Howard Davies' MT Diary

A weekend among the Tatars; putting a drag on the Dragon; the John Prescott hoop-la.

by Howard Davies, the director of the London School of Economics
Last Updated: 31 Aug 2010

Just spent a weekend in Tatarstan, as one does. Kazan, the Tatars' capital, had its moment of glory in the 1550s, when the besieged inhabitants resisted Ivan the Terrible for more than a year. More recently, it has won a special place in the hearts of Manchester City supporters as the latest home of Georgi Kinkladze, who promised to be the club's saviour in the dark days of 1995 (a job soon revealed to be beyond even his considerable talents).

The only guidebook I could find described the waters of the city's lake as 'fit only for washing horses and drowning kittens', which didn't sound too promising. But it was written in 1860, so I packed my Speedos nonetheless.

There are no flights from London, so you abandon the matronly charms of BA in Moscow and take a Tatar Airways (symbol: a flying horse) Yak - one of those aircraft where you climb up its bottom from the tarmac.

But the elderly plane deposits you at a spanking new airport and things look up from there.

My excuse for this eccentric bit of tourism was a speech to a central bankers' conference: there are few lengths I won't go to in the interests of price stability. I will nonetheless glide over my 40 slides on the development of inflation targeting. As usual in conferences, the entertainment was the main event.

We were treated to a ballet version of the Rite of Spring, a tour of the prime minister's garage, with a beautiful 1950s Volga (complete with Japanese engine) and a Bentley, followed by a convivial dinner in a pyramid by the lake, next to Kinkladze's football stadium. The floorshow included the basketball team's cheerleaders.

I can thoroughly recommend it as an 'impress your friends' citybreak, especially if you have a few surplus kittens.

Shenzhen is a different kettle of carp. There was not a lot going on there in the 16th century. Indeed, until Deng designated it a special economic zone in 1979, the population was only 30,000. That decision, which allowed inward migration from across China, combined with its position just north of the Hong Kong border, was the stimulus for exponential growth. There are now almost 8 million people in a sprawling, shapeless metropolis.

It's not all skyscrapers and blocks of flats, though. The Mission Hills Hotel describes itself as the world's largest golf complex. I can't say I'm an expert on golf - in fact, it's only one up from Formula 1 in my list of least compelling sports - but even I know a course with 180 holes is not your run-of-the-mill municipal links.

For a non-player, it lacked a little something: you are not allowed to walk on the paths. Disappointing, but it is wise to stay away as there is a serious risk of being flattened by Aussie seniors on all-in packages from Brisbane speeding round the course in silent electric buggies.

So golf was the last thing on our minds as we wrestled with the problem of how fast to open up the Chinese financial markets to foreign capital and overseas firms.

The issues are complex. While most observers (and the Chinese themselves) see exchange-rate flexibility and capital convertibility as desirable end-points, the recent financial history in Asia is littered with episodes of instability caused by rapid capital outflows (and inflows) when markets with weak institutions and poor regulation were thrown open. The problems experienced by Thailand, Indonesia and Korea make up a collection of cautionary tales.

Unfortunately, these episodes don't offer a 'school solution' that can be adopted by an economy as big and dynamic as China's. So time is needed to experiment and to work out an appropriate sequence of market-opening moves.

That will be well understood by Hank Paulson, Bush's nominee as the new Treasury Secretary. When he came to talk at the LSE recently, one of our students asked him how many times he had visited China: '68' was his quick-fire response.

That experience will surely lead him to adopt a less strident tone on the renminbi/dollar relationship. The one thing that can delay greater flexibility on the part of the Chinese authorities is public political pressure from the US.

Back home, I quickly realised that the future of the Chinese economy, the integrity of global capital markets and the prospects for the dollar are mere trivia. The big political issue of our time is how late in the afternoon does it need to be before a deputy prime minister can crack open the Jacques croquet set and roquet through a few hoops before pegging out with his diary secretary?

We now know, courtesy of the Daily Mail, that 4.15 is too early. As a result, John Prescott will no longer provide material for the long lenses at Dorneywood.

Alan Johnson, who has launched a bid for Prescott's 'job', doesn't look nasty enough to be a good croquet player, but perhaps he has hidden depths of ill-will towards his fellow man. Prescott, meanwhile, drifts from ignominy to bathos and back again. The PM should wield his mallet and consign him to that herbaceous border specially designed for such causes - the House of Lords. Then he can be on the lawn all afternoon and no-one will think twice about it.

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