The real costs of Rudd's CPRS are just starting to surface

It looks like Kevin Rudd had a brain explosion last Friday;  climate change denialists are sabotaging the future of humanity by asking tough questions about policy.  In the Prime Minister's view, the opposition are cowardly for not promoting government policy.  Of course, in democracies, the opposition are not supposed to promote policy;  that is the government's job.  That is why Kev lives in the big house and gets the big salary.

Commentators are going to focus on the Prime Minister's attack on "sceptics", as if the only barrier to stopping global warming in its tracks is Barnaby Joyce and Cory Bernardi.

But Rudd's real problem is that his government's climate change policy is incoherent and is becoming ever more expensive.  Rudd has had good mileage criticising markets over the past year.  It seems the neo-liberal belief in markets is all but discredited.  Yet what is his "solution" to climate change?  A new synthetic market in the emissions trading scheme.

Admittedly, Rudd asked a very good questions at the Lowy Institute last Friday, "Where is the evidence basis offered by the new league of world government conspiracy theorists that climate change can be effectively dealt with by market means or by uncoordinated national means?  Answer -- there is none."  Indeed.  But he's off message.  Last December, Wayne Swan and Penny Wong told us that "Australia will make its fair contribution, including by implementing efficient market-based policies to substantially cut domestic emissions in a cost-effective way"?

Swan and Wong wrote that line in the preface to the Treasury modeling for the Carbon Pollution Reduction Scheme.  The report, Australia's Low Pollution Future:  The Economics of Climate Change Mitigation is more quoted than it is read.  Certainly Rudd quoted extensively from the report last Friday.

The Treasury modelling investigates four possible scenarios relative to a reference scenario -- some sort of "business-as-usual" case.  At best it can be considered to be a sophisticated thought experiment and does not constitute a forecast of the actual economy.  The exercise does, however, provide an estimate of the magnitude of the program costs (but not benefits) of introducing a cap and trade system.  None of the four scenarios correspond to the details of the actual policy that the Australian government has introduced.  In addition, the Treasury modelling does not include a) the costs and impact of global warming itself, b) does not well capture any short-term economic adjustment costs, c) does not capture ‘market failures' caused by asymmetric information, externalities, or strategic behaviour, d) does not include transaction costs associated with emission permit allocation, e) does not capture the beneficial consequences of mitigation policy and f) does not capture non-market goods and services.

This list is taken from the Treasury document itself.  Most importantly the Treasury modelling does not dwell very long on the losers from the government's CPRS.  The economy declines relative to the reference case -- that is the policy design.  The losers are shown at page 161 of the Treasury document.

The two poorest states, South Australia and Tasmania fare the least worst.  (There isn't much economic activity already there to be destroyed.) Over the next 40 years the two biggest losers are the resource growth states of Queensland and Western Australia.  The relative decline in WA only occurs after 2040, but Queensland takes the hit early.  You would think that the government would have some explanation for the citizens and voters of Queensland and WA as to why they were bearing the brunt of the CPRS policy.  New South Wales and Victoria aren't far behind;  their residents might want some explanation too.

Another problem with the Prime Minister's argument is jobs.  Rudd says Treasury modelling also demonstrates that all major employment sectors grow over the years to 2020 -- substantially increasing employment from today's levels.  Treasury modelling also projects that clean industries will create sustainable jobs of the future -- in fact by 2050 the renewable electricity sector will be 30 times larger than it is today.

Unfortunately that is not what the Treasury modelling indicates.  At page 151 we read:

... real wages are assumed to adjust in the long run to ensure the labour market remains in equilibrium.  As output slows slightly in response to emission pricing, firms' demand for labour also slows slightly.  In the short run, real wages are assumed to be sticky, taking up to 10 years to adjust, resulting in some temporary unemployment.  However over time, real wage growth slows, demand for labour increases, returning employment to reference case levels ...

The Treasury indicates that Australia will experience "up to 10 years" of "temporary unemployment" before real wages decline.  Treasury forecasts that real wages might decline by anywhere between 5.4% and 11% relative to the reference case.  That is why there is no unemployment;  Treasury assume it away by imagining that real wages fall.  At the same time, Treasury assume the green jobs and green technology into existence.  That is not at all what Rudd told the Lowy Institute.

The CRPS is turning out to be a lot more expensive than first promised.  The government first indicated that it would be "revenue neutral" -- by that they meant self-funding.  The government intended to spend all the money raised.  Now we hear that the CPRS is not revenue neutral and is forecast to run at a loss.  The economic modelling is not as rosy as the government says and the UN is asking for heaps of money at Copenhagen.  No amount of name-calling is going to change the fact that this policy is a lemon and needs to be radically reconsidered.

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Australia Will Survive the Greenback's Fall

Governments around the world currently are trying to respond to the declining value of the U.S. dollar.  Several Asian countries have intervened in currency markets to try to soften the blow.  Brazil has imposed a tax on the capital inflows seeking returns from an appreciating real.  Australia, however, is taking a different-and better-approach:  Doing nothing.

The central bank is operating monetary policy solely in line with domestic economic conditions.  With the economy rebounding and underlying inflation still above the 2%-3% target band, that has meant increasing interest rates from their emergency low levels-by 0.25 percentage points at two consecutive meetings, most recently last week.  This hike, coupled with strong global demand for Australia's mineral exports, has pushed the Australian dollar up 45% against the greenback since February.  It is possible that the Australian dollar could eventually reach parity or even beyond.

This is an unusual policy stance, especially in the Asian context.  Central banks in the region are buying the U.S. dollar in the hope of restraining its fall and promoting their own country's exports by keeping them from appearing relatively more expensive in dollar terms.  And domestic exporters have been howling.

But Australia is on the right track.  A depreciating U.S. dollar is a market signal that the U.S. needs to export more and save more.  It is a symptom of extremely loose monetary policy and high government spending in Washington.  It is also a warning about inflation, given a dollar today buys fewer goods than it did a year ago.  U.S. policy makers are reinforcing this cycle by refusing to reform America's "too-big-to-fail" financial system and avoiding tough decisions on spending priorities.  In a sense, the falling dollar is a signal that the U.S. needs reform at home.

Central banks abroad that buy dollars to control the dollar's fall are both ignoring and subverting these market signals.  Their dollar purchases are placed into reserves that are often recycled into purchases of U.S. government debt, enabling the profligacy that's causing the problem in the first place.  Meanwhile, this policy effectively imports U.S. inflation.  Inflation is a tax on initiative and innovation;  it leads to severe economic dislocation and allows governments to avoid making the kinds of efficiency-boosting reforms that would be in their best interests anyway.

Australia's decision not to follow suit will be controversial in a country that fears "Dutch disease", the situation where strong demand for a mineral-rich economy's commodities pushes the currency up, which in turns makes the manufacturing sector less price competitive.  Minerals comprise 8% of Australian GDP but 48% of total trade.  In the extreme, the fear is that Dutch disease could force manufacturers out of business entirely, as supposedly happened in the Netherlands after oil was discovered offshore in the 1950s.

The normal prescription lies in various nonmarket actions such as creating a sovereign wealth fund to keep commodity revenues offshore, or entry taxes, or various subsidies such as government "innovation funds" to boost the "competitiveness" of domestic manufacturers.  No doubt rent-seekers in Australia will be lining up the arguments for subsidies and various protections as prices for Australian goods and services rise on international markets.

But Dutch disease is just another form of creative destruction, and Canberra should not fear it.  Economist Joseph Schumpeter recognized that while economists fixate on price competition, business also competes on cost and quality.  If the prices of Australian goods and services are rising on world markets, this provides a clear incentive for Australian firms to either reduce their costs or to improve the quality of their offerings.

Rather than seek out government protection and subsidies, export-oriented firms should be innovating in response to a strengthening currency.  This ultimately benefits consumers and, very often, the firms themselves.  Similarly, governments should not be buying U.S. dollars and undermining market signals;  they should consider reforms like tax cuts and red-tape cutting that allow firms to respond to market signals more quickly.  Central bankers Glenn Stevens's lack of concern on the exchange rate should, in particular, force Canberra to reconsider plans to re-regulate labor markets and to reconsider its expensive and economically wasteful emissions trading scheme that would make manufacturers significantly less competitive.

Seen in this light, a weak greenback can have its advantages for the rest of the world.  The U.S. is an exporter of intellectual property and business know-how that often forms the basis of innovation.  If more countries followed Australia's lead, they would force the U.S. to bear the consequences of its fiscal irresponsibility, while also gaining more purchasing power to buy U.S. assets and technology on the cheap to help reform their own economies.  What a smart idea.

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How Rudd Is Undoing The Aussie Miracle

As the world searches for new models to address the after-effects of the global financial crisis, Australia deserves a closer look.  The country is now the envy of the industrialised world, having recorded faster growth than the United States this decade, even as it provided universal health care and other social services that the U.S. does not.  The economy has also weathered the crisis better than its peers:  unemployment is at 5.7% (compared with 10.2% in the U.S. and 7.9% in Britain);  the equity market has reached 12-month highs;  the Aussie dollar is heading toward parity with the greenback;  growth forecasts are so bullish that Australia is the first G20 nation to raise interest rates since the global downturn, and it is widely praised as the best place to invest because it is free of banking crises.

When John Howard became treasurer 32 years ago, Australia was an over-regulated and over-protected nation, weighed down by chronic inflation and union militancy.  By the time Mr. Howard retired as prime minister in 2007, the country had undergone a thorough transformation, including financial market deregulation, tax reform, freer labor markets, import-tariff reductions and privatisation of state-owned enterprises.  Wages, economic growth and the stock market were up, while unemployment, inflation, and even interest rates were down.  The Coalition government had paid off its predecessors' AUD$96 billion debt and AUD$10 billion budget deficit.

The irony, however, is that the current government, led by Kevin Rudd, is in the process of repudiating the free-market approach that has served Australia so well and is rolling back the reform agenda of the last three decades.  In the past year, it's become fashionable to blame capitalism for the world's economic ills and to predict the end of the three-decade bull run in economic conservative ideas that began with Margaret Thatcher's election in Britain in 1979 and Ronald Reagan's ascendancy in the U.S in 1980.  The specter of big government has returned to haunt Australia.

In essence, Mr. Rudd champions a new paradigm that shifts his nation's priorities from private to public power.  He is interpreting this moment in history as a mandate for a renewed activist state.  He insists that "the great neoliberal experiment of the past 30 years has failed", and that it has "not served Australia well in preparing for the current crisis."  In many respects, the Australian Labor leader's economic-stimulus packages-taken together with his laws to beef up union power in the workplace, plans to introduce an emissions trading scheme and efforts to increase the power of public-health system-reflect this new interventionist mindset.

There has long been a statist culture Down Under.  Since independence from Britain in 1901, big government had manifested itself in various ways:  import protection to guarantee domestic profits and an arbitration system to stand between capital and labor by guaranteeing a share of the protected pie for workers.  Not surprisingly, this stifled the nation's development, and by the early 1980s, Australia was economically insular, bogged down by protectionism, over-regulation and chronic inflation.

The tide began to turn when a group of free-market-oriented thinkers took a stand against the prevailing culture and went on to play a significant role in the country's public life.  In the late 1970s, the free-market position was adopted by conservative Liberal party "dries", including the-then treasurer Mr. Howard.  From 1983 to 1996, Labor Prime ministers Bob Hawke and Paul Keating floated the Aussie dollar, reduced import tariffs, and deregulated the financial system, as well as state-run industries such as aviation and telecommunications.  From 1996 to 2007, Liberal prime minister John Howard-ably supported by his long-time treasurer Peter Costello-corrected Labor's debts and budget deficits, finished off the job of slaying inflation, pursued labor-market flexibility, improved waterfront productivity, privatised government businesses and implemented income- and business-tax reforms.

The results:  17 years of uninterrupted vigorous growth;  record low unemployment of 4% in 2007;  a less inflation-prone economy, lower interest rates, a wider choice of goods and services at lower prices, a strong and stable financial sector, and the weathering of the 1997-98 Asian financial crisis, the 2000-01 dotcom-inspired equities crash and the post-Sep. 11 meltdown.  While the commodities upswing and China's demand for Australian raw materials from 2003 onwards also helped prolong the boom years, it was a testament to the dynamism of a modern, flexible economy that it was able to weather external shocks and keep growing.

Most of the credit for creating the miracle economy belonged to innovative managers and hard-working employees.  But Canberra's leaders-on both sides of the political divide-helped create a new culture of competition and hard work that drove the nation to new heights by taking the politically brave step of pushing a reform agenda onto a skeptical electorate.

During the past 30 years, public opinion polls and surveys have consistently showed that the Australian populace remained deeply uneasy, and even overwhelmingly hostile, toward market reform, free trade and foreign investment.  Still, from the interventionist mindset that delivered economic turmoil in the 1970s, Australia had moved to an era of sounder policy and more durable prosperity.  Free markets and prudential financial regulation occupied the moral and policy high ground.  Good policy really matters.

In this utterly changed economic and political environment, Mr. Rudd ran for prime minister on the Labor Party ticket with a campaign slogan of "economic conservatism."  Mr. Rudd not only styled himself as an "economic conservative";  he also mimicked Mr. Howard on most public policy issues.  Such tactics worked a treat.  He convinced key segments of the socially conservative working and lower middle classes in marginal suburban and regional electorates to vote Labor again after their 12-year affair with the Coalition.  Widespread embrace of the market consensus meant that the new center had moved to the right.

That was a mere two years ago, when the Australian economy was roaring and free of public debt.  Unemployment was on the brink of breaking the 4% mark, and mutual fund managers were becoming celebrities.  The world now is quite different;  words like turmoil, crisis, hurricane and tsunami are freely thrown about.  And the Labor leader who ran as Howard-lite now thinks the dire global financial circumstances have given his government license to remake the nation in a more interventionist image.  In so doing, Mr. Rudd's new direction marks a strong contrast with not only the Howard-Costello era but also the Hawke-Keating years.  It is a grave mistake.

In February, Mr. Rudd announced a giant A$42 billion spending package on top of last October's A$10 billion stimulus package.  As a result, he has thrown the government back into deficit and debt to the forecast tunes of A$57 billion and A$200 billion respectively.  Add to this his government's plans to implement an emissions-trading scheme to limit the carbon pollution he says causes global warming, as well as its new laws to roll back labor market flexibility and boost trade union power in the name of a "fairer" workplace.  The economic crisis will serve as a stepping stone to a radical shift in the relationship between people and their government.

What, then, is one to make of all this?  There are several reasons to raise serious doubts about this new agenda.  First, Mr. Rudd says free-market economic reforms "have not served Australia well in preparing for the current crisis."  Never mind that the economy is better prepared to weather the global storm precisely because of those very economically conservative policies such as deregulation, economic liberalisation and prudent regulatory oversight of the nation's financial institutions.  Never mind, too, that Australia has had nearly a dozen years of budget surpluses and can now spend tax dollars to try to fuel a recovery from a strong position.  Never mind that no Australian bank has suffered a run or subprime mortgage default in the past 15 months.  Never mind that all of Australia's major commercial banks are highly profitable and in the top credit bracket of the world's banks.  Never mind that there is no evidence of regulatory failure.  In fact, the only financial institutions in trouble are those debenture funds that had to freeze redemption.  Far from being the fault of any market fundamentalism, this was primarily due to the Rudd government's ill-considered decision in October to guarantee bank deposits at taxpayer expense.

Second, Mr. Rudd misunderstands the causes of the financial crisis.  He downplays or ignores the argument that Australia's short-term problems came courtesy of inappropriate government interventions overseas, as well as poor regulatory oversight of the U.S. financial sector and the bursting of asset-price bubbles in the U.S.  Thus, he unfairly tars the Howard-Costello government with the flaws of the Federal Reserve and the Clinton and Bush administrations.

In fact, only one senior political figure in Australia read the national and global economic landscape and caught the significance of the aforementioned events:  Peter Costello.  On at least half a dozen occasions between the subprime mortgage collapse in September 2007 and the federal election two months later, the then-treasurer predicted that the subprime collapse would "create other problems around the world."  In late October, he forecast a "huge tsunami would roll through the financial markets, as the subprime home lending debacle ran its course in the United States."  Though the Australian economy was in good shape, it was imperative that our leaders held their nerve and did not panic.  "At a difficult time like this," he declared in October, "it is important we keep our economic management strong, in experienced hands, and that we keep Australia's economy growing strongly."

