The Jamaican Experience - Third World Debt Crises

The history of mankind has been punctuated by an elusive series of booms and slumps. Historians have singled out the experience of the early 1930's as the 'Great Slump' or the more commonly termed 'Great Depression.' This undeniably humbling event, dubbed an 'economic blizzard' by historian Denis Richards, destroyed the then nascent economic stability in Europe and severely dented consumer and investor confidence around the World. Similarly the world debt crisis of the 1970's and 1980's also brought with it its own blizzard effect that engulfed both developing and developed countries. The debt position of developing countries became extremely troubling when as Stambuli (1998) notes it became obvious that there was a growing mismatch of external indebtedness and the ability of nations to service their debt. This serious disparity was ultimately characterized by numerous debt rescheduling arrangements and more importantly countries declaring default. In hindsight there have been many theories that have sought to explain the causes of this crisis, however this paper will explore specifically whether developed or developing countries should be held accountable for causing and by extension alleviating this crisis. Jamaica's debt position will also be comparatively analyzed in a bid to ascertain the extent to which there is an unusual difficulty in servicing debt or in other words a crisis exists.

In order to fully appreciate the concept of accountability we must first understand the general conditions under which third world debt became problematic. Many development economists view the substantial increase in oil prices in 1974, which saw the price of oil increase from $2.70 in 1973 to a daunting $10.00 per barrel, as a major root cause.(1) This price increase immediately elevated the surplus on the current accounts of oil producing countries from $7 billion in 1973 to $68 billion in 1974. These large surpluses created the situation cogently documented by Stambuli (1998) that prompted oil-exporting countries who had more foreign exchange than they needed to invest in western banks. In a bid to offload the subsequent liquidity these banks then sought to recycle the surplus of 'petro-dollars' with developing countries that had experienced deteriorating current accounts. In Jamaica for example Brown (1986) reports that between 1976-1980 the deficit totaled $733 million. This process of recycling was inherently aggressive since as Kenneth Hall notes in the text 'The Caribbean Community Beyond Survival' the real interest rate during the 1970's was actually negative, which implies that borrowers were actually being compensated for taking loans. Developing countries then entered into what has been described as 'an orgy of borrowing' (Hall, 2001 ppxxxiii) that left them severely exposed in 1979 when a second oil price increase occurred. The latter brought the debt service capacities of developing countries to the forefront as countries faced increasing interest rates and shorter maturities on loans that were needed to amortize previous obligations. It is in this general environment that the crisis culminated with Mexico's poignant declaration that it could no longer honor its debt requirements in August of 1982.

Banking is a lot safer than it was

The financial crisis was fought at the weekends. In sweat-stained shirts, fuelled by stale coffee and cold pizza, harried officials worked the phones and held emergency meetings with other bankers to discuss whether to save this bank or to let that one sink—all before markets opened on Monday. The Sunday scrambling reflected the fact that officials had too many fires to put out and too few good options to choose from.

Before the crisis, regulators hoped that the discipline of markets would ensure banks were sensible in the risks they took. That proved to be a vain hope, in part because markets are prone to exuberance and in part because many banks had become so large that they could not be allowed to fail and they knew it. The emphasis now is on drawing up a new rule book for finance. In America, the world’s biggest financial market, the Dodd-Frank act is reversing decades of deregulation. In Britain officials are pondering plans for banks to erect firewalls between the different parts of their businesses. All banks will be required to hold a lot more capital to protect them against unexpected losses. New rules on funding and liquidity will force them to keep more liquid assets that can be easily sold should they need to raise funds urgently. These measures are making banking safer than it was. But the job is still far from complete.

To make banking safer, regulators need to marry two seemingly contradictory aims. The first is to make it less likely that banks will fail in the next crisis. The second is to make it less painful for taxpayers when they do fail. On the first, the biggest gains come from raising liquidity and capital standards—and here there has been plenty of progress. The new Basel 3 rules will have the effect of doubling the amount of core equity that a typical big bank holds as a proportion of its assets. The standards come into full force only in 2019 but the market is making banks plump up their capital cushions far sooner. Had Basel 3 been in force before the crisis most big banks would have been sufficiently stocked up on capital.

Most, but not all. Only a handful of big firms, out of a couple of hundred worldwide, suffered net losses that the new Basel standards would have been unable to deal with. Forcing all banks to hold enough equity to ensure that even the worst outliers think Irish banks are safe is an option from the ivory tower. The amounts needed would harm banks’ capacity to lend, fail to discriminate between well-run outfits and badly run ones, and encourage risks to migrate out of the regulated banks to the shadow-banking system (another area that still needs lots of work). Regulation, even in a business as dangerous as banking, should be restrained and targeted.

A little layer cake in Basel

A bit more equity is sensible for banks that are interconnected and large enough to cause serious economic damage if they collapse. The simplest way of doing this would be to insist on a chunky capital surcharge for systemically important banks. The Basel committee should look at the debate under way in Britain, where an independent commission has proposed an additional equity buffer of 3% for big retail banks.

