> The Newsletter of The Australian APEC Study Centre

In late May, the Australian APEC Study Centre, with the support of AusAID, conducted a capacity building training program in structural reform that builds on the work of the Economic Committee responsible for implementing LAISR 2010.

The purpose of the program was to enhance the policy formulation capacity of the officials involved. In this case, officials were from economic and financial agencies, and they came to Melbourne to participate in the program ‘Strategies to Promote Structural Reform by Focussing on the Drivers of Economic Growth in APEC’. Given its nature, the program had a particular focus on productivity performance.

Mr Tony Hinton, the academic coordinator of the program who for many years worked in Treasury and was most recently a Commissioner with the Productivity Commission, assembled an impressive array of speakers. Although most were from Australian institutions like the Productivity Commission, Treasury, Mercer or NAB, the faculty also included an official from New Zealand Treasury and member of the Policy Studies Branch of the OECD in Paris.

A total of 19 regulators from seven countries participated in the week-long program that had lectures and panel discussions, with plenty of opportunity for participants to express their respective viewpoints. Many of the participants ended up asking very challenging questions, clearly drawing on the knowledge that they were gaining.

The program followed a structure that firstly focussed on the definition and measures of productivity, then on the various aspects of public policy that impact on productivity, and then on structural reform.

Issues examined included competition policy, good regulatory systems, labour market, financial sector reform, international trade and institutional memory. A case study focussing on some of the recent developments in this area in PNG was also presented. Some of the PNG participants who actually worked with the Australian Treasury to implement changes in their country were participants of this capacity building training.

On the final day, the participants, separated into four groups, were asked to present their findings and collaborations on the issues presented during the course, including the importance of productivity enhancement, the challenges to structural reform and the specific issues affecting developing economies.

The participants left Melbourne with a greater understanding of many of the issues related to structural adjustment that they have to manage in their respective home economies - the same issues being pursued by the Economic Committee and which will become increasingly important to APEC economies that want to sustain the solid economic growth achieved since the group's inception.

It is a truism, unfortunately, that politics is the enemy of the good. Tackling climate change requires a global consensus. There is none at present. Although the federal Government and the Opposition aspire to a new global consensus, international initiatives require a good measure of bipartisan support. The imminence of a federal election will rule this out. Climate change has become a partisan issue.

The Prime Minister's emission trading taskforce report on a system of cap and trade to control emissions of carbon dioxide is due later this week. All state governments and the Opposition say the system is necessary, but most people do not know what this means. There is a lot of technical jargon about trading permits to emit carbon dioxide, but that is secondary. The first and key measure is to increase the cost of electricity by capping how much is produced.

So the real issue in this debate is how much the cost of electricity should go up. The Howard Government evidently thinks not much. The Australian Greens and the Australian Labor Party have been cagy on this, but they support positions that indicate significant increases. They appear to support the assessment by Blair Government economist Nicholas Stern that prices have to be hiked sufficiently to reduce world growth by 1 per cent each year. A cut of 1 per cent is a lot. The world economy grows by about 6 per cent each year, rich economies between 2 per cent and 4per cent.

We can afford that, says Tony Blair. No, we can't, say the leaders of the world's poor countries. With about two billion people still living on less than $1 a day, curbing consumption of electricity worldwide curbs growth, which is the first thing required to eliminate poverty. Nothing better illustrates the lack of interest in the poor by the Greens.

Furthermore, the Stern target does not reduce the amount of carbon dioxide in the atmosphere; it merely aims to stabilise it during the next century. The cost of reducing the amount of carbon dioxide in the atmosphere is so great that no government is willing to propose it.

The political rhetoric about climate change is misleading people to believe that global warming can be stopped. None of the measures proposed by the Green groups, Labor or the Government will do that. The only way to reverse the increase of emissions generated by the human race is to reduce the world's population, as a British group correctly observed.

The Greens and Labor still call for Australia to ratify the Kyoto Protocol. It is moribund. Its commitments to cap emissions expire in 2012 and developing countries, which account for 40 per cent of the world's emissions of carbon dioxide, have made it clear they will not accept such commitments. This means a global system of cap and trade is not feasible.

So should we not bother about climate change? Certainly not. We can switch the focus to assist countries to meet the effect of global warming rather than to try to reverse it. And emissions can be reduced without curbing growth. China would cut its emissions in half if it replaced all its old power stations with modern generators. Research by US consultant Charles Rivers and Associates shows this strategy could reduce emissions as effectively as the cuts proposed in the Kyoto Protocol.

This is the aim of the Asian-Pacific Climate Change Partnership initiated by Australia and the US. Other members are China, India, Japan and South Korea. This offers a realistic basis -- indeed, the only one -- for building a global consensus on climate change. Members emit 60 per cent of the world's carbon dioxide. They are developing practical programs in eight areas where emissions are significant, such as power generation, steel and cement. This program produces tangible results, so why won't the Greens support it? They have cemented themselves to the idea that the consumption of energy must be regulated, blinded by the economically wrong-headed idea that we consume too much.