This brings us to the third response to the Rudd thesis:  serious doubts dog the Government's Aus$42 billion stimulus package which passed in parliament in February.  The jury is out on the extent to which the big spending agenda has protected the economy from the global downturn.  But it seemed reasonable for the Liberal-National Opposition to question not only the size but the make-up of the government's package.  Borrowing money from the public and then redistributing that wealth only digs Australia deeper into debt.  And Canberra has borrowed so much already that if it adds too much more debt, or spends it poorly, it could precipitate a global crisis of confidence in Australia-leading to a run on the Aussie dollar-and encourage tax increases in the future to pay for the spending spree.

If the problem wasn't the size of the Rudd government's fiscal stimulus, it was certainly its design.  The package was badly composed, handing out lump sums of cash for special interests and Labor pet projects rather than instituting income tax cuts and spending on economic infrastructure.  Of course, most economists agreed that some kind of fiscal stimulus might help the economy, and that running budget deficits may be appropriate in a recession.  But the debate should have focused on the quality of stimulus.  Is increased government spending on schools, homes and the automobile industry a more effective way of stimulating the economy than creating incentives for individual businesses and workers to create wealth?

In any case, Australia continues to weather the economic storm.  So much so that in October the Reserve Bank of Australia raised interest rates to 3.25% from 3%, making Australia the first G20 nation to tighten monetary policy since the crisis began last September, and this month the RBA raised its benchmark interest rate to 3.5%.  In the last quarter, 40,600 jobs were created and unemployment fell to 5.7% from 5.8%.  The share market, meanwhile, is at 12-month highs and the local dollar is fast approaching parity with the greenback.  Yet the Rudd administration refuses to contemplate winding back its large-scale budget stimulus more quickly than scheduled.

Mr. Rudd and Treasurer Wayne Swan maintain that Labor's big spending stimulated consumer spending and thus insulated Australia from the global contagion.  Several economists point to China's rapid rebound from the crisis.  But the primary reason for Australia's resilience has more to do with its starting point.  Australia went into this global recession in an incredibly strong position.  Unlike Britain and the U.S., Australia had a budget surplus and no public debt.  Unlike Britain and the U.S., Australian banks were well-regulated, well-capitalised and profitable.  And unlike Britain and the U.S., unemployment was at a record low of 4%.  All of this gave Australia considerable padding and insulation.  It was a position of unique strength bequeathed to the incoming Labor government.  This is why the RBA is now talking up the economy, even though the government is talking it down.

It is true that the Australian economy, hitched to a China-driven Asian growth engine that has decoupled from the recession-plagued U.S. and European economies, is being pumped up by mining and energy exports to the north.  But if, as Messrs. Rudd and Swan say, the Labor government's fiscal stimulus package explains why Australia is immune to global contagion, why haven't similar big spending programs implemented by Messrs. Brown and Obama kept Britain and the U.S. out of recession?

In this climate, the onus is on bastions of free markets to defend unapologetically the economic reform record of the past three decades and remind skeptics that the nation became economically secure, not less, by exposing itself to competition.  Without the so-called "neoliberal" reform agenda, Australians would have been poorer during this period, unemployment would have been higher, the fall in the Aussie dollar several years ago would have fed a vicious cycle of higher inflation, and we would have had much less to spend on social services such as health, education and roads.  Free-marketers, meanwhile, should also unashamedly highlight the perils of Canberra's big government, pro-regulatory agenda as well as point out the merits in a more market-oriented policy approach of reducing disincentives to hard work and innovation.

More than 30 years ago, former California governor Ronald Reagan met with then British opposition leader Margaret Thatcher for what was scheduled as a rudimentary 20-minute session between two right-of-center politicians from opposite sides of the Atlantic.  The conversation instead lasted more than two hours and, as Mr. Reagan later put it, they immediately identified each other as "soul mates" in promoting the cause of "small government and economic freedom."  Though Mr. Howard never met Mr. Reagan, he confided with the Iron Lady on several occasions since the 1970s.  The rest is history.

Thirty years later Messrs. Obama, Brown and Rudd have recognised one another as soul mates, but the comradery is insincere, since at least in the case of Brown and Rudd, they conveniently supported opposite ideological positions during the previous decade.  At any rate, their repudiation of the 30-year "neoliberal" experiment is fraught with danger.

Australia is weathering the global storm precisely because of the past few decades of economic reform.  And yet Mr. Rudd, like Messrs. Obama and Brown, is effectively proposing that Australia alter the relationship between the federal government and private sector, a relationship that has been in place for nearly 30 years.  Then the private sector led the economy;  now Canberra will chart its course and, according to leading Labor economist Ross Garnaut, risk entrenching a damaging expansion of government regulation.

Of course, Mr. Rudd maintains that a market economy will prevail and in recent months he has lectured the world on the perils of unchecked spending programs and protectionist economic policies.  Still, in the Rudd era it's becoming clear that the private sector is going to be demoted to a secondary role.  This may not be socialism, but it is not the system that has produced Australia's miracle economy.

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Poor palmed off by a load of old monkeys

In a choice between the life of a cute, fuzzy orang-utan and tighter food labelling regulations, who'd be surprised if the orang-utan won?

It's what Melbourne Zoo is betting on in their campaign to have Food Standards Australia New Zealand regulate palm oil to be labelled as a separate ingredient on groceries.

Melbourne Zoo's campaign is predicated on concerns that the developing country farmers aren't doing enough to stop deforestation and the loss of habitat for orang-utans in their quest to keep themselves above the poverty line.  And the solution is a misguided campaign to stop Aussies and Kiwis buying palm oil.

But a win for those cute, baby orang-utans is a loss for cute, baby rural Indonesians and Malaysians whose families rely on palm oil for their livelihoods.

Deforestation occurs because poor rural communities want to lift themselves out of poverty, and the best way they know how is to grow agriculture commodities that people want to buy.

Palm oil is grown in developing countries for the same reason that most farmers grow agriculture commodities -- it is profitable.  And in the case of palm oil it's conveniently in demand domestically and for export because it's used in many household food items that require oil ingredients.

Less palm oil consumed in developed countries means that either other crops will be grown in their place, or developing markets will be flooded with cheap oil.  And since one million of the world's poor die from Vitamin A deficiencies, and palm oil is Vitamin A rich, demand isn't likely to drop.

Its economic importance is underlined with more than one million Indonesians and Malaysians dependent on the industry for their livelihood.  And from the total area of palm oil grown 40 per cent is gown by smallholders in Malaysia, and reaches 45 per cent in Indonesia.

The irony is that palm oil actually limits environmental degradation because it has a four-fold yield potential from other oil seeds.  If farmers switched they'd need more resources to produce less.

It might seem counter-intuitive, but the best way to improve the environment in poor countries isn't to stop them developing, it is to help them prosper.  All over the world the evidence shows that as societies become richer they're more concerned about, and can afford, to protect their environment.

But so long as poor palm oil growers are worrying about where their next meal is coming from, concerns about the environment are likely to come second.

It's a decision that looms much larger than that of armchair environmentalists who are concerned that they can't tell whether palm oil is an ingredient in their potato chips.

Don't demonise the food industry for causing obesity

It is easy to blame big business for a change we don't like.  So Rosemary Stanton's attempt in Crikey to blame the Australian Food and Grocery Council (AFGC) for proposed changes to the emissions trading scheme is understandable.  But wrong.  Instead, the real push to exempt agriculture comes from farmers and Coalition voters in rural seats.

Agriculture and basic food processing are exempt from the European and proposed US ETS schemes.  Yet the current Australian CPRS includes a provision to leave agriculture out for three years, with a view to including it after that period.  If Australian agriculture is included then the Farm Institute estimates the total elimination of profitability for the livestock industry.

But -- in an era when food companies are suddenly now seen as enemies of the public good -- blaming the AFGC makes for a better story.  The proposed Coalition amendments seek to include primary food processing as a trade-exposed industry, and therefore able to access assistance.  Primary food processing is abattoirs and milk processors, it is not the manufacture of breakfast cereal, soft drink or other packaged groceries made by the members of the AFCG.

Stanton says it is absurd to omit food from the ETS because the processing, packaging, transport and storage of processed food creates greenhouse gasses.  Well none of these activities will be exempt, they will pay the carbon tax like everything else and food prices will rise because of it.

But the attack on the carbon footprint of grocery manufacturers is only a hook to get to Stanton's real agenda, demonising the food industry for causing obesity.