The other thing that regulators need to do is soften the blow when banks do get into trouble. Most countries are putting in place resolution regimes that allow regulators to shut down smaller banks. But letting a big retail bank close its doors completely is still unthinkable. The real task is finding a way to impose losses on banks’ owners and creditors rather than making calls on taxpayers.

Tools are being developed in the form of convertible-capital instruments and bail-in debt, whereby creditors of struggling banks are turned into shareholders if losses rise high enough. Swiss regulators, for example, want their biggest banks to hold the equivalent of 9% of their risk-weighted assets in convertible capital. The advantage of these instruments is that losses fall where they ought, on those who funded the banks, and that they provide a ready-made pool of capital that is cheaper than equity and large enough to recapitalise all but the most extreme failures. Questions swirl around these new instruments. Is there enough demand for them? Will they stop the problem of creditors running for the hills at the first sign of trouble? But a thick buffer of equity and convertible debt is the best way to make crisis-filled weekends less terrifying.

The Oil Supply and Petroleum Economics

Many have blamed the rapid rise in oil prices in 2007 and the first-half of 2008 on speculators. But if we somehow banned speculators from trading oil futures and options, would the price of oil drop back down to pre-2007 levels? It is not clear that it would.

The link between high oil prices and speculators is understood to work as follows:

1    Oil analysts and traders believe that oil prices will rise in the future due to a combination of increased demand from China and India and due to slowing or even reduced supplies from "peak oil".

2    Seeing the writing on the wall, speculators start buying up oil futures and options today, believing they will be worth more in the future. This buying up of oil futures immediately raises their price, due to basic supply and demand.

3    The price of oil should fall once these futures mature because speculators have no need for a physical delivery of oil - where would they store it?

4    However prices, on average, do not fall - in fact they rise. It could be because someone is buying massive amounts of oil and physically storing it somewhere, but this is highly unlikely. What is more likely is that the price is maintained high because it is being "stored" in the ground rather than making it to market; that is some oil companies are cutting production.

Step 4 in the chain is the crucial one. Unless the oil is being stored by the speculators (or somebody the speculators are selling their futures to), they cannot permanently drive the price up. All else being equal, oil prices must fall as the speculators sell their futures prior to maturity. But since the price of futures are not going down (on average), then all else must not be equal - it must be that production is being cut from what it would have been. We can think of the current situation as being akin to oil companies buying the futures from the speculators and delivering the oil to themselves.

Due to this, it is not clear that getting rid of the speculators would drop oil prices one cent. The high prices appear to be largely supply-side issue. How much of the lower supply is due to oil companies cutting production and how much is due to "natural" factors is open to debate.

Egypt's revolution

In The four months since the fall of Hosni Mubarak, Egyptian politics have rocked along in a see-saw fashion. The Supreme Council of the Armed Forces, which has assumed interim powers in advance of elections scheduled for the autumn, tilts in favour of the status quo. Its members 18 ageing generals seem instinctively shy of risk and bewildered by the noisy civilian world into which they have stumbled. Their reluctance to move rouses suspicions among the wider public. Pressure for prompt, tangible evidence of revolutionary change builds, culminating in threats to reignite the massive protests that toppled Mr Mubarak. The military men buckle, and cast a few concessions to the crowd. Equilibrium is briefly restored until the next surge of public passion.

Such was the background to the decision, on May 24th, to refer the former president, his two sons and a fugitive billionaire associate to trial on criminal charges which may include murder. Last month Mr Mubarak and his sons, who spent the first weeks after their ouster in a secluded resort, were arrested in response to massive protests in Cairo's Tahrir Square. As their incarceration dragged on (the 83-year-old Mr Mubarak has been held in a hospital rather than prison), doubts arose as to the government's will to prosecute them.

Not only did the generals, all of whom served most of their careers under the command of Mr Mubarak, himself a former general, show little sign of sharing the public's outrage over growing evidence of the former first family's gross abuses of power. The army's imposition of swift, draconian military justice on civilian activists, and its deployment of thuggish military police to quell protests, contrasted jarringly with the relatively mild treatment enjoyed by hated strongmen of Mr Mubarak’s regime. Although dozens of these men are in custody or under investigation, few have been sentenced and only one, a low-level police officer tried in absentia, has been convicted for his part in the killing of more than 800 people during January's unrest.

With much of the disparate movement that organised the revolution calling for another huge gathering in Tahrir Square on May 27th, Egypt's hesitant rulers again budged. Not only are the Mubaraks now certain to face trial, a development that is unprecedented in any Arab country. The government's apparent bid to stem public anger in advance of Friday's protest included the sacking of several top police officials and the amnestying of many civilians held in military prisons.

Such efforts to show good will are effective, up to a point. Many Egyptians have tired of the turbulence that has dogged the country since the fall of Mr Mubarak and would be content to let the soldiers rule in peace. Parts of the political spectrum, most glaringly Islamist groups, led by the powerful Muslim Brotherhood, have sought to score tactical gains by praising the military and condemning its detractors. Yet the protests will go ahead, nevertheless, if only because a broad spectrum of Egyptians has concluded that they are the only thing the generals listen to. This strange dialogue looks set to continue through a long, hot Egyptian summer.

