Israel should stop forex buying, refrain from tax cuts, says OECD

The Bank of Israel should cease foreign currency intervention, while the government ought to be more cautious in slashing taxes and imposing high car purchase taxes, the Organization for Economic Cooperation and Development said in a report on Wednesday ahead of Israel's accession to the organization.

Foreign Minister Avigdor Lieberman shakes hands with Angel Gurria, Secretary General of the Organization for Economic Co-operation and Development (OECD) during their meeting at the Foreign Ministry in Jerusalem, Tuesday.
Photo: AP

"None of these set conditions for Israel's accession. The recommendations are not binding, but they are expected to be absorbed in the OECD's spirit of cooperation and collaboration, which is now at the disposal of Israel," said OECD secretary-general Angel Gurria at a seminar in Jerusalem on Wednesday. "We are in the home stretch." Israel started the accession process for entry into the OECD in 2007 and has a target of joining in May this year.
In light of the pick-up in economic activity in recent months, which the OECD says will likely prompt monetary tightening at some point, heavy intervention into foreign exchange rate would work against the policy-rate hikes and damage transparency in policy.
"The exchange rate needs to be given a boost every now and then but it cannot be weakened artificially for too long. The market does not buy that for too long and we are also telling other member countries not to do that," said Gurria.
In its economic survey of Israel, the OECD noted that although regular interventions were stopped in early 2009, the central bank announced a policy of discretionary intervention, and foreign currency purchases have continued.
"The build-up of international reserves proved useful, attenuating external vulnerabilities when concerns about a downturn were at their greatest," stated the report. "However, foreign exchange reserves are now more than adequate. The Bank of Israel should cease heavy exchange rate intervention to avoid damaging its credibility."

The OECD said it was surprised by the government's decision to go ahead with personal income and corporate tax cuts in 2010 under the prevailing macroeconomic circumstances and cautioned against further cuts, while criticizing the abolition of some VAT exemptions and bemoaning the continuation of high purchase taxes on cars.
According to the government's tax reduction plan the corporate rate will be cut to 18% by 2016 from 25%, while personal income tax will be lowered from a maximum rate of 45% to 39%.
"Although cuts in corporate and personal income tax rates have beneficial effects on business activity and competition, tax burdens are not the only concern of investors (who are also put off by red tape). They need to be put into context, and a degree of caution is required in pursuing them," stated the report.
In addition, the organization urged the government to leave last year's temporary step to raise value-added tax by 1 percentage point to 16.5%. This comes as the Finance Ministry decided to lower the VAT rate to 16% from January 1, earlier than planned in light of improved growth and revenues.
"Trade-offs in fiscal policy would be eased by making the recent temporary increase in the VAT rate to 16.5% permanent," said the report. "Also, the abolition of some VAT exemptions should be revisited, notably those on some tourist services (including those for the town of Eilat) and for fruit and vegetables."
At the same time, the OECD sees no strong justification for the imposition of the high purchase tax on cars.
"The schedule of rates has been recently adjusted to reflect environment considerations, but the attractive revenue-raising properties of such taxation probably remain the primary motivation," stated the report.
Furthermore, Gurria called upon Israel to transfer the Finance Ministry's supervisory bodies into a more independent body.
"Supervisory bodies in Israel should be kept at arm's length from political power and could be more independent," said Gurria. "Like in other OECD member countries, they should be put into an independent body."
In the report, the establishment of a "fiscal council" was suggested along the lines of those operating in Austria, Sweden, Canada and the Netherlands, in order to devolve power from theFinance Ministry.
Also speaking at the conference, Governor of the Bank of Israel Prof. Stanley Fischer was optimistic about the country's acceptance to the OECD, saying that the message received was that solutions to unresolved issues can be found.
"Full compliance with the findings of the two reports are not conditions for membership," said Fischer. "There are still still unresolved technical conditions of entry such as anti-corruption policy measures and compliance with intellectual property legislation common in OECD member countries, which still need to be resolved. But the message we got is that solutions can be found.