Apparently, all this choice is making us fat.  The impressive statistic of obesity costing society $58.2 billion is often seen.  That figure came from a study paid for by a diet drug company and commissioned by an organisation that receives grant money and donations based on government and donors' perception of a massive problem.  Grocery and soft drink companies are not the only ones with a financial stake in this.

According to Stanton, "The more on offer, the more we buy, the more we waist and the more we waste."  But Stanton and most higher-income women are not overweight.  Most Australians are not obese and less than 10% have a BMI over 35, the level the most authoritative studies conclude is where serious health risks increase appreciably.  Most Australians manage to refrain from obesity despite the choice on offer and the supposed pernicious efforts of the food manufacturers.

The real agenda is higher taxes for processed foods.  But there is no evidence that taxing "bad" foods, those high in fat, sugar and salt, does anything other than raise revenue.  The GST already taxes processed food and not fresh food, yet the growth in processed food consumption has continued unabated.  Stanton callously dismisses the effects of a highly regressive tax on the poor without any evidence her approach would do anything other cause greater financial (and nutritional) hardship.

Morbid obesity is a serious health problem that needs targeted resources from the health system to combat.  All the society-wide scatter-gun approaches, such a labelling, taxes, bans and cajoling do not address the serious, and usually multiple, health problems of the extremely fat.

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Government has lowered expectations on labour market success

The cash rate is 3.5% right now.  The market is expecting it to rise to 5% by next November.  That is six 25 basis point increases over the next year.  Each time rates rise, the media will wheel out those individuals who are doing it tough as a result of the rates rise.  This is political Chinese torture for any government.

It is not clear what other choices the RBA governor Glenn Stevens can make.  The preferred RBA inflation measure has risen above the target band of between 2%-3% and has remained above that band since September 2007.  Despite the high levels of underlying inflation, given the state of the global economy many (including myself) have argued that domestic interest rates were too high in 2008.  Once the extent of the economic crisis became evident, the RBA moved quickly to reduce rates.

It is now clear that the global financial crisis has had a mild effect on the Australian economy and the "Go early, go hard, go household" advice to government was inappropriate.  The economy did not collapse as forecast;  unemployment did not rise to 8.5%, or even 6.75%.  The Mid-Year Economic and Fiscal Outlook (MYEFO) invites us to believe that unemployment will still rise another 1%.

In its panic the government has over-stimulated the economy and that fiscal mistake is going to have adverse consequences.  It seems that some minor aspects of the stimulus packages are being recalibrated and delayed and so on.  But that just highlights that the packages were not timely, targeted and temporary.  Some of the temporary spending is now delayed for two years.

The bottom line is that interest rates will have to rise quickly to constrain inflation.  At the same time the government is finding that borrowing costs are somewhat higher than they had expected.  This is adding to the government interest bill even as the government is telling us that debt won't be as high as we had thought.  That translates into us paying more for less money.  We shouldn't be surprised;  government spending routinely delivers less bang for buck than was promised.

The real problem is that the government won't come clean.  Rather than cut the spending the now, it still maintains the myth of "jobs being saved or supported".  Just because the government can imagine a world where unemployment rose dramatically, that doesn't mean that its actions did or could have saved any jobs.  It is obviously hoping that nobody will question its counter-factual.  What is damning, however, is that it has very quietly lowered expectations as to labour market success.  The MYEFO indicates that Australia has a natural rate of unemployment of 5% (that is the non-accelerating inflation rate of unemployment for the cognoscenti).  With unemployment now only at 5.7%, it shouldn't take long before the government can claim to have solved the problem.

The government is also fudging the crowding-out aspects of its policies.  With interest rates rising and the exchange rate appreciating some, perhaps much, displacement is likely to occur.  Yet the government is quoting Glenn Stevens as having suggested that this is not due to fiscal policy.  Stevens, of course, is not in a position to openly criticise fiscal policy;  his actions will be speaking louder than his words over the next year.

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Big Government: A Love Story

Michael Moore's Capitalism:  A Love Story "takes aim" at the capitalist system, as a few dozen supportive reviewers have mindlessly written.  But that's a tough metaphor to uphold.  It's easy to aim when you don't care what you hit.

Moore is interested in Big-C Capitalism.  So after a few stories of families having their homes foreclosed, Moore reveals his thesis.

"Capitalism is a sin", he gets a series of priests to say darkly into the camera;  it's "obscene" and it's "radically evil".  Capitalism is a secular "crime" and spiritually "immoral".

Another priest reflects that he is "really in awe of (pro-capitalism) propaganda", which is funny to hear from a minister of religion.  And a bit rich:  one sequence in Moore's film describes the somewhat icky practice of firms taking out life insurance for their employees, which he tastefully illustrates with lingering shots of a grieving family, as if insurance policies cause cancer.

Moore has always been an awkwardly self-conscious working-class man.  In this instalment, he is also God-fearing.  And his NASCAR-chic populism is now littered with calls to "people power", which, coming from a multimillionaire, are as authentic as the Spice Girls' "girl power".  It's all so laden that there's a good chance he wants to run for office.

In a bizarrely misdirected appeal to authority, Moore quizzes the off-Broadway actor Wallace Shawn, who has "studied history and a bit of economics" about what he reckons is the problem with capitalism.  (The audience Moore hopes will see his film know Shawn from The Princess Bride.  But those who will actually see it know Shawn from My Dinner With Andre.)  Shawn's answer isn't the point:  what possible value could his view add?

But Moore's argument is even more misdirected.  He's justifiably outraged at the bailouts and the way they were pushed through Congress.  Who isn't?  He's angry about the favour-trading relationship between Wall Street and Washington.  Again, who isn't?

But that's not capitalism.  It's corporatism -- a political system with a veneer of free enterprise but where a network of lobbyists, bureaucrats and politicians use the political system to achieve private goals.  Moore would like to add a fourth movement to this symphony -- the unions.  But unless you think of unions as omniscient and beneficent guardians of the public good, doing so wouldn't change the corporatist dynamic.

So when he describes a real outrage -- like a corruption case in Pennsylvania where a corrupt judge funnelled innocent kids into a privately run juvenile detention centre -- he doesn't quite understand who the bad guy actually is:  the politicians and administrators who let it happen.  (After this case, two judges face charges of racketeering, fraud, money laundering, extortion, bribery, and federal tax violations.  Corruption is, after all, against the law.)

And who to blame for the bailouts?  The firms that ask for them, or the politicians that grant them?

For Moore, Barack Obama's election is a spiritual catharsis, an explosion of people power, and a sudden break with the capitalist nightmare.  But the outrages he spent 90 minutes detailing have, if anything, gotten worse under the Obama administration.  The employment pipeline between Goldman Sachs and Treasury has is even busier.  And Obama has graduated from bailing out banks to bailing out car companies.  For Moore, when Bush did this sort of thing, it was capitalism.  When Obama does, it's democracy.

In Capitalism:  A Love Story, Moore can't quite get himself to the problem.  If he did, he'd have to admit that the big activist government of his dreams is actually the cause of his nightmares.

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Carbon tax will light a slow fuse

A form of carbon tax such as the emissions trading scheme cannot reduce global emissions unless there is agreement for a similar level of tax across all economies.  That aside, the government's immediate issues are how to spend the money the tax raises, including how to avoid compensating the privatised brown coal generators for losses the tax causes.

Naturally, to ensure re-election, the Rudd government wants as much of the revenue as possible to go to voters.  But the government is constrained because the tax would cripple firms that are unable to pass on all its costs.  Twenty-five per cent to 35 per cent of the revenues raised are, therefore, to flow to the emissions-intensive, trade-exposed industries.  This has kept those firms quiet by cushioning the effects of the carbon tax on their existing assets.

That the carbon tax means nobody will again build an aluminium smelter, a steelworks or any other facility that makes use of Australian low-cost energy is not their worry.  Nor, apparently, is it a concern of governments, all of which seem to envisage a dreamy, new low-energy economy that jettisons domestic consumption of our coal reserves and, eventually, our gas reserves.

Other business users also will be losers from the higher priced electricity brought about by the ETS tax.  Higher energy costs will undermine the profits of all firms and even destroy some businesses.  But the damage to relatively low energy users will be less easily traced to the government imposition.

The other major loser industry comprises carbon-based electricity producers.  These provide 85 per cent of Australia's electricity.  The ETS tax hits the brown coal generators hardest, followed by black coal generators.  Notwithstanding the government's fantasy about new low-cost power generation technologies emerging, there is no alternative to the present supply profile, so it's more than likely we will see few generator departures.