Banks in Central Europe

Herbert Stepic could qualify as the grand old man of central European banking, and not just because of his avuncular beard: at Austria’s Raiffeisen Bank (now RBI) he has been the face of its foreign business since the 1970s. RBI’s subsidiaries now range over 16 former communist countries including Russia and last year yielded around €930m ($1.3 billion) in pre-tax profits. He is bullish about the potential for banking in the region, having just bought Polbank, a Polish retail bank, which he says fills “the last gap” in his diversified portfolio.

Only UniCredit of Italy has a comparable spread, if its banks in the Baltic states and Turkey are included. UniCredit calculates that, by assets, it is the biggest regional player. Erste Bank, which is Austrian like RBI, has more concentrated market power. Through its subsidiaries it has around a quarter of the retail markets in the Czech Republic, Slovakia and Romania.

The region is undoubtedly promising. For 2011, RBI predicts GDP growth of 3.9%, more than double the euro area’s 1.8%. Each group insists it is well placed to profit from the upswing. UniCredit points to its exposure to Russia, Turkey and Poland, which it says combine size with low banking-sector volatility. The trio accounts for 57% of the Italian bank’s regional revenues.

A handful of other foreign banks have a presence in one or two central European countries, but they lack a grand regional strategy. Intesa San Paolo of Italy, for example, owns the biggest bank in Serbia and the second-biggest in Croatia and Slovakia. KBC, a Belgian banking and insurance group, owns the biggest bank in the Czech Republic and the second-biggest in Hungary. It is expected to hang on to those but is planning to sell its banking interests in Russia, Serbia and Slovenia.

Two decades after the fall of the Berlin Wall, Erste, RBI and UniCredit are benefiting from their early commitment. Each has been led by a man with a zest for the place. In Austria, Andreas Treichl, still head of Erste, and Mr Stepic at RBI acquired banks early on in neighbouring countries and never looked back. Alessandro Profumo, then head of UniCredit, was early into Poland and later bought Germany’s HypoVereinsbank, which owned Bank Austria Creditanstalt, the market leader.

These men had the foresight, during the global banking crisis, to keep their banks engaged in the region, with a little help from their home governments, the European Commission and the European Bank for Reconstruction and Development. Together they developed a voluntary pact known as the Vienna Initiative, to keep money flowing in the European Union’s eastern states. It is paying dividends today.

There are some clouds. The recoveries in Hungary and Romania may falter and the Polish economy could overheat. Mr Stepic reckons the biggest irritant is bank windfall taxes imposed by Austria and Hungary, based on balance-sheet size. Other countries will follow, perhaps with performance-based levies. But old hands like Mr Stepic seem to relish an obstacle race.

Greece and the Euro

It Was a year ago that the European Union produced its big bazooka to quell the euro area’s sovereign-debt crisis: a €750 billion fund to safeguard the single currency, following within days of the €110 billion bail-out of Greece. It did not work. Ireland has since been bailed out, and a rescue of Portugal is in the works. Greece looks closer than ever to defaulting, or at least to having its debt restructured.

After a year of muddling along, the EU seems more muddled than ever. The disarray was painfully apparent over the weekend. News of a secret meeting of selected European finance ministers (including Greece's man, George Papaconstantinou, pictured above) in Luxembourg on May 6th was promptly leaked.  Der Spiegel reported that Greece was considering leaving the euro zone; the briefing note for the German finance minister, Wolfgang Schäuble, made clear this would be economic suicide. It would greatly expand (perhaps double) Greece’s debt burden, provoke capital flight, cause turmoil across Europe’s banks and endanger the country’s membership of the EU. Greece described the report as "borderline criminal".

Indeed, the idea of Greece giving up the euro has now generally been accepted as nonsense, but not before another upheaval in the markets (Greece was downgraded again by Standard & Poor's yesterday). The notion of Greece leaving the EU was “stupid”, declared Jean-Claude Juncker, the prime minister of Luxembourg (who presides over the euro area’s group of finance ministers), after hosting the meeting that his officials denied was taking place. Mr Juncker is, after all, the man who argued against transparency in decision-making, saying he was all for "secret, dark debates". He may think this is a sign of seriousness in economic policy, but this weekend he came across as incompetent.

It is possible that the meeting caused such confusion that the ministers felt compelled to rule out one option that  is being discussed more and more openly: restructuring Greek debt because of the country's inability to repay its loans, or even to balance its books, as austerity measures worsen the country’s recession.

So for now, it is the EU’s rescue plan that is being restructured. “We think that Greece does need a further adjustment programme”, said Mr Juncker. The details will be worked out at a meeting of finance ministers next week. The country is in no state to start tapping back into markets next year, as envisaged in its current bail-out plan. So European countries are likely to extend more assistance to Greece.

