brisbane is the capital. What I found odd about what they did was they actually didn’t privatize it, they pretended they privatize it. They said if we did privatize it, we could sell it for $8 billion, and therefore, even though it’s still doing the same thing it did yesterday, we’re now going to treat it as a well; we’re creating this private company, we’re converting a government.
Cameron Murray 45:08
This was the property title’s office, right where you change, when you sell a house, you register the change in ownership. It’s the Torrens title.
Gene Tunny 45:16
Yeah, that’s right. Sorry, I should have mentioned that. Well, this is actually a private company, and we own shares in it. So therefore, we’re going to take it out of the general government sector. And we’re going to recognize this $8 billion asset on our balance sheet and use it to offset our $40 billion worth of debt or whatever it was, and that reduces our net debt.
Cameron Murray 45:47
That’s an accounting trick. I did think it was very interesting that we’re going to privatize, we’re not going to change the ownership. We’re just going to say that it’s; and I guess my point to you was; The other point you were saying is that Queensland has a future fund that does investments in private companies. And they were saying that we’re not putting it in that fund is that?
Gene Tunny 46:14
I know they did. So, it is in that future fund? Yeah. It is in there – the debt retirement fund they’ve got.
Cameron Murray 46:22
Well, and I think one of the questions in your comments was that New South Wales got a lot of flak last year for doing the same thing. And they created this thing called the transport asset holding entity. Did you follow that news?
Gene Tunny 46:38
Yeah, I’ve got to look more into it.
Cameron Murray 46:4
The basic gist was the same thing. They said, well, this is the Department of Rail or whatever it’s called. But actually, we’re going to corporatize it and say it’s a private company. So, when we subsidize it, that’s an equity injection. So, that’s actually an investment, not a cost. So, there was this great big accounting trick to get around there other standard measures of government spending and standard ways that they produce the budget. They’re like, well, no, that’s not a cost, that’s an equity injection, which of course, you could do for anything.
Gene Tunny 47:19
I have to have a closer look at that. I guess the point I was trying to make is that I thought this was a good example of just the financial or the public accounting trickery that can go on. And I think as economists, we need to be mindful of that.
Cameron Murray 47:40
I think your point; you said at the beginning that we’re meant to be sort of, reporting in a standardized way. And you’re comparing governments between countries and budgets and debts. How much does this accounting trick matter? And we’re comparing Queensland and Western Australia or Australia to New Zealand to Canada.
Gene Tunny 48:01
Yeah. It’s difficult to know. And while any one of them, you might think in the greater scheme of things, okay, maybe that’s not the biggest deal but they just all add up and you just don’t know.
I remember what I was saying about what was going into the future fund. What I was trying to say is that originally, they were going to put in liquid assets. So, the original idea was, we would have, I think it was 4 billion or whatever it was, from the defined benefit. The funds set aside to meet the defined benefit superannuation liability, and they were going to take that out, because they were saying, well, we’ve got excess there, we don’t need that much to pay the pensions. We’ll put that into this future fund, but they would have been liquid financial assets. So, cash or shares or whatever. But then, they didn’t have as much as they expected. So, they couldn’t actually put in liquid assets. What they then did was said, well, oh, we’ve got these $8 billion titles registry, let’s stick that in the future fund. And is not the same thing, because it’s not actual ready money. It’s not a liquid asset.
Cameron Murray 49:13
No, it’s definitely not. Although, we did later discuss before we recorded that, a cynic might say that the government is wedged right now in not privatizing any public assets. And they’re literally setting this up. So, when they’re out of power, they get the result they want because the next government, it makes it easier for them to then privatize and sell this off, because the structure is already changed.
Gene Tunny 49:42
It certainly does do that.
Cameron Murray 49:45
It depends how much you think these political games are being played behind the scenes.
Gene Tunny 49:50
Yeah, I’ll put a I’ll put a link to both of our papers in the show notes. I’ve got to think more about your housing article because I think that’s a fair point about the speed limit at a point in time. And I’ve had Peter Tulip on the show before. Peter is someone that you’ve debated or you have a lot of interactions on Twitter and
Cameron Murray 50:15
and in person every time. Yeah.
Gene Tunny 50:19
So, Peter was here at the conference too. And I think Peter’s point is that; I think he acknowledges that, like, you’re not going to solve the housing supply shortfall overnight by relaxing restrictions, because there’s just so much construction or so much building that would have to occur. I mean, have to occur over many years. And I think his point is that, well, the problem is we’ve had these restrictions in place for decades. So, there’s been a whole lot of under building.
Cameron Murray 50:51
We had a good conversation last night with Peter. I think there’s a hidden mental model that we both have that I can’t quite articulate with both tried. One of the components of that is this competitive element in the property market, like how fast would we supply? What’s the real counterfactual? Because his argument, and it’s a common argument, is that we’ve had supply constraints for a long time, therefore, we don’t have enough houses. If we didn’t have a supply constraint, we would have more dwellings per person and more space than ever before. And yet, that’s actually what we have.
Although prices are high. Part of that’s the interest rate, right? Rents compared to income in the private market are 20%. They were 20% in 1996. So, we’re talking, what’s that 26 years ago, quarter of a century. So, not only are rents the same proportion of income, and we’d probably expect people to spend roughly the same proportion of income on housing as they do, you know, there’s a fixed budget share results in the Cobb Douglas function as your income grows. But we have bigger houses, we have more bedrooms and more area and fewer people. And we actually saw that in the recent Census. Census was interesting, because last year, the week that we filled it out in August 2021, I predicted that the homeownership rate in the census would go up. Because it was 65.4%, in the 2016 census. And when the data came out a month ago, it was 66.0. So, a 0.6% increase. So, we got more homeownership. And we saw that the number of people per dwelling fell quite a lot as well, partly because of COVID. People sort of spread out a little bit more. Yeah. And we had a bit of a building boom as well, in that period. And So, we’ve got bigger houses, fewer people in them. So, the question is, why isn’t this the market outcome? Like, surely, you’ve got to tell me why the market outcome is something of even bigger houses and fewer people than what we have. And why would that be the case? That’s where we still disagree. Myself and Peter Tulip as the most active housing supply debaters on Australian social media.
Gene Tunny 53:27
Absolutely. Love to have you both thoughts for a chat in the future. But anyway, we’ll have to leave it there. Because we’ll wrap up soon, because we’ve got the State of Origin game between Queensland and New South Wales coming up.
Yeah, I thought that’s been a great discussion. I just thought of something with Nicole Kagan’s paper.. So, you’ve got that idea that the government could have bought the shares off or it could have basically bought the super assets…
Cameron Murray 54:05
From people if they want to cash out their super, then the Superfund says, okay, we’ll give you cash but the government’s got to give us the cash to take a claim on their same assets.
Gene Tunny 54:15
Yeah. So, the government would have to borrow to buy or to let them cash out. But your argument would be they would be earning more, the government would be earning more from those assets than the cost of the borrowing, giving borrowed and was so cheap.
Cameron Murray 54:31
Yeah. And also, that whatever they earn on those assets is exactly what the people who took the money out of super would have earned. So, if you’re thinking about a cost to the age pension in the future, well, the government now got those assets, exactly the same amount of assets that it can use to spend on your age pension. Do you know what I’m saying? Because you don’t have the super, the government has it. And if you need the age pension, they’ve got exactly the same amount of money that they can give back to you if you qualify for the age pension.
Gene Tunny 55:00
I’ll just have to think that through because I’ll also have the debt one day to a border. Although you could think about the Reserve Bank doing it, perhaps. I mean, that’s one thing that could have;
Cameron Murray 55:14
I mean, it’s a balance sheet expansion for the government. And it’s a contraction for the person who took the cash and doesn’t have that other asset. I might write a blog on this;
Gene Tunny 55:25
I think would be good. I’d love to see.
Cameron Murray 55:27
Nicole was the author of the paper? I’ll reach out because I thought she had the right idea of testing all these scenarios. There you go. That’s what conferences are for; meeting people and sharing ideas.
Gene Tunny 55:41
Absolutely, very good. Cameron Murray, from University of Sydney. Thanks so much for your time. It’s been really great chatting. And it’s been amazing catching up with you at this conference. It’s been great.
Cameron Murray 55:52
Yeah, I know, it has been great to hang out, Gene.
Gene Tunny 55:57
Thanks, Cameron.
Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Till next week, goodbye.
Credits
Thanks to this episode’s guests Leonora and Cameron for the great conversations, and to the show’s audio engineer Josh Crotts for his assistance in producing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au.
In episode 147 of Economics Explored, Kurtis Lockhart, Executive Director of the Charter Cities Institute, tells us about the benefits of charter cities – cities with their own rules or charter, independent of national or subnational governments. Kurtis argues the best way to implement charter cities is via public-private partnerships (PPPs). Learn about the fascinating work the Charter Cities Institute is involved in around the world, particularly in sub-Saharan Africa, with a view to stimulating economic development and lifting millions out of poverty.
Here’s a video clip of Kurtis’s conversation with show host Gene Tunny to give you a flavour of what is covered in the episode.
About this episode’s guest – Kurtis Lockhart
Kurtis Lockhart is Executive Director & Head of Research at the Charter Cities Institute. Kurtis is also a PhD candidate in political science at the University of Oxford. His research examines the effect of institutional reforms on public goods provision with a regional focus on sub-Saharan Africa. At Oxford he has taught both quantitative methods and African politics.
In the field, Kurtis has previously worked as a Research Manager for the International Growth Centre (IGC), for Warc Africa (both in Sierra Leone), and for the ELIMU Impact Evaluation Center in Kenya where he managed the implementation of several randomized control trials across many different sectors (health insurance, rural electrification, tax administration, and legal aid). Kurtis has also completed consulting projects with both Oxford Development Consultancy and with Warc Africa. He holds an MSc in Development Management from the London School of Economics where he graduated top of his class, as well as a BA in Economics and Development Studies (First Class Honors) from McGill University.
The Charter Cities Institute on Twitter: @CCIdotCity
Transcript: Charter Cities: A Public-Private Partnership (PPP) model w/ Kurtis Lockhart – EP147
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:01
Coming up on Economics Explored…
Kurtis Lockhart 00:05
As an organization, CCI’s vision is to empower new cities with better governance; to lift tens of millions of people out of poverty. So, we’re all about poverty alleviation.
Gene Tunny 00:17
Welcome to the Economics Explored Podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official.
This is episode 147 on Charter Cities. We’re going to learn what Charter cities are exactly, and what progress has been made setting them up. My guest this episode, is Kurtis Lockhart, Executive Director at the Charter Cities Institute, and a PhD candidate at Oxford. One important takeaway for me from this episode was the importance of having a genuine partnership with host countries. So, Charter cities aren’t seen as Neo colonialism.
In the show notes, you can find relevant links and details of how you can get in touch with any questions, comments, or suggestions. Please get in touch and let me know your thoughts on this episode, or have any ideas that you have for future episodes. I’d love to hear from you.
Right on, now for my conversation with Kurtis Lockhart on Charter cities. Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it.
Kurtis Lockhart, Executive Director at the Charter Cities Institute, welcome to the program.
Kurtis Lockhart 01:33
Thanks so much, Gene. I’m happy to be here.
Gene Tunny 01:36
It’s great to have you here. I’m keen to learn about what you’ve been up at the institute. As an economist, this is a concept that’s I’ve been fascinated by since, I think it was Paul Romer, famous Economics Professor Nobel Laureate, if I remember correctly; he had this great TED Talk, probably about eight years ago now on Charter cities. I’ll put a link in the show notes.
To begin with, Kurtis, could you just tell us a bit about the Charter Cities Institute, please? Where’s it located, what you’re doing, what your mission is, please?
Kurtis Lockhart 02:17
The Charter Cities Institute is a 501C3. That just means a nonprofit Think Tank and nonprofit research organization. We are headquartered here in Washington, DC. There’s a Zambian office of CCI in Lusaka, that we’re really proud to have opened late last year. That now has three full time staff there, so we’re ramping up quickly there. And I can break down CCIs activities around Charter cities into a few buckets. And they’re all-around building the ecosystem for Charter cities. So, one is around just research, right? So, we provide very nerdy, longer papers on academic jargon and that you’re more e-con inclined audience members would probably resonate with, around why Charter cities are an idea whose time has come. Why they are; we think they’re convincing from a public policy standpoint, to pursue, and why we think that they could be game changers in terms of economic growth, and spurring economic development. So, that’s research, in addition to this longer, more academic oriented pieces, we also, you know, we want to start a movement, and we want people to be involved. You also need to communicate it in other forms, like blogs, like media outlets in more popular press, and exactly like I’m doing with you here today, Gene, on podcasts. So, that’s the research bucket.
The second bucket is around events; we host various events and conferences and summits. One other things that we’re really excited to do, later this fall is co-hosting a conference, a two-day conference with MIT in Boston. They have a sustainable urbanization lab there. And we’re hosting a two-day conference with them, where the first day will be focused on academics; talking about this idea of Charter cities and new city developments as a way to grapple with really rapid urbanization that we’re going to experience as a species over this century. And then the second day, we’ll be less academically inclined and more focused on practitioners and policymakers and new city developers themselves.
So, we’ll go from, the abstract and the academic on day one to the practical and the real world on day two. And I think that’s really necessary in a new space like this with a new novel idea is to get those two silos talking to each other and that’s one of the key things that we see CCI doing in terms of building the ecosystem. So, first bucket – research, second bucket – events.
The third bucket of activities that CCI engages in, is around technical assistance and partnerships. So, engaging in and providing advisory to new city projects on the ground to get these things built in thriving new Charter cities out there in the real world.
Gene Tunny 05:24
Great. I mean, I’m keen to learn about new cities being built. And because this Charter cities idea, it’s designed to stimulate economic development to improve outcomes for people out there in the real world. So, you’re keen to learn what’s going on there? Would you be able to explain first, what is a Charter city? How do you conceptualize it? How would you describe it, Kurtis?
Kurtis Lockhart 05:48
Our simple definition of a Charter city is new city with new rules. And there are two pieces of that: the city component, which is the built environment, or the urban space, and the rules, which economists, have a fancy jargon word; institutions for rules. And economists of all stripes pretty much come to agree that the fundamental determinant of long run economic growth, long run economic development, is institutions and governance. And the issue is, across a lot of countries, low-income countries, lower middle-income countries in the Global South, you have poor governance and poor institutions. And they’re really hard to change. So, we see Charter cities as a mechanism to bring about deep reforms needed in governance and institutions that can then lead to increases in long run economic growth, which is, we think, the major way to lift masses of humanity, from poverty, to prosperity, in its short amount of time as possible. And that’s the main reason; I can go more into why we think that Charter cities are a great mechanism to bring about that institutional reform and institutional transition, if you want. But I’ll pause there.
Gene Tunny 07:17
So just first, why is it called a Charter city? The Charter, is there an actual charter that you give to the city? Is that the idea there’s a document or a set of principles, a set of rules? Is that the idea?
Kurtis Lockhart 07:32
Yes. So, I mean, it comes from history, where new jurisdictions being settled, were granted charters; and basically charter is a standing for the new rules that apply in this new jurisdiction. And it’s a stand-in for institutions. That’s what we mean by charter. And then city, I always break it down by those two words, because that’s what we’re all about at CCI is cities, which is about the physical, geographic space, and urban planning, and land use regulation, and how the city is kind of planned, it is super important. Transportation, urban infrastructure, the built environment. And then on the other hand, the charter, right? That’s what you could call the soft infrastructure of the city, which is the rules that govern different policy domains in a city. Both of the soft and hard infrastructure need to be right, in order for a city to thrive.
Gene Tunny 08:39
So, it’s a new city with its own rules. So therefore, you either need to carve out, or you need to carve out territory from an existing country. I mean, you’ve got to; most of the world’s is going to be covered by sovereign nations, isn’t it? Like, how does this work? I mean, you have to get the agreement of a government, is that right to get a new bit of land and have your own rules? Is that correct?
Kurtis Lockhart 09:09
Yeah. So, this is a great time to bring in Paul Romer, who you alluded to in the first question. So he had a TED Talk back in 2009, that you talked about, where he coined this term Charter cities and defined this concept to begin with, or at least early versions of the concept. And his model, Romer’s model of Charter cities is what we can call the foreign guarantor model to Charter cities where he advocated for a high income, well governed country like Canada to come into a low income poorly governed country like Honduras, and Honduras would cede a large city scale chunk of land to Canada. Canada would then effectively you know, import its good institution. And in that delimited chunk of land that it’s been ceded, and because of that institutional shift towards good institutions, and being administered by Canadians; I’m Canadian, so I’m kind of, patting myself on the back right now, then you would therefore, get economic activity, you’d attract investment, you’d get business formation. And those things would spur sustained rates of growth moving forward, and you get all these good outcomes.
So that was kind of Romer’s foreign guarantor model – a candidate coming into Honduras. As you’ve brought up now, that idea was seen as controversial by a lot of people because it has implications for sovereignty, right. A lot of Hondurans are going to say, wait a second, you’re telling me that we don’t have sovereign control over all of our Honduran territory, and we’re ceding that sovereignty to foreigners? Like no, I did not agree to this.
Well, I think that critique, that sort of, Neo colonialism critique is a bit misguided in certain ways, nonetheless, it’s real. And it rubbed a lot of people the wrong way and was seen as controversial. So Romer tried to implement this model in Honduras, and in Madagascar, and it didn’t work out so well, and then he sort of, receded from this charter cities movement. So, the Charter Cities Institutes, CCIs model is different from Romer’s, We advocate for Public Private Partnership, a PPP between a host country and an urban developer. And ideally, it’s an urban developer from that host country so that they know the context, they have appropriate connections and whatnot. And the reason we think that’s better is basically two reasons:
One is it sidesteps all of these issues of sovereignty that are implicit in Romer’s model, right. This space of land that the developer is going to build is not at all, a separate entity. It is part of the sovereign jurisdiction of the country, subject to its constitution, subject to its criminal law, subject to its international treaties. The only other things that it has kind of special control over is commercial law and everything else other than those three things; constitution, criminal law, and international treaties.
So, number one, it sidesteps these issues of sovereignty implicit in Romer’s model. Number two, we think that this PPP model does a much better job aligning incentives between the urban developer on the one hand, and both the host government and the population, the city residents on the other. The reason is because, urban developers make their profit from the appreciation in land values over time, right? And so that’s their main incentive; is to maximize land values. How do you maximize land values? Well, you attract as many people, as many residents and businesses to your city as humanly possible. How do you do that? You create a livable city, you govern that city well, you provide urban services and urban amenities to the businesses and residents of that city and you will attract more residents and businesses, and therefore see land values increased.
So, we think that aligning incentives is done much better under this PPP model than the foreign guarantor model. It’s a lot sort of, analogous to, you could say, the way a shopping mall is set up. I think that’s a good model in a lot of people’s heads, maybe your listeners. You have a shopping mall, where there’s the mall owner, and then they rent out storefronts, or store space to various shops. And the shopping mall owner provides public goods like lighting, garbage removal, and cleaning and security to the public space within the mall. And in exchange, they get rents from the various stores within the mall to the extent that it then therefore attracts foot traffic to those various stores, and therefore the force base within that mall increases. That benefits the shopping mall owner. So, it’s a very kind of similar model and you can use that as an analogous thing to the way it aligns incentives.
Gene Tunny 14:50
Right. You mentioned that Paul Romer had; there were some practical examples of this that he was involved in. He was advising them, was he? And they just didn’t work out. Do you know why they didn’t work out? What were the problems that occurred?
Kurtis Lockhart 15:07
His full involvement is still unclear; the extent to which was involved. I know that the Hondurans in particular saw the Ted Talk that both you and I have alluded, and I think he was the adviser to the President, really resonated with him. And so, he called Paul Romer and got the Presidential in support and they said, let’s go with these things. And there were a few, several iterations that I don’t want to go into all the history. But eventually, this new Charter cities law, you could say was passed called the ZEDE law, which basically stands for the Zone for Economic Development and Employment. And Romer, as part of this law was placed on the transparency commission. So, there was like an oversight board, that would make sure there’s not a lot of, abuse going on with these zones and the developers kind of, given a lot of powers within these special jurisdictions, these ZEDEs,
The issue then became that potential developers or deals started to arise between folks that wanted to govern these ZEDEs and the government that were being held without the oversight or input from the transparency commission. So, Paul Romer said, okay, I’m done with this, you’re kind of, not at all going about this in a transparent way that I had signed up for. So, he left the ZEDE project.
There have since been a few that he’s started. I think there are three in operation right now, including well known one called Prospera, on the Island of Roatán.
Gene Tunny
Sorry, Roatán; where’s that? Sorry.
Kurtis Lockhart
Roatán is an Honduran Island. Those were the first kind of, ZEDEs under this law, a socialist was elected president last fall in Honduras. And she was elected with one of her platform planks being the abolishment of this deadly law. The Honduran Congress just passed that abrogation earlier this year. And so that’s kind of a huge blow to this ZEDE regime.
I think the three ZEDEs that are currently in place, that were passed before that law came in or was abolished, aren’t going to be abolished, they still have the ability to function. But obviously, if you’re an investor, and you see a president in place, that is hell bent against this concept of a ZEDE, that’s going to likely give you pause about getting involved. So, it’s great for the space. But I think what the Honduran example goes to show you is that you need legitimacy. And you need buying from the local population. And I think the way that the ZEDE law was passed in Honduras in the early days, did not at all, have that legitimacy necessary for long term success.
Gene Tunny 18:19
Right. Did you mention Madagascar as well? I can have a look into it. It’s just fascinating, I wasn’t aware that that was happening. And I mean, if I can get Paul Romer, on the show in the future, or, I’d love to chat with him about that. But you did mention Madagascar, was that right?
Kurtis Lockhart 18:38
Yeah, Madagascar happen. I think Paul Romer met with the president whose name is long, and so I’m not even going to attempt to say it, but they had a conversation and the president, I think was on board. But for many other reasons in addition to this one, what was happening is I think a South Korean company was going to come in and get a large tract of land, and the local population didn’t like that idea. So, a kind of protests broke out. Again, this is somewhat related to the Romer presidential conversation, but there were other factors involved that spurred the protests and riots. So the reform didn’t end up going through. Both attempts, well-attempted and in the Honduran case, it did get implemented, t just hasn’t been very successful. They didn’t end up having an enduring impact and Romer has since receded.
Gene Tunny 19:39
I was interested in that point you made about the new; there was a new government in Honduras and it’s a socialist government. They’re not going to like a Charter city. If you think about it, because is the idea of a Charter city, it’s going to have more liberal or more free market institutions, lower taxes, lower tariffs, more business friendly regulations, is that the idea? That they want to try and replicate what Hong Kong was in a few decades ago. I mean, Hong Kong is still a prosperous place. But there’s concerns about the, the administration or the influence of Beijing in Hong Kong now. Is that the idea that it’s; you want to have a free market type of city state? Is that the idea?
Kurtis Lockhart 20:34
By our simple definition of Charter city being new cities with new rules, that’s a pretty politically agnostic definition, right. So, if you think about it, that could be taken on either end of the spectrum and ran with. I think the model that CCI advocates for is more in line with what you’ve been saying. So, liberalizing and introducing market-oriented reforms, just because if you look at history and how well you know Hong Kong has done and Zen Jen has done and Singapore has done and Dubai has done when they’ve liberalized, that would seem to indicate that that’s a good idea to do. And then you contrast that with reforms on the other end of the spectrum and how those worked out. And I think that effective option is pretty clear from history.
But that’s not to say that we have been approached by, for example, indigenous groups that are interested in this model of Charter cities, because they want as a group, and want to push for an advocate for more decentralized, and devolved authority and autonomy over the jurisdiction that their group resides in. And they see this Charter cities model as a potential way to do that. So, I wouldn’t label that as kind of libertarian or free market fundamentalism in any way; that’s more just an indigenous group seeking some more ability to control their own fates. And I think this is an interesting avenue of the Charter cities movement is around this kind of more traditional local groups that are pushing for more reforms or more powers over their areas.
One other things that; I’m from Vancouver So, I’ve been following this. I guess, developments around this section of Vancouver that’s reserved, a first nation’s reserve, it’s called the Squamish nation. And they own some very, the reserves on some very prime real estate within Vancouver, and just as other in thriving cities elsewhere in Vancouver, real estate prices are astronomically high. And so, what this Squamish nation decided to do was partner itself with an urban developer and say, hey, instead of letting this very pricy and scarce, urban land lay vacant, and just dedicating it to a park or something, let’s build some skyscrapers. Let’s build some housing and apartments for Vancouverites. We have an equity stake in this development. We partner with this urban developer that they bring in the technical expertise and the financing to get the project built. The urban developer benefits, we benefit as the Squamish nation, and each of our members can benefit and was voted positively, overwhelmingly by the Squamish nation. And now, this indigenous group is going to benefit immensely from an urban development project. It’s also going to provide a lot of housing that’s very sorely needed in the city of Vancouver.
So, there’s win-win situations. And I think the model of Charter cities can span the gamut between these helpful models that indigenous groups can like as they want more devolved authority, all the way to more libertarian like sea steading models or something like this have in the past.
Gene Tunny 24:10
I remember listening to an episode of, I think it was Ross Roberts econ talk show about see steady, it just sounded like something that couldn’t work. I couldn’t see how that would be feasible. You just have to give up too much of your lifestyle. I mean, like I often complain about regulations where I live here in in Brisbane in Australia, but I do recognize that there are a lot of good things about living in Brisbane and I couldn’t imagine as much as I am relatively free market and I do have some sympathy for libertarian views. I couldn’t imagine going on to; I don’t know what would you go on to, an oil rig or something or you’d have to buy an island somewhere, I suppose. But I mean the amount of investment you need to get a critical massive population, don’t you? I mean, they’re all these things that you’d have to get right.
But I guess we can talk about your Charter city model in a minute and how that’s going to work and how it’s going to grow and develop.
I want to ask you about this concept of institutions. So, you’re talking about institutions and how important they are to economic development, and then they facilitate trade, and they facilitate innovation. Now, there was a great book about, I don’t know, maybe a decade or so ago, why nations fail, and that really emphasized the importance of institutions. And the problem is in some many developing economies, the ones that can’t get beyond that, per capita income of a few or a few thousand US dollars a year or So, they’re trapped because those institutions are so bad, and they’ve got kleptocrats in charge, and they’ve got marketing boards, which are extracting surplus, and you’ve got all of these really bad institutions. I mean, Reimer gave an example of regulations that mean that electricity companies won’t, they’re not covering a lot of the population. So that’s where you really want the Charter cities, is it in developing economies, particularly in Sub Saharan Africa? Is that where your focus is?
Kurtis Lockhart 26:35
Yeah, I would say that’s accurate. As an organization, CCIs vision is to empower new cities with better governance to lift 10s of millions of people out of poverty. So, we’re all about poverty alleviation. And so our focus does tend to be on those places in low and lower middle income countries, because that’s where most of the poverty lies, almost teleologically. And so that’s where we focus our efforts. And, like, I want to go into the mechanism of institutional change that sort of our theory of change, because you kind of alluded to that we’re talking about kleptocracy and marquee awards and sort of incumbents that kind of dominate the current rule set in the current system. And I think this is really important.
Some of your listeners may be familiar with, not just Why Nations Fail, which is a fantastic book on institutions, but also a book called The Rise and Decline of Nations by Mancur Olson. And he writes about this phenomenon called, The Logic of Collective action. And in essence, you get collective action problems when you have concentrated benefits and dispersed costs. So, what do I need? Let me unpack that. I’ll give an example. So, the main example given in the book and in the States is around sugar tariffs. So, you have these Florida sugar farmers that because of this sugar tariff in the States, sugar therefore, in the US is a lot higher per unit than elsewhere. That tariff puts a lot of money and profits in the pockets of these sugar farmers. Because there are a few farmers, they’re really incentivized and mobilized to go lobby their politicians to keep this sugar tariff in place and not abolish it.
On the flip side, consumers of sugar like you and me that maybe go to the store to buy a bag of sugar once every year for like a few bucks, we are maybe going to have to pay 50 cents extra because of this tariff. And while the group of consumers that are impacted by that 50 cents is huge, much larger than the number of farmers, because that impact is so small at 50 cents is so sort, of trivial. We, I mean you are not going to get all mobilized and angry and co-lobbying our politicians to abolish this tariff. That is completely the opposite for the farmer, they are going to be mobilized.
And so, you get this bad equilibrium for these rules where despite the tariff being suboptimal for society as a whole, it is continued because of this dynamic of the logic of collective action. And you can apply this example with the sugar tariffs to institutions writ large. There are incumbent political elites that are currently benefiting from the status quo institutions, right. So, they have every incentive to see the status quo institutions continued and undermine attempts to reform them, despite reforms, potentially bringing these institutions into a much better and more optimal equilibrium. And because, on the flip side, everyone maybe, has to deal in that place with those institutions, maybe as to kind of, give a bribe once every three months or so. We’re not hugely, hugely impacted in our day to day lives, or perhaps we have other worries to worry about. We are less mobilized as a group of citizenry to push for institutional change on a national level, than the small group of political elites who currently benefit from the status quo are at mobilizing to keep those subnational suboptimal institutions in place.
So, we see Charter cities as a way to, instead of attempting to pass national level reforms, where you’re going to get and threaten all of these political elites interests, and therefore those elites are going to try and stymie and undermine reforms. We see Charter cities as a way to circumvent those interests in elites by situating themselves in a delimited, small geographic space. Ideally, greenfield space where it’s sparsely populated, so you’re not bumping up against any of these incumbent elites interests, and therefore, these spaces can get a lot deeper institutional reforms than otherwise possible. And so that’s the mechanism and theory of change, and why we think Charter cities are this great policy tool to get very deep and needed institutional reforms.
Gene Tunny 31:28
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Gene Tunny 32:02
Now back to the show.
So, could you now tell us please, Kurtis, where your institute is involved in new Charter cities? Like where are we talking about? Where will these cities be? Where are they in the development cycle? What’s happening? I’d love to know.
Kurtis Lockhart 32:22
So, we are an organization CCI, we were founded in 2017. So, we’re in year five, that’s in the think-tank world, we’re still a baby. And, it does take a long time to build driving new cities. So we’re talking on the timeline of decades, not years.
We are involved in several projects. They are nascent, so I’ll go over some of them. One of them is in Lusaka, Zambia, just outside Lusaka, Zambia, it’s called Nkwashi. It’s a Charter city, a new city development that’s aimed at 100,000 residents. And its anchor tenant is anchored around a university. So, what the model is, is to have this stem University of science, technology, engineering, math, attract really bright smart Zambians to this university, train them up in STEM subjects, and then connects those graduates that STEM graduates with remote work in either Europe or the states. And that does two things. I mean, you’re going to earn more being employed by these European and American tech companies – number one.
Point number two, these graduates are also going to earn in American dollars or euros and that allows them also to hedge against the volatility of the Zambian kwacha, which is really tied to copper price, copper price fluctuations, which can be it can experience really wide swings. And so that’s the model for Nkwashi. Nkwashi attracted its first few residents; I think it’s a few years in operation, the groundwork foundations have been laid for the building of the university. There’s also a feeder school, a high school that will attempt to feed students into the university called Explore Academy; that’s I Nkwashi.
The other ones worth mentioning are a Talent city, in Nigeria. The founder of Talent city, his name is Iyinoluwa Aboyeji. He is one of the most successful Nigerian tech founders in the country. He’s co-founder of Andela and Flutterwave, two or the more successful African tech startups and unicorns. So, he wants to give back to the Nigerian tech community that’s growing really rapidly. But he sees the biggest constraint on that tech ecosystem in Nigeria as tech talent. And so, he wants to establish this space, this jurisdiction with new rules that especially allow for freedom around things like crypto and more innovative technologies, and provide very reliable digital infrastructure, and power and electricity, and all those things that you need in order to function as a tech company in the modern world. So that’s talent city.
Another one in Nigeria is called Enyimba Economic city. It’s in the south west, not on the outside of Lagos like Talent city, but in a place called Abia State, and that’s in the Delta region. And so those familiar with Nigeria know that the Delta region is sort of the oil and gas sector, oil and gas region of Nigeria. This city is aiming for 1.5 million residents, it would in phase one, be oriented around logistics and processing around the O&G sector in the Delta region. But it envisions and phase two and phase three, to expand beyond that focus on logistics and O&G processing, to having a university and a world class research hospital, because some of the social sector provisions in the south and southeast of Nigeria are just really, really lacking. And so that’s probably our biggest and most ambitious, single project.