Indeed, the compensation offered to the coal power stations is contingent on them remaining online when the only way the government can meet its stated carbon reduction goals is if they close down.

That aside, as with energy-intensive industries, the government has made it impossible for any firm to again build a base load power station in Australia without giving it a cast-iron carbon tax indemnification.  As with the energy-intensive industries, the proposed tax will impose substantial costs on the existing generators.  The most vulnerable are Victoria's privately owned brown coal generators.

Though Canberra refuses to publish its own estimates of the cost to the generators' shareholders, these are unlikely to differ from the $8bn to $10bn estimated by commissioned studies for the Victorian government and for the generators themselves.

Canberra is keen to avoid paying these costs to businesses it has already demonised as producing dirty energy.  Its process has been to play the tough cop, soft cop game.  The tough cop, Labor's consultant Ross Garnaut, argued that the generators should get no compensation on the (incorrect) basis that there was no tradition for such provision in Australia.  Uncharacteristically, Climate Change Minister Penny Wong played the soft cop and offered $3.5bn in compensation.

The Coalition is arguing for $10bn in compensation, though an unknown amount of that is to go to the state-owned black coal generators in NSW and Queensland.

The issues are perceptions of "sovereign risk" on all future foreign investment and whether a hardline approach will mean distress sales and low maintenance causing power outages.  The latter is an open question but has belatedly become a concern of the Brumby government since brown coal provides 96 per cent of Victoria's supplies.

With regard to sovereign risk, it is argued that the investors bought these facilities more than five years after the 1990 Kyoto Protocol writing was on the wall, and any business risk of expropriation by regulatory taxation should have been built into their decision frameworks.

The generators would maintain that the state government sales documents contained no indication that a future government would impose a new discriminatory tax on the assets being sold, thereby reducing their value.

Nor did the opposition at the time indicate such likelihood.

If the sale was by a private enterprise that withheld information about the imposition of post-sale measures, that would significantly devalue the assets and the buyers would have legal recourse.

In fact, the generators have a better case to be compensated than emission-intensive industries, at least those built or bought in the past 15 years, since the emission-intensive industries were not bought from the government, a related branch of which is now imposing a discriminatory tax on them.

This haggling over compensation is vital to present investors and of concern also to the government, which could see some depletion of its election-buying pot of new taxes.

For the Australian economy the stakes are far greater.

The planned carbon tax regime (and opposition to nuclear generation) makes significant new power plant investment impossible.  This lights a slow fuse under the economy's growth potential.

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Vegetarians' meat tax plan just a load of hot air

This week British economist Lord Stern called for the world to get off beef and on to broccoli:  go vegetarian for the planet.  Methane -- burped, belched and otherwise released by cows in impressive amounts -- is around 20 times more potent a greenhouse gas than carbon dioxide.

So the author of the influential 2006 Stern Review into global warming told Britain's Times newspaper that the climate change meeting in Copenhagen would only be a success if it led to skyrocketing meat prices.  Otherwise, Stern predicts, climate change will turn southern Europe into a desert and there will be "severe global conflict".

Stern isn't alone.  Also this week, Peter Singer called for a 50 per cent tax on all meat.  According to the Australian vegetarian philosopher, cows are pretty much like cigarettes:  they're bad for you and smelly.  They should be taxed accordingly.

It may come as a surprise, but there are flaws in this plan.  We could all go vegetarian tomorrow if we tried -- good news for the vitamin supplements industry.  But a world without meat would be a much sadder world.  And at best we'd be making a marginal change to global emissions.

According to NASA's Goddard Institute for Space Studies, 85 per cent of methane from cattle is produced by cows in the developing world, because they have poorer diets, which produces more methane.  And many of those cows aren't just hanging around in paddocks waiting to become tasty beef -- they're work cows.  India's 283 million cows aren't being eaten.

One environmentalist gripe is that cattle raised for human consumption themselves consume vast amounts of food that could go instead to humans.  But grain-feeding produces less methane than feeding on wild grass.  Purpose-grown feed is, at least in some respects, more environmentally friendly.

So:  cow farts are a surprisingly complex issue.

It's easy for Stern and Singer to urge the developed world to change its ways.  But it would be much harder -- and would get them invited to far fewer cocktail parties -- if they decided a good use of their time was haranguing poor Indians into giving up their livestock.  Stern and Singer are proposing little more than a green indulgence for the wealthy.

Anyway, practical problems aside, there's something obscene about the idea that governments should deliberately make basic staples of life more expensive.

After all, Stern and Singer's meat tax is hardly the only tax on food being proposed.  Public health activists are adamant that the only way to get people to shed their ugly kilos is by making sweets more expensive.

Taxes on food have been among the most punitive in history.  Dissatisfaction with taxes on salt was one of the causes of the French Revolution.  Gandhi marched against the British salt tax.

We forget just how far we've come.  A few centuries ago, getting hold of affordable and edible meat was like playing roulette -- if the roulette wheel was made of parasites and salmonella.

Early cookbooks spent almost as much time teaching household chefs how to identify spoiled meat as they did describing recipes.  The Compleat Housewife, published in 1727, told readers to prod carefully at beef in a marketplace.  If the meat sprang back, it was fresh.

Admittedly, there is a positive spin you could put on the proposals to tax our food consumption:  finally, the human race is so rich, so comfortable, that we can start making it a bit harder to get our basic needs.  But food taxes will disproportionately affect the poor.  If meat was as expensive as environmentalists would like, the rich wouldn't significantly reduce their wagyu steak intake, but families on a tight budget would certainly eat less three-star mince.

And (need it be said?) hunger caused by inadequate or low-quality food supplies is still a major problem in the developing world.  Just this year, in the Central African Republic, malnutrition caused by limited meat has created a humanitarian disaster.

These contemporary crises should remind us that humanity's greatest struggle has been against malnutrition and starvation.  Not for nothing did the Nobel Prize winner Robert Fogel title his groundbreaking study of recent global history The Escape from Hunger and Premature Death.

Since 1950, the global population has increased more than 150 per cent.  But, in real terms, the price of food has sharply declined in that period.  Basic commodities such as grain and vegetables are 75 per cent cheaper than they were 60 years ago.  And it's the potent combination of rapidly expanding economic growth and technological change that did it.

But we shouldn't forget how hard it was to get where we are today.  Cheap food is our inheritance as human beings.

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Jobs, living standards run second to other goals

National governments protect their citizens' interests in many ways.  They negotiate trade deals to get better overseas market access, raise loans at the best interest rate and aggressively promote their countries' merits as tourist destinations.

This same pursuit of citizens' interests is equally evident within federal systems like Australia's.

Bitter disputes take place each year at premiers' conferences about each state's contribution to and share of the national cake.

However, uniquely among the world's nations, the Australian Government's approach to international climate change negotiations has jettisoned this conventional approach.

India and China are engaged in endless negotiations and posturing over their carbon dioxide emissions.  They say they may contemplate measures that reduce those emissions if they get copious amounts of compensation from the developed countries.

The US is stalling while making pious noises.

The European Union has placed a cap on its carbon emissions policy but carefully shields its companies from any detrimental effects.

By contrast, the Rudd Government wants Australia to implement job-sapping and business-bashing carbon emission reduction policies no matter what other countries do.  Moreover, the Government's proposed emission reduction policies entail us buying emission rights from overseas -- by mid-century at a cost of $26 billion a year, more than Australia now earns from its meat, grain and other food exports.

And whatever their domestic impact, these measures will have a zero effect on overall global emission levels, even in the unlikely event that there is a global agreement.

Australian CO₂ emission levels are relatively high, partly because our low-cost coal provides economical electricity allowing us to export energy-intensive goods like aluminium.  Importing countries are therefore outsourcing carbon emissions to us.

Nonetheless, the Government fails to explain why we have high emissions, preferring to wear them as a badge of shame.

Nor does it advertise that Australia's vast land mass also absorbs carbon dioxide.  Based on CSIRO estimates, Australian soils absorb 138 million tonnes of carbon dioxide a year.  That's a fair chunk of the 330 tonnes of yearly emissions by our households, producers and transport vehicles.

Much of the motive for the Australian Government's apparent unconcern about the national interest stems from its wish to obtain international credits for other goals.

It hopes to use these credits to further its aspirations for Australia to obtain a seat on the United Nations Security Council and, perhaps, to promote Prime Minister Kevin Rudd's ambition to become secretary-general of that body.

After all, former New Zealand PM Helen Clark has a gig as head of the UN development program.  So the top job in the world body cannot be beyond the reach of a Chinese-speaking Australian PM.

A step on the way to this may be Mr Rudd's invitation to become a "friend of the chair" of next month's Copenhagen climate change conference.

Some Australians would be pleased to see their country as a member of the UN Security Council and would be thrilled to see their PM as UN secretary-general.

However, few would think it worth sacrificing jobs and living standards to promote those goals.

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Palming off livelihoods? The misguided campaign against palm oil

ABBREVIATIONS

EU = European Union
FSANZ = Food Standards Australia and New Zealand
NGOs = Non government organisations
RSPO = Roundtable on Sustainable Palm Oil
UNICEF = United Nations Children's Fund

1.0 EXECUTIVE SUMMARY

Internationally environmental non-government organisations and activists are campaigning against industry and consumer use of palm oil.  Their opposition to is driven by claims that it is unsustainable promotes deforestation and reduces orang-utan populations.

Regulations have now been approved in the European Union to artificially reduce the capacity for palm oil to be imported as a biofuel.

But these campaigns are based on false foundations.

The primary cause of deforestation is poverty -- not palm oil.  One of the core reasons forests are converted to agricultural use is because poor farmers need land to grow crops to sell on the international market to help themselves, and their communities, be lifted out of poverty.  In fact small holders account for up to 40 per cent of planted palm oil plantations in Malaysia and 45 per cent in Indonesia.

Palm oil is in demand in the developing world.  If palm oil isn't consumed in developed countries, developing countries will simply be flooded with cheaper product, and other lower-yield agriculture products may be grown to replace it.  And in contrast to the activist campaigns, because palm oil is a high yield oil seed in comparison to its competitors, its use is likely to cause less deforestation and keep more forests intact.

In recognising the impact that the industry is having, private certification regimes, like the RSPO, have developed to give consumers confidence that palm oil is produced sustainably.

Deliberately reducing consumption of palm oil is not going address the primary reasons behind the declining orang-utan population, but it will definitely harm one of their closest cousins in the area -- poor farmers and their communities.  Reducing demand for palm oil will harm their livelihoods and their capacity to lift themselves out of poverty.

Palm oil is also a necessary dietary staple for the poor because it is a rich source of Vitamin A.  Vitamin A is essential to boost the immune system, and Vitamin A deficiency leads to the death of one million children in the developing world each year.

Rather than being a campaign to help conserve animal and plant life in Malaysia and Indonesia, opposing palm oil is a misguided campaign that will alleviate developed world consumers of guilt, at the expense of the world's poor.

2.0 INTRODUCTION

Recently NGOs and activists have run campaigns in Australia and New Zealand attacking the use of palm oil as an ingredient in consumer products.  As a staple agriculture product in Indonesia and Malaysia the consequences of reducing consumer demand has the potential to have a real impact on these countries and those who depend on the industry for their livelihoods.

This backgrounder will analyse the palm oil industry, the campaign against it, whether it is justified and who will deal with the consequences.

3.0 WHY PALM OIL?

Palm oil, extracted from the fruit of oil palms, is the world's most produced oil seed and all-round one of the world's most produced agriculture commodities.  Brought to South East Asia in the 19th Century from Africa, ⁽¹⁾ nearly 90 per cent of the world's palm oil is currently grown in Malaysia and Indonesia.

Palm oil is a valuable commodity in Indonesia and Malaysia because it is an inexpensive, high yield oil crop that is in demand in the lucrative export market because it is used as an ingredient in many common household products including margarine, potato chips, chocolate, margarine and soap. ⁽²⁾  Palm oil is particularly popular in developed country markets because is it trans-fat free. ⁽³⁾

Global production of palm oil has risen from 16.9 million tonnes in 1995 to 43.1 million tonnes ⁽⁴⁾ in 2008 and is the world's most traded edible oil.

Since December 2007 Indonesia has overtaken Malaysia as the world's largest producer of palm oil, ⁽⁵⁾ with around 40 per cent of plantations run by small holders in Malaysia, and 45 per cent in Indonesia. ⁽⁶⁾  In 2006 the Indonesian palm oil industry employed approximately 1.5 million people. ⁽⁷⁾  Employees are also provided with free or heavily subsidised housing, schools and healthcare. ⁽⁸⁾

Earlier this year the Indonesian government announced plans to double its palm oil output by 2020, but only 20 per cent of that growth is expected from increased plantations. ⁽⁹⁾  Most is expected from improved yields;  especially the yields of small holders.

One of the core reasons that palm oil is grown in Indonesia is because the government is seen as "aware of the need to alleviate poverty and to provide food and employment on an economically sound and sustainable basis to an already large and rapidly increasing population", ⁽¹⁰⁾ and holds the belief that "labor and land remain plentiful" ⁽¹¹⁾ for production.

Despite historically producing more palm oil than Indonesia, the Malaysian industry has a higher yield output than Indonesia because of "improved tree varieties, improved cultural practices, and perhaps the biological yield cycle" ⁽¹²⁾ -- not expanding land use.  As of 2007 the Malaysian industry supported more than half a million workers. ⁽¹³⁾

4.0 THE CAMPAIGN AGAINST PALM OIL

Yet, despite the benefits of palm oil to farmers in Asia and the Pacific islands, campaigns are now run against palm oil based on allegations that it is grown on land converted from natural forest, causes carbon dioxide emissions and reduces habitat for endangered species like the orang-utan.

Despite only emerging in Australia and New Zealand's mainstream media this year, Greenpeace ⁽¹⁴⁾ and Friends of the Earth ⁽¹⁵⁾ have been campaigning against the growth, importation and commercial use of palm oil for years.  Their campaigning activities have ranged from opposing the loading of palm oil shipments to developed country markets, ⁽¹⁶⁾ to lobbying European officials to ban the importation of palm oil as a biofuel ⁽¹⁷⁾ to working to get palm oil industry advertisements taken off television. ⁽¹⁸⁾

And they have had some success.  In 2002 Swiss-based supermarket chain, Migros, announced plans to hire auditors every year to assess the sustainability of palm oil suppliers. ⁽¹⁹⁾  A number of US and EU-based companies have taken equivalent measures or stopped using palm oil all together.  And in 2008 the European Parliament accepted a directive imposing limitations on biofuels that can be imported into the EU.  As a result, from 2009 imported biofuels must reduce carbon dioxide emissions by at least 35 per cent against fossil fuel alternatives, ⁽²⁰⁾ artificially locking out palm oil because its bottom range can be as low as a 19 per cent saving, but actually has the potential of a 72 per cent saving. ⁽²¹⁾

And in early 2008 the campaign against palm oil reached Australia and New Zealand.  Following complaints from anti-palm groups the Auckland Zoo took Cadbury chocolates off its shelves, and anti-palm oil activists encouraged consumers to "Boycott Cadbury".  Their campaign was also supported by the establishment of Facebook group claiming "Only d*cks eat Cadbury". ⁽²²⁾  After a relatively short campaign, Cadbury New Zealand advised that they were removing palm oil as a key ingredient from chocolate, despite health benefits.

The campaign then moved across the Tasman and Cadbury also removed palm oil as an ingredient in its Australian chocolate products. ⁽²³⁾  The Melbourne Zoo, partnering with celebrities from popular television and radio programs, have established a similar campaign criticising the use of palm oil. ⁽²⁴⁾  Their "Don't Palm Us Off" campaign is designed to request the Food Standards Australia and New Zealand (FSANZ), an intergovernmental body that establishes standards on food labelling, to specifically require palm oil to be labelled on all products. ⁽²⁵⁾  Currently it is labelled as part of a family of vegetable oils.  The objective of the campaign is to encourage consumers to haze products that include palm oil, and by default push industry to stop using it as an ingredient in their products. ⁽²⁶⁾

And more recently the web-based Palm Oil Action Group has produced and supplied coloured stickers to activists that state "Warning:  contains palm oil".  These stickers are being used on supermarket products that have palm oil as an ingredient to encourage consumers not to buy them. ⁽²⁷⁾

5.0 PALMING OFF LIVELIHOODS?

The campaign run against palm oil is multi-faceted, but has one clear objective -- to reduce the consumption of palm oil in its raw and processed forms in developed country markets, like Europe, the United States, Australia and New Zealand.  But these campaigns have been built on false foundations.

5.1 DEFORESTATION AND ORANG-UTANS

The principle claim by anti-palm oil activists against the industry is that it causes deforestation in Malaysia and Indonesia and the loss of habitat for orang-utans.  But what activists miss is the core driver for the demand for increased agriculture land;  it isn't palm oil specifically, but the development of primary industries to help lift rural communities out of poverty.  This was the same driver that saw wealthy countries redevelop land for agriculture practices to support economic development.

Without palm oil deforestation would still occur, it would just be for a different crop.  But farmers have used palm oil because it is a high yield oil seed that delivers between three and four tonnes per hectare.  By comparison competitor seeds such as rapeseed, sunflower and soybean oils yield less than 0.7 tonnes per hectare. ⁽²⁸⁾

Behind the claims that expanding plantations for palm oil is driving increased deforestation, and increased output from the industry, the reality is that recent growth in industry output has been a direct result of increased yields driven by industry improvements.

While deforestation is legitimately concerning, like in developed countries, not all land can be kept as forest.  The European average is only 25 per cent, which is roughly the same as allocated in Indonesia, and less than half of Malaysia's allocation at more than 55 per cent. ⁽²⁹⁾  As the Stern Review found less than 20 per cent of forest land cleared in Indonesia was to support the palm oil industry, and it is only 30 per cent in Malaysia. ⁽³⁰⁾

And behind the superficial claims of activists arguing that virgin rainforest is behind destroyed, a deeper reading of their material points out that "it is unlikely that virgin forests are still cleared for palm oil expansion in Malaysia on any significant scale, merely because most forests have already been logged, at least once". ⁽³¹⁾

Measures should reasonably be taken to protect wildlife like orang-utans, such as the Malaysian government's plan to ban planting palm oil near rivers to maintain wildlife habitats. ⁽³²⁾  But pressuring consumers off consuming palm oil won't solve the problem, but it does have the potential to increase the amount of land needed to produce equivalent agriculture output.

In 2004 the palm oil industry established the Roundtable on Sustainable Palm Oil to develop and enforce private certification standards to "promote the growth and use of sustainable oil palm products through credible global standards and engagement of stakeholders". ⁽³³⁾  Part of RSPO criteria for certification is that new plantations not replace land with a high conservation value and damage to high conservation value habitat is avoided.  And under the GreenPalm program consumers can buy GreenPalm certified palm oil products and make a contribution to farmers who voluntarily choose to have their product independently certified. ⁽³⁴⁾

Industry has also partnered with civil society in projects like the Borneo Conservation Trust and the World Wildlife Fund to develop programs that ensure endangered wildlife are not threatened.

5.2 SUSTAINABILITY FOR WHOM?

The campaign against palm oil is underpinned by the expectation that palm oil cannot be produced in an environmentally, socially and economically sustainable way.  Yet even the United Nations Development program recognises the potential for it to be grown and harvested in a sustainable manner. ⁽³⁵⁾

But there is one area that palm oil activist campaigns won't deliver a sustainable outcome -- the economic sustainability of the roughly one million Indonesians and Malaysian workers who depend on the industry for their livelihoods and the millions of people dependent on it as a dietary staple.

An agriculture crop principally grown in developing countries, small holder palm oil farmers include some of the world's poorest producers.  And they are not insignificant contributors to the industry.  In Malaysia small holders account for up to 40 per cent of the total area of planted oil palm and in Indonesia it is 45 per cent. ⁽³⁶⁾  And the industries in both countries support hundreds of thousands of workers.  And that is one of the reasons why the Asian Development Bank finances palm oil projects, whose success ensures that it delivers strong repayment rates on loans from funded projects. ⁽³⁷⁾

Supporting poor farmers is not the only contribution of palm oil.  Is also a dietary staple for millions of Indonesians and Malaysians, as well as the poor in other developing countries.  Palm oil also has a high Vitamin A content, an essential dietary vitamin to boost the immune system.  According to UNICEF an estimated one million young children die each year as a consequence of complications from Vitamin A deficiency. ⁽³⁸⁾

6.0 CONCLUSIONS

Palm oil is an essential crop in the developing world, but most importantly for the world's two largest producers -- Indonesia and Malaysia.  Recent campaigns against palm oil by developed country activists may appear to be well intentioned to promote the best interests of communities and wildlife in these countries, but they are misguided in blaming palm oil.

Lost forest and the impact that may have on endangered species isn't a consequence of growing palm oil, but the consequence of the developing world's process toward economic development.  Contrary to the claims of anti-palm oil activists, because it is a high yield crop, palm oil may actually be limiting any deforestation needed by farmers to expand holdings and increase usable land.  And recent significant increases of output by the industry have not been driven by increased land use, but increased yields which have progressively grown.

Reducing demand in developed world markets may make consumers feel good, but it will not be cost free.  An essential crop, it provides nearly one million workers in Indonesia and Malaysia with a sustainable livelihood and is also a vital dietary supplement in these countries to boost immune systems and stave off developing world diseases that can kill millions each year.

7.0 REFERENCE LIST

___., 2009, "Buttering up chocolates", Daily Telegraph, August 20, Sydney, Australia

___., 2006, "Indonesia counting on biofuel", International Herald Tribune, August 16

___., 2009, "Malaysia argues for green palm with own CO₂ standard", The Malaysian Insider, October 19

___., 2009, "Malaysia to ban some palm oil plantations to protect orangutans", Malaysia in Focus, October 15

AFP, 2009, "Indonesia to double palm oil production by 2020", Khaleej Times (Business), May 27

Asian Development Bank, 1999, "Project performance audit report on the West New Britain small holder development project"

Basiron, Y. 2008, "Malaysia's Oil Palm -- Hallmark of Sustainable Development", Global Oils & Fats Business Magazine, v5, i4

Brown, E. & Jacobson, M., 2005, "Cruel oil:  How palm oil harms health, rainforest and wildlife", Centre for Science in the Public Interest, Washington DC, United States of America

Commission of the European Communities, 2008, "Proposal for a Directive of the European Parliament and of the Council on the promotion of the use of energy from renewable sources", Brussels, January 23

Datuk, A.Y., 2009, "Case of biofuel in Asia:  Palm oil based biofueld in Indonesia, Malaysia and Papua New Guinea", Nueva Sociedad

Forest Watch Indonesia, World Resources Institute & Global Forest Watch, 2002, "The State of the Forest:  Indonesia", Washington DC, United States of America, February

Friends of the Earth International, 2008, "Malaysian palm oil -- green gold or green wash:  A commentary on the sustainability claims of Malaysia's palm oil lobby, with a special focus on the state of Sarawak", October

Friends of the Earth International and Friends of the Earth Europe, 2007, "Complaint to the Advertising Standards Authority", July 25

GreenPalm, "How it works", London, United Kingdom

Greenpeace, 2007, "How the palm oil industry is cooking the climate", November 8

Greenpeace, 2009, "Greenpeace challenges RSPO to stop green-washing member companies", November 14

Greig-Gran, M., 2008, "The cost of avoiding deforestation:  Update of the report prepared for the Stern Review of the Economics of Climate Change", International Institute for Environment and Development, London, United Kingdom

NZPA, 2009, "Cadbury sweet with Auckland Zoo", New Zealand Herald, August 18

Oil World, 2008, "Oil World Annual 2008", Hamburg, Germany

Riedner, U., 2002, "Palm oil from sustainable production -- a Migros pilot project", Migros

Roundtable on Sustainable Palm Oil, "Overview of RSPO", Factsheet, RSPO, Malaysia

Roundtable on Sustainable Palm Oil, "Palm Oil, Factsheet, RSPO, Malaysia

Sargeant, H., 2001, "Vegetation fires in Sumatra Indonesia:  Oil palm agriculture in the wetlands of Sumatra:  Destruction or development?", Forest fire prevention and control project, Ministry of Forestry, European Union

Sunday Star-Times, 2009, "Palm oil foes sticking it to supermarkets", New Zealand, October 11

UNICEF, 2004, "Vitamin and mineral deficiency:  A global damage assessment report", United Nations, New York

United Nations Development Program, 2007, "Human Development Report 2007/08", United Nations

United States Department of Agriculture, 2007, "Indonesia:  Palm oil production prospects continue to grow", Foreign agriculture service, Commodity intelligence report, December 31

United States Department of Agriculture, 2005, "Malaysia:  Palm oil yields surprisingly high", Production estimates and crop assessment division, Foreign Agriculture Service, June 24

Vermeulen, S. & Goad, N., 2006, "Towards better practice in smallholder palm oil production", International Institute for Environment and Development

World Growth, 2009, "Palm oil -- the sustainable oil", Washington DC, United States of America September

Zoos Victoria, 2009, "Campaign launch"

Zoos Victoria, 2009, "Don't palm us off", October 2

Zoos Victoria, 2009, "What do I need to know?"

---

ENDNOTES

1.  Datuk, A.Y., 2009, "Case of biofuel in Asia:  Palm oil based biofueld in Indonesia, Malaysia and Papua New Guinea", Nueva Sociedad

2.  Forest Watch Indonesia, World Resources Institute & Global Forest Watch, 2002, "The State of the Forest:  Indonesia", Washington DC, United States of America, February, p42

3.  Brown, E. & Jacobson, M., 2005, "Cruel oil:  How palm oil harms health, rainforest and wildlife", Centre for Science in the Public Interest, Washington DC, United States of America, p27

4.  Oil World, 2008, "Oil World Annual 2008", Hamburg, Germany

5.  United States Department of Agriculture, 2007, "Indonesia:  Palm oil production prospects continue to grow", Foreign agriculture service, Commodity intelligence report, December 31

6.  AFP, 2009, "Indonesia to double palm oil production by 2020", Khaleej Times (Business), May 27

7.  ___., 2006, "Indonesia counting on biofuel", International Herald Tribune, August 16

8.  Sargeant, H., 2001, "Vegetation fires in Sumatra Indonesia:  Oil palm agriculture in the wetlands of Sumatra:  Destruction or development?", Forest fire prevention and control project, Ministry of Forestry, European Union, pvi

9.  AFP, 2009

10.  Sargeant, 2001, pv

11.  Sargeant, 2001, pvi

12.  United States Department of Agriculture, 2005, "Malaysia:  Palm oil yields surprisingly high", Production estimates and crop assessment division, Foreign Agriculture Service, June 24

13.  Basiron, Y. 2008, "Malaysia's Oil Palm -- Hallmark of Sustainable Development", Global Oils & Fats Business Magazine, v5, i4

14.  Greenpeace, 2007, "How the palm oil industry is cooking the climate", November 8

15.  Friends of the Earth International, 2008, "Malaysian palm oil -- green gold or green wash:  A commentary on the sustainability claims of Malaysia's palm oil lobby, with a special focus on the state of Sarawak", October, i114

16.  Greenpeace, 2009, "Greenpeace challenges RSPO to stop green-washing member companies", November 14

17.  Greenpeace, 2007, "How the palm oil industry is cooking the climate", November 8

18.  Friends of the Earth International and Friends of the Earth Europe, 2007, "Complaint to the Advertising Standards Authority", July 25

19.  Riedner, U., 2002, "Palm oil from sustainable production -- a Migros pilot project", Migros

20.  Commission of the European Communities, 2008, "Proposal for a Directive of the European Parliament and of the Council on the promotion of the use of energy from renewable sources", Brussels, January 23, p32

21.  ___., 2009, "Malaysia argues for green palm with own CO₂ standard", The Malaysian Insider, October 19

22.  NZPA, 2009, "Cadbury sweet with Auckland Zoo", New Zealand Herald, August 18

23.  ___., 2009, "Buttering up chocolates", Daily Telegraph, August 20, Sydney, Australia

24.  Zoos Victoria, 2009, "Don't palm us off", October 2

25.  Zoos Victoria, 2009, "Campaign launch"

26.  Zoos Victoria, 2009, "What do I need to know?"

27.  Sunday Star-Times, 2009, "Palm oil foes sticking it to supermarkets", New Zealand, October 11

28.  Oil World, 2008, "Oil World Annual 2008", Hamburg, Germany, and Brown, E. & Jacobson, M., 2005, "Cruel oil:  How palm oil harms health, rainforest and wildlife", Centre for Science in the Public Interest, Washington DC, United States of America, p7

29.  World Growth, 2009, "Palm oil -- the sustainable oil", Washington DC, United States of America September

30.  Greig-Gran, M., 2008, "The cost of avoiding deforestation:  Update of the report prepared for the Stern Review of the Economics of Climate Change", International Institute for Environment and Development, London, United Kingdom

31.  Friends of the Earth International, 2008, "Malaysian palm oil -- green gold or green wash:  A commentary on the sustainability claims of Malaysia's palm oil lobby, with a special focus on the state of Sarawak", October, i114, p30

32.  ___., 2009, "Malaysia to ban some palm oil plantations to protect orangutans", Malaysia in Focus, October 15

33.  Roundtable on Sustainable Palm Oil, "Overview of RSPO", Factsheet, RSPO, Malaysia

34.  GreenPalm, "How it works", London, United Kingdom

35.  United Nations Development Program, 2007, "Human Development Report 2007/08", United Nations, p144

36.  Vermeulen, S. & Goad, N., 2006, "Towards better practice in smallholder palm oil production", International Institute for Environment and Development, p4

37.  Asian Development Bank, 1999, "Project performance audit report on the West New Britain small holder development project"

38.  UNICEF, 2004, "Vitamin and mineral deficiency:  A global damage assessment report", United Nations, New York

Commonwealth rules tax roost over states

The avalanche of reviews ordered by the Federal Government has not been shy in recommending changes to how state governments operate.  The Henry tax review will be next in the conga line of top-down advice.

The recommendations by Treasury secretary Ken Henry on state revenue reform will be of vital importance to the quality of government in the future.  This is because the basic rule of Australian federalism is that who holds the tax rules the roost on policymaking.

On this score, the states are widely viewed to have been consigned to feather-duster status.  The Commonwealth has progressively gained extra taxing powers, leaving the states in a mendicant position of relying on federal grants for much of their revenue.

It is in this context of so-called "vertical fiscal imbalance" that Henry will redraw the line on what taxes should be allocated to which level of government.

Will the Rudd Government's top economic adviser recommend that the Commonwealth remains on top of the revenue pecking order, or will he suggest that the feds show fiscal humility by giving some revenue room to the states?

It is difficult to predict the outcome of a closed-door review, but keynote speeches by Henry, and media reports, can serve as some guide.

Twice this year, at least, Henry has spoken of the virtues of greater co-ordination of state taxes.

The idea that the Tax Office manage state tax administration on behalf of the states was viewed as a way to apply broader tax bases, including for payroll tax, and eliminate the alleged evils of interstate tax competition once and for all.

The creation of state tax sub-divisions of the Tax Office would effectively extend the policy influence of the head of the Henry review secretariat.

Others, including major business representative organisations concerned about compliance costs, would also welcome the extinction of tax base competition between the states.

But wholesale state tax harmonisation would restrict opportunities for taxpayers to select a jurisdiction with a more amenable tax structure.  In other words, two key virtues of fiscal federalism -- choice and diversity -- would be further diminished in the tax realm.

As explained by Australian National University economist Geoffrey Brennan, any efficiency gains due to broader taxes might also be more than offset by the consequent growth of inefficient government spending.

The idea that tax centralism is desirable has also infused Henry's suggestion that the Commonwealth introduce a profit-based royalty regime in place of royalties levied by the states.

Several specific arguments raised by Henry in March appear spurious.  It was suggested that the states are in a weak bargaining position when negotiating with mobile resource developers, leading to greater revenue constraints for jurisdictions.

This scenario would be no less of a reality for the Commonwealth with central resource royalty powers, as developers make decisions about competing projects located in, say, Brazil, Canada or South Africa.

The veracity of the claim that a single Commonwealth royalty regime might be less subject to change, reducing sovereign risk, is undercut by frequent changes already made to existing federal tax streams.

One glimmer of hope is that the Henry review may commend at least a personal income tax-sharing system between the Commonwealth and states.

In general terms, the Commonwealth would reduce its income tax rates, giving room for the states to levy their own rates on top.

While this proposal is a far cry from a much better policy to return all of the personal income tax responsibility to the states, there are some likely benefits from a tax-sharing deal.

If states set their own rates of income tax, up to a certain limit, they would be somewhat more accountable to voters.

For a Henry review sure to contain plenty of advice, it will be intriguing to see if it urges the Commonwealth to step aside and give federalism a fighting chance.

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