Looking ahead at 2011

In the countdown to the new year our media are full of retrospectives looking back at what happened in the year that is coming to a close.

Last year in Looking ahead at 2010 I commented that the start of a bright and shiny new year is perhaps a good time for those who are presumptuous enough to think that they know a few things to put their money where their mouth is and attempt some forecasts of what the year ahead will bring.

Forecasting remains a hazardous business, but I think I should repeat the exercise.  Reviewing Looking ahead at 2010 I think I had a reasonable hit-rate on my forecasts, to the extent that for the year ahead I think I should just record last year’s (in italics) and provide some updated commentary:

(1) There will be no progress towards an Israeli-Palestinian settlement. Settlement building on the West Bank will resume, the slow ethnic cleansing of East Jerusalem will continue, and Gaza will remain strangled by Israeli sanctions. There will be hand-wringing in Washington, but not much else.

Not much new to be said there: at the present time no-one even pretends that there is a peace process in prospect.  The Netanyahu Government has made plain that settlement building is more important to it than either peace or its relationship with the Obama Administration, Netanyahu is engaged in a contest with Avigdor Lieberman for leadership of the Israeli right, and the Israeli left has all but ceased to exist.

The two-state solution is dead, with no possibility of resurrection, so by year’s end things will be much the same as now only somewhat worse.

(2) The “surge” in Iraq will by year’s end be a proven failure.

Iraqi politics will continue to fragment.  The return to Iraq from Iran of militant Shi’a cleric Muqtadar al-Sadr testifies to that. He has not returned to Iraq to facilitate the process of bedding down either its internal politics or its relationship with the US.

(3) It will be even clearer than it is now that there is no possibility of “victory” or “success” in Afghanistan, and the US Administration will be busy positioning Hamid Karzai and everyone around him to take the blame for the failure of what was a doomed enterprise from the start.

An old colleague of mine used to say that the opportunity of a lifetime had to be grasped within the lifetime of the opportunity.  If the invasion of Afghanistan in 2001 presented us with the opportunity of a lifetime to do something or other, the lifetime of the opportunity certainly did not last through eight years of neglect. If there was ever a chance, it is now far too late. The failure to establish any clear objective for the invasion did not help.

Enough said.

(4) There will be modest efforts to salvage something from the wreckage of the Copenhagen conference on climate change, but we can be sure that whatever action is agreed will be far too little, far too late. For a long-term hold, buy shares in engineering companies that are very good at sea walls.

The Cancun outcome marked a step forward, but one which sits firmly within the established framework of far too little, far too late. Engineering companies that are very good at sea walls remain a sound investment.

(5) Spin doctors will find creative ways to present all of the above as success, or at least as meaningful progress. Modern governments never do anything that is unsuccessful.

No change likely here.

(6) Pakistan will look more like Afghanistan than it does today. The US Administration will continue to pressure the Pakistanis to take actions in the Federally Administered Tribal Areas which will prove disastrous sooner rather than later. There are good reasons why those areas were directly administered by Delhi during the Raj, and why the tailor made administrative regimes were continued from 1947 in the successor state, Pakistan.

At the outset of the invasion of Afghanistan in 2001 a lot of people would probably have agreed that if Afghanistan ended up looking a bit like Pakistan in 2001, that would be success. The net effect of our efforts will in fact be to make Pakistan look a lot more like Afghanistan.

The recent assassination of Punjab Governor Salman Taseer by a member of his own bodyguard, without any other member of his bodyguard attempting to prevent the murder or apprehend the assailant, serves to illustrate just how powerful the forces of Islamic conservatism are in Pakistan, and how deeply they are embedded in the armed forces.

(7) Nothwithstanding Pakistan’s travails, the Directorate for Inter-Services Intelligence will continue to intervene unhelpfully in Afghanistan, with a view to Pakistan establishing itself as the dominant power in Central Asia. Much of the money to fund this will be diverted military assistance funding from the United States.

No further comment needed.

(8) There will be a very significant evolution of the Iranian political system. It is hard to see this happening without a lot of blood being shed, because neither side can afford to give up.  In the next few months there will be increasingly heavy handed efforts to suppress the reform movement, but the reform movement has such momentum, and so many members of the urban classes are so sick of the current regime, that it is hard to see the current leadership being successful in reimposing order. There are grounds for cautious optimism, but don’t mortgage your house to bet on it.