The other, and this is the most recent project that we’re engaged with is in Malawi. And we’re really, really excited. So, we’ve just signed an MOU with the National Planning Commission in Malawi, who have spent the last three years coming up with these secondary cities plan. This plan is really and this has happening across the continent. It’s aimed to address this challenge across a lot of African countries of really rapid urbanization. As it stands right now today, Malawi, is actually among the least urbanized countries on planet Earth. It’s about 17% urbanized. But what we’re going to see in the next 30 years, 28 years to 2050 is Malawi’s urban population is going to more than triple. And so very kudos and plaudits to the National Planning Commission, they see this trend and say, okay, well, we need to get our ducks in a row, and plan for this really, really rapid urbanization in advance. So, the secondary cities plan that they’ve created, and they launched on May 31, I spoke at the launch, it lays out eight new secondary cities, and lays out the spatial development plan for those eight cities.
Malawi is a North South country. So, the cities are spread out from the north, all the way down to the south. What we are going to do as CCI, after we’ve signed this MOU, and we’re now an official implementation partner of this secondary cities plan. We’re in the process with the National Planning Commission, the Ministry of local government, the Ministry of lands, the president’s office, writing up the special jurisdiction laws that are going to apply to these eight secondary cities across Malawi.
So, this, to me is one of the most exciting projects because we have, government buying across a slew of needed ministries, including the President. There’s already been a lot of resources and thought put into this over a sustained period of time. So, you have a demonstration effect that there is that political buying. The plan is already in place for these eight secondary cities. And we’re getting in at the ground floor to shape the legal jurisdiction around those eight cities. So, this is a huge opportunity for us. And we’re really excited about what we’re seeing in Malawi.
Gene Tunny 38:56
Yeah, that’s fantastic. Are you involved in getting any of the financing or any funding from say, World bank or other donors? Do they get any funding from those organizations? You mentioned PPP, Public Private Partnerships? So, there’s an infrastructure developer, or what did you call it? An urban developer or a development company that develops it and they’ve got some deal with the government that the government will not pay them for providing infrastructure? How does that work, Kurtis?
Kurtis Lockhart 39:30
One of the roles that we will play as implementation partner is to help facilitate financing. This is one of the constraints I think most African cities and towns face is this ability to adequately finance urban expansion, right. It’s the most rapidly urbanizing place on planet Earth. In Africa, the estimate is that almost a billion people are going to move into their cities over the next 30 years. So this is a huge transformation. Yet, African towns and cities are not able to issue municipal bonds to the same level that historically, European cities and American cities were able to tap in order to fund and finance urban infrastructure.
So we see these kinds of municipal bond markets in Africa are either kind of, really nascent, or more commonly just nonexistent. So we want to help number one, come up with a de risk model of municipal bonds. And number two, help fill that financing gap by not just kind of public sector debt in the bond market, but also deifies. Like you mentioned the World Bank; the IFC is a World Bank arm that invests in privates. I know, the Millennium Challenge Corporation was also at the launch of the secondary cities plan in Malawi on May 31. And they’re involved in work in Malawi. So, they would be great partners, because they focus on infrastructure growth and institutions.
You have the municipal bonds that need to be figured out, that’s on Malawi, you have the DFIs that will be involved in financing as well. And then the hope is that once those two financial pillars are in place, that a third financial pillar will be then convinced that this is a good idea, and that’s the private sector. Typically, in these new emerging frontier markets, it’s the government that needs to get its house in order, and then the DFIs that come in ahead of the private sector, and that’s a signal to the private sector that okay, this is now a place where I can do business and start offering different financial instruments to.
Gene Tunny 41:47
Can I just clarify Kurtis DFI, do you mean Development Finance Institutions, the World Bank, Asian Development Bank, etc? Is that right?
Kurtis Lockhart 41:58
Yeah, that’s exactly right.
Gene Tunny 41:59
That’s okay. I was just wondering, because I used to work in the Treasury in Canberra, we call them IFIs. I think International Finance Institutions, or I can’t remember. I remember there was some sort of abbreviation or acronym…IFIs.
Kurtis Lockhart 42:12
IFIs is more fun than DFIs. So, I’m happy to go by if IFIs.
Gene Tunny 42:18
Right oh, yeah. Sorry, I interrupted you there. We’re talking you’re going to help sort of, sort out financing and all that. One thing I’m wondering is about the deal or the relationship with the host country? Because I mean, one of the; and you would have thought about this. I know, and this is why I’m interested in your thoughts on it. How do you constrain or tie the hands of the host country of the host government? Because I mean, one of the risks is that you have this thriving Charter city, and the economy is going gangbusters. And, everyone’s wanting to move into it. And if you’ve got lower taxes, or it’s running itself, the host country, their finance ministry, they’re going to look enviously on this little Charter city, aren’t they? And, I mean, they’ll want to get a piece of the action. So, isn’t there a risk there that they could then impose? They could ramp up taxes, they could try and, take, extract some money out of the Charter city, and that threatens the viability of it. How do you deal with that situation?
Kurtis Lockhart 43:32
You hit on what I think of as probably the biggest risks to Charter city projects. And that’s just the fact that there’s a political risk. And, the urban developer is going to enter into a public private partnership in a point in time with a particular political regime. And because these city projects are decade’s long projects, the project is going to span multiple political regimes. And so how do you as the developer know that the political regime that’s agreeing to the public private partnership today, is going to also agree to that same public private ship, public private partnership tomorrow, when that political regime has changed or altered? How do you know that there is a credible commitment? So that risk of the government’s killing the birds that laid the golden egg is ever present.
We’ve thought of this, and there are several ways that we can go about trying to mitigate that risk, that political risk of expropriation, two of the simplest, I think, are just about, again, aligning incentives. One, I think, within that public private partnership, there should be a revenue sharing agreement that’s embedded. So, every year the developer within that jurisdiction collects user fees, they collect taxes, they collect land leases, right land lease rents, from those within that jurisdiction. And I think a proportion or percentage of those funds should be remitted to the host country so that every year, the country gains something in their coffers from the success of that Charter city. Therefore, it has less of an incentive to, see that pot of money that it gains every year, destroyed.
Another way to do exactly that is by giving an equity stake in the development company, to the host country, right. So, if the urban developer succeeds immensely, as has happened in kind of Sangen, and Singapore, and Hong Kong and Dubai, and the city grows, 5, 10%, on average year on year, then the post country also reaps huge rewards from that success. So those are two pretty simple ways to align financial incentives.
Another simple way is that there are organizations that do offer political risk insurance MIGA, M-I-G-A, I forget what the acronym actually stands for, but they are the entity under the World Bank Group of organizations that offers political risk insurance. A few other things that could be attractive to help mitigate this risk is floating the development company and publicly trading the development company. So, then you have big sort of institutional investors within that host country, like pension funds, for example, invested in the success of this Charter city, and whether we like it or not sort of business elites, and political elites kind of talk with each other and influence each other. And if the political elites are threatening to expropriate the Charter city, and that’s going to have adverse consequences for the pension fund folks. They’re going to raise a stink and say, hey, don’t do that, that’s going to hit our pocketbooks, and we might not support you in the next election. And so that could also be some cover.
Another way, and I think this is this is probably really effective, is to include sort of an objective, international organization in the project. You mentioned the World Bank. So, by including the World Bank in a Charter city project, whether that’s alone, or I don’t know, if they would do equity investments in a private company, that would more be IFC, which is their private arm. But including them in the project would mean that if the political elites decide to expropriate or jeopardize or threatened interfere with that Charter cities project, and the World Bank is involved, that means they’re also jeopardizing a bunch of other loans and projects that the World Bank is investing in their country. And they’re also jeopardizing their access to concessionary loans and finance that the World Bank offers their country. So, they would not want to, ideally, they would not want to do that.
So, there’s a bunch of ways to lessen the risk, to de risk, but you cannot fully get rid of that risk of political expropriation, just because, again, unlike Romer, our model doesn’t create a new sovereign, right? These are not sovereign entities, they are subject to the constitution, and criminal law and international treaties of the host country. And so that’s sort of an ever-present list. But again, I just listed off a bunch of ways you can help de risk and mitigate that risk such that it’s, it’s less, much less likely to occur.
Gene Tunny 49:01
I just wanted to ask, those examples you gave of how you can de-risk. Have they been any of those been applied? Or is that just your ideas of how you can de-risk?
Kurtis Lockhart 49:12
I know revenue sharing agreements are part of it. And I know for example, Enyimba Economic city, which I mentioned in Nigeria, both the state government, located in Abia state, as well as the federal government in Nigeria, have equity stakes in the Enyimba development company. And so that risk mitigation technique has been implemented there. There’s also a revenue sharing agreement embedded in the PPP.
When it comes to others that I recommended; it’s not a Charter cities project, but it was a pipeline project in Cameroon. And it was, oil was discovered in Cameroon and Exxon Mobil at the time. I think this is the late 90s or the early 2000s. Exxon Mobil saw an opportunity there to operate in the country. But there had been some protests in the past about the oil sector. So, ExxonMobil was worried about, engaging in all this upfront investment and investing all this capital only to have these protests breakout and then to have to, leave the country. So, they wanted reassurances, they wanted a credible commitment on the part of Cameroon and the Cameroonian government, that that wouldn’t happen. And that also the sort of funds, the revenues derived from the pipeline project would not be expropriated by the Cameroonian government. So, it is what both the Cameroonian government in negotiation with ExxonMobil agreed to, was there would be this escrow fund, that the revenues flowing from the pipeline project went to, and there would be a council approving disbursements from that escrow fund. And some of the spots on that council would be appointed by Exxon, some of the spots on that council would be appointed by Cameroon, but that basically, the tie breaking vote on that council would be the World Bank. It was seen as sort of legitimate from both sides from both Exxon and in the Cameroonian government. Any sort of dispute or kind of corruption or revenue issue was sort of mitigated by having the World Bank involved. Again, for this reason that I brought up earlier that the World Bank is involved in a lot of these low and lower middle-income countries in terms of a bunch of infrastructure projects, or health projects, or education projects, and gives loans of various sizes and numbers to a bunch of really important political projects across the country. If they’re involved, the host government is much less likely to interfere with and expropriate the project than otherwise would be the case. So, I use that example, as kind of illustrative of that, of that power of that risk mitigation technique.
Gene Tunny 52:15
Right. Now, I do want to just ask about special economic zones. This idea of a Charter city, this is broader than a Special Economic Zone, S-E-Z or SEZ because you’ve got people living there, haven’t you? You want to actually establish a city? It’s not just a sort of an export processing zone or whatever it says is, is that right?
Kurtis Lockhart 52:40
Yeah. So, there are a few main differences between a special economic zone and a Charter city. They’re kind of analogous in that both are delimited jurisdictions with different rules, right. But there are a few main differences that we think make Charter cities much more impactful than SEZs. One is just size, right? So Charter cities are cities scale, SEZs are usually much smaller and more narrow. And that just affects how many people and how many businesses can agglomerate within a particular area. Both you and I, being economics nerds, we know the importance of agglomeration economies, and this is why cities are fantastic, because of all these agglomeration economies. So, that’s number one is size.
Number two is SEZs tend to be focused on a single or one or two different sectors or industries. So, you have textile or manufacturing, or tech hubs, those types of zones that have one sector that they really want to focus on. Whereas, Charter cities are mixed use and multisector. They’re cities, right. There’s not just an industrial component, there’s also a commercial component, and very importantly, residential component.
A lot of zones and industrial parks don’t have people living there, right? And again, that impacts this urban agglomeration potential, and we really, really want conglomeration economies to take off. So, the mixed use so multisector and the residential component are super key differentiator.
The third difference is around governance and the rule set. SEZ legislation, when it’s passed, is sort of, you could say setting stone; my whole thing is humility. So, we’re not going to get the rule set exactly perfectly right at the beginning of these things. And the zone operator or administrator is going to figure out that, okay, hey, we didn’t get this law that we wrote, five years ago, completely right. There are a few clauses that are causing us a lot of problems that we need to change pretty quickly, otherwise, these businesses aren’t going to like it. When that happens with SEZs, they have to go to higher tiers of government or Parliament even and get Parliament to pass an amendment or pass a new SEZ law. As you can imagine, that takes a lot of time and slows the reform process down immensely. And, usually the reform doesn’t even happen at all. And so that hurts business dynamism and the ultimate success of those zones. Whereas, Charter cities, we devolve that ability to change the rules over time, down to the city administrator and the city operator. And so instead of having to do that slow process of every time they need to change, they have to go up to higher tiers of government, they can make those changes really quick on the fly as needed within the Charter city. So, those are the four main differences.
Gene Tunny 55:44
Good one. Okay. Just finally, I’ll try and sneak this in. You’re doing a PhD at Oxford. Are you nearly finished? And is it on Charter cities?
Kurtis Lockhart 55:51
Yes, I have a year left. I mean, I’m knocking on wood right now. I am doing a Doctorate in Political Science at Oxford. It’s focused on political decentralization. So, a couple of the articles will be around New City developments and Charter cities, and the potential of these for economic growth and prosperity around the globe. So, that work really aligns with the work that CCI is dedicated to.
Gene Tunny 56:18
Brilliant. Okay, Kurtis has been fabulous. I’ve really enjoyed and I’ve been blown away learning about what you’re doing. And the sheer potential of Charter cities is something that excites me. So terrific work, I’ll put links to your institute and to your social media in the show notes. I really enjoyed the conversation. If there’s anything you want to say to wrap up, please do otherwise. Yeah. I’ve really enjoyed it. And thanks so much.
Kurtis Lockhart 56:50
Yeah, thanks so much, Jean. I will just say if people are hearing this, and they want to learn more and get involved in the Charter cities movement, we are starting and has started a coalition this year called the next 50 Cities Coalition. So, it’s really easy to sign up, you can sign up as an organization, or even an individual, and you’ll get notifications of upcoming events and conferences, you’ll get newsletters and all that stuff. So, I’d encourage you to go to our website, Chartercitiesinstitute.org. And it’s backslash nxt50. And you can join the movement that way.
Gene Tunny 57:26
Great. I’ll have to look into that. I mean, one of the things I found fascinating about this conversation, you talked about the indigenous people in Canada, we’ve got indigenous people in Australia. I don’t know whether any of the indigenous leaders in this country have been thinking about Charter cities, but that’s something I might follow up. Yeah, absolutely fascinating. Kurtis Lockhart from Charter cities institute. Thanks so much for the conversation, I really enjoyed it.
Kurtis Lockhart 57:51
Yeah. Thanks so much, Gene. This has been fun, appreciate it.
Gene Tunny
Okay, ciao.
Gene Tunny 57:56
Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If So, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Till next week, goodbye.
Credits
Thanks to the show’s audio engineer Josh Crotts for his assistance in producing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au.
The next big global economic shock could come from a Chinese invasion of Taiwan, a shock which would probably have more extensive economic impacts than the Russian invasion of Ukraine. Joining show host Gene Tunny in episode 146 to discuss China and Taiwan and the Indo-Pacific more broadly is Dr Greta Nabbs-Keller, Senior Specialist in Defence Research at The University of Queensland and the Program Director of the Australian Program Office for Advanced Hypersonics.
About this episode’s guest – Dr Greta Nabbs-Keller
Dr Greta Nabbs-Keller is a Senior Specialist in Defence Research at The University of Queensland (UQ). She is also an Affiliate Senior Specialist at UQ’s Centre for Policy Futures where her current research project centres on issues of contestation and coherence in Indonesia’s national security policy making. Greta has extensive professional experience working on Australia’s bilateral relationship with Indonesia and continues to utilise her Indonesia country expertise in consulting, research, and international development roles. She contributes regularly to media and think-tank analysis on regional strategic, political and foreign policy issues, and engages with policy communities through submissions, dialogues, conferences and executive educations programs. Greta’s broader research interests include Indonesian civil-military relations, Indonesia-China relations, politico-security developments in Southeast Asia, and Australia’s regional foreign policy. Greta is an Executive Council member of the Australian Institute of International Affairs (AIIA) Queensland and Adjunct Research Affiliate at Griffith Asia Institute.
Links relevant to the conversation
Greta’s articles at the Lowy Institute Interpreter:
Transcript of EP146 – China, Taiwan & the Indo-Pacific w/ Dr Greta Nabbs-Keller
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:01
Coming up on Economics Explored…
Greta Nabbs-Keller 00:04
I think Biden has, whether there were slips or not, he’s made it quite clear that the US will intervene, but I think it’s increasingly likely that we would be looking at essentially World War III if China did decide to attack Taiwan.
Gene Tunny 00:21
Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional Economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is episode 146. On China, Taiwan and the Indo-Pacific.