Public money _Pakistan

The public interest demands that the government overhaul its spending procedures. –Photo by Reuters

 
According to a report in this newspaper yesterday, hundreds of billions of rupees of public sector funds are lying unutilised with commercial banks and the government is seeking to claw back the money as per its commitments with the IMF.

The idea behind the change is straightforward: synchronise the allocation of money to development agencies with their spending requirements, i.e. give the agencies involved in development work money when they need to pay contractors, vendors, etc and not before. While there is Rs680bn of ‘public money’ lying with the commercial banks, the government is targeting a smaller amount of approximately Rs180bn of development/PSDP-related funding. (The larger amount includes everything from endowments of public universities to money for the armed forces and it would not make sense to apply the change to those funds.)
Why did Rs180bn of public funds end up lying unused in commercial banks? The answer seems to be a combination of history, bad management, corruption, incompetence and inefficiency — in short, 62 years of Pakistani governance. It also explains why the government has pushed forward by a year its original deadline of June 2009 to complete the change: the weight of history hangs heavy and revamping a decades-old system has not been easy. The new system envisages assignment accounts for the various entities involved in development work and requires tearing up the manual and coming up with a new set of rules that will encourage ‘just in time’ delivery of money to development projects.

There has been speculation that the commercial banks are resisting the change because it would deplete their deposit base and generally make doing business more difficult for them. But that argument ignores the basic point: the money belongs to the government and as a depositor it has the right to withdraw its money. Of course, given the vast sums involved, a sudden withdrawal would rock the entire banking system, but the government has only talked of a phased withdrawal.

In fact, the public interest demands that the government overhaul its spending procedures. We have said it before and we will say it again: in times of crisis, every little bit of help is welcome — and if the government can’t get serious about reform in the bad times, there is little hope that it will ever get it right. It is nothing short of a scandal that Rs180bn of development money is languishing in commercial banks, and now is the time to right that wrong.

Apple Sees New Money in Old Media

By YUKARI IWATANI KANE And ETHAN SMITH

With the new tablet device that is debuting next week, Apple Inc. Chief Executive Steve Jobs is betting he can reshape businesses like textbooks, newspapers and television much the way his iPod revamped the music industry—and expand Apple's influence and revenue as a content middleman.
In developing the device, Apple focused on the role the gadget could play in homes and in classrooms, say people familiar with the situation. The company envisions that the tablet can be shared by multiple family members to read news and check email in homes, these people say.

 

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For classrooms, Apple has been exploring electronic-textbook technology, these people add. The people familiar with the matter say Apple has also been looking at how content from newspapers and magazines can be presented differently on the tablet. Other people briefed on the device say the tablet will come with a virtual keyboard.
Apple has recently been in discussions with book, magazine and newspaper publishers about how they can work together. The company has talked with New York Times Co., Condé Nast Publications Inc. and HarperCollins Publishers and its owner News Corp., which also owns The Wall Street Journal, over content for the tablet, say people familiar with the talks.
New York Times Chairman Arthur Sulzberger declined to comment in an interview Wednesday on its involvement in the new device except to say, "stay tuned."
Apple is also negotiating with television networks such as CBS Corp. and Walt Disney Co., which owns ABC, for a monthly TV subscription service, the Journal has reported. Apple is also working with videogame publisher Electronic Arts Inc. to show off the tablet's game capabilities, according to one person familiar with the matter.

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Apple's strategy contrasts with how other technology companies are approaching media. Notably, Google Inc. offers content to consumers largely free on properties like its video-sharing site YouTube, making relatively little distinction between clips from users and that of professional media companies. Web sites like Twitter and Facebook also provide outlets for user-generated content.
Mr. Jobs has a longstanding strategy of devising new ways to access and pay for quality content, instead of reinventing the content. Apple's iTunes Store, for instance, became the world's largest music retailer partly by making it easy for people to buy music, most of it from major record labels, by the song instead of by the album. Its digital media receiver Apple TV was also designed so people can buy and rent movies and television shows.
Mr. Jobs is "supportive of the old guard and [he] looks to help them by giving them new forms of distribution," says a person who has worked with the CEO. "What drives all of these changes is technology, and Apple has an ability to influence that."

Apple's divide with Google over how it views media content also drives the wedge deeper between the two companies. Apple's iPhone, for example, currently closely integrates Google's mapping and search technology, but a person familiar with the matter said Apple was in serious discussions with Microsoft Corp. to incorporate its Bing search engine into the iPhone as the default search and map technologies. Microsoft declined to comment.
Details of how Apple charges for the content on its tablet couldn't be learned, but people familiar with the company's thinking say Apple could change conventional payment structures. One person familiar with the matter said the company was discussing with the New York Times how it could charge for news through iTunes. It's unclear how people will access content wirelessly off the tablet.
An Apple spokesman said the company "doesn't comment on rumors and speculation." Mr. Jobs didn't respond to a request for comment.
Mr. Jobs's effort to repackage and resell more media content is not without obstacles. He has already faced resistance from television companies and cable network providers over Apple's desire to license just their best content rather than all of it.
Many music executives complain that it has become a powerful gatekeeper between the labels and customers. What's more, the iTunes Store's music downloads haven't grown fast enough to offset the decline in CD sales for music companies.
On Monday, Apple sent out an invitation to a media event on Jan. 27 "to see our latest creation." The tablet, which Apple currently plans to ship in March, will have about a 10- to 11-inch touch screen, people familiar with the situation say.

 

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Apple CEO Steve Jobs spoke during an event in September 2009.

Apple's tablet foray faces several obstacles. Analysts say demand will depend on its price, which some believe will be about $1,000. Apple must also convince consumers the product is worth buying in addition to an iPhone and a laptop computer. And Apple faces competition from cheaper netbooks and other devices such as Amazon.com Inc.'s Kindle e-book reader.
The tablet's success will depend "on how this product can fit into the user's daily life... and whether you have enough content to make it important enough to use it," said Henry Lu, senior vice president of Taiwanese computer company Micro-Star International Co., which failed at selling a tablet computer a few years ago.
In the academic arena, Apple could face hurdles wooing universities if the tablet doesn't meet their needs or isn't compatible with other computing devices that students are using.
Amazon had been hoping to target the market with its 9.7-inch screen Kindle DX e-book reader, for example, but schools said the device wasn't sufficiently interactive and lacked basics such as page numbers and color graphics.
One person familiar with the matter said Apple has put significant resources into designing and programming the device so that it is intuitive to share. This person said Apple has experimented with the ability to leave virtual sticky notes on the device and for the gadget to automatically recognize individuals via a built-in camera. It's unclear whether these features will be included at launch.
Apple's content-related efforts heated up in the fall. In October, Apple sent representatives to the Frankfurt Book Fair, the industry's largest trade fair, according to one person familiar with the matter.
At the same time, Apple pitched media companies on a "best of TV" subscription service to television networks under which customers would pay a monthly fee for on-demand access to programs from a bundle of participating TV networks, giving consumers another way to readily access TV content.
At a meeting in New York with one network in October, an Apple executive said the company was specifically looking to access four to six shows per channel, said one person familiar with the meeting.
Apple has also been planning a revamp of its iTunes music service by creating a Web-based version of it that could launch as soon as June, say people familiar with the matter. Tentatively called iTunes.com, the service would allow customers to buy music without going through the specialized iTunes program on computers and iPhones.
People familiar with Apple's plans say a central part of the new strategy is to populate as many Web sites as possible with 'buy' buttons, integrating iTunes transactions into activities like listening to Internet radio and surfing review Web sites.
In November, Apple hired Tracy Augustine, a former executive at textbook publishers Cengage Learning Inc. and Pearson Education Inc., as the director of worldwide education. Ms. Augustine is responsible for "driving global strategy and revenue for the education online store for students," according to her LinkedIn description. Ms. Augustine didn't respond to a request for comment.
—Geoffrey A. Fowler
and Russell Adams contributed to this article

Clinton Urges China to Investigate Google Case

By SIOBHAN GORMAN And SKY CANAVES

Secretary of State Hillary Rodham Clinton made unrestricted Internet access a top foreign-policy priority and urged China to investigate cyber intrusions that led Google Inc. to threaten to pull out of that country.

The remarks come in the wake of accusations last week that Chinese hackers penetrated Google's computer networks. Mrs. Clinton called on the Chinese government to make the results of any probe "transparent."
The growing role of the Internet in foreign policy became clear last year during protests in Iran after allegations of election fraud. The government tried to crack down on protesters' Internet communications, but they circumvented digital blockades to send out video and Twitter messages about violence against demonstrators.
"Countries that restrict free access to information or violate the basic rights of Internet users risk walling themselves off from the progress of the next century," Mrs. Clinton said in the speech Thursday on Internet freedom at the Newseum journalism museum in Washington. She said the U.S. and China "have different views on this issue, and we intend to address those differences candidly and consistently" as part of a cooperative relationship.
She cited China as among a number of countries where there has been "a spike in threats to the free flow of information" over the past year. She also named Tunisia, Uzbekistan, Egypt, Iran, Saudi Arabia and Vietnam.
"Some countries have erected electronic barriers that prevent their people from accessing portions of the world's networks," she said.
"They have expunged words, names and phrases from search engine results," Mrs. Clinton said. "They have violated the privacy of citizens who engage in nonviolent political speech."
Google said on Jan. 12 that it will remain in China only if the government relents on rules requiring the censorship of content the ruling communist party considers subversive. The ultimatum came after Google said it uncovered a computer attack that tried to plunder its software coding and the email accounts of human-rights activists protesting Chinese policies.

A State Department official said Thursday that the department hasn't yet registered a formal complaint calling for an investigation. State officials had said they would send the complaint earlier this week but have so far only held additional conversations with Chinese officials on the matter.
Google's complaints about cyber attacks and censorship in China shouldn't be "overinterpreted" or linked to Beijing's bilateral relations with the U.S., Chinese Vice Foreign Minister He Yafei said Thursday.
Mr. He's comments represent the highest-level response so far to Google's statement last week that it might have to leave the market. The official's statement came ahead of Mrs. Clinton's speech.

"The Google case should not be linked with relations between the two governments and countries; otherwise, it's an overinterpretation," Mr. He said at a news conference, according to the state-run Xinhua news agency.

Chinese authorities have reacted cautiously to statements from Google and from U.S.-government officials, wary of openly fueling tensions with Washington and with Chinese Internet users, many of whom bristle at government censorship. Some state-run media have taken a more combative approach, portraying Google's moves as the result of its failure to beat domestic rival Baidu.com. An editorial in the Global Times newspaper on Wednesday charged that Google had allowed itself to be used by the U.S. government for political purposes and warned that Google would pay a high price for doing so.

Public opinion in China has been divided, complicating the government's response. Google's estimated 80 million Chinese users include a number of vocal supporters, some of whom have traveled to the company's offices to leave flowers and cards over the last week, and any sudden action against Google could give rise to protests that could embarrass the government. But there is also a vocal constituency of anti-Google Web users who are calling for China to stand up to unreasonable foreign demands.

The Xinhua report didn't specify what prompted Google's Jan. 12 statement, saying only that the company cited "disagreements with government policies and unidentified attacks targeting its services in China" as a reason for its possible withdrawal.

Mr. He's remarks indicate that Beijing is sticking to its low-key approach in responding to the Google case. Previously, lower-level officials have portrayed the matter as a legal and business issue that doesn't merit government-to-government discussion.

In Mrs. Clinton's speech before she explicitly mentioned the Google matter, she spoke broadly about the connection between information freedom and international business, reported the Associated Press.

"Countries that censor news and information must recognize that, from an economic standpoint, there is no distinction between censoring political speech and commercial speech," she said. "If businesses in your nation are denied access to either type of information, it will inevitably reduce growth."

"Increasingly, U.S. companies are making the issue of information freedom a greater consideration in their business decisions," she added.

WORLD FOREX: Dollar Slips On Bank Regulation Proposal

NEW YORK (Dow Jones)-- The dollar swung to a loss in volatile trading Thursday, as an Obama administration proposal for new restrictions on banks led investors back to the euro, despite continuing concerns over Greek debt and worry over China putting the brakes on economic growth.
Analysts warned that in such erratic trading, the dollar could once again trump the euro by the end of the North American session.
"Right now, a lot of people are probably viewing [the bank regulation plan] as potentially negative for the U.S.," denting the dollar, said Brian Kim, currency strategist at UBS in Stamford, Conn.
"But all the other things out there have not gone away," Kim said, referring to festering concerns over Greece's sovereign debt and worry that China could move to slow economic growth, which could affect the global economic turnaround.
Thursday afternoon in New York, the euro was at $1.4136 from $1.4102 late Wednesday, according to EBS via CQG. The dollar was at Y90.36 from Y91.23, while the euro was at Y127.52 from Y128.69. The U.K. pound was at $1.6211 from $1.6285. The dollar was at CHF1.0424 from CHF1.0443.
The ICE Dollar Index, which tracks the dollar against a trade-weighted basket of currencies, was at 78.278 from 78.369. It earlier hit 78.814, its highest level since Sept. 2.
The bank regulation plan would force institutions to choose between commercial banking and proprietary trading for their own profit, while seeking to limit the size of megabanks.
Though the proposal appears to move the U.S. back toward Depression-era barriers between commercial and investment banking, White House officials denied they are pushing for a return of the Glass-Steagall Act, which was repealed in 1999.
The dollar earlier had moved sharply higher against most rivals on the back of a slump in U.S. stocks and the concerns over Greek debt and Chinese growth.
Despite the euro's afternoon rebound against the dollar, the common currency remained lower against the yen.
The dollar's earlier rally began overnight when China reported its gross domestic product had expanded at 10.7% in the fourth quarter of last year, up from 9.1% in the third quarter. Beijing also disclosed that inflation had risen as far as 1.9%, instead of increasing to only 1.7% as expected.
The Chinese data signals that "tighter policy is just around the corner as Beijing seeks to prevent the economy from overheating," RBC Capital strategists wrote in a note to clients.
The euro had dipped to $1.4029, the lowest level since July 30, during overnight trading on the back a slew of negative news out of euro zone, including concerns over sovereign debt and weaker economic data.
A spokeswoman for the European Commission, the European Union's executive arm, Thursday said she isn't aware of any financial bailout packages being arranged for Greece.
The IMF warned that if Portugal doesn't reduce public wages and boost revenues this year, its deficit/GDP ratio will rise to 8.6%. Under the Maastricht Treaty, euro-zone countries are supposed to limit that ratio to 3%.
In the meantime, the latest PMI surveys from the region were disappointing on the whole with the composite PMI--covering both manufacturing and services--coming in at 53.6 this month, down from 54.2 last month and lower than the 53.7 that had been forecast.
"The two dominant themes in the currency markets are the Greek financial difficulties and also what's happening in China in terms of possible tightening," Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.
Before swinging to its latest loss, the dollar had given up earlier gains after the Philadelphia Federal Reserve reported that its business activity index slowed to 15.2 in January, from 22.5 in December and compared to economists' estimates of an 18.0 reading.
(Fabio Alves in New York and Henry J. Pulizzi in Washington contributed to this article.)