The options include giving it more time to meet its deficit-reduction targets (its budget deficit was 10.5% of GDP last year, a long way off its 8.1% goal), softening the terms for its current bail-out (by again reducing the interest rate or again stretching out its repayment schedule), issuing new loans, or having the EU buy new Greek bond issues in future. Mr Papaconstantinou suggested this last option was under active discussion. Ireland hopes it, too, will benefit from the rethink on Greece.

Plainly, the crisis requires fresh thinking. But so far the EU remains doggedly on its year-old path. First, do what is necessary, but no more than that, to avert a financial collapse in euro-area member states. And second, play for time in the hope that troubled economies will start to grow out of their difficulties, or at least until Europe’s banking sector strengthens sufficiently to cope with the losses on restructured government debt. Above all, push the problem beyond the political horizon of the euro area's main leaders: the 2012 presidential election in France, and the 2013 parliamentary election in Germany.

Australia could become a model nation to be The next Golden State

Imagine a country of about 25m people, democratic, tolerant, welcoming to immigrants, socially harmonious, politically stable and economically successful; good beaches too. It sounds like California 30 years ago, but it is not: it is Australia today. Yet Australia could become a sort of California—and perhaps a still more successful version of the Golden State.

It already has a successful economy, which unlike California’s has avoided recession since 1991, and a political system that generally serves it well. It is benefiting from a resources bonanza that brings it quantities of money for doing no more than scraping up minerals and shipping them to Asia. It is the most pleasant rich country to live in, reports a survey this week by the OECD. And, since Asia’s appetite for iron ore, coal, natural gas and mutton shows no signs of abating, the bonanza seems set to continue for a while, even if it is downgraded to some lesser form of boom (see article). However, as our special report in this issue makes clear, the country’s economic success owes much less to recent windfalls than to policies applied over the 20 years before 2003. Textbook economics and sound management have truly worked wonders.

A flash in the pan?

Australians must now decide what sort of country they want their children to live in. They can enjoy their prosperity, squander what they do not consume and wait to see what the future brings; or they can actively set about creating the sort of society that other nations envy and want to emulate. California, for many people still the state of the future, may hold some lessons. Its history also includes a gold rush, an energy boom and the development of a thriving farm sector. It went on to reap the economic benefits of an excellent higher-education system and the knowledge industries this spawned. If Australia is to fulfil its promise, it too will have to unlock the full potential of its citizens’ brain power.

Australia cannot, of course, do exactly what California did (eg, create an aerospace industry and send the bill to the Pentagon). Nor would it want to: thanks to its addiction to ballot initiatives, Californian politics is a mess. But it could do more to develop the sort of open, dynamic and creative society that California has epitomised, drawing waves of energetic immigrants not just from other parts of America but from all over the world. Such societies, the ones in which young and enterprising people want to live, cannot be conjured up overnight by a single agent, least of all by government. They are created by the alchemy of artists, entrepreneurs, philanthropists, civic institutions and governments coming together in the right combination at the right moment. And for Australia, economically strong as never before, this is surely such a moment.

What then is needed to get the alchemy going? Though government should not seek to direct the chemistry, it should create the conditions for it. That means ensuring that the economy remains open, flexible and resilient, capable, in other words, of getting through harder times when the boom is over (a sovereign-wealth fund would help). It means maintaining a high rate of immigration (which started to fall two years ago). It means, above all, fostering a sense of self-confidence among the people at large to bring about the mix of civic pride, philanthropy and financial investment that so often underpins the success of places like California.

Many Australians do not seem to appreciate that they live in an unusually successful country. Accustomed to unbroken economic expansion—many are too young to remember recession—they are inclined to complain about house prices, 5% unemployment or the problems that a high exchange rate causes manufacturing and several other industries. Some Australians talk big but actually think small, and politicians may be the worst offenders. They are often reluctant to get out in front in policymaking—on climate change, for instance—preferring to follow what bigger countries do. In the quest for a carbon policy, both the main parties have chopped and changed their minds, and their leaders, leaving voters divided and bemused. There can be little doubt that if America could come to a decision on the topic, Australia would soon follow suit.

Its current political leaders, with notable exceptions, are perhaps the least impressive feature of today’s Australia. Just when their country has the chance to become influential in the world, they appear introverted and unable to see the big picture. Little legislation of consequence has been passed since 2003. A labour-market reform introduced by the Liberals was partly repealed by Labor. A proposed tax on the mining companies was badly mishandled (also by Labor), leading to a much feebler one. All attempts at a climate-change bill have failed. The prime minister, Labor’s Julia Gillard, admits she is unmoved by foreign policy. The leader of the opposition, Tony Abbott, takes his cue from America’s tea-party movement, by fighting a carbon tax with a “people’s revolt” in which little is heard apart from personal insults. Instead of pointing to the great benefits of immigration—population growth is responsible for about two-fifths of the increase in real GDP in the past 40 years—the two parties pander shamelessly to xenophobic fears about asylum-seekers washing up in boats.

None of this will get Australians to take pride in their achievements and build on them. Better themes for politicians would be their plans to develop first-class universities, nourish the arts, promote urban design and stimulate new industries in anything from alternative energy to desalinating water. All these are under way, but few are surging ahead. Though the country’s best-known building is an opera house, for example, the arts have yet to receive as much official patronage as they deserve. However, the most useful policy to pursue would be education, especially tertiary education. Australia’s universities, like its wine, are decent and dependable, but seldom excellent. Yet educated workers are essential for an economy competitive in services as well as minerals. First, however, Aussies need a bit more self-belief. After that perhaps will come the zest and confidence of an Antipodean California.

Japan's Economy Post Quake

On May 13th Yoshihiro Murai, governor of the tsunami-stricken prefecture of Miyagi, received an angry petition from the bosses of a co-operative that has long controlled some of the richest fishing grounds off the coast of north-eastern Japan. Their slogan: “We won’t let fishermen be turned into salarymen.” They were responding to his proposal that, in return for money to rebuild their shattered livelihoods, they should let private firms fish in Miyagi’s waters. Mr Murai, a former pilot, was undeterred by their protests, noting that with most of them over 60, the industry risked dying out anyway. Later he told The Economist that deregulation of Miyagi’s coastline should serve as a model for reform nationwide. “There’s always pain when there’s revolution,” he said.

That resolve has become more common since the earthquake and tsunami of March 11th and the subsequent nuclear crisis jolted Japanese citizens’ faith in their country and those who run it. The question now is whether the reformist zeal will stop at the rebuilding of Tohoku, the devastated region in the north-east, or go further, to solve the problems of overcapacity, high public debt and deflation that were plaguing Japan long before the disaster.

The speed of the clear-up is raising hopes that the economy will prove resilient after the initial shock. Industrial production plunged by 15.5% between February and March, a far steeper drop than the previous monthly record of 8.6%, in February 2009 not long after Lehman Brothers’ bankruptcy. Figures this week showed that GDP fell at an annual rate of 3.7% in the first quarter compared with the last three months of 2010, pushing the economy technically back into recession. Moreover, the decline in output in late 2010 was 3% rather than the previous estimate of 1.3%. But private economists are forecasting a pick-up in the second half of the year, which would be a big improvement on what happened after Lehman.

Recovery in stricken Tohoku has been quicker than many had expected. Nine out of ten manufacturing firms damaged by the disaster hope to restore output to pre-crisis levels by mid-summer, the government says. After a heroic effort by Renesas Electronics, a quake-damaged chip company whose microcontrollers are vital for running many cars, hard-hit Toyota is now expecting to be back to normal production by the autumn.

Electricity supply in Tokyo, thrown into chaos after the Fukushima Dai-ichi nuclear plant and other generators were knocked out by the quake and tsunami, is also being restored, which will further boost the revival. There have been no blackouts since March 29th. Tokyo Electric Power (TEPCO), the utility that owns the Fukushima plant, expects peak capacity to reach 55-56 gigawatts this summer, enough for a small surplus if it is not too hot.

Beyond Tokyo, doubts linger over possible losses of power during the summer because only 19 of the country’s 54 nuclear reactors are in service. Many of those closed for routine maintenance require approval from local governors to be restarted, but with the Fukushima accident still so fresh in people’s minds, it is touch and go whether they will get it. However, companies and households have shown a willingness to curb demand during peak hours, which the government hopes will ward off blackouts.

Another bright spot is that consumers may be perking up. Although there was a record plunge in confidence in April, the “Golden Week” holiday in early May produced an unexpected flurry of tourism. “It is the first time I have been happy in a traffic jam,” quipped Masaaki Kanno, chief economist at J.P. Morgan in Tokyo.

But if the private sector is putting its back into reconstruction, the public sector is being less heroic. The government has passed a ¥4 trillion ($50 billion) supplementary budget for cleaning up the debris and other urgent tasks. But there is a political tug-of-war over a proposal to spend an extra ¥10 trillion on reconstructing and revitalising Tohoku, a lagging region even before the disaster. That public spending will be vital to ensure a strong rebound in the national economy.

Even if Naoto Kan’s government, which suffers from low poll ratings and divisions in parliament, can prevail on the extra budget, there are doubts about whether his leadership is strong enough to shake the economy out of two decades of low growth and rising debt. On May 17th the prime minister postponed a decision on whether to join talks to form a free-trade area called the Trans-Pacific Partnership. That was aimed at reducing the loss of manufacturing jobs to Asia, which is hollowing out Japan’s industrial base and sapping tax revenues.

Another worry is whether Mr Kan can push through a reform of the fiscal system to help ease strains on the public finances. Polls show that the appetite for raising the consumption tax to help share the burden of reconstruction, which was strong shortly after the crisis, is now waning.

Despite these doubts about the politics of reform, Mr Murai is not alone in calling for a decisive break with the past. Within the Ministry of Economy, Trade and Industry (METI), revised growth plans are being prepared that an official says would enable small power-producers to increase their contribution to the grid, encourage more renewable energy and introduce smart metering to stimulate conservation. Officials believe that a focus on green technologies could give new impetus to Japan’s economy. Some think TEPCO should be put through bankruptcy while at the same time Tokyo’s energy market should be opened to more competition. The government has not gone that far but on May 18th Mr Kan hinted that the monopolistic power of electrical utilities might be reviewed, which could lead to the separation of power generation and distribution.

There is, says one METI official, a change of mood. “Before March 11th the goal of Japan was not that clear. Now it’s much clearer.” At present most efforts are being focused on recovering from the disaster. But there is reason to hope that energy may be directed to finding a new way forward for an economy that grows mainly because of foreign trade, generates insufficient demand at home and has been unable to find a productive use for the oodles of spare cash that sits on private balance-sheets.

There is something awe-inspiring about the Japanese on a mission. During Golden Week holidays this month, thousands of volunteers helped to sift through the muddy wreckage left by the March tsunami. Stricken roads, bullet trains and factories have returned to normal with astonishing speed. In people’s ardour to rebuild, once-taboo ideas are emerging on how to reform and deregulate not just the damaged areas but the country at large. The government urgently needs to develop a sense of mission, too.

The combined power of a quake, tsunami and full-scale nuclear accident has jolted whatever sense of complacency the Japanese had about the resilience of their country. The ham-fisted efforts of Tokyo Electric Power (TEPCO) to stem the crisis at the Fukushima Dai-ichi nuclear-power plant have exposed the company for what it is: an inept monopoly so big it could co-opt or run rings around its regulators. It should be broken up. Meanwhile, the smashed-up fishing fleets and sea-swamped rice paddies in the north-east have prompted discussion on bringing private investment into these heavily protected areas which no longer provide a future for the young. Many are championing the idea of special economic zones in the north-east, which would free the area from the cat’s cradle of rules imposed from Tokyo that hamper free enterprise. All of these are good ideas. But they will wither unless the central government throws its weight squarely behind them.

For much of the crisis, Naoto Kan, the prime minister, has been a sadly withdrawn figure. Yet when he does show leadership, the public responds. His popularity, though low, rose this month after he unexpectedly pressed for the closure of the nuclear-power plant nearest to Tokyo because it sits on a fault line. He has won plaudits for suspending plans to build more nuclear facilities. No doubt he could do more to accelerate an emergency ¥10 trillion ($123 billion) plan for rebuilding damaged parts of the Tohoku region if he were not faced by a “Bring Down Kan” campaign within the opposition and even his own party. But he must get around such pettiness.

Carpe Diet

To do so, Mr Kan needs to craft a message as substantial as the challenges Tohoku faces. And he needs debate on it to ring out beyond the corridors of power. There are a few encouraging signs. As TEPCO’s compensation liabilities mount, Mr Kan is airing the once-unthinkable suggestion that it should be broken up. The government may end up on the hook for many of its liabilities, but a break-up could help spur long-overdue deregulation of the energy sector.

More broadly, Mr Kan should seize the national mood of solidarity with Tohoku to persuade people to accept difficult reforms. Higher taxes will be needed not just to pay for reconstruction in Tohoku but also to help shore up Japan’s overstretched social-security system. The pension-eligible age, now nearly 65, may have to be raised sharply, too.

So far, Mr Kan’s message has been muddy. He has backtracked on an idea to enter talks to create a free-trade area known as the Trans-Pacific Partnership, even though the parts-suppliers in Tohoku that have been damaged in the disaster would benefit from freer trade. He has yet to spell out deregulatory proposals that would encourage private companies to invest, in Tohoku and elsewhere.

His excuse is politics: with a divided Diet, it is tough to be bold. But that ignores his ability to harness public opinion for the cause. Not for years have good ideas flowed so freely in Japan. But such moods don’t last. Miss this moment, Mr Kan, and Japan will rue it for years to come.

Spain’s young want jobs

"The markets want reform and voters want a new government" 

A child in the 1964 Disney musical, “Mary Poppins”, is an unlikely hero for today’s angry Spanish youth. But his face features on some of the thousands of posters pinned to the walls of Madrid’s central Puerta del Sol square, where protesters have been camped out for almost two weeks. The reason? He demanded his tuppence back from the Dawes Tomes Mousley Grubbs Fidelity Fiduciary Bank, and started a run.

As Spain’s ruling Socialists reeled from a ten-percentage-point defeat at the hands of the conservative People’s Party (PP) in municipal and regional elections on May 22nd—the party’s worst-ever result—some found explanations among the tented demonstrators in Madrid and dozens of other Spanish cities. It is not that the protesters—an ill-assorted mix of anti-capitalists, anarchists and pragmatists bothered about corruption and electoral imbalances—changed voters’ minds. It is that they, and people like them, might normally have voted for left-wing parties. On May 22nd the Socialists lost 1.5m, or one in five, of their votes. Yet the communist-led United Left coalition picked up only 210,000. Likewise, Mariano Rajoy, the PP’s leader, focused his party’s election campaign on the economy and jobs, Spain’s two main concerns, but the PP gathered only 560,000 of the spare votes. Its victory was due chiefly to disillusion with the left, not great advances on the right.

Still, this was an historic drubbing. It is best measured by the record number of regional governments and city halls won by the PP. The party will now run between nine and 11 of Spain’s 17 regional governments, and have an important say in several more. The Socialists are left in control of just Extremadura and two regions that did not vote—Andalusia and the Basque country. But all of Andalusia’s provincial capitals, including traditionally Socialist Seville, are now in PP hands.

A general election must be held by the end of next March. José Luis Rodríguez Zapatero, the Socialist prime minister, announced in April that he would not stand again, hoping, probably vainly, to save his party by acting as a lightning-rod for voter fury. Few now doubt that Mr Rajoy, on his third try, will move into the prime minister’s Moncloa Palace. The question is whether he will land the holy grail of Spanish politics: a parliamentary majority. If repeated, the PP’s ten-point lead over the Socialists on May 22nd should do—just. Anything less threatens to leave Mr Rajoy without a mandate for the reforms Spain badly needs.

Mr Zapatero’s popularity has proved inversely proportional to the wisdom of his decision-making. For two years he denied that Spain was in serious financial trouble. His support fell only slightly, despite recession and galloping unemployment. But last May, as contagion spread across the euro zone’s periphery, he executed a U-turn, embracing austerity and, to a lesser degree, reform. His ratings plunged.

Now the Socialists must choose a replacement for him. A bitter fratricidal battle is looming, with calls for an emergency party conference to remove him as secretary-general. If he loses control of his party, Mr Zapatero might be dumped as prime minister, or even have to call an early election, as the PP has urged. A party meeting on May 28th was due to set the course. Alfredo Pérez Rubalcaba, the deputy prime minister, and Carme Chacón, the young defence minister, are the front-runners to replace Mr Zapatero. In policy terms neither represents a huge change.

As his party grows more uneasy, Mr Zapatero is sticking to an austerity path that aims to reduce Spain’s budget deficit from 11.1% of GDP in 2009 to 4.4% by the end of next year. The OECD, a think-tank, says he is on target. The political cost is becoming apparent. But if the Socialists think left-leaning voters abandoned them only because of spending cuts, reduced civil-service pay and pension reform, they should study the demographics of the Puerta del Sol’s unhappy campers.

The protesters are mostly students. “Most live with their parents. Their problem is the lack of a future,” says Ignacio Sánchez-Cuenca of Madrid’s Juan March Foundation, a research body. Spain’s already-startling 21% unemployment rate rises to 45% among the young. Growth, at just 0.8% over the past year, remains sluggish. A decade-long bonanza of private borrowing, followed by a spurt in public borrowing when the crisis struck, has left a heavy debt burden. Discharging it may depress growth for years. The Economist’s May poll of forecasters predicts growth this year of just 0.6%, followed by 1.1% in 2012. That will create few jobs.

Provisional economic figures released earlier in May contain some worrying details. A surprise upturn in public-sector spending—which increased by 1.1% in the first quarter of 2011 after four quarterly declines—raises questions about decentralised Spain’s ability to cut its way to fiscal health. Ángel Laborda of Funcas, a savings-banks body, says regional governments and town halls may have been using this year’s budget to pay costs from 2010. That implies a hidden extra deficit.

Many of these administrations are now in the PP’s hands. Thorough scrutiny should reveal the true state of the books. The PP now has a good chance to show voters how it would run public finances. So far, its record is mixed. The Madrid region, long a PP bastion, has the lowest deficit of Spain’s 17 regions. But PP-governed Murcia is one of the worst performers.

Markets did not celebrate the PP’s win. Bond yields rose and stocks fell, stoking fears that Spain’s attempt to “decouple” itself from the problems of other peripheral euro-zone countries may be in trouble. Mr Rajoy has criticised Mr Zapatero’s pension reform without offering an alternative. If he wants to take control of a country that is not in crisis he must become clearer about his plans for government.

A radical’s idea for fighting graft stirs a debate on Indian democracy

“People are convulsing. This is good,” says a man with a trim, grey beard. Nearby, in the shade of a neem tree, protesters with banners and flags listen as a speaker inveighs against corruption. In a tent, a former assemblyman crouches on a platform and calls for criminals to be barred from public office. An assistant explains that he is only on “indicative” hunger strike today, “but his fast until death will start on April 14th.”

Jantar Mantar, a street in the middle of Delhi, is a favourite spot for activists: Tibetans praying for political freedom, students marching to have a headmaster sacked, minor politicians desperate for attention. Few achieve much. But one of them, Anna Hazare, an ageing rural activist with a hint of Gandhi about him, has just scored a tremendous victory.

He had vowed to fast to death unless the prime minister, Manmohan Singh, agreed to push through parliament a long-stalled plan for a Lokpal, a powerful anti-corruption ombudsman. His previous hunger strikes were ignored. Yet this time, to his own surprise, Mr Hazare barely had time to get hungry. On April 9th, four days in, the government conceded everything, agreeing that activists should supply the chairman and half the members of a committee that will draft a new law, which will in theory produce the Lokpal within just a few months.