This is the main item on which I was too optimistic.  My view is that Ahmadinejad has such control over the apparatus of repression that things will deteriorate for the reform movement for the foreseeable future.  Nevertheless, Iran has had over a century of elected representation in a national parliamentary body, it has an educated middle class in the major cities, and I do not believe that the regime can maintain itself in power in the long run simply by means of repression.

(9) Whoever is running Iran will remain firmly committed to the development of an independent nuclear energy program, and in so doing will reduce the lead time for Iran to develop and deploy a nuclear weapons capability.  Nevertheless, the Iranian regime will refrain from committing to a nuclear weapons capability.

I remain of this view.

(10) The United States will not succeed in establishing any sort of effective sanctions regime against Iran (for which we can all be thankful).

Such sanctions as are established will cause hardship to ordinary Iranians without having much impact on the regime, and no impact on its policies.  As I have remarked in previous posts, the Iranians will not accept any settlement which they regard as humiliating, and they will not accept a position of second class international citizenship regarding the independence of their nuclear energy program. They will not accept what the United States wants, and the international community would not be prepared to impose upon Iran such draconian hardships that the regime – any Iranian regime – would  be likely to change its mind.

(11) As we emerge from the depths of the Global Financial Crisis, the full meaning of the crisis will become clearer, as we begin to appreciate the consequences for the United States and the United Kingdom in particular of the massive sovereign debt they have incurred. It will become evident that there can be no return to “normal”, that a new “normal”, meaning a substantial realignment of economic power and political influence, is in the process of being established.

The state of affairs in Europe speaks for itself.

Far from believing in signs of recovery in the United States, I think the consequences of US debt and deficit are still playing themselves out. US politics are in such a toxic state that I do not foresee any effective action to repair the nation’s public finances.  Meanwhile, it is trying to shrink its defence budget to help meet its rising interest bill, but that shrinking of the US defence budget is contingent upon greater success in its military adventures than I can foresee.

(12) Some of the above predictions will turn out to be profoundly wrong (I just don’t know which ones). Actually, not too many of them turned out to be profoundly wrong, but it is always a danger to be acknowledged.

Last year I did not venture any predictions about domestic politics, mainly I think because up to that point my primary focus had been international.  So much happened on the domestic front during the course of 2010 that there was much to write about, and this year I will venture some observations about the outlook within the national polity:

(1)  As discussed in Can Gillard last?, I think that it will be established fairly early in the year that Julia Gillard does not have what it takes to be a successful Prime Minister, and on the balance of probabilities I think that there will be a change of Labor leadership before the end of the year.

(2)  A change of Labor leadership will not necessarily lead to the Government falling – the independents and Greens have a strong interest in seeing the Government go its full term.  Some deft footwork on the part of a new Labor leader should enable Labor to continue as a minority government.

(3)  The Government will fail to break out of its current obsession with the 24-hour media cycle, and its thinking will continue to be dominated by focus-group think. It will try to give the public what it thinks it wants, not what it needs.

(4)  As a result, the Government will botch the following major policy issues during the course of the year:

- Putting a price on carbon, and indeed the establishment of any effective climate change action

- Establishing a Minerals Resource Rent Tax regime

- Design and implementation of a Murray Darling Basin Plan

- Tax reform  

(5)  The Government should undertake a thorough review of the Defence White Paper and its defence policy settings, but will not.

(6)  Kevin Rudd will continue to be driven more by his overwhelming need for publicity and his desire to upstage Julia Gillard than by any concern to pursue Australia’s foreign policy interests. He will continue to display pedestrian thinking, poor management of his agenda, and poor judgement.  In sum, he will continue to demonstrate that he is a disastrous appointment as Foreign Minister.

MDB Guide: how not to handle public policy

There is bound to be near-universal agreement that establishing a comprehensive plan for the management of the Murray Darling Basin is a very complex and challenging piece of public policy, the implementation of which would require political leadership of a high order.  The Murray Darling Basin is the third largest river basin in the world, and by far the driest. Its waters have been substantially over-allocated, a fact that has been recognised since the early 1990s, and it has outstanding conservation values, some of which we have international obligations to protect.  It plays a central role in Australian production of food and fibre, and some townships depend to an important extent upon irrigated agriculture and the maintenance and management of irrigation assets.

On a matter of such complexity and importance one might expect the responsible Minister, who at the end of the day has to take the Basin Plan to Parliament, to take a leading role in managing the politics of the issue.

Au contraire, the Murray Darling Basin Authority unveils it to a startled world late one Friday afternoon, all hell breaks loose, and The Weekend Australian for 23-24 October, under the headline Minister distances himself from Murray-Darling Basin report, quotes the Minister for Water etc., Tony Burke, as saying (see report here):

The guide is not government policy, it is not my document, I have deliberately made sure I did not launch it.

And just in case you were still in any doubt as to whether the Minister was up to the task he rushed off and sought legal advice from the Solicitor-General as to whether the Authority was giving effect to its onerous duties on a sound legal basis or whether he might have grounds to instruct the Authority to listen harder to the people making the most noise.

A Minister made of sterner stuff might have seen handling an issue of such pith and moment as a wonderful opportunity – the best opportunity he will ever get to demonstrate that he is able to deliver major reform.  As it is, Tony Burke has made the Commission’s task immeasurably more difficult and signaled to the opponents of reform that the Government does not have the stomach for this fight, thereby encouraging them to mount an even more vociferous campaign, confident that it will work.

Had I been advising the Minister, I would have advised him, far from disowning the Authority’s Guide, to launch it at the opening of the business day and to set the rules of engagement for the consultation process that it is designed to set up.  I would have suggested that he use the following talking points at the launch:

-  We are here today to launch the Murray Darling Basin Authority’s Guide to the Murray Darling Basin Plan.

-  This Guide has been developed by the Murray Darling Basin Authority pursuant to the Water Act 2007, legislation which was introduced into Federal Parliament by the Howard Government and passed with the support of the Australian Labor Party.

-  It has been developed to expose for public comment the Authority’s thinking about how it should go about its task of balancing environmental, economic and social requirements, subject to making certain necessary provision for the health of the river and its ecosystems.

-  This is a very ambitious and challenging exercise.  No-one has ever attempted anything like it on this scale. The Murray Darling Basin is the third largest river basin in the world, and by far the driest.  It is host to unique, world class ecosystems, some of which we have international obligations to protect.  At the same time, it is the source of the livelihood of many enterprises, industries and communities built around irrigated agriculture.

-  It has been recognised since the early 1990s, and by many commentators before that, that the waters of the rivers in the Basin have been substantially over-allocated and that these allocations must be wound back. Winding these over-allocations back will take time  and will need to be handled with sensitivity because the over-allocations have themselves been in existence for long enough to become embedded in the social and economic fabric of the Basin, and to an extent the wider Australian community.

-  The Government recognises these issues but none of them can be allowed to distract the Government or the Australian public from the fact that we have to make the changes that will protect the health of the river systems upon which everyone in the Basin relies. Without healthy rivers no-one in the Basin has a long-term future.

-  The Authority estimates that in order to protect the health of the river and its high value ecosystems it is necessary to reduce diversions from the river by between 3,000 and 7,600GL per annum.

-  On the basis of the social and economic analysis that has already been undertaken, the Authority has assessed that any reduction of diversions greater than 4,000GL per annum would involve social and economic costs that would outweigh the additional environmental gains, and so the real focus of our attention is where in the range 3,000-4,000GL per annum the line should be drawn, the trajectory by which we get ourselves to the desired point, and the adjustment mechanisms which need to be brought into play.

-  The Guide makes clear that as well as the global cuts to diversions it is necessary to distribute the reductions geographically so that additional water is available for the environmental assets at the places where it is needed. Much of this additional water has a cumulative environmental effect – the waters of the Basin have done a lot of work by the time they reach the Murray Mouth and the Coorong.

-  The Authority itself recognises in the Guide that further work on the social and economic impacts needs to be undertaken, and it has already commissioned some of this. The consultation process will lead to further information and insights.

-  For its part, the Government has guaranteed, and I reaffirm today, that there will be no cuts to anyone’s water entitlements – the Government will achieve the necessary reductions only by purchasing water from willing sellers.  The purchases that have already taken place represent a good start on what is required.