The Russian invasion of Ukraine has highlighted how geopolitical developments can disrupt global markets and economies. The next big geopolitical and global economic shock could come from a Chinese invasion of Taiwan. The Chinese government claims Taiwan belongs to China. It has an ambition of taking over Taiwan by 2049, the 100th anniversary of the founding of the People’s Republic in 1949, following the Communist Revolution led by Mao Tse Tung. Various actions of the Chinese government and its military in recent years, have raised concerns that a Chinese invasion of Taiwan could happen sooner rather than later. Obviously, this would have profound implications for the global economy, and hence, I feel it’s important to cover the issue on the show.
Joining me in this episode of chat about China and Taiwan, among other geopolitical issues, is Dr. Greta Nabbs-Keller. Greta is a senior specialist in Defence Research at the University of Queensland, UQ, here in Brisbane. Currently, she is the interim Program Director of the Australian program office for Advanced hypersonics. Greta has an extensive background in defence and foreign policy issues with a specialization in Indonesia and Southeast Asia.
I invited Greta onto the show because I thought she’d be a great person to help us understand what’s happening with China and Taiwan, and what China has been up to in the Indo-Pacific region more broadly.
This episode, you’ll learn why foreign policy experts are so concerned about China, because it’s what they call a revisionist power, one with a goal of remaking global institutions and rules for its benefit. In the show notes. You can find relevant links and details of how you can get in touch with any questions, comments or suggestions. I’d love to hear from you. So please get in touch and let me know your thoughts on this episode. This is a big issue we deal with in this episode, and allow him to return to it in the future for a closer look at the potential economic impacts of a Chinese invasion of Taiwan, if that were to happen.
Right on, now for my conversation with Dr. Greta Nabbs-Keller on China, Taiwan in the Indo-Pacific.
Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it.
Dr. Greta Nabbs-Keller, welcome to the program.
Greta Nabbs-Keller 02:57
Thanks very much, Gene.
Gene Tunny 02:57
Excellent, yes. Good to have you on the show. I thought I’d invite you on; I had a recent conversation with Michael Knox, who’s the Chief Economist at Morgan’s, which is a major stock broking wealth management firm, here in Australia. And I asked Michael about China. And I must say I was rather, surprised by his answer that he was so concerned about a potential Chinese invasion of Taiwan sometime in the future or in the next few years. So that’s, that was the original reason I thought I’ll be good to have you on the show. And then I know you’re also an expert on Indonesia and Southeast Asia. And we’ve got a new government here in Australia. And the first trip the PM made was to Jakarta and he had a bike ride with Joko. So, we got to ask you about Indonesia too.
But before we get into all of that, would you be able to tell us please, what is the Australian program offers for advanced hypersonics? That’s where you’re the interim Program Director. Can you tell us a bit about that, please?,
Greta Nabbs-Keller 04:10
Yeah. Thanks, Gene. Well, my position at UQ on both senior specialists Defence research in our engineering, architecture and IT faculty. And my other hat is the program director of the Australian program office for advanced hypersonics which is probably one of the most exciting titles, I think I’ve ever had Gene. Essentially, the program officer, the APOAH, as we abbreviate to it, it’s fundamentally about bringing Australian university expertise in hypersonics together So, University of Queensland is the world’s largest hypersonics group. And I don’t think many people are aware of that that the southeast Queensland with the University of Queensland and USQ are home to considerable expertise in hypersonics science and technology and indeed, I think really the genesis or the story of hypersonics in Australia from Professor Ray Stalker’s time, for around 35 years is largely been centered on the University of Queensland and the subsequent integration with US hypersonics program.
So, the Australian program offers for advanced hypersonics it’s fundamentally, a team Australia approach to advancing hypersonics research and more blue sky or beyond, you know, near horizon research, things around electric propulsion and plasma field engine. And it’s also fundamentally about workforce pipeline. As you know, Gene, Australia is facing increasing shortage of STEM graduates and the APOAH look at pathways to citizenship and basically developing a nurturing that workforce pipeline that’s in such demand by Defence and industry.
In essence, the APOAH provides a single gateway into the Australian university hypersonics ecosystem to include UQ, USQ, University of New South Wales, and RMIT. So, we’re developing that concept to be ready to provide Australian Department of Defence with hypersonic solutions and capabilities.
Gene Tunny 06:26
Okay, so hypersonic, that’s five times the speed of sound?
Greta Nabbs-Keller 06:30
That’s correct. Mark five and above. And I must say, Gene from a non-science and engineering background, and you introduce me as an Indonesian specialist. So obviously, I have more on international relations or comparative politics background, I’ve been on a steep learning curve about hypersonic about scram jets and various modes of propulsion. And it’s been very, very interesting for me.
Gene Tunny 06:56
Yeah, well, it’s certainly relevant in geopolitics, because one of the things that I’ve heard is that I mean, the Chinese, they’re making great advances in hypersonics. So, and I don’t know whether they’re ahead of the Americans or ahead of us or the British, I don’t know. But I know that that’s one of the concerns that’s out there. I mean, there are these hypersonic missiles that have been developed, or is that the Russians do?
Greta Nabbs-Keller 07:23
It’s both. You’re both right. I mean, the Russians have long had hypersonics technology and other players are India and Japan. And indeed, there may be others because a lot of that is closely guarded. Chinese did fire a advance hypersonic missile last year, which caused some alarm, at least in media reporting, Gene within the Pentagon and Washington. I think one senior US General described it as a Sputnik moment where the US I think, was, fundamentally alarmed at the advances in Chinese hypersonics technology.
Again, I’m not a hypersonics scientist myself, but certainly China’s formidable military buildup and integration of critical and emerging technologies is quite significant. And the rest of the world is looking at that with some unease, of course.
Gene Tunny 08:29
Right, okay. So, we might talk about China now. So, what stunned me as an economist in the last few years, I think it’s the last few years, is just how much that relationship with China has deteriorated. Because there was so much excitement about China joining the WTO in 2001. And I mean, we all saw the economic gains to Australia from the growth of China through them purchasing our coal and iron ore and what that meant for that sector. So yeah, this is all come as a real shock. And it looks like I mean, there’s been a real; it’s a big challenge for our country, and also for our allies, the US and Japan. And I suppose we’re part of this quad group now with India. So, I’d like to ask you about that later. What’s that all about? Because I thought India was not aligned. But now it looks like it’s aligned.
To begin with, could you just describe what’s your assessment of the current strategic environment, the current environment facing Australia and I suppose the US as well in the Indo-Pacific, I mean, how concerned should we about what’s going on?
Greta Nabbs-Keller 09:55
I think it’s deeply concerning, Gene, for those of us who follow international political and strategic developments closely, I think there are real reasons for concern and you know, indeed, in terms of Australia and take Australian strategic guidance and defence and foreign policy documents, you know, they describe the environment as more uncertain, and more complex and more dangerous. You might recall Peter Dutton talking about the drums of war, a beating and being criticized for that. But I’ve seen in my own career, particularly over the last, I’d say, post COVID, particularly Gene that that word war, is being more openly discussed and acknowledged as a real prospect due to the deteriorating strategic environment and rising strategic tensions between major powers.
So, I think in a nutshell, many of the current geopolitical tensions in the Indo-Pacific centre on a rising and a revisionist China and of course, it’s not only sino US strategic rivalry that we can see, you know, playing out, across economics, geo-economics, around technologies, around trade, around human rights, around maritime strategic competition. But of course, one also has to remember that it’s not only US and Australia have difficulties with China, but indeed, many countries even actually, European countries as well. Particularly, you mentioned the Koba particularly Japan and India, of course, as significant Indo-Pacific powers. And they have their own issues, which are probably, to some degree more concerning and more pressure than Australia’s facing, particularly India, on the line of actual control up there on the border. And definitely, India and China have gone to war previously. Over their contested border, they’re in the line of actual control up there in the Himalayas, you see increasing pressure on Japan, particularly in the maritime domain in the East China Sea.
So, China under current president, Xi Jinping and I acknowledge, as you introduced me, I’m an Indonesian specialist rather than a China specialist. But of course, I follow these developments closely. And a lot of these uncertainties centre on China and a more assertive, and aggressive China and decision Jinping’s presidency and how various states in the region are responding to these pressures and constraints. I think particularly with Australia, if you’re an observer or student of Southeast Asian politics particularly, you would have seen some of the coercive and punitive behavior playing out previously on Southeast Asia that was later applied to Australia, particularly once our former Prime Minister, Scott Morrison, called for and rightly so, an independent inquiry into the origins of the COVID 19, the virus.
Indeed, in Southeast Asia we’ve seen for a number of years, very coercive tactics, particularly in the maritime domain, and some implementation of coercive trade practices against Asian states like the Philippines, over tensions in the South China Sea; rival maritime claims in the South China Sea. And if I’m not mistaken, there was some tariff barriers put on Banano, a Philippines banana export. So. there have been a number of precedents here.
I think China, after COVID-19 obviously became more brittle and much more brittle and more sensitive to international criticism over the origins and the management in the earlier days of the COVID 19 pandemic. And I think a number of, you know, even seasoned foreign policy experts and senior Australian public servants are probably shocked by Australia’s treatment by Beijing after calling for that independent inquiry into the COVID 19 pandemic. But also, I think, a number of countries, we saw what was characterized as wolf warrior diplomacy, by Beijing, that list of 14 grievances against Canberra.
But there has been some precedent here in their treatment of other countries and indeed, it’s not just Australia that’s experiencing these problems as I said, countries like Japan are really at the frontline of increasing coercion and intimidation.
I think also China’s willingness to engage in grey zone tactics. And that’s something that Russia has also employed successively in Ukraine. Prior to the actual invasion of Ukraine, and you see, militia groups that, rather than they’re not Russian military forces, per se, but there are militia groups, you see disinformation campaigns, and I think China has increasingly engaged in those grey zone operations or what is termed hybrid warfare. So, their acts of intimidation and coercion, shorter warfare. And I’ll give you an example on that Gene, in the maritime domain. You’ll see China deploy heavily armed paramilitary vessels escorting their fishing fleets in the South China Sea, rather than PLA Navy vessels, for example, increasing cyber intrusion, cyber hacking against Australia, but a range of countries all around the world.
You’re seeing increasingly, aggressive and assertive China that looks to fundamentally kind of reshape the Indo Pacific and probably more broadly the global order; more convergent, with its own interests. So, I think there’s no doubt that, you know, China has achieved particularly, in Southeast Asia, increasing political, economic; in terms of military balance of power, that’s something we can discuss. I think it was quite a shock for Canberra and the Australian public to be on the receiving end of that rough kind of diplomacy and treatment post March 2020.
Gene Tunny 16:56
Absolutely. Well, they applied higher tariffs on many of our products on beef, barley; they restricted the imports of our thermal coal into their ports. I’m going to have to look at those sporting grievances. That’s interesting. And you mentioned Peter Dutton, was he a Defence minister?
Greta Nabbs-Keller
Yes, former Minister for Defence.
Gene Tunny
So that’s why those comments were picked up and he was accused of being, was it sensationalist? It was the right word to describe that. But yeah, there were people who were thinking that sort of commentary wasn’t helpful at the time. Right. Can I ask you what you mean, by revisionist? What do you mean by a revisionist China?
Greta Nabbs-Keller 17:42
The concept of a revisionist power, is a power or a nation state that wants to remake the international order, an international system and the rules. As I said, it convergent with their own interests. Undergraduate students studying international relations and politics, they understand about the post Second World War kind of US led global system, whether and of course, you Gene, you’re more an expert on the international trading order and the WTO, and the basis of rules and norms, and that extends, of course, to international legal norms that govern the maritime domain.
And so, it’s really that post Second World War Bretton Woods, US led system of strategic alliances that emerged out of the Second World War, where the US has largely been the dominant, the preponderant global power and that’s very much been changed. And I give a practical example, because it sounds abstract. So take the maritime domain and on class, the 1982 UN Convention on the Law of the Sea, which governs territorial waters and exclusive economic zones, and indeed, Indonesia, was one of the architects of on class the UN Convention, and as diplomats, played a key role being the world’s largest Arca pelagic state, and a system of rules and governance and norms that guaranteed maritime governance and nation states access to their territorial and the resources within their 200 nautical miles exclusive zone.
So, China has, increasingly refuted international legal norms, Permanent Court of Arbitration ruling 2016 which found in favor of the Philippines on rival maritime claims. China simply chose to ignore that and refute that. So, I think what you’re seeing more generally Gene, in terms of geopolitical tensions, you’re seeing countries like Russia and China who are more willing to challenge those established legal norms and international principles that have largely underpinned prosperity and security and stability in the Indo Pacific. And we’re seeing the erosion of that and that’s creating increasing uncertainty and tension.
Gene Tunny 20:21
Just on those maritime boundaries, is that what you were talking about before and China isn’t respecting what was decided by this international body? What does that mean, practically? Does that mean that they will help their fishing crews go into those waters and fish?
Greta Nabbs-Keller 20:45
Absolutely. The problem in the South China Sea; and you might be familiar with, China’s very ambitious South China Sea claim that takes in around 95% of the South China Sea, irrespective of those maritime boundaries that were decided under the UN Convention on the Law of the Sea in 1982. So, you’re seeing effectively, Chinese paramilitary and fisheries activities inside our state’s exclusive economic zones. You’re seeing increasingly belligerent and coercive behavior against the Coast Guards; more often Coast Guard, sometimes military assets of Southeast Asian states, littoral states that have claims in the South China Sea. So, you basically have a very powerful nation state who’s not willing to follow the rules of the game and has the power and the might to simply ignore that. And of course, the US is not innocent of ignoring international law. Let’s be fair here. But, we’ve also had harassment of regional states like Vietnam and Indonesia and Malaysia with their exploration of hydrocarbons, oil and gas in the maritime domain and harassment of oil rigs and oil exploration activity. So, it’s kind of spans a range of activities in the maritime domain, but again, it undermines the principles of sovereignty, and of course, maritime sovereignty and of course, that’s inherently destabilizing.
Gene Tunny 22:29
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 23:03
Now back to the show.
I thought it was interesting before you mentioned this concept of grey zone activities. And I mean, they’re also engaging in applying economic pressure in a way, aren’t they? Or that they’re coming into these countries and they’re signing memorandums of understanding or they’re doing deals and then there’ll be some financing. But then what can happen is that if they don’t meet the repayments the country, then the Chinese can take it over or they can apply leverage on those countries. That’s a concern, isn’t it? So, there’s a whole range of things that the Chinese are doing, they’ve signed a deal; there’s some sort of deal with the Solomon Islands, you know what’s going on there? Does that fit in with a sort of a grander or a broader plan to dominate the Indo-Pacific?
Greta Nabbs-Keller 24:01
You’re talking about debt? What’s term debt trap diplomacy. And usually that some understood in terms of China’s expansive infrastructure and connectivity program, the Belt in Road Initiative or the VRI and indeed, there have been legitimate concerns about these massive infrastructure projects, extending from Africa and through, South East Asia, Pakistan, and the Pacific. The problem, particularly of debt exposure of these countries; they’re taking on debts for infrastructure projects that they’ll never be able to repay.
One of the key-case studies there is Sri Lanka actually, and the Hambantota port; I think I might have a pronunciation regret. Hambantota port facility in Sri Lanka, and exposure to too much debt and China can effectively take control of that strategic port facility, which of course, not only has, civil applications and uses, but strategic and military benefits, of course, by buying ceding control of that.
So, I think countries are increasingly aware of some of these risks. And I think the US has even the State Department has done work in some countries, including Myanmar, to revise the terms of those infrastructure projects, which had, incredible interest levels and unfavorable term. And some of them have actually successively, successfully been renegotiated.
I think what you, I don’t know if admires the right word, Gene, but certainly, I think if you’re talking about grand strategy and sweeping strategy, and coherent whole of government strategy from Beijing, using all its policy arms, from military, from economics, from political to technological, and so on. It’s a very strategic approach to, if it’s not dominance, to increasing economic influence and political leverage, and ultimately, being able to project military forces. It’s very sophisticated.
And we’ll turn to Honiara deal for a moment, the Solomon Islands China deal. I mean, that’s deeply concerning on a number of levels. First of all, for the Solomon Islands, people and parliament, it was not a transparent negotiation process. So, that’s been of great concern. There’s also a sense also from looks at Southeast Asia; it’s an indication of what will increasingly happen in the Pacific and some scholars and analysts call it elite capture that you’ll find in Southeast Asia, for example, that, Beijing’s ability to wield significant economic blood, yes, it has some respects, captured some of the region’s elites. But that doesn’t mean that there’s broader strategic distrust in in those countries in Iran. I think you’re seeing the same sort of thing with the Pacific that China can successfully co op some of the region’s elites. But there’s certainly lingering distrust and unease remains around in the region’s politics.
