Resolution To Authorize Extension Of Public Transit Vehicle Lease: Fill & Download for Free

BRISBANE CITY COUNCILANNUAL FINANCIAL STATEMENTS 1992-93AUDIT REPORT - QUALIFICATIONComments by David C. Jones, CPFA, FCCA (UK).International Financial and Management ConsultantResearch Fellow, Center for Urban Development StudiesHarvard Design SchoolIntroductionBecause of the public interest generated by the report of the Queensland Audit Office on the Brisbane City Council Financial Statements for the year 1992-93, I have been requested to provide professional comments. As some of the public commentary in Brisbane appears to be contentious, I feel that I should presage my remarks by a disclaimer of interest.As a non-Australian international consultant, I have no personal or private interest in making professional comments. As a United Kingdom professional accountant, moreover, I am held to a high standard of independence and ethics. Although I have met the Lord Mayor briefly, in connection with my professional work, I do not know him personally and I have no private interest in his political fortunes. I am known to the Finance Manager and the Chief Executive only in connection with my professional work, although we are on good terms.The decisions and assertions under consideration are being made against a background of Australian (and Queensland) law, together with national and local administrative and accounting practices. Clearly, I have no competence to address these matters. Thus, my comments will be based on what I assess to be standard practices and principles of public sector administration and financial management, commonly practiced internationally.BackgroundIn May 1993, at the request of the Lord Mayor I made a brief presentation at a luncheon, given for the benefit of the financial media, to explain the introduction of new budgeting and financial reporting practices for the City Council. The session was entitled: "Financial Reform Preview - Highlights of the 1993/1994 Brisbane Budget.On that occasion, I was complimentary to the Lord Mayor, in respect of his leadership in setting the framework and facilitating the work of his professional staff, in moving towards what I regarded then, and still do, a fuller and more appropriate form of financial reporting.Brisbane City Council, as I then pointed out, was taking a lead – almost world-wide – in dealing with matters which have been (and still are) under consideration by the accountancy profession for many years. In the opinion of many, these actions are none too soon, for the public has been ill-served by crude reporting and thus crudely-based decisions.In making my comments about The Lord Mayor, I likened his political leadership the that of Mahatma Gandhi, when he sought independence for India:“They are my people. I am their leader. I must catch up ith them.”For this, I was good-naturedly taken to task by the media, as using an over-blown analogy.Probably, I deserved this. However, I am still of the opinion that my principal point is valid. Whether we live in a national, regional or local communities, we owe it to each other to be fully accountable for: stewardship of public funds; performance of public service; and, security of public assets. Indeed, to quote again – this time from the Christian Bible:“Forgetting all dishonesty, let us speak the truth to our neighbour, for we are allmembers of one another.”To the extent that we fail in this, community independence is compromised. Evidence of this, in many parts of the world, is overwhelming.The International ContextWorldwide, public sector financial reporting is increasingly being criticized as not conforming to private sector practices - often held to be of a higher standard. Often, private sector practices are of a higher standard, despite inherent differences not always fully appreciated by those without public sector experience. It is towards these higher standards which Brisbane - and Australia - has been moving. Yet, for doing so, the public sector now finds itself criticized.In terms of performance, also, there is a constantly growing demand for the public sector to be more aware of market forces. Unfortunately, it is the lot of the public sector to deal with the most extreme cases of market failure. Indeed, it could be argued that this is a large part of its justification - the delivery of "public goods" and "merit goods," as well as dealing with "natural monopolies” and other situations where the private market is – sometimes inherently - inefficent in service delivery.Unfortunately for the public sector, market forces usually operate more efficiently when there is competition. They operate less well in situations of monopoly. Furthermore, market forces operate least well of all in situations of coercion. This is an almost sole prerogative of governments.A limiting case is the eminent domain power to take property for public use, although usually, though not always, there must be just compensation. Yet, despite this power of intrusion into private lives, accountability for it has been - and commonly still is - little short of abysmal.One of the most serious shortcomings in public accountability has been the disregard, in public sector accounts, of the concept of the financial, economic, social and environmental rent. This is the actual or assessed charge for the use of fixed assets - the community plant.It is this plant which forms the most significant part of a community's equity, or its capability to deliver public services. It is, using