-  It is important for all participants in the consultation process to recognise that this Guide I am releasing today is not the Basin Plan, nor is it a draft of the Basin Plan. It simply sets out for public comment the current state of the Authority’s thinking about how it should go about framing the Draft Plan.

-  In framing your comments, I would ask all participants to work on the basis that the feedback that will be of most interest to both the Authority and to me will be the potential impacts on the respondent of what is set out here. We want to hear from irrigators and irrigation managers how the proposals will affect them, from local government and community organizations how the proposals will affect their communities, and from other regional business people how the proposals might affect their businesses.

-  If you think we have got the science wrong or the socio-economic analysis is deficient or incomplete, we will welcome your comments and take your concerns seriously, but in the interests of a constructive and civilised debate I would ask you in making your comments to bring forward the scientific evidence or socio-economic data or analysis that you find more compelling.

-  I would also ask participants to remember that at the end of the day we must achieve a substantial reduction in allocations, with an appropriate geographic distribution, so please bear in mind that if you seek a lesser reduction for your enterprise or community, that may come at the cost of a greater reduction elsewhere.

-  I now ask the Chairman of the Murray Darling Basin Authority to make a few remarks about the consultation processes that the Authority proposes to undertake over the weeks and months ahead.

My guess is that if the Minister had adopted something like the above approach he would now be running a manageable political process, one from which he would have prospects of emerging looking like someone who can get things done.

He chose not to go that way, and sadly my current expectation is that the failure of Murray Darling Basin reform will take its place alongside the Carbon Pollution Reduction Scheme, the Mineral Resource Super Profits Tax and the Home Insulation Program as a case study in how not to do public policy.  

Reducing rural industry research

It is sad to read the report in the 7 May 2009 Australian Financial Review (p. 8) that Land and Water Australia (LWA) is to be abolished and the Rural Industries Research and Development Corporation (RIRDC) is to have its budget reduced from $13 million to $10 million (i.e., a 23% reduction).

Land and Water Australia began life in 1990 as the Land and Water Resources Research and Development Corporation, an R&D Corporation established by the Hawke Government under the Primary Industries and Energy Research & Development (PIERD) Act 1989.

It acts as a research investor and research broker developing, in collaboration with industry, government and local communities, research programs directed to the development of the knowledge required for sustainable management and use of Australia’s natural resources. In 2007-08 it delivered a $38.7 million R&D program, leveraging its $13 million budget appropriation to $38.9 million through its collaboration with other government agencies and industry. Given that we have custodianship of a land mass of about 7.5 million sq. km., with great geographical, climatic and biological diversity, $13 million p.a. of Government expenditure does not strike me as excessive, even in the toughest of times.

I have been through one of these R&D corporation executions. It was my sad duty as Secretary, Department of Primary Industries and Energy in 1996 to preside over the wind up of the Energy Research & Development Corporation. It is never an elegant procedure – simply a matter of shutting everything down, paying all the bills, switching off the lights and sending everyone home, no matter how important, high quality or close to completion any given program might be.

No doubt there will be some fine words at budget time about how LWA has done a great job but its job is done, the baton will be picked up by the Caring for our Country Program, or CSIRO, or someone. Don’t believe a word of it, it never works that way. R&D is a delicate flower. It is not possible to break up research teams and shut down programs and have everything continue as though nothing has happened. And as this is about saving money, there is by definition a clear intention to reduce expenditure on the function.

The Rural Industries Research and Development Corporation (RIRDC) was established under the same legislation as LWA. It is an interesting and important body because it is the home for funding R&D projects which cut across rural industry in general and thus cannot readily obtain funding from any of the sector-specific R&D bodies, and for R&D relating to new and emerging rural industries. I find it hard to explain why its budget is as small as it is, let alone why anyone would want to cut it.

Reductions of this kind at the present time raise a larger question about the Government’s response to the Global Financial Crisis. The Government has, for understandable reasons, spent tens of billions of dollars attempting to stimulate consumer spending and the housing industry, in the interest of sustaining employment levels. That is all very well and good, but given that just about every consumer product is manufactured overseas, it is a mystery why the Government chooses to stimulate consumer spending to the point where it feels it is necessary to bring about the abolition of the jobs of people who are currently employed in contributing to the business of government, such as people working on rural R&D programs, people collecting essential data for the Bureau of Statistics, or self-employed contractors working for government agencies.