I think on the Honiara deal, what what’s most concerning to Australia as well, that Solomon Islands is only 2,000 kilometers from Cannes and if you look back to your history in the Second World War, and the Guadalcanal, fiercely contested battles between the US and Japan, principally. I mean, that was basically about, preventing Japan from gaining a strategic foothold and strategic access, that would cut the US off from allies like Australia, and indeed, if China was to increasingly base or rotate, military assets and military personnel through Honiara, that’s a deeply destabilizing concerning strategic development for Canberra.
Gene Tunny 28:42
Right. I mean, was that a failure of diplomacy on our part, or on the US’s part? It just seemed to take everyone by surprise that that came up. I was stunned when I heard it.
Greta Nabbs-Keller 28:53
Well, I think, again, about sophisticated grand strategy that I think Washington and Canberra and a number of countries are being outsmarted by Beijing on a number of levels. And there’s a lot in this and I won’t unpack it all, but I think the previous government could have done more. In some ways, I think during the Morrison government’s pacific step up, which I think was announced, if I recall correctly, around 2017, or 2018, was somewhat an admission of neglect. Now, I don’t want to overstate the neglect because obviously, both Southeast Asia and the Pacific have a fundamental, foreign policy importance to Australia. There’s no doubt about that. But I think the step up was a recognition in the context of growing geopolitical tensions Australia needed to do more with our Pacific neighbors, or as Canberra terms it, Pacific family.
I think the US has also realized recently that they need to do more in the Pacific, particularly in response to China. Fundamentally, Pacific countries like Southeast Asian countries want to be taken on their own terms, they want to be considered on their own terms. And they don’t want their relationships with Australia or Washington to be viewed; you’re only within the prism of sino US rivalries or geopolitical tensions. Yeah, they have their own fundamental development concerns, and as you know, Gene, the Pacific with existential threats from climate change, rising sea levels are, an abiding concern for Pacific Island countries.
The other thing I’d say about China and Bina Indonesian specialists have a number of decades, something I note with interest, Gene, is that the China builds the capacity and regional expertise of its diplomats. So, they have Chinese diplomats who are real Pacific hands, they have years of rotational postings through the Pacific, so they become Pacific experts. And they engender that kind of expertise and the context and the relationships that come with that. And I think Canberra could do more, I think, to build again, or rebuild from what’s a generalist type model with our diplomats. And when I say diplomats, I don’t only mean Department of Foreign Affairs and Trade Representatives, I mean, all our agencies that are involved in international engagement and diplomacy. And as you know, treasury and finance as much Defence and Home Affairs, and others are posted into regional capitals. I think we could do more; we need a more sophisticated approach, we need to recalibrate our policy settings and more whole of government approach to regional engagement, and particularly on the Pacific and Southeast Asia.
Gene Tunny 32:01
It sounds like it. The way you were describing it earlier, it sounds as if China has this coherent strategy. So, there’s coordination between the different arms of the government, the different departments with state owned enterprises, perhaps? I mean, is it because they’re an authoritarian country with the President; I mean, is he President for life now or something?
Greta Nabbs-Keller 32:24
Constitutional change; I think there’s some more detail, I think, in the machinations that remain outstanding, whether that’s, guaranteed by the senior leadership of the Chinese Communist Party, but it seems that there were there was some agreement that his tenure would be ongoing, but I don’t know if that’s absolutely guaranteed genuinely in that context. But, it looks certainly a very, very strategic approach. I think you’re right, in an authoritarian kind of party-controlled state, centralized command, it is much easier, of course, to formulate and operationalize a very coherent kind of, strategy as opposed to democracies, where intrinsically, there’s more bargaining, there’s more difference, there’s more debate. And, indeed, the parliamentary system with the government and opposition that’s sort of; the foundations of Westminster democracy. So, I think it is much easier in a centralized party-controlled state to wield power and influence and sort of mobilize all your arms of government, and you mentioned State owned enterprise, for the purposes of very sophisticated strategic kind of policy approach.
Gene Tunny 34:00
Yeah, I found fascinating to that concept of; was it debt trap diplomacy? Yeah. Because I heard about what happened with Sri Lanka. I’m going to have to look more into that and probably cover it on the show. It’s fascinating and disturbing.
Right, my chat about Taiwan. How big a risk do you think that is? I mean, because that would be so disruptive to the global economy. I mean, we’ve seen what’s happened with Russia – Ukraine, but if China did invade Taiwan, I mean, it would have different impacts, but it’d be just as bad, probably worse. I mean, if you think about how much of the world’s industrial production has shifted to China, they make all the iPhones, they make computers. And then in Taiwan, it’s a major producer of semiconductors, I think, the chips that go into computers, I mean, this would be profoundly destabilizing.
Do you have a sense of how big a risk it is? And I mean, what would actually happen? Would the US respond? Would Australia respond? How would it all play out? I’m hoping it doesn’t happen; we’re all hoping it doesn’t happen. My feeling is that it’s unlikely but when I talked to people like Michael Knox, and then I, I listened to people like Ian Bremmer and other global commentators, I realized that the risk is much higher than I understand at the moment that I had expected.
Greta Nabbs-Keller 35:42
I think, again, I’m not a sonologist or China experts. I’m not privy to classified briefings. I’m not privy to the inner workings of the Chinese Communist Party and their thinking, but in broad terms, of course, I follow these strategic developments in the Indo-Pacific.
I think there’s no secret that Beijing, and Xi Jinping is made no secret of seeking, as they term it, to reunify with Taiwan, but of course, Taiwan, strictly speaking, was never part of China. The Republic of China was originally under Japanese controllers; Formosa and then the Shang Kai Shek. After the China’s civil war, the remnants of his army fled to Taiwan. And, if not a country formally, it’s a very successful; indeed, it is a country whether it’s formally recognized as a sovereign country in political terms is another aspect. It’s been a very successful democracy, very dynamically, economically, and of course, it’s a democracy. And I think Beijing’s made no secret, it seeks to peacefully reunify with Taiwan, but they have not ruled out military force to do so.
I’ve been present at the Shangri La dialogue in Singapore, which is the preeminent security defence dialogue in in in the Indo Pacific region based in Singapore at the Shangri La Hotel, every two years and there’s no secret that, senior Chinese officials and generals, speaking at that dialogue, make no bones about it, that Taiwan, is an inseparable part of China, and they will seek to reunify.
Now, the implications of China’s invasion of Taiwan are memes, as you say. I mean, it’s almost difficult to really comprehend the massive implications. I mean, we look at Russia’s invasion of Ukraine, and the flow on effects for the global economy, and indeed, food security for millions of people looks like they’re going to be threatened with food shortages, rising interest rates. And you’ve got the supply chain issues in China associated with COVID 19 lockdowns which are exacerbating that. And of course, you as an economist know very well about this.
Let’s look at some of the key implications, and there’d be many implications. But I think if China successfully invaded Taiwan, it fundamentally changes the Indo Pacific region, it gives China force projection. So, occupation of some of that first island chain, as we see that island chain along the eastern part of the South China Sea, it enables them to forward deploy military forces and to deny the US access, around the Philippine Sea, and more broadly threatens, they’re leaving implications, for us, us force disposition in Guam. Fundamentally, for Japan, this will be a profound concern for Japan because it effectively cut or deeply imperil Japan from US military assistance. So, in strategic terms, it provides Beijing with a forward presence to project military force and potentially control vital sea lanes and air space. So, I think also, it would have broader consequences, as we’ve seen it in Russia’s success in Ukraine, because it means authoritarian states can simply annex and occupy democratic ones. So, it’s more fundamentally a threat to democracies and those fundamental principles and values of democracies that we hold dear.
We hear about European values Gene, in the context of Ukraine, and Ukraine’s potential membership of the EU and NATO. And we talk about European values and what we’re talking about, there are the fundamental tenets of liberal democracy. And I think, more powerfully, in some respects, if the US did not successfully defend Taiwan, it’s the end of that post Second World War order, it’s very profound, it’s the end of basically US hegemony in the Indo-Pacific region, the US would lose credibility with allies and also mean the consolidation of a China centric order. And all that entails; I don’t know about you Gene, it doesn’t feel me, the prospect of living under a China dominated doesn’t fill me with great glee on a range of France from just environmental management. And I talked about maritime and the maritime domain about, exploitation of fisheries, you’ve got seabed mining emerging as a warrying prospect, but also, in terms of political liberties, surveillance, cyber intrusion, and coercion, it doesn’t fill me with confidence that if China could successfully take Taiwan, and then it would fundamentally impact on the balance of power and all that would entail.
I’d like to quote, Malcolm Turnbull actually on this, as what’s at stake here, more generally, with China’s revisionist tendencies, as Malcolm Turnbull, our former Prime Minister said, you, you can’t have a situation where the big fish eat the little fish and the little fish eat the shrimp. And that’s the basis of the international rules-based order, is making sure all sovereign states at least, have some equality in the international system. And I think China’s might and power is fundamentally eroding that rules-based order and this is the danger of highly destabilizing.
It’s hard to imagine; the economic implications are something you wouldn’t be able to talk about. But this would be profound, absolutely profound. And, the US has tripped itself up a little bit, particularly Biden on Taiwan, because there was a deliberate policy of ambiguity by Washington recognizing one China policy and ambiguity around whether the US would actually deploy military force to defend Taiwan. And I think Biden has, whether there were slips or not, is made it quite clear that the US will intervene, but I think it’s increasingly likely that we would be looking at essentially World War 3 if China did decide to attack Taiwan, because that would invoke Japanese involvement. And certainly, we’d be involved as well.
Gene Tunny 43:25
Right. Yeah. I mean, I just wonder what it would look like. Would it look like a block aid? I mean, I’m struggling to think of how they would respond; there’d be diplomatic pressure at first. I mean, we don’t know how it would go. Would the Chinese easily; would they take it over? I’m sure the Taiwanese have, I mean, they’ve probably been training for this, preparing for this. They would have their own military equipment to defend the island. So, it could be like Ukraine. I mean, that’s been a surprise that the Ukrainians have been able to push back on Russia so well. And I mean, the Americans have been supporting Taiwan, haven’t they? They’ve been arming the Taiwanese?
Greta Nabbs-Keller 44:13
Yeah. It’s been a number of congressional acts on Taiwan, the increasing number of US officials, much to Beijing’s consternation flying in into Taiwan. And that’s, of course, in China’s eyes, undermining one China principle. I mean, Taiwan, has some formidable military capability. So indeed, that the Taiwanese and Americans are looking very closely at Ukraine.
What has surprised strategic analysts about Russia’s invasion of Ukraine is that the Russian military was always considered, a formidable, and highly capable military force. But the Ukrainians in asymmetrically have been able to impose significant costs on Russia. You’ve got issues around morale, conscription with the Russian military, the use of drones; successful application of drones and sophisticated anti-tank missiles and anti-aircraft missiles. Ukrainians have; they’re defending their homeland and they’ve done surprisingly well.
You could imagine, Gene, this would be quite devastating. I think the inevitability of war, as sad as it seems, it’s very hard to see this not being on a trajectory towards war, because there’s so much at stake as, as I stated, for the US and other countries in Taiwan. And from China’s perspective, they fundamentally see Taiwan as part of the Chinese mainland and homeland. Again, what makes it dangerous is there’s a sense of domestic political legitimacy in reunifying, with Taiwan for Xi Jinping regime, which perhaps makes it more dangerous and as economic trends and deterioration, the global economic environment will buffets China, as it will other states. Does that make Xi Jinping, more inclined or less inclined to consider an attack on Taiwan?
The longer the US leaves it, China grows inexorably stronger and more military capable as the years tick by. So, there’s very, very high risks at the moment, Gene, of a conflict or regional conflict emerging. And that’s what worries countries in Southeast Asia feel so much, you feel sort of, pawns and caught in the middle of these kinds of dynamics?.
Gene Tunny 47:12
So we’re recording this on the 23rd of June, 2022. On 22nd of June, 2022, CNN reported China sends dozens of war planes into skies near Taiwan. So, it’s acts like this that make people very concerned about the future.
Can I ask about the other sort of players in the region, the major countries, Indonesia and India? So where do they fit in this because they’ve traditionally been nonaligned. We’ve been in, was it Bandung? Did have a famous conference there. We were there on a course for the Indonesian Ministry of Finance and stayed in the Padma on the Gorge there, which was beautiful. But there was, was it the East West Conference? I’m trying to remember it. There’s that old colonial building in downtown Bandung where they had a famous conference back in the 50s.
Greta Nabbs-Keller 48:09
You right Jean, that’s the Asia Africa conference of 1955, still lauded as one of Indonesia’s greatest diplomatic achievements and out of the Asia-Africa conference, which was essentially, that was in a cold war environment, but it brought the newly independent countries of Asia and Africa together. And it was the birth of the nonaligned movement. Of course, these countries who are effectively post-colonial states, didn’t want to be two sides between the US and the Soviet Union; a Soviet bloc in the Cold War, and they wanted to forge an independent path. And out of that, emanated the peaceful principles of coexistence and it was historically a significant development in an international political history.
There’s one thing I just want to pick up from your previous comment about the Chinese planes, PLA Air Force planes are flying into Taiwan border area air identification zone. This is what makes it so dangerous too, it’s not just the rhetoric, and the polemic around Taiwan, It’s China’s increasing willingness to engage in that kind of conduct both in the maritime domain and the air domain that make the risk of miscalculation and escalation so high, you can foresee a situation where, missiles are locked on and in this game of brinkmanship, you can see how something could go terribly wrong and escalate very quickly. And indeed, the ABCs reported this morning on more details of PLA Air Force interception of rafts Australian Air Force planes are flying out from the Philippines over the South China Sea around the Paracel Islands, challenging them in some very dangerous midair maneuvers. Things are escalating.
Now, Indonesia and India, very interesting states – pivotal states, of course. India is the second largest country in the world in population terms. And Indonesia, many people overlook is the fourth largest country in population terms and the world’s third largest democracy. So, India and Indonesia are pivotal states to the Indo-Pacific. And you’ll see India’s been very, interesting and you’d said, of course, they’re both formally nonaligned. India and Indonesia have a lot of historical and cultural similarities.
India, of course, has become increasingly concerned about Chinese actions on its Himalayan border there around Ladakh, in the line of actual control. There’s been physical skirmishes up there between PLA and Indian troops that saw at least, I think around 25, roughly, Indian soldiers killed, and the Chinese China never released the number of their troops killed in the physical skirmish up there.
So, that’s been of increasing concern. And certainly, India’s responded with increasing its military presence at Himalayan border significantly. They’ve banned dozens and dozens of Chinese apps. I’m talking about mobile phone apps around the risks of surveillance and intelligence collection, and intrusion.
And you’ve seen India move; although it’s formerly nonaligned, India has moved much closer to Washington, and indeed Japan and Australia, as those four states of the quadrilateral security dialogue or the quad, look to act in coalition and it’s not a formal military alliance with note, because of the nonaligned status of India. But you see, you’re increasing coordination between the quad members, around vaccine diplomacy and vaccine infrastructure, economic technological cooperation.
Now, the military component of the quad is probably the Malabar naval exercises. There’s sort of a tenuous link with the quad and as I said, the quadrilateral security is a dialogue. It’s not a military path or alliance, but perhaps the Malabar exercises for nation exercises and conducted in the Indian Ocean between those four states. You can see is the kind of the military defence component of the quad.
Now Indonesia, of course, is a country that’s been very much at the forefront of my research and professional interests for decades. Indonesia is an interesting country. It’s again, formerly nonaligned, it’s effectively the largest state in the Association of Southeast Asian Nations and Southeast Asia and effectively the veto actor. Indonesia has a foreign policy doctrine, a free and active foreign policy doctrine, and it seeks strategic autonomy and to manage the influence of what it considers external powers and I mean, the powers external to the Southeast Asian region. Although China’s proximate in Indonesia’s foreign policy conceptions, China, Japan, US and other countries are external to those ASEAN states.
And I think, Indonesia and many of the major Africa; the go back to Bandung Conference were born out. They were decolonized within this Cold War, polarized global political context, and they don’t want to be seen as pawns in great power rivalry. So, this is increasing policy complexity to Jakarta.
You’re acutely worried about rising geopolitical tensions and what that means for decades of stability and growth in Southeast Asia and you know, ASEAN as a bloc is a significant economy collectively. Over around 650 million people in ASEAN; significant collective strength in ASEAN.
So, Indonesia hedges and balances; it has close and constructive relations with China and very close and constructive relations with Washington, and of course, Canberra and Tokyo. Tokyo, and one cannot forget Japan; Japan is still a significant global economic power. And Japan before China was the engine of growth in Southeast Asia, for decades. It was Japanese investment – FDIs, you know, Gene, in Southeast Asia that really spurred, Southeast Asia’s growth there, for decades.
Gene Tunny 55:40
And so now China has taken up that role, has it? Within Southeast Asia, it’s engaging a lot of foreign investment. And so that’s giving them political leverage..
Greta Nabbs-Keller 55:51
Absolutely. As I said, don’t underestimate Japan, as an economic partner and political partner for Southeast Asia. But of course, like China, is a major trading partner of all Southeast Asian states.
It’s much more China and Japan are both very good in comparison to Washington I’d say through ASEAN mechanisms are more integrated than the US is into Southeast Asia, through ASEAN Plus mechanisms and economically. And also, I’d say, Gene, in the context of the COVID pandemic, as young countries turn to Beijing, because Beijing was able to roll out very quickly; the Sinovac vaccine was most readily available and cheaper to Southeast Asia, then, AstraZeneca or Pfizer, and even though Southeast Asian states knew that the efficacy of those vaccines was higher than the Sinovac or the Chinese manufactured variants, China, to be fair, has been able to offer the public, goods and the investment vaccines that the education opportunities that US has neglected to do, and I think you see, increasingly in Washington’s or regional policies that they’re looking to make up ground, and that it’s not only about the importance of military partnerships between Washington and Southeast Asia.
And I must say that for Indonesia, for Jakarta, Washington is a much more important strategic military partner than China. They know they have to do more work in infrastructure, in trade, in economics and climate finance to basically compete with China in the region. The US knows that too. And of course, Australia as well.
Gene Tunny 57:50
I think they’re finally woken up to the threat in the region. Or it’s become more apparent with what happened in Solomon Islands, because they sent one of the very senior State Department officials over, didn’t they? To go and visit Honiara, if I remember. Yes, I just remembered, we’ll wrap up soon. But I just remembered when we’re talking about the FDI, the Foreign Direct Investment, we were talking about Bandung before, there was that rail line; they were going to rebuild that line or was it a fast train high-speed rail from Jakarta to Bandung? That’s a Chinese Indonesian Consortium. But now, that’s been thrown into disarray, because the Indonesians are looking at moving the capital away from Jakarta, because apparently, Jakarta is sinking isn’t it? Do you know what’s going on there?
Greta Nabbs-Keller 58:42
Yeah. That’s been really interesting, Gene. As you know, we both worked on infrastructure courses and finance public policy courses that considered the Jakarta bundle high-speed rail. And, in many respects, I think the problem has been at Indonesia and to be fair, rather than China’s. Their huge problems from the start, I think when President Joko Widodo Giancoli turned over the soil; the groundbreaking ceremony, which was a number of years ago, I think even back to around 2017, 2018 If I’m not mistaken. There have been problems from land acquisition problems, these transport infrastructure corridors. They might identify the anticipation; but the land acquisition has not been resolved, which is one of the fundamental impediments to infrastructure projects in Indonesia, more generally.
So, there’s been a range of problems with the Jakarta bundle high-speed rail. Part of it is built, I’m not up with the absolute latest, but I know there have been ongoing challenges which are blown out the timeline for delivery of that infrastructure project.
You mentioned about the move or relocation of the Indonesian capital to East Kalimantan Province, which many people know as Borneo, Kalimantan is Indonesian. Borneo, of course, you have Brunei and the Malaysian states of Sabah and Sarawak in the northern part of Borneo. There’s fundamentally some environmental challenges with Jakarta, it’s a capital that is widely understood to be to be sinking. Anyone who’s been to Jakarta knows that there are infrastructure challenges, some of the basic infrastructure has not been updated since the Dutch colonial times. There’re issues around governance and corruption and things.
So, Jokowi, the infrastructure president has announced and that’s been recently legislated to relocate the capital to East Kalimantan, a very, very ambitious project. And I think there are also benefits and risks, although it’s going to be a smart and Green City. I think there are broad implications for the environment and biodiversity and ecology up there. Whether this will be a white elephant project, Gene, which won’t outlast Joko Widodo’s presidency; we know the presidential elections will be in 2024. Whether this capital, I guess what I would say, if you take the, at a micro scale, the Jakarta bundle high speed rail project and extrapolate that to a much more ambitious infrastructure project in the new capital city, how successful and how protracted and how problematic? Will it be? It remains to be seen?
Gene Tunny 1:01:59
Yeah. One of the things that economists have observed over the years is that any mega project brings big risks of cost blowouts. So, you just see it all the time. I’ll have to cover that on the show in the future. Right oh! Greta, this has been fabulous. I think we’d like to wrap up have picked your brain for nearly an hour. Any. Any final thoughts? Before we wrap up? Anything we should we should have covered?
Greta Nabbs-Keller 1:02:27
No, look, I think you could talk for hours about strategic developments and regional dynamics, Gene, and there’s so much going on at the moment. It’s barely possible to keep abreast of all the developments. So, I’d like to thank you very much for having me today.
Gene Tunny 1:02:46
Oh, pleasure. Where can we find more about your work? Do you publish your work on, is it LowE Institute from time to time or SB?
Greta Nabbs-Keller 1:02:56
Yeah, I publish but it’s on that SB’s blog, the strategist and the Low E Institute for International Policy. The interpreter recently I’ve had some analysis published with the conversation and Australian foreign affairs, AFA on Indonesia and particularly the new government, Albanese governments, Indonesia policy settings.
Gene Tunny 1:03:20
Ah, right. Okay, I forgot to ask about that. I guess it’s early days. So, I’ll put a link to your article in the show notes so people can have a read of that.
Very good. Okay. Dr. Greta Nabbs-Keller, thanks so much for being on the program, really enjoyed it. Thank you. Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com And we’ll aim to address them in a future episode. Thanks for listening. Till next week, goodbye.
Credits
Thanks to the show’s audio engineer Josh Crotts for his assistance in producing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au.
ESG, short for environmental, social, and governance, is proving difficult for companies to implement in practice, and some have been accused of greenwashing. What exactly is ESG and has it come to the end of its useful life, as the Financial Times has suggested may be the case?
Joining show host Gene Tunny in episode 145 to discuss ESG are some highly experienced corporate governance experts: Dr Rachel Baird and Stephen Howell, part of HopgoodGanim Lawyers. Both Stephen and Rachel advise boards on ESG matters and Rachel is currently facilitating the Law & Sustainability short course delivered in partnership between Pearson and Oxford University.
In this episode you’ll learn how good corporate governance is the critical foundation for everything, and how company leaders should ensure their company’s policies are not dictated by inexperienced people posing as ESG experts pushing their own agendas.
Transcript of EP145 – ESG: Useful concept or greenwashing w/ Rachel Baird and Stephen Howell, Effective Governance
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:01
Coming up on Economics Explored…
Rachel Baird 00:04
We don’t even know what the implications are of lithium, like, is that actually going to be environmentally friendly? We don’t even know; you know, there’s movements about green steel. We don’t know what the impacts are of all the cloud-based servers in the American desert. So, there’s so much more potential to understand what we’re doing.
Gene Tunny 00:22
Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional Economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is episode 145 on ESG, short for Environmental, Social, and Governance.
According to Investopedia, ESG criteria are used to screen investments based on corporate policies and to encourage companies to act responsibly. But ESG is proving difficult for companies to implement in practice, and some have been accused of greenwashing.
What exactly is ESG? And has it come to the end of its useful life, as the Financial Times has suggested may be the case? Joining me to discuss ESG this episode, are some highly experienced corporate governance experts, Dr. Rachel Baird and Steven Howe, of effective governance, part of HopgoodGanim lawyers. Both Stephen and Rachel advise boards on ESG matters. And Rachel is currently facilitating the law and sustainability short course delivered in partnership between Pearson and Oxford University.
In this episode, you’ll learn about how good corporate governance is the critical foundation for everything, and how company leaders should ensure their company’s policies are not dictated by inexperienced people posing as ESG experts, pushing their own agendas. In the show notes, you can find relevant links, corrections and clarifications. You’ll also find details of how you can get in touch with any questions, comments, or suggestions.
Please let me know what you think about this episode. And if there are any topics you’d like me to cover on the show. I’d love to hear from you. Right now, for my conversation with Rachel Baird and Steven Hale from effective governance on ESG. Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it.
Rachel Baird and Steven Howell from effective governance part of Hobgood Ghanem Lawyers, welcome to the program.
Rachel Baird 02:26
Thanks. Great to be here.
Stephen Howell
Yeah. Great to be here, Gene.
Gene Tunny 02:29
Yes, it’s good to have you back on again, Steven. We chatted about corporate governance a while back and I reached out to you because I’m interested in this issue of ESG. And you mentioned that Rachel is an expert on ESG. So, I thought, that’s great. Let’s bring her into the conversation. So, Rachel, it’s good to have you.
Stephen Howell 02:51
It’s good, Gene, because, in our practice, we recognize the importance of the Australian; ESG is not just Rachel’s area of practice, she does right across the governance advisory work, but she does have an interest in ESG. So, that was one of the main reasons that we brought Rachel into the business to assist us with that. Because of the increased activity, particularly from boards.
Gene Tunny 03:21
Right. Okay. I’ll be interested to hear about that. Rachel, could you just tell us a bit about your background? When I spoke with Stephen last time, I learned a bit about Stephens background at ASIC and, and before that, in the Police force. I’d be interested in your background; you’ve been in the law, haven’t you?
Rachel Baird 03:43
I have, but I actually started my legal career in the defense force. So, Stephen and I share that; we come from, I guess, regulatory backgrounds, which is good for governance. And I was a lawyer in the Airforce and decided that I needed to have more challenges and got out into the masters of environmental law. And that led to practice at Clayton Newts, which was great; big law firm, lots of exciting work. And then, children came along and I ended up doing academic work and did my PhD in International Environmental law with Gillian Triggs, who was a great supervisor. And I’ve always had this very strong interest in ESG. And even in the late 1990s, that corporate social responsibility concept was starting to take seed. In a way, I feel like I’ve written this wave where environment wasn’t accounted for on the financial pledges, and now it’s very firmly on the board table conversation. And I’m really excited about that. And obviously, of course, social as well, and we’ll unpack that acronym soon. But yeah, I have a strong sort of academic and practical background in environmental social issues. I’ve worked on big oil and gas projects, I’ve been exposed to the social impact, I have done large projects as well.
Gene Tunny 05:02
Right, okay; very good. Let’s get started.
Rachel, would you be able to tell us what ESG is exactly? You mentioned corporate social responsibility; is this a successor to that concept? What is it exactly?
Rachel Baird 05:20
You could say it is. I guess to start with, it obviously means something, because there’re some estimates that, by 2025, around US 53 trillion dollars, will be held in ESG assets, whatever that could be. And it’s a very nebulous term. And I think it’s an acronym with a huge remit. And, I could be cynical and say that it’s like, avocado on toast, or soya balls; it’s the big fad. But I don’t want to be that cynical, because ESG is very, very important. But you can trace its roots back; I think the first time it was mentioned was 1999, the UN came out and they were more forward looking. And they talked about this global compact where they wanted big business and banks and government to be part of a social conscience. And so, there was a report that came out of that global compact, called Who Cares Wins. I guess that was by James Bond,
Gene Tunny 06:23
Yes, yes, very good.
Rachel Baird 06:27
So, Who Cares Wins, and buried in this report was a statement that said, “better inclusion of environment, social and corporate governance factors in investment decisions from there and its use.” Well, that was the statement, sorry; “better inclusion of environment, social and corporate governance factors and investment decisions would lead to better outcomes.” But from there, its use really grew in investment decisions and investment circles. So, for a long time, it was spoken about in investment circles. And I think that’s borne out by a lot of the standards about, climate change related disclosures, financial disclosures, you know; are there climate change related risks or litigations that are going to impact the financial bottom line of a corporation? But gradually, it sorts of crept out of the investment circle.
So, in 2005, there was a UN report that linked ESG factors to financial performance, and that was increasingly being recognized. So, it wasn’t just nice to have that, it was actually proving its worth looking at environmental issues, social issues, and corporate governance, decision governance issues.
Gene Tunny 07:37
So, what was this report, again?
Rachel Baird 07:39
In 2005, the UN report, I’m sorry, I don’t have…
Gene Tunny 07:43
That’s okay. But they were making the case that it does improve financial performance.
Rachel Baird 07:49
And I think that’s been accepted. Well, and truly now, with 17 years later, there’s a definite link between improving your environmental and social and corporate governance factors. I mean, Stephen…
Stephen Howell 08:01
I think it links back to good, or highly effective governance processes and procedures in place. We know from other reports, we know from a lot of research that’s been done, we know from our own businesses, and our own business activity, that, investment decisions often relate to good governance practices within corporations. Investors will look for those good practices; investors will be turned off by those bad practices.
So, good, solid governance frameworks, good processes in place, good controls in place, having the right people with the right skills sitting around board tables, having the right people with the right skills, in the executive teams making those decisions, always attracts investors and investors nowadays will go out of their way to seek out good companies to invest in based on their governance practices. And that’s what Rachel was saying. By having; investors will now look towards those organizations that have good ESG practices in place.
Gene Tunny 09:37
Yeah, they mean to have a closer look at those types of studies because the skeptical economist is going to wonder, to what extent is the correlation rather than causation? or to what extent is it; is it the fact that it’s something else? I mean, it’s the fact that these companies are better run, they’ve got all of these other processes and then they adopt ESG because they like to have that suite of policies and procedures and it may not necessarily be ESG that’s improving their performance. It’s the fact that they’re well run in the first place.
Stephen Howell 10:12
Some really game commentators will talk about percentages of increase in performance levels, based on good governance practice. I think that’s a bit dangerous to do that. Because, it sends the wrong message. And but, I think a lot of it, Gene, is also based around government policy, particularly around particularly the regulators; we’ve got a lot of regulators in this country, we talk about ASIC, our company regulated when we got our pro rail, prudential regulator, we’ve got the ACNC, charities regulator, and all those regulators always talk about the; sorry, not so much, talk about they articulate the level of scrutiny of companies that aren’t abiding by good governance practice. And they will highlight the fact that they need to have the people that are able to make the right decisions. The people that have the background and experience. It’s a big push from regulators at the moment to ensure that directors and executives for that matter, have the right skill, they’re the right people to make decisions that are going to affect shareholders, stakeholders, consumers.
Rachel Baird 11:47
I think economists can be encouraged by the fact that the term ESG started in investment circles, okay? So, it’s earned its chops so to speak, because it’s proven that it relates to a better financial performance. But it’s true that the better organized you are; the better your governance structure is, the better equipped you are to take advantage of opportunities. Some people talk about ESG is a risk, but it’s an opportunity. So, if you’ve got a really well operating organization, then you can go; let’s take advantage of the opportunities that an environmental and social strategy provide us. So, if you just look at environmental, and we’re talking about this before, it’s becoming a requirement of government tenders to show that you’ve got an ESG strategy.
If you don’t, you’re straightaway cutting yourself out of those opportunities to get the government work. We also know with our young workforce, the millennials entering the workforce, they want an organization that’s aligned to their values.
A research shows that employees want to work for companies that have a strong environmental and social moral license, whatever that means. But then you’re going to have more engaged employees, you’re going to have theoretically lower attrition rate, a higher discretionary effort. There’s also benefits to your bottom line where you’re operating more efficient processes; there’s a lot of economic benefits to be gained. And I used to say to my environmental law students years ago, when we get very idealistic, and they go, why does environmental social issues; why do they always lose out to the Big E economy? And I’d say, it’s time will come when it will have a financial value and I think that time has come.
For the ASX 200 companies would not be involved in ESG because it’s voluntary in Australia still. If there wasn’t a financial benefit to doing it, because they still at the end of the day, have shareholders to be responsible.
Gene Tunny 13:46
Okay. I mean, it’d be good to explore that a bit later. And to what extent they’re doing it because it is of economic value, or to what extent is it just for PR, or is it so called greenwashing, that sort of thing? So, we can we can chat about that? There are a couple of things I want to pick up on what you’ve said.
It’s ESG; and you mentioned the statement relates to environment. Is it society or social? Social issues and then corporate governance. So, to create the ESG abbreviation, they’ve dropped the C because ESG sounds better than ESCG, presumably. So yeah, that makes sense. Environment, social, and corporate governance. What typically are these issues; what are the big ESG issues, Rachel?
Rachel Baird 14:37
Okay. Well, before I go to that, I’ll just talk a bit about how I think the term can be misused or misappropriated. So sometimes it’s used for investment analysis and a lot even more and ASIC has made some comments that we can talk about later. Some say we’re ESG friendly, whatever that means. It can also be used from a risk management point of view, opportunity point of view; it can be used in what I call corporate social responsibility context, which is really values-based or morals-based. And then it can also be just its trend, like the vibe of people want to go to the movie, the castle, it’s the vibe.
So, I do sometimes get a bit cranky that people misuse the term or bandied around and don’t know what it means because it’s complex. And so, when people get, I just want an ESG strategy as well, I want one piece. What do you really want from your strategy? And it goes down to what your business is.
So, short climate change, greenhouse gas emissions reductions, sea level rising, they’re huge, big-ticket items, from a global point of view. But your local florist is not going to have much of an impact on that. What does ESG mean to them? So, then you have to really translate it to them and go, well, what are your environment impacts? Are they waste to energy use transport suppliers? What are your social impacts? What’s your supply chain? Are you employing staff properly? There’ll be micro level but, to them, don’t make a difference. And then also, what’s your what’s your governance impact? So, a florist who’s running a chain of florists might say, well, how governance impacts or compliance or decision making policies about employment or whatever they are, but you relate it to the florist.
But then if I move to say, a suite of health, transport operations, they would have completely different E, S and G issues. I guess, there’s no one size fits all, you can’t just roll out a roadmap or a playbook to a company and say, we’ve got your ESG sorted, because it will depend on their level of maturity, where they are in the businesses; some businesses might be so broken that until they get their governance framework sorted, people throw around diversity is a governance issue. Yes, it is. But if you if your governance framework is so broken, I can’t even talk to you about diversity until you get the governance framework working.
I’m working with an organization at the moment, who going on; we need women on the board, we need women on the board. I said, yes, you do. But governance is not static, it’s dynamic – it’s a journey. So, let’s sort out your basic hygiene first and your policies. And then you can talk about diversity on the board. And I think with ESG, people try and promise too much, as in, over promise and under deliver. And I think they really need to be realistic and going, what can we actually deliver? And that goes to greenwashing which we’ll talk about but don’t over promise and under deliver because that’s greenwashing territory.
Stephen Howell 17:34
I think it’s really interesting, Gene, with the activity that we’re seeing, at the moment. Yes, ESG is a big issue. But some of the questions that were being asked, as you know, in my role as the Principal Advisor for effective governance, I spend probably about 95% of my time working directly with boards. And the questions that I get asked all the time by boards is, those questions that you’ve posed today, what is ESG? How do we deal with it? Should we be dealing with it at board level? Should we be just ensuring that we’ve got the right people with the right skills in the management team? Or do we need people on the board? And if we do need people on the board with those skills, where do we get those people from? How’s that going to affect our business? How do we report on that? So, they’re asking all the right questions.
I’m talking about boards in the listed area, in the unlisted area, the public companies, even governments, of course. You know we do a lot of work with government and corporations, and we do a lot of work with charities, which is really interesting; the big charities around Australia. And they are asking those questions, because that’s going to improve their governance footprint, if you like. Particularly when they’re talking to funding bodies, about how they might be operating the hospitals, that we do a lot of work in the hospital; health sectors. in working imagine the ESG implications for within hospitals.
Rachel Baird 19:29
I was just going to say charities are; they’re going to have the biggest impact on the SRP – ESG. Because their whole purpose; their purpose driven for social impact and social change. So that’s where we’re going to see a lot of a lot of good work.
Gene Tunny 19:46
Okay, we’ll take a short break here for a word from our sponsor.
Female speaker 19:51
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Gene Tunny 20:20
Now back to the show.
So, one of the criticisms of, I think it’s a criticism of ESG, or maybe it’s a criticism of the whole sort of woke concept in the States, particularly is that there’s this concern by some commentators, particularly on the right, that companies such as Disney, and well, I think Netflix has pushed back on it recently, we chat about Netflix, perhaps. But other companies, Nike, they’ve gone, so woke, so to speak, and that they’ve embraced particular sort of positions. They’re promoting diversity. And I mean, I think diversity is great. But it looks like they’re taking political positions. To some extent they might be; Disney will be changing traditionally, male characters into female characters. There’s a huge debate about all of this. And that, I mean, there’s an argument that it’s gone too far. I’m just wondering to what extent is what you’re seeing in the States, I don’t know, maybe it’s a bit of a beat up? I don’t know. You’ve seen similar things in Australia? Is this something you’re concerned about?
Rachel Baird 21:34
Yeah, it’s really good question. And before I get to that, Steven mentioned something about the boards asking lots of questions. There’s a real dearth in ESG talent. Okay? So, what I worry about and it goes to your question, is there’s not enough people who have the skills to talk about this in an informed and intelligent way. So, and we can’t just call someone a sustainability officer, okay. So that they are so if you’re sticking someone in a big multinational and saying, drive sustainability, if they’re a young generation person, they might drive it from a me too lens because that’s all they know. Or if they’re a greeny who; I shouldn’t say greeny. It’s not in a pejorative sense. But if there’s someone who recycles and, and it has zero waste and doesn’t use plastic and all that, they’re going to drive it from an environmental sense. So, you’ve got to be really careful about what the corporate strategy is.
So, Nike, for example, their purpose is people, planet, profit. And so, they are going to go out and make comments about; and a lot of companies go people, planet, profit, because the planet is environment, people are social and profit is still their shareholders. Like I said before, there is the risk that the term gets misappropriated to drive different agendas. So for example, if we’re going to say that we’re going to have more animated characters – female because there’s been a dearth, and it’s been to male, that goes to gender diversity and social. But is that really part of ESG? Is that really the roots of ESG? And that’s where; you could be debating about that the whole time. But it probably has lost its way. And there’s a really interesting article that I’ve got with me, written by an American academic, where she out of the Wharton School, University of Pennsylvania, and it’s a really good one. It’s called the Origins and Consequences of the ESG moniker by Elizabeth Pullman. And it explores how the term evolved and has been appropriated.
Gene Tunny 23:29
Okay, I might put that in the show notes. I’ll have a read of that. Okay. Good stuff.
Rachel Baird
I’ll send you the link
Stephen Howell 23:35
From the Institute of Law and Economics, Gene.
Gene Tunny 23:39
Oh, good. Excellent. So, another thing I wanted to chat about was, you mentioned the younger cohorts. I mean, we’ve got, millennials have come into the workforce. And now, we’re getting what came after Millennials or Gen Zs; they’re coming in.
Rachel Baird 23:58
I forgotten I’m a Gen X. I’m just sandwiched between the baby boomers who spend my inheritance and my children who inherit it.
Gene Tunny 24:05
Yeah, same here. But I remember when I first entered the workforce, I mean, I don’t think anyone cared what I thought about. I wouldn’t have been presumptuous enough to try and change the culture of the, the organization of the company. I don’t know. But yeah, it’s extraordinary. It’s become an issue in the States because I think, it was Netflix; there were some employees at Netflix who complained about the Dave Chappelle special. I don’t know if you’re aware of that. Or was it, Josh Dave Chappelle the comedian and Ricky Gervais has had a controversial special on recently, and whether they’ll make comments that upset some of the people working because the people in the organizations think that they’re not respectful of the rights of marginalized groups or whether it’s gays or whether it’s trans people. And yes, there was some pushback internally, and then Netflix, I think, put out a memo that said, ultimately, we have to make the business; the business has to work, and we have to produce content people want. Just settle down people, was basically what they were saying. I thought that was interesting, because ultimately, these companies have to make money. They do have an obligation to shareholders, don’t they?
So, how do companies balance these considerations? Because the traditional economists view and what Milton Friedman argued, in that infamous Newsweek article in the early 70s, was that companies just owe an obligation to their shareholders. And so, they’ve just got to maximize profits. That’s what they do. They should abide by the law, but they shouldn’t go beyond that and do much more for the environmental social issues, and that they should just maximize profits. That’s how they’ll maximize well-being.
But is that right? That companies still owe an obligation to shareholders, don’t they? And how do they balance all of these things?
Rachel Baird 26:04
It’s a double-edged sword because this new phrase of stakeholder capitalism has been gaining traction. And then it’s, well, how long is a piece of string? Because shareholders are stakeholders, but so are the community that you operate in. So, if you’re operating in a developing country, they’re stakeholders. So are your employees, so are your suppliers, so is the government. So, how do you keep all of those stakeholders happy? It’s a huge balancing job. And I think the key is to be really strong on what your strategy is, so that you’re not doing what I call the 24/7 news cycle, knee jerk reaction, that if someone says something, you go; I’ll be better put out a press release to keep them happy. The board goes back to its strategy and goes, well, look, we can’t keep everybody happy all the time. But our strategy is this, we’re happy with it, we’ve deliberated on it, we in a moment of quiet deliberation, we agree this was our strategy. So why in a moment of crisis, would we deviate from our strategy and make some kind of knee jerk comment? A bit like I guess, if you want to say cricket, Australia, when they handle the Tim Payne thing, stick to your strategy.
Gene Tunny 27:18
Can you elaborate on that?
Rachel Baird 27:20
I don’t know a lot about it. But I just think that they probably acted in the heat of the moment when they decided to part ways with Tim Payne rather than sticking to; and again, I wasn’t in the boardroom, sticking to a strategy and going, we don’t need to feed the 24/7 news cycle, we can take a moment, we can issue a press release that talks about strategy. So, the Netflix one sounds like they’ve done something where they’ve gone no, this is our pathway. We’re not going to keep everyone happy, but as long as we’re not being egregious, we’re being socially and environmentally, sustainable and responsible. We’re not going to apologize for who we are. I think that’s where boards are the second guessing themselves a bit trying to think well, we just got to keep; so I think really, Cricket Australia was trying to stay on the right side of the me-too movement. But if you ever try and stay on the right side of a movement, you’re never going to be on the right side of it.
Gene Tunny 28:13
Gotcha. So, Tim Payne was an Australian cricketer. And I’m trying to remember the circumstances; did he have an affair with someone who was working at Cricket Australia?
Rachel Baird 28:21
I think there’s something about that incident, messages exchanged or something. Okay, even the facts aren’t really relevant. It was I was more raising my eyebrow about how it was managed.
Gene Tunny 28:33
Right. Okay. I’ll put some links in the show notes. Can’t remember the facts.
Rachel Baird 28:39
And he was ultimately stood down as captain of Australia for something he did several years ago.
Stephen Howell
Several years prior.
Gene Tunny 28:46
Right. Okay. I’m interested in the companies that are asking for this. You talked about a wide variety of companies; there’re public companies, but what about private companies where the owners have a strong control over the operations of the company? I can see why charities would want something like this because they’re trying to achieve some social purpose. But what if you’re an Elon Musk or something; actually that’s not a good example, because these companies are public, aren’t they? But he’s been trying to privatized Twitter, but what about private companies? Are they immune from this or they’re not? Do they want ESG as well? what’s driving…
Stephen Howell 29:33
They might not want it now, but particularly, I always think about the private companies being some of the big building corporations, some of the big builders that are building not just homes;
Rachel Baird 29:51
We’re getting commercial work that needs to comply;
Stephen Howell 29:55
They need to comply. Yeah. It’s really interesting. Yes, the private companies are going to be involved as well.
Rachel Baird 30:05
They’re slower, they’re definitely slower than public companies. And I’m seeing in Europe because I’m, I’m involved in this course that’s run by Oxford University. But I’m employed by Pearson, I’m not allowed to say I’m employed by Oxford University even though I teach the university course. And I’m seeing talking to all my students who are from all around the world, that I mean, environmental law really started in Europe anyway, and those streets ahead of Australia, and we’ve been following the lead of the Europeans. And the private companies are jumping on and realizing they have to comply with ESG requirements as much for their customers, their employees, and also to be competitive, definitely. They might not have the stakeholders who are shareholders, but I’ve got all the other stakeholders.
Gene Tunny 30:55
Okay, so this is something that will you mentioned, the younger, potential employees, it’s something that they care about that if you want to get the best people, you need to show that you’ve got ESG. Right? That’s interesting.
Rachel Baird 31:11
You’ve got everything, so you care about your staff, you’ve got good leave programs. You do waste recycling, and you give them leave days to do like, say, a law firm, pro bono, or whatever it is. You’ve got a social conscience, what does that mean? it’s defining it for the firm. Like you said, when you join the workforce, it was just you just turn up and work and do what you’re told. But now it’s like, I know, I want to have a work life balance, but I also want value in the work I do.
The worst thing my son told me was, I don’t want to grow up and be like you because you just leave the house and you look sad, and you go to work, and you come back and you’re tired. I really do enjoy my work when I’m at work. But they seem to think there’s a utopia out there in the workplace. I don’t know; it is still works.
Gene Tunny 32:02
Yeah. Well, ultimately, if you’re in business, you need to make money, you need to make a profit to keep going. just with this regulatory requirement or this requirement intenders, that you need to demonstrate your ESG credentials. I know for government that’s right; is it also corporations that are pushing this on their suppliers as well? Are they pushing for ESG?
Rachel Baird 32:32
It’s becoming more evident. I was talking to a very large company, I won’t say what industry they’re in, or it might be easy to pick them. But they found out dealing with other commercial providers that they were needing to show that they had an ESG strategy. If you think of it as like a food chain or supply chain. If they’re tendering for work, they needed to be able to demonstrate that the suppliers that they deal with how socially responsible. So, it goes up that whole ecosystem.
Gene Tunny 33:08
Gotcha. Yeah. Okay.
Stephen Howell 33:11
Also Gene, as I mentioned earlier, the push; there’s a significant push from government and regulators, and my experience is that when there’s a push from government, when there’s a push from regulators, boards and corporations will take note because they need to take note; because government and regulators don’t have a heightened scrutiny in particular areas for no reason. They do it based on what’s driving that, and it’s normally driven by shareholders, the people, those investors and the general public who want to see higher levels of ethics and responsibility in organizations. So, that’s what’s normally drives it.
And so, boards and organizations will take note of what the regulators have to say and as we were saying earlier about the; yesterday, ASIC made a press release in respect to that whole issue of what’s described as greenwashing. particularly Australians, the Australian Securities and Investments Commission, and, who are responsible for Australian or most of Australians companies.
It’s interesting that they targeted superannuation funds and managed funds. There’s a similar push from the corporate ring at the prudential regulator, ASIC being the corporate regulator; APRA, the Australian Prudential Regulation Authority, being the prudential regulator, the ones that the regulator looks after the financial institutions. Being, of course, some of the super funds and managed banks and insurance companies. And, in fact, I was only talking to a life insurance company this morning, one of their clients along the similar lines about skills that are needed in particular areas, and this particular area came up.
It’s all about what the regulator is saying, what ASIC is saying is that, these firms need to be very careful about how they represent their financial products, or their investment strategy. Particularly around being environmentally friendly, sustainable and ethical. If they market their products as being ethical and sustainable and environmentally friendly, they need to be able to show that that’s in fact, correct.
What ASIC is saying today is, these promoters need to use clear labels and they need to clearly define what sustainability terminology they’re using, they need to define that. What does that actually mean? This product will help maintain a sustainable, organization or product. But unless you properly describe it, it doesn’t make much sense, and clearly explain how sustainability considerations affected in to the investment strategy. How does that all work? How do you actually factor all that into any investment strategy?
They made it clear; the regulators made it clear that it’s what they call it a priority area of focus. And they’re going to be looking at it and monitoring the market.. And they specifically highlighted that any misleading claims about ESG and sustainability will come under their notice. What I’ve seen of recent times, Gene, is how the regulators making these sorts of comments about monitoring, and about how they’re going to be, really watching the market clearly. So, it’s not just ASIC, it’s APRA, and it’s the ACNC – the charities regulator,
Rachel Baird 37:54
Even the securities [exchange] ASX has come out and said, companies should check their sustainability claims. But what’s interesting is I think, this comes off the back of litigation. So, Australia is a bit of a hothouse of litigation. But in America, there is a shoe wear company called Allbirds. And they manufacture wool; they’re called slippers, but they’re not slippers. They are like soft linen, sunlight pleasure shoes, and their statement was that their wool was sustainably sourced. Now somebody in New York who had a lot of time on their hands delved into that and challenged that in a New York court and found that their wool wasn’t sustainably sourced or their statement was greenwashing. And I think everyone in Silicon Valley was wearing Allbirds shoes.