my own terminology[1], the "results" of past operations, available as "resources" for future operations. In the language of Brisbane's reporting, it is described as "Increase in Operating Capability" virtually the same thing.Brisbane's Financial Statements - The Audit QualificationIt is with some concern that I noted the decision of the Auditor to issue a qualification to the Council's Financial Statements. This was with respect to the valuation placed on "land under roads" and on the related income item for the donation of such land during the fiscal year.In my opinion, so long as the City Council is the "highway authority[2]" the roads vested in it are clearly part of its operating capability. The land on which these are built is, by definition it would seem, part of the value of this capability.It must be noted, however, that the audit qualification is very clearly bounded. It refers only to valuations placed upon the land – not to the implicit ownership responsibility. Were this to be the only issue now in the public discourse, it might well be resolved by continuing the open conversations in which many earnest professionals have been engaged. These have been part of a concern to see proper resolution of contentious issues, in a brand-new domain of professional development.The Open Letter - General ObservationsUnfortunately, the relatively constrained nature of the Auditor's comments have triggered what seems to me an intemperate and unreasonable commentary, now in the public discourse, in the form of an " ‘Open letter’ to the Constituents of Brisbane and all Professional Accountants," issued by Ms. Pauline Pender. Since I number myself among the latter, I feel that I have a right and responsibility to respond to it.Before attempting a response, however, I recall that one of my compliments about the Lord Mayor was that his encouragement of the professionals in this endeavor involved some political risk. So it has proved. In my judgement, quite unfairly.Having read the "Open letter" carefully, I would divide it into three main themes.First, there is an unbecoming use of intemperate language. This conveys to the reader a degree of anger on the part of the writer, without justifying it. I shall leave this for the reflection of individual readers. However, it does represent the kind of ungrounded rhetoric which so often becomes part of the public discourse, with the potential to inflame opinion, to no specific purpose.Second, and more serious, is the strong implication that the presentation is a deliberate attempt by the City to misrepresent its financial position, either to improve its debt ratio or to offer an inappropriate enhancement of its equity value. Since this also relates to my claim of a third theme, I shall return to this later, and in detail.Preparation and Presentation of Financial StatementsWith respect to the broad assertion of misrepresentation, I offer the following observation. My considerable experience in the public sector, with particular emphasis on local government, offers little evidence of either opportunity or ability, on the part of policy-makers, to deliberately distort financial reports for their own selfish or political ends. This is because, almost universally, preparation of such reports is the responsibility of professional officials – not elected representatives.Within the Anglo-Saxon tradition, from which I emanate – and from which Australia (as well as the United States of America) takes many of its original precepts – a very strong concept is that of "the independence of the treasurer of public funds." This holds that the chief financial officer of a public body – by whatever name called – has an independent fiduciary responsibility to the taxpayers as a body and may not plead the instructions of his political masters for the carrying out of illegal or unethical conduct[3].It must, of course, be admitted that the permanent officials may prepare statements with a great range of professional skill, from the most competent to the least competent. Also, standards and practices vary widely. Most importantly, paid officials at all levels of government can and sometimes do engage in fraud or commit errors. These, of course, create false statements of figures, as well as damaging the public trust. Surely that is not what is intended as the implication in the "Open letter". It is certainly to be hoped not; otherwise action for defamation could arise.There are also, as is well-known, countless ways in which published numbers, once presented, can be used and abused for political purposes. But that is not what is here implied. Instead, there is a much clearer implication that the figures themselves have been mis-stated. This seems hardly worthy of a fellow professional. Indeed, taken with the intemperate language, it presents the image of a professional team within the Brisbane City Council which has been behaving in an arbitrary manner.From my, albeit limited, observation, it seems clear that the converse is true. In the preparation for these new and innovative practices, the Brisbane City Council accounting professionals appear to have gone out of their way to engage in a variety of conversations on contentious and difficult issues. Indeed, I understand that Ms. Pender was, herself, a participant in this.The Open Letter - Detailed ObservationsThe third and final theme of the "Open letter" should be dealt with in some detail. This is because it is a collection of erroneous assertions regarding the accounting treatment and valuