28 November, 2008

What's wrong with our education?

I wrote earlier about the deteriorating standard (not academic standard, but really personal standard) of Hongkong's college students. A friend attributes this phenomenon to "species dilution". What a phrase! By this he means that the quantity of the bad breed has outgrown that of the good breed (a kind of reverse evolution).

At the risk of being labelled as a rightist or conservative, I think there's some truth in this. But the problem arguably goes deeper than sheer quantity. I put forth below a number of conjectures for readers' consideration -

Lack of stratification: it's definitely a good thing to have more people receiving higher education. Problems arise only when you do not properly stratify the students for fear of labelling losers and winners. This creates confusion because if you put a genius in a class of the mediocre; you do not raise the average of the mediocre but merely ruin the genius. I am not being elitist because I believe people have different strengths. You can be mediocre in mathematics but a genius say, of accounting (and there's no proof that an accountant contributes any less than a mathematician). In the 1990s, under the old British administration, we saw a huge and rapid increase of tertiary institutions called "universities" but not a correponding increase in the average quality of intakes. Why can't our government just acknowledge that some institutions are technical high schools or polytechnics? Why must all students go to traditional universities? In Germany, for example, there're a lot of institutions other than grammarian schools or universities that can be just as good as them. This worked well to support the manufacturing-based German economy.

Lack of discipline to reward and punish: This again stems from our reluctance to label winners and losers. In the old days it's very difficult to get a First Honor and even a Second Upper was already damn good. But nowadays, my friends teaching at universities would be a bit embarrassed not to give out more As because anything other than that is frowned upon. Strange. They call it "grade inflation", which at the end of the day, I presume, will be as disastrous on the credibility of our grading system as inflation is on that of our monetary system. Besides, you'd have a hard time if you discipline students - nay, they're really your clients to be respected.

All this I believe has something to do with the excessive American style of 360-degree assessment (which means your subordinate can assess your performance) (gosh! yet another example of the failure of American capitalism!) and sheer commercialization of tertiary education.

But none of the above strikes at the heart of our education malaise - something which I would call the general vulgarization of Hongkong, including that of our education, culture, politics, etc. A particular strand of this vulgarization is a vulgarized and mistaken form of egalitarianism. I would talk more about that in my next piece.

In the meantime, I had taken the trouble to write to the President of that university after seeing a guy playing hand-held video game at the library(!) Let's see what he would do.

21 November, 2008

Hongkong's university students - our future???

I hate saying this but I cannot help feeling puzzled, frustrated and at times annoyed by our university students. I hate saying this because I shan't be too far away from them in terms of age and outlook (or not? with all the widening generational gap?) But being a frequent visitor to one of the top universities in Hong Kong, I'm increasingly wondering whether there's something wrong with them or myself. Three phenomena strike me: -

1. On any day at any single hour there are someone talking in the library - aloud, unabashed and unashamed. Very often such conversation is conducted through state-of-the-art mobile phones equipped with the latest fancy ringtones. Well, surely in my times we talked in the library too. But acutely aware that we weren't doing something right, we usually did it discreetly and with some moderation. But today's students seem to have no such sense of remorse and decency. They ARE the standards. They just do whatever they like, without regards to others. The librarians won't take action - well, what more can you expect from them than our bureaucrats?

2. Maybe I've been a bit corrputed by English hypocrisy (or courtesy, whatever you like), but I do expect a return of some sort (be it a nod, a smile or even a gaze) when I do the hotel doorman's service to someone - for free. But today's students are usually expressionless when they see you holding/opening a door for them. So these days I tend to just open the door for myself. Still, some students could just stand in your way - their expressionless faces suggesting as if they aren't aware at all of your existence. They seem perfectly ignorant of the mutual frustration of this standstill. On several occasions they nearly try to go under my armpit.

3. A peculiar subculture resembling what you see on Japanese soap operas - an unsuccessful insurance agent having to chant aloud some morale-boosting slogans in a bustling street, with the supervisors looking on. Well, I have much respect for these people since they're more or less forced to do it. Above all, they have the courage to do it on his/her own. But at universities, a place supposedly to nurture free spirit and independent thinking, it's a scenic view to see students getting dressed in uniform, marching together like a gang and shouting/yelling/screaming (excuse me, but I can't possibly call it "speaking" without insulting this word, for you can hardly discern a syllable of their speech). Oftentimes this is for running for some cabinet posts in some associations/societies, which in itself is a very honorable endeavor, if only their electoral platform could be a little more substantive than these empty slogans. Perhaps I can't blame them too much since they're just learning from our honorable politicians. But the troubling fact is that if you ask anyone of them to speak out loud (and sensibly) in a class on his/her own, you'll usually find them mumbling, if not speechless. So they seem to be merely compensating for their lack of guts in individual presentation or rational discussion by mob politics. Ah, yes, they're again just imitating the politicians of the day.

If Hongkong's tertiary education is not failure, what is?

12 November, 2008

Cognitive inertia (and the danger of picking a stock market bottom now)

The school of behavioural economics has rightly pointed out our frailty as rational beings in our bounded rationality and limited self-control. To that, however, must be added a third element which may shed light on the current crisis and its aftermath -- cognitive inertia.

By this I am referring to our tendency of accepting any prevalent trend, model or methodology as permanently valid without questioning its underlying (often muted) assumptions. For that takes a lot of mental agony and often the courage to go against conventional wisdom.

Take for example many valuation tools analysts use to evaluate a security or stock. Whether they are called the discounted cash flow model or the discounted dividend model, a key component is the discount rate. Some people would merely use the long-term bond yield whereas more sophisticated analyses may employ a weighted average cost of capital that takes into account both the costs of debt and of equity financing. Without turning this into a slumberous technical finance paper, suffice it to say that if the discount rate goes up, the value of whatever you are measuring would be going down, ceteris paribus.

Unfortunately, this may be exactly what is coming to us and may become a new sustained trend rather than a short-term phenomenon exhibited by the scaringly high LIBOR rate lately. For one thing, the unlimited supply of treasuries to finance the bailouts or fiscal stimuli (now being called for globally) would eventually drive down long-term bond price and push up the yield. We are already seeing this with a steepening yield curve. Believe it or not, US 30-year bond yield has long been taken by finance students as the "risk-free rate", on which all the rest of valuation exercise depends. Secondly, with all the increased market volatility, the market risk premium demanded by investors will inevitably go up. That also negatively raises the cost of equity. All this will translate into a higher discount rate on whatever dividends or cash flow you expect to receive from whatever business endeavour.

If this is not yet convincing, take a look at the return on equity (ROE), which is often used by management to justify why they deserve a higher bonus. The ROE is a product of three components: i.e. profit margin, asset turnover and financial leverage. Throughout the past ten years of low-interest rate environment, managers were fond of gearing up the last element for that was the easiest thing to do (the other two requiring more hard work and ingenuity that may be wanting). Now, with the burst of the bubble and all this devilish deleveraging forcing even the most strongly capitalized banks to bow, you can imagine what level of ROE you will get on ordinary companies.

Investors are now busy picking a bottom by comparing the current cycle with previous cycles by superimposing one chart upon another or tabulating the historical P/E ratios through business cycles to evaluate whether stocks are fairly priced now. Yet we shan't forget to look at the more fundamental assumptions on which our previous cycle of boom is based and how we evaluate those stocks in the first place.

If you believe that the collapse of confidence, the power of deleveraging, the unprecedented nationalization of businesses and many other changes now taking place are going to structurally change the way we see things and inaugurate a new era, it may be too early to say where the bottom is. For what we are experiencing may be truly a "paradigm shift". Winston Churchill's words are best to conclude the turmoil in September and October, "now this is not the end...it is, perhaps, the end of the beginning."

08 November, 2008

The lost decade of Hong Kong?

When the Nikkei Index fell through its 2003 low this October, commentators woke up to the fact that the Japanese economy might still be in a secular bear market and Japan has hardly walked out of its "lost decade" since the bubble burst in 1990.

This prompts me to ask whether the same can be said of Hong Kong (I wish not). On the face of it, the Hang Seng Index is still way above its lows of 1998 and 2003. But in June 1997, the Index closed at 15,196. Today, it bearly holds above 14,200. What's more, even at this level the Index arguably reflects the strength of the mainland economy rather than that of Hong Kong, if one takes a comparison of the Index componenets in 1997 with those of 2008. (We shall ignore the property market for the moment; most residential properties have bid farewell to their 1997 level forever.)

In spite of this, the government is telling us that "it is difficult for us to get poor" on the back of a strong booming chinese economy. The official data would have you believe that your money in pocket, as measured by GDP per capita, has grown from HK$166,822 to HK$226,669 during 1997-2007, a 26% jump. But that doesn't seem to measure up to many people's actual feeling. In fact, if you look a bit deeper at the statistics provided by the government, it shows a different picture. The real wage indices for employees in different industries up to supervisory level grew from about 104 to 115 during the same period, or at an annualized rate of 0.9%. (So you may congratulate yourself this is better than the humiliating interest rate you earn on bank deposits.) Another index measuring the overall changes of average salaries of middle-level managerial or professional employees, arguably the cornerstone of Hong Kong's middle class, shows an increase from 103 to 120. All this has not yet taken into account the onslaught of the financial crisis now rampant everywhere.

Statistics is the biggest lie of all as one intellectual says. So we shan't labor too much on this. In fact numbers look less indicative of the actual situations than plain comparison in key policy areas. Ten years ago, the Government urged three quarters of publicly funded schools to switch to Chinese as the medium of instruction at junior secondary levels, in an effort to promote mother-tongue teaching. That policy was formed at a time when the government was talking about encouraging more autonomy at schools. A decade has passed but mother-tongue teaching has gained neither popularity nor respect amongst parents and students. This year, the education department finally admitted that it was necessary to "fine tune" this policy to give greater flexibility to schools.

Ten years ago, the Tung Chee-Hwa administration unveiled a bold plan to develop Hong Kong into a world-class hi-tech centre. The plan was as ambitious as it was unfortunate, for having coincided with the burst of the dot-com bubble. Ten years later, does anyone still care for the Science Park or the ASTRI (Applied Science and Technology Research Institute)? Where they stand (physically), they seem to have faded aptly into history in people's mind. The City (its top leaders included) prides itself on its traditional financial industries.

Ten years ago, Hong Kong had a world-class international airport opened at Chek Lap Kok. Since then, there has been considerable debates as to whether a third runway should be built on the airport to sustain its edge as an aviation hub. Like many other things such as the container terminal ten, that runway is still at the stage of feasibility or consultancy studies. Meanwhile, the site of the old Kai Tak Airport remains abandoned, having been considered for an array of feasibilities ranging from cruise terminal to watersports centre.

Ten years ago, the government commissioned a Harvard team of specialists to look into Hong Kong's need for medical reform. The team came up with a number of options for consultation with the public and legislators. No consensus was reached. The strategy? The government commissioned yet more specialists (usually overseas as they seemed to know more about the problems than the locals; this time from UC Berkeley) to come up with more consultancy reports. Discussion ensued. As late as March 2008, we learnt that the government again embarked on another round of consultation.

Readers may by now discern a common strategy for getting anything done (or undone, or redone, depending on how you see it) in this City. It is best encapsulated in this trilogy, i.e. consultancy, consultation and consultancy (again). In fact, the diligent Hong Kong government may soon become a world leading archive of consultation documents and Hong Kong itself may quickly overtake any other big economy as an importer of consultancy services. And the most widely used vocabulary by government in response to any public enquiry on any subjects, ranging from electronic road pricing to the pace of democratization, is likely to be one of those three words in this trilogy.

Blame the sluggish government machinery, some would say, esp. a group of conservatively-minded elites called administrative officers (or AOs) occupying top government jobs. Since 1997, this bunch of people have been accused of having caused or failed to have prevented anything ranging from the Asian financial turmoil to bird flu and SARS. (But the same bunch of people were also priased before 1997 as being a major pillar underlying Hongkong's success.) And curiously, after a decade of mistrust in civil servants, today the City's top posts - including the Chief Executive and the majority of the politically appointed ministers - were drawn from the AOs. Like in education and health care reform, history seems to have turned a full circle here.

Nonetheless, critics cannot deny that "change" - a word reinvented and now popularized by Mr. Obama - has been taking place. The government has successfully undercut the prestige and authority of AOs by inventing echelons of political appointees atop and alongside these traditional elites. Tens of millions of (your) dollars are spent each year to fill up these posts that require the sanctions of neither examinations nor elections. The people are told that these "trainee" positions are necessary to nurture the future political leaders. OPM, in politics as much as in finance, is what drives the world ahead.

Another discernible "change" is quite telling. In the election for the last colonial legislature in 1995, the average age of candidates competing for the geographical constituencies (Hong Kong's version of direct election by universal suffrage) was about 44. Now, more than ten years later, the average age of the newly formed Legislative Council stands at 55. You might indeed wonder if it's just the same bunch of people having gotten older by 11 years. For even a casual glance of the public faces on television or on the appointed lists of government's consultative bodies would suggest - as a local newspaper nicely dubs it - the same old bunch of people in a merry-go-round. Hopefully, we possibly do grow older and wiser.

As all this numerical or factual comparison looks quite gloomy, I am desperate to find some real breakthrough, which I did in an unlikely candidate. Being a keen hiker, I notice that the country parks at the heart of Kowloon have been increasingly colonized by feral monkeys for the last ten years. Biologists estimate that they have been growing at a pace of 10% per annum which, though shy of the phenomenal growth of the chinese economy, is a very remarkable achievement indeed. The success is partially attributable to the leniency of the agricultural and fisheries authority of the City, which believes that the animal rights of these wild creatures should be fully respected (so was I told, when pointing to the authorities the potential hazards posed by these aggressive animals).

Thus, in considering whether there has been a lost decade for Hong Kong, I find comfort in at least three critical statistics -

1. The budget for nurturing our political trainees has gone up exponentially as the US subprime mortgage-backed securities for the last ten years;

2. The age (and possibly wisdom) of our politicians has increased; and

3. The number of monkeys in Hong Kong have spiked sharply.

Last month when I was visiting the country park again, the monkeys snapped our food and howled at the visitors in anger. At the same time, our legislators were throwing bananas at the Chief Executive in the legislature with perhaps more frustration than anger over the latter's ambivalence over a HK$300 rise for monthly old-age benefits. (The government eventually agreed to, though reluctantly, lifting all restrictions on the benefits.) And thus when I look from monkeys to men, and from men to monkeys, and from monkeys to men again -- alas, it is already impossible to tell, who are the monkeys? Who are the men?

05 November, 2008

What an Obama Victory really means for the American Economy

Much has been dreaded of an Obama victory, as if the spectre of Big Government were now haunting free-enterprise America. Much has been said of the end of American financial supremacy since the demise of Lehman Brothers. Much has been anticipated of the emergence of China and others as soon complementing - if not substituting for - the western world in fueling global economic growth.

Yet, an Obama victory is perhaps more epoch-marking than the collapse of Wall Street when we look back at history in a hundred years' time. What eventually determines a nation's wealth, if not technology and demography, in particular the quantity, quality and unity of its peoples? Which country on earth has the biggest potential, the most favorable institutional and cultural milieu to attract the brightest minds in this globalized world and infuse a sense of cohesion amongst them? What can be more convincing to talents around the world (and promising to their future generations) than an African US president, that this is a country which truly believes in "la carriere ouverte aux talents"?

If we look at these fundamental questions, we know it is far too early to pronounce the death of American supremacy. Even a non-American cannot deny that this is a country with the ability to admit its own mistakes in history and eventually self-heal over its greatest social divide. Such open-mindedness and social inclusiveness are perhaps worth ten aircraft carriers or billions of dollars in projecting American power abroad.

Afterall, this is still quite inconceivable in other more ethnically homogeneous countries of Europe and Japan that are battling with negative population growth. Oil-exporting countries and China, though endowed with rich reserves and with a very proud history and culture, are arguably less inclusive of immigrants. For instance, it is very difficult for a foreigner to be "naturalized" as a Chinese citizen. On the other hand, many people in China still crave for US green cards. Whereas the US has crossed the great racial divide at least in election, the Chinese people have yet to bridge their political divide over the Taiwan Strait.

People often tend to amplify short-term events beyond proportion, losing sight of the more underlying currents shaping history. President Obama will face no small task in fixing the economy, which may not come around in his term. But his symbolic victory certainly speaks a lot when one ponders about the global power balance of 21st century.

04 November, 2008

Global co-ordination may be (much) harder than we think

With the contagion of the credit crisis spreading fast and deflationary talks taking up the front-pages of newspapers, your editorial yesterday was timely in calling upon the G20 to give the "marching orders" to get our world fixed. Yet some realistic pessimism (or pessimistic realism) must be sprayed to contain the expectations of both leaders and the public who are expecting a new Bretton Woods.

The difficulty is not just whether we have the time to frame such a system to restore confidence before the deflationary spiral seizes the world economy, but whether the world is structurally ready for such a system at all.

Taking a more long-term and macro historical perspective, the year 1944 was the apex of America's economic power when it accounted for more than half of the world's GDP. Neither the war-torn Europe nor defeated Japan was in a position to offer any alternative to what we now know as the Bretton Woods system that defines the post-WWII economic order.

Yet, as with any human institutional design, it became incongruent with the underlying fundamentals over time. Nixon's decision to close the gold exchange window in 1971 was the first blow to the credibility of such system. Now the bust of 2008 marked the second.

Still, the present institutional setup best serves the interests of the status quo power and never has any status quo power in history voluntarily given up its supremacy without a fight (economically or militarily). And for a new order to emerge, it is often by the virtue of a powerful undisputed leader rather than co-ordination of equals.

The patchwork we face now is an America that is both ideologically and financially discredited, as a result of not only the burst of the subprime bubble but accumulation of many excesses in the past decade or so. Meanwhile, with all the enthusiasm about China, it is far from ready in assuming global economic (let alone political or ideological) leadership, while at the same time too big to swallow any agenda dictated by Washington or Brussels.

The power shift of the last two decades has thus resulted in a world that resembles less a war-shattered 1944 but more a delirious 1924 - a world characterized by fallen old order, a British Empire on decline (much like America today), a Germany crippled by reparation and an isolated new power yet reluctant to take up global leadership. The result? The League of Nations - a classic example of global co-ordination without clear leadership.

Today, to the traditional western powers we must add all the emerging players who share still less in common in terms of cultural and ideological backgrounds. This would make co-ordination even harder. These emerging players have been schooled for decades in the free-market philosophy. They belong to the periphery of the globalized capitalist market but they are learning fast the success story of the core members in US and Europe. Some of them are now questioning why they have to pay the price, as the hard-working reserve-rich South Korean are now paying, for the lack of financial discipline at the core of the capitalist world order. They were taught that sustainable economic growth was premised on prudent management of one's fiscal and external deficits and yet the past decade of global imbalances seemingly benefited those borrowing and consuming heavily rather than those working hard and putting their savings in supposedly risk-free reserve currency.

We are fortunate that so far there is no competitive devaluation and import quotas as we saw in the heyday of the Great Depression. But one could argue whether the recent indiscriminate guaranty on bank deposits and loans, first introduced in Europe, is not a kind of unco-ordinated competitive financial tool that protects one's capital market at the expense of the less viable but innocent members at the periphery. Thus, at the coming G20, the western leaders must show to the world that their poorer cousins are invited not merely as a matter of courtesy and that those have enginneered this bubble must be more than willing to take up the leadership and even the costs in cleaning up the mess. After all, even after the financial tsunami, the high-income countries are still institutionally and technologically far more advanced than many of the upstarts at the periphery.