Building a global consensus on climate change requires a multi-track approach. Provide one track for those who want to hike power prices to reduce emissions and another for those who prefer to do so through growth-friendly co-operation programs to develop new systems and technologies. There is already a consensus among Asian-Pacific countries on this. It would be a global strategy if the Europeans joined it.

Could we see bipartisan support for this if the Howard Government introduced a cap and trade system? While political parties are more interested in votes than the environment, the much-needed strategy to build a global consensus will have to wait until after the election.

From the origins of APEC, capacity building has been regarded as the third pillar of regional economic cooperation. The rationale being that if the first two pillars are to be achieved, liberalization and facilitation, then economies require support in building their institutional capacities to implement measures to promote trade and investment flows and make easier and more efficient, the facilitation of  the movement of goods and services across the Asia Pacific region. As APEC moves to create a fourth pillar in its drive to promote growth, productivity and structural reforms to remove “behind the border” barriers to trade and investment flows, it follows that capacity building initiatives to support this process will need to be enhanced and deepened. The process is well underway. APEC is focusing on structural reform that will assist economies in shaping their domestic policy frameworks to deepen economic activity, to promote employment and to widen opportunities and horizons. Clearly, the gains from these processes will be deeper for an economy when its domestic growth policies converge with open regional and global trade and investment initiatives.

The Australian APEC Study Centre has contributed to or organized, support for three recent initiatives to support APEC’s agenda to enhance domestic economic capabilities. One involved a high level APEC policy dialogue to enhance investment flows in APEC economies, convened in Melbourne April 26-27. The second was a public/private sector dialogue to promote regional bond markets, in Melbourne May 8, and the third a training program for APEC regional policy makers that took place May 21-25, also in Melbourne, organized and administered by this Centre, on strategies to promote structural reform by focusing on the drivers of economic growth in APEC. The common thread of the three initiatives was that of support for APEC economies in building their domestic policy frameworks and institutional capacities.

The investment initiative brought together policy makers from a number of APEC economies, Vietnam, Mexico, Philippines and Indonesia to discuss their investment policies in the context of important work by the OECD on its Policy Framework for Investment (PFI). It involved investment policy officials, academics, and representatives from the OECD, IMF, World Bank, ADB, UNCTAD and business groups. The PFI is a thoughtful and balanced tool for assessing an economy’s policy framework in the context of well established frameworks of practices and procedures developed by members of the OECD and by many emerging market economies. A key and sobering fact is that foreign direct investment flows into many APEC economies have not yet fully recovered to the levels achieved before the APEC financial crisis of 1997. This reveals both the extent of the continuing legacy of that crisis, but also points to the fact that there are many impediments to both domestic and foreign investment flows in the APEC region – most of which are the consequences of policies inimical to private investment and which can be adjusted by domestic policy reforms.

The second initiative involved policy makers and financial regulators from three APEC economies, Vietnam, Indonesia and the Philippines, and from other economies  in a dialogue with financial market participants, including funds managers and institutional investors, rating agencies, representatives from the ADB and OECD and academics, to discuss ways in which corporate bond markets in those three economies can be enhanced.   The absence of a well developed corporate bond market limits access to domestic capital by corporate borrowers and often leads to an undue concentration of risk in the banking sector which, in many emerging markets, remains as the primary source of lending. Deepening an economy’s capital market provides greater choice to investors and borrowers, lowers the cost capital for development and promotes growth and employment. The dialogue considered market infrastructure needs, the legal base necessary for bond issuance, the policy environment that attracts domestic and foreign institutional investors and the measures needed to attract local corporate issuers. Innovative ways in which small and medium enterprises could through various vehicles access local bond markets were also discussed. This form of dialogue will be continued with other interested emerging APEC economies.

The third initiative, a training program involving senior policy makers from China, Indonesia, Philippines, Thailand, Vietnam and PNG, was organized by this Centre as a partial response to a call by APEC Leaders for measures to support the implementation of structural reforms to promote economic growth. The program focused on definitions and measurement of productivity, adjustment techniques to manage structural changes, regulatory systems and the institutions that have been established in some economies to develop the policy framework for reform. It also covered competition policy, labour market and financial policies (see related story in this edition of Currents).

The essential message underlining these three initiatives is that policy choices determine growth paths and that there are proven good policies which APEC economies can develop and adopt. APEC is a forum in which solid policy choices can be carefully analysed and experiences shared with member economies in a cooperative way in support of policy reforms. Deliberations in the various forums within APEC, provides the means by which economies can define their policy choices for growth. Invariably, new policy directions which are at the core of structural reform do necessitate changes in policy approaches and in the institutions whose job it is to guide reforms. Seen in this light, capacity building is a critical component of and central to the attainment of APEC’s goals and aspirations.

Source: APEC Secretariat