The government was wise to capitulate. Mr Hazare had caught the public mood. A Facebook campaign sent celebrities, carpetbaggers and young urbanites eager to be jasmine revolutionaries all flocking to Jantar Mantar. Some fasted beside Mr Hazare. Others marched with candles and placards. Support for Mr Singh’s government promised to waste away even quicker than Mr Hazare.

The fight is not yet over, though. Columnists have lined up to snipe at the “Hazare phenomenon”, hinting that an extra-parliamentary movement is undemocratic by definition. Urban activists, a tiny minority, must not force the hands of politicians picked by hundreds of millions, they intone. Mr Hazare has also said some foolish things: for instance, that ordinary folk are too stupid to understand the value of their vote, giving it away for cash or a new sari. He has also lost some shine after calling for crooked officials to be executed, and praising Gujarat’s hardline Hindu nationalist chief minister, Narendra Modi.

Now the two sides must reconcile their ideas for the anti-corruption body. A longstanding government draft bill for a Lokpal wastes the paper it is written on. It would set up another toothless body, unable to investigate elected officials and under the thumb of public figures who have let corruption flourish for decades. The activists’ ideas are fresher: Nobel laureates, judges, the electoral commission and other notables would pick Lokpal members. It would get powers to start investigations, even of the prime minister, and to suspend elected officials, even cabinet ministers, suspected of corruption.

The disagreement is about power. The activists say corruption will be curbed only when independent officials of high integrity are appointed to wield an effective stick over elected ones. That is unconstitutional, the politicians retort: in a democracy it must be voters, not Nobel laureates, who decide. The politicians are unlikely to back down, especially once a series of state elections is out of the way, in May. Assuming he has the stomach for it, Mr Hazare may well be back in Jantar Mantar this summer.

Coruption In Indonesian - Slow to shame

Some societies are controlled by guilt, others by shame. Then there’s Indonesia, which is rarely controlled by either. At least among the political elite, there is an insuperable ability to avoid accepting responsibility for one’s actions. While American politicians step down quickly enough over sex or corruption scandals (Europeans even faster), and an Indian railways minister will fall on his sword after a horrific train crash, Indonesian leaders have a long record of refusing to resign no matter how serious the allegations against them, no matter how high the level of public pressure.

In 2000 General Wiranto refused to resign his post as security minister despite accusations that he was responsible for war crimes committed in East Timor the year before, when he had been commander of the armed forces. Two years later the speaker of parliament, Akbar Tanjung, kept on banging the gavel even after he was found guilty of corruption. (Happily for him, the conviction was overturned on appeal.) More recently, a conservative Islamic lawmaker, Arifinto, kept on showing up for work even after being forced to resign: in April he was busted watching pornography on his tablet computer in the middle of a parliamentary session.

Last week however there were signs that shame might yet rear its ugly head. At least among the party brass, if not yet among the wrongdoers themselves. The president’s own Democratic Party sacked its treasurer, Muhammad Nazaruddin, on May 23rd. Mr Nazaruddin was implicated in a scandal involving the construction of athletes’ dormitories for the upcoming South-East Asia Games, to which Indonesia is playing host. On May 20th, the constitutional court’s chief justice reported that Mr Nazaruddin had offered a court official an unsolicited payment of $100,000 last year as a “gift”. Mr Nazaruddin was also accused of using his influence as a party boss and member of parliament to have one of his former business partners thrown in jail. As if for good measure, he stands alleged of raping a young woman last year during the Democrats’ national congress in Bandung.

As the allegations piled up the Democrats, who initially denied that their treasurer had any involvement in the dormitory-corruption scandal, perhaps had little choice but to fire Mr Nazaruddin. After all, Susilo Bambang Yudhoyono won the presidency in 2004 and was re-elected handily in 2009 on a platform of zero tolerance for corruption; Mr Nazaruddin’s scandals were becoming too much to ignore. Mr Yudhoyono’s squeaky-clean image has already taken a scuffing over the past two years. He was seen to have allowed the national police to frame two independent anti-corruption commission officials for bribery amid a power struggle right after his re-election. Mr Yudhoyono came off looking the worse when his cabinet’s leading reformer, the finance minister Sri Mulyani Indrawati, bolted to the World Bank a year ago. Upon her departure Ms Mulyani claimed that members of the powerful Golkar party, led by Aburizal Bakrie—who happens to be Mr Yudhoyono’s chief political ally—hounded her out of the cabinet as part of a selfish attempt to hijack the country’s economy.

For his part, Mr Nazaruddin, possibly in disbelief that he was actually being held to account in South-East Asia’s most corrupt nation, didn’t take his sacking lightly. The next day he lashed out at his own party, claiming that other Democrats, including a cabinet minister, had violated its code of ethics and that they were involved in corruption. Mr Yudhoyono has tried to remain above the fray in all of this. It is an open question whether he can retain any of his good reputation without taking the axe to other members of his party in coming weeks.