China defies Hague over sea dispute; CIA’s damning torture report; Disney, Skype on Luxembourg tax list. By Hamish McDonald.

Economists doubt Shinzō Abe’s reform plan

Prime Minister Shinzō Abe (left) and fellow LDP candidate Hideki Makihara during Japan’s election campaign this week.
Prime Minister Shinzō Abe (left) and fellow LDP candidate Hideki Makihara during Japan’s election campaign this week.

Japan’s Prime Minister Shinzō Abe goes into elections tomorrow in the awkward position of having promised an easing off of fiscal rigour to the voters, and definitely-this-time movement on structural reforms, including dismantling of farm and other trade protection to his foreign friends.

Abe called the snap election just after a second quarter of negative economic growth was reported for July–September, and his central bank moved the monetary-easing throttle further beyond the red line to pull Japan out of a return to deflation. Despite having a two-thirds majority in the Diet and two years left to run of his term, he needed to get a new mandate to spare citizens a second rise in the consumption tax next year. Seriously.

The outside world has been watching for two years to see if Japan can pull itself out of decline by the “three arrows” of so-called Abenomics: initial fiscal stimulus followed by a rise in the indirect consumption tax, monetary easing, and the structural reforms to open up protected sectors and get more women into the workforce. With the third arrow still in Abe’s quiver, economists such as the Australian National University’s Warwick McKibbin are pointing out that the other two measures can only be temporary fixes. He argues that while the first rise in the consumption tax in April caused a six-month spending slump, the prospect of future increases can only encourage people to get their wallets out early.

Abe is promising to foreign visitors that with his new mandate he can move on things such as the Trans-Pacific Partnership, a proposed market-opening pact with the United States, Australia and nine other countries. Let’s see how he goes. If Abe’s Liberal Democratic Party loses many seats, or the voter turnout is unusually low, it won’t be a mandate for anything but more fudges on past performance. As economists are wont to say, when it comes to structural reform, Japan never fails to disappoint. 

1 . China defies Hague over sea dispute

Monday is a busy day in The Hague, where five judges at the Permanent Court of Arbitration will be on alert in case China changes its mind in time to meet a deadline to file a defence to a case brought by the Philippines. This is about China’s recent efforts to keep Philippine fishing boats and government patrol craft out of reefs in the South China Sea that Manila considers to be within its own resource zone.

Beijing insists that it won’t dignify the proceedings by taking part, but a week ago issued a lengthy position paper that it clearly hopes the judges will read. Its arguments are pretty dodgy. Essentially it says the Philippines agreed in 2002 along with other South-East Asian nations to solve maritime disputes with China through negotiation, and that a move to compulsory arbitration was a last resort. Negotiation seems a strange term for sending patrol ships to blockade the reefs. The strongest Chinese argument is that it declared in 2006 it had withdrawn from arbitration jurisdiction on maritime boundaries. This seems a leaf out of the John Howard–Alexander Downer playbook: they made a similar move in 2002 to prevent the newly emerged Timor-Leste taking Australia to court over the Timor Sea boundary.

The US State Department meanwhile has produced a 26-page paper on China’s famous “nine-dash line” claim to historic sovereignty over most of the South China Sea. It dismisses its authenticity on several grounds and points out that the line itself varies in different maps put out by Beijing anyway. While it recently lifted its restrictions on arms exports to Vietnam, Washington wouldn’t mind if Hanoi took its maritime disputes with China to the courts as well. One awkward detail overlooked in this new bonhomie is that the US Seventh Fleet must have turned a blind eye in January 1974 when the Chinese kicked the then South Vietnamese forces out of the disputed Paracel Islands, no doubt as part of the Nixon–Kissinger great strategy with Mao Zedong.

2 . CIA’s damning torture report

The report by the US senate intelligence committee into torture by the Central Intelligence Agency after the September 11, 2001, attacks is disturbing reading, even though it has been heavily redacted and at 499 pages is a fraction of the 6000-page dossier the committee compiled.

Helped by millions of dollars in bribes to officials, the CIA had secret prisons in Poland and other Eastern European countries, but also closer to here, in Thailand, before all prisoners were brought to Guantanamo Bay in Cuba. The interrogation of one Abu Zubaydah in a Thailand prison was one of the worst cases. Even though he’d already started to talk through normal methods, he was put through waterboarding that left him unconscious and foaming at the mouth. Thanks to The New York Times, we know the names of two psychologists, James E. Mitchell and Bruce Jessen, who supervised the interrogation as CIA contractors. Doctors, who presumably had sworn the Hippocratic oath, were also present at torture sessions. Outsourced torture earned such contractors $US81 million between 2003 and 2009.

Time, surely, for Australia’s intelligence community and our ambassadors in Washington at the time, Michael Thawley (now head of the Department of Prime Minister and Cabinet) and Dennis Richardson (now head of the Defence Department), to reflect on what they were told by the Americans and what their officials heard and saw on consular visits to Guantanamo.

3 . Disney, Skype join Luxembourg list

As Gerard Ryle, director of the International Consortium of Investigative Journalists, told us (World, November 15) “leaks beget leaks”, and the ICIJ’s recent trove of documents on Luxembourg tax lurks set up by PricewaterhouseCoopers has been followed by more documents on profit-shifting by clients of the other “big four” accounting firms: Ernst & Young, Deloitte and KPMG.

Many of the documents are rulings by Luxembourg tax authorities that are obtained by accountants before their clients go ahead with setting up the Luxembourg companies that are party to shuttling earnings and borrowings in a way that lands profits in the low-tax principality. This would seem to put paid to arguments that the arrangements flow from normal business activity. The latest cache adds the Walt Disney Company, the Koch brothers’ empire, Skype, private equity firm Warburg Pincus and Hong Kong’s Hutchison Whampoa to the list of part-time Luxembourgers. The Australian Financial Review’s Neil Chenoweth has joined the ICIJ crew going over the documents, and details how Walt Disney has used intra-group high-interest loans and other tricks to bring its tax rate down from an effective 19.4 per cent in 2008 to 5 per cent in 2013. 

There’s some comfort that such companies end up with huge profits stashed in foreign tax havens that can’t be brought back to parent company shareholders without incurring tax. Bloomberg calculates the top 500 American companies have $US1.95 trillion banked overseas (Disney among them with $US1.9 billion). One’s heart bleeds. Brazenly, many of these companies now lobby for a temporary cut in the corporate tax rate as a “repatriation holiday”.

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This article was first published in the print edition of The Saturday Paper on December 13, 2014 as "Economists doubt Abe’s reform plan".

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Hamish McDonald is a Walkley Award-winning foreign correspondent.

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