But then in Australia, we’ve had Santos; there was a federal court claim made by the Australasian Centre for corporate responsibility, alleging that they engaged in misleading and deceptive conduct saying that they would produce clean energy and had a clear pathway to net zero emissions. So that was what I mean about over promising because, they were tested and then the Commonwealth Bank, a shareholder, must have been a large individual shareholder, made a claim in a federal court, and they ordered that he be given access to documents in the bank’s premises to, I guess, scrutinize the bank’s decision to finance oil and gas projects. So, more and more claims are being challenged to be verified the accuracy of those claims. And so, as Steven mentioned, the ASIC information sheet that just came out, came off the back of ASIC’s own review. They just looked at a sample of superannuation funds and found there were some areas for improvement.
We’re not at the stage yet, as the UK and New Zealand where they have actually; the government has mandated there’s got to be disclosures of financial related climate change, material risks or material disclosures. We are not there yet. But I think the change of government, they’re probably testing the mood of the public. I don’t think we’re that far away from some kind of mandatory reporting or tighter scrutiny. And the ASIC guideline is enough to put every single ASX company on notice to go. We can’t be cavalier anymore about ESG and greenwashing and just say, those terrible shows you see where you have marketers ago, just put that out that will do. This can’t happen anymore because it will be scrutinized.
Gene Tunny 40:38
I better make sure I understand what the actual requirements are now. Is it under the Corporations Act and other countries would have, I mean, the UK would have a Companies Act? And the US has got some legislation for corporations, but companies are supposed to look after the interests of shareholders or obligation to shareholders. I guess we’ll talk about Australia, given you’re working in this jurisdiction? What are the requirements for reporting on environmental and social and governance issues at the moment? They don’t have any, do they?
Rachel Baird 41:09
Directors have a responsibility to exchange due diligence in relation to climate change.
Gene Tunny 41:13
Due diligence in relation to climate change? That’s included in the corporations act, is it?
Rachel Baird 41:20
There’s no requirement to produce an ESG report, for example. There is a preference from shareholders, that any such report was integrated with the financial report, because a lot of companies are doing standalone reports, but there’s no requirement to do; just a financial disclosure report, is all that’s required.
Stephen Howell 41:39
So, directors just generally have a duty of care and diligence. Like, that’s one of the fundamental wrong to govern, with due care and diligence in the interests of the organization. I just think that we really do need to; I will be advising my clients to be very careful about how they label and explain any of their products, because any misinformation that will erode investor’s confidence in the Australian markets, is going to be looked at very, very closely by the regulators, and by the market supervisor, the ASX.
Gene Tunny 42:33
Yeah, I have to look into that provision about climate change, because I’m going to be the skeptical economist again. Because, the government saying you’ve got to give due diligence, or you’ve got to pay attention to climate change. But what’s wrong with a company just abiding by the law? And if there’s no carbon price imposed? What do you do? I mean, how do you know what to do? I mean, what if you do too much, and that adversely affects your company and the viability of your company? I mean, you’ve got employees, what if it affects our competitiveness relative to other countries?
Anyway, I know, these are big questions, and we can’t answer them today. But it just strikes me as just over the top to have that in the act at the moment.
Rachel Baird 43:21
It relates to financial disclosures. So, you’re obligated to make financial disclosures, material risks of climate change might be material risk. You’re not obliged to make non-financial disclosures. Does that makes sense?
Gene Tunny 43:34
It’s not imposing an obligation to do anything in a positive sense, to get to net zero? I misunderstood what you are saying.
Rachel Baird 43:43
There’s no obligation. And again, I don’t have it right in front of me, but I know that there’s been talk about; I wish I could remember the name of it. But some kind of safety mechanism, it might be called the safeguard system for over 200 Children 21 large emitters in Australia, those companies to help them transition. So even if there is something that comes in, there’ll be a recognition that you can’t require, say AGL for example, or Santos to suddenly pivot and stop emitting greenhouse gases, because otherwise we’d all be sitting around in the dark.
There’s got to be that pragmatism that we want to move to; not just net zero but just reducing our footprint waste use. Food waste is one of the worst contributors of carbon emissions and people don’t even talk about food waste. So, there’s all sorts of ways we can reduce our carbon emissions.
Stephen Howell 44:47
I saw a great thing, talking about food waste; I saw a great innovation just recently, one of our colleagues showed us, was in here in Brisbane or around and all the public hospitals, you can only just imagine the food waste within public hospital systems. And it all traditionally just gets delivered out to a waste disposal facility somewhere. What they’ve been doing is there’s a company been gathering all waste food up and turning it into fertilizer and putting it into carryback packaging and selling it as fertilizer. It’s just amazing. Rather than take it all the way and dispose of it, turn it into something that’s going to be useful and, and making money out of it as well. So, turning it into fertilizer
Gene Tunny 45:45
That’s useful, particularly because the price of fertilizer has been spiking, hasn’t it because the cost of the inputs;
Stephen Howell 45:54
I thought that was a very innovative, sort of a process; deal with what would otherwise be a total waste of product.
Rachel Baird 46:05
And that reminds me like ESG, you can take it really, really high and say okay, what’s Wesfarmers doing about ESG? Or you can take it really, really low and say what’s Rachel doing about ESG so in where I live, I can have my little worm farm and my little recycling compost thing and I cannot use plastic; that’s the thing, it’s such a huge term that can go across all these layers of human activity.
So, if your listeners, I’d encourage them to say well, what can you do to ensure you don’t have a net zero? Some of my students at Oxford are talking about an individual passport, so when you buy something you get to choose, you might go and the product actually has a little ESG rating like the heart smart or the energy rating you can go I’m choosing that loaf of bread because it has a lower carbon footprint. Yeah, and that goes onto my little smartwatch and I can show everyone that my carbon footprint, kind of gamify which the young people would like but we’re not there yet.
Gene Tunny 47:02
Just as long as this doesn’t end up going to some government agency…
…We’re going to have to start wrapping up. This is a good conversation.
Stephen Howell 47:29
Isn’t it the smallest garbage bin you’ve ever seen in your entire life, Gene?,
Rachel Baird 47:34
Does that makes you rethink? That’s the bin in our office.
Gene Tunny 47:37
It’s slightly bigger than a Rubik’s Cube.
Stephen Howell 47:46
That’s what I was thinking. It’s the size of a Rubik’s Cube.
Gene Tunny 47:49
Yeah, that’s tiny. I was just going to ask you about Wesfarmers; that owns, is it Coles? One of the major…
Rachel Baird 47:57
I think they’ve diverted from Coles, they did okay. Bunnings and Officeworks.
Gene Tunny 48:03
Right. Okay, so they’ve got some retail businesses in Australia.
Rachel Baird 48:07
And then, they got the chemicals part in their fertilizers partners, WesCEF.
Gene Tunny 48:12
I know that at least one of the major supermarket chains is trying to have it all of its energy, renewable energy, by some date, and I think they’ve signed some agreement with the clean energy company here in Queensland, if I remember correctly, I’ll try and find some information about that.
Rachel Baird 48:29
That’s really smart because you’re going to get customer loyalty. So, a lot of my friends who don’t work in law at all, but they ring me up and they say, oh, shop here, because that’s an environmentally friendly company. I don’t always take it on face value. I like to investigate and make sure they actually are. But it’s a great PR tool if you’re accurate. If you’re not accurate, you could be in front of the court.
Gene Tunny 48:52
That will cost you …I mean, if you’re making bold claims, like Volkswagen years ago, I mean, they got into trouble for what they were alleging about emissions, didn’t they? They were doctoring or they were manipulating their test results on the diesel engines, okay.
I’ll just ask you finally, about this article that Stephen and I both found independently, it was published in the Financial Times, and then it was picked up by the Australian Financial Review; how ESG investing came to a reckoning. This is the sort of thing you expect to see in the Financial Times – very good paper. The term ESG is less than two decades old, but it may already be coming to the end of its useful life. Have you had a look at that article at all, Rachel? And any thoughts on that?
Rachel Baird 49:48
I did. Steven, do you want to start?
Stephen Howell 49:49
I think that’s just a way; what I read into that, Gene was that it was a way to, once again, highlight ESG, to say, it’s been around for a long time, we haven’t really sort of made too much of a movement. But really, we have. This what I read into it that it was a way to heighten the level of understanding of ESG. I don’t agree with that comment that it’s not going to be around, I think it’s going to be around for a long, long, long time. And it may even change shape in some way. But I think, from the way I look at it, Gene, from a governance perspective. And as a forensic accountant coming out in me, looking at the evidence and looking at the impact that ESG will have from a governance point of view, I just think it’s just that another level of good governance practice.
Gene Tunny 51:06
Okay.
Stephen Howell 51:07
That’s the way I’d describe it.
Gene Tunny 51:09
Yeah. I just thought I’d ask because this article is getting shared around a lot, and particularly by economists, who say, I’ve been saying this all along.
Rachel Baird 51:18
That’s interesting, because a couple of weeks ago, there was a Financial Times conference, where a very senior banker at a bank whose name escapes me, made a comment about how those hysteria carry on and it’s the same as like Y2K, and I think he got stood down, didn’t really test the waters. So, this might be the Financial Times way of saying, it’s a movement that’s come and gone. I think it’s not, there’s so much to do, like, we don’t even know what the implications are of lithium, like, is that actually going to be environmentally friendly? We don’t even know; there’s movements about green steel, we don’t know what the impacts are of all the cloud-based servers in the American desert. So, there’s so much more potential to understand what we’re doing. And every time we have a decision to reduce our impact, we don’t know what the trigger is for more impact.
This is not why we’re here and we’re aware. I mean, we can say that we’ve evolved as a species. And going back to my polar exploration, when mankind, because it was men first started exploring, they just left their rubbish in Antarctica, that didn’t take it back, right? So it’s taken years and years to clear those rubbish dumps from Antarctica, because it doesn’t degrade, right? There’s nothing to degrade it. So, we’ve just evolved as a species to understand that we can’t just keep polluting our environment, and keep abusing our people. That’s not going to go anywhere.
Gene Tunny 52:47
Yeah. And that’s why we have regulations and laws.
Stephen Howell 52:54
It’s like that concept, Gene, that I’ve been sort of, looking at closely recently about the consequences of decision making. And, the decisions that you make in respect to whatever the issue might be, what are the consequences? What are the likely consequences into the future? And so, we’re talking here about, ESG and environmental issues, what are the consequences, many decisions that we make in respect to our environment. The consequences of the decisions that we make in respect to the social impact within Australia and also corporate governance issues. I think you might be aware, I just said, there’s a fabulous book that I’m reading at the moment called Leadership by Algorithm.
Gene Tunny 53:45
Yes, my mother bought it for my birthday based on your recommendation.
Stephen Howell 53:57
It’s written by Professor David de Cremer. It’s all about artificial intelligence, but he does talk a lot about the consequences of your decision making. And he relates it to real life stories. It’s really interesting stuff.
Gene Tunny 54:16
I’m going to read it. It does look great. And I’ll see if I can get him on the program.
Stephen Howell 54:26
I think it’d be great to; he told a fabulous; I went to a conference that he spoke at, he related that to a to a decision that was made by the Singapore government, in respect to the COVID app.
Gene Tunny 54:49
Yeah.
Stephen Howell 54:52
And the COVID app in respect to identifying where people might be at any point at the time, so that they could be tested, etc. And then what happened there in Singapore is that the Singapore government then decided to go one step further and use the information for law enforcement. I am sure it happens in other jurisdictions as well. But it was only the Singapore government got caught. I’m sure we got closer in Australia, there might be something similar. It’s interesting, isn’t it? We think that okay, the government is going to do this for us, to help us, but we had no idea that we’re going to move further and use it for war enforcement purposes.
Gene Tunny 55:44
Yeah, okay. I just thought I’d bring up that FT article, because it has been shared around a lot. And I’ll put a link in the show notes, unfortunately, as paywalled, though, but anyway, I’d recommend getting a subscription to the FT if you don’t already have one, if you’re if you’re listening. I just what I did want to point out was that, one of the factors is this war in Ukraine, which is arguably making it more difficult for companies to meet ESG goals. I’ll just read this out before we wrap up.
On top of the allegations of greenwashing at the industry’s highest levels, there is the impact of Russia’s invasion of Ukraine, which is forcing companies investors and governments to wrestle with developments that at times appear to pit, the E, the S and the G against one another. For example, governments in Europe are reneging on environmental goals by turning to fossil fuels to reduce dependence on Russian gas in order to fulfil ethical goals because they don’t want to buy it from the Russians. They’ve got someone who’s a managing partner at Lombard od air is it? I probably mispronounced that.
The war in Ukraine is an incredible challenge for the world of ESG says Hubert Keller. This conflict is forcing the questions; what is ESG investing? Does it really work? And can we afford it? And that’s what we’ve been talking about today, Rachel.
Rachel Baird 57:07
I know; what it goes to that whole social issue, if you really want to take the high moral ground and the UN’s involved, and we’re not political. I’m not being political. But if you’re saying what Russia is doing in Ukraine is hugely immoral socially, because of the civilian casualties? Then that’s highlighting a failing of the whole international community to try and do something for social good. And I mean, I know you can’t just stop the war because you can’t take action against Russia, because then you’d have world war three. But you can see how ESG can just apply to any conversation, right? So don’t think it’s failing. I think it’s just showing how complex it is. Because there’s so many levers and there’s so much human interaction.
Gene Tunny 57:50
Exactly. And there are tradeoffs. And I mean, this is what economists would say. And ultimately, the companies have to be sustainable financially, so they can keep people employed, they can keep operating, and so if you can do these other things, and then that’s great, but fundamentally, that’s what they need to do. They need to produce products that people want to consume.
Rachel, we should wrap up. Any final words, I mean, anything you’d like to say anything you’d like to push back on anything? If you want to push back on anything I’ve said? Or if you’ve got other points you did want to make that haven’t been made, then please make them now.
Rachel Baird 58:27
No, I think what I’d like to; if your listeners if there’s anyone out there go, where do we start on this ESG journey? Is to just get the right advice from the right people who actually have the right credentials. Because there is a lot of; there’s a vacuum, we need skills on ESG, and the vacuum has been filled, and it’s not being filled equally, if you know what I mean. So, if you want to start embarking on this journey, or you want to have a critical conversation on ESG, do some reading yourself first, but then really test the credentials of the people that you’re talking to. Because you can’t afford to make a misstep on this now that we’ve got the heightened scrutiny by regulators and also stakeholders, which are not just shareholders on what you’re doing. So, I guess, I get a bit cynical that there’s the people who suddenly go, Hey, I’m an ESG expert, and I’m going, yesterday, you were, like a corporate lawyer. You can’t just be an ESG expert overnight. So, people please, look for someone who knows what they are.
Gene Tunny 59:26
So, you need the experience?
Rachel Baird
I think you do.
Gene Tunny
Do you need specific training?
Rachel Baird 59:30
Not necessarily. I’m talking to some people at the moment who are experts in greenhouse gas emissions measurements, right. So, it’s a huge ecosystem of talent from environmental scientists to accountants, who are forensic accountants to lawyers to bankers, so pick the person for the problem you’ve got at the time. So, it’s not particularly credentials, just matching. So don’t think you’re going to get one person to solve your whole ESG problem. It won’t happen
Gene Tunny 59:59
Okay.
Stephen Howell 1:00:02
That’s why we have an expert in Rachel.
Gene Tunny 1:00:06
I’ll put links to effective governance out of the hub good Ganon. Lawyers here in headquartered in Brisbane, but you work or live in Australia, you probably work internationally as well.
Rachel Baird 1:00:19
Yeah. I’ve practiced in most, a lot of different states in Australia, because we have environmental law, is state based, is Commonwealth based, it’s international. Again, you’ve got to understand how they operate. It’s quite complex.
Gene Tunny 1:00:35
I have to come back to environmental law. There’s so much of our law that’s driven by these international agreements and rams are and all of that, but that’s a topic for another time.
Okay. Rachel Baird and Steven Howell from Effective Governance; I’ve really enjoyed this conversation. Thanks so much for your time and your great insights. Really appreciate it.
Stephen Howell 1:00:59
Always great to be with you.
Gene Tunny 1:01:01
Thanks, Stephen.
Rachel Baird 1:01:03
Thanks, I really appreciate the chance to talk about something that I’m passionate about.
Gene Tunny 1:01:08 Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.
Credits
Big thanks to EP145 guests Rachel Baird and Stephen Howell, to the show’s audio engineer Josh Crotts for his assistance in producing the episode, and to Peter Oke for editing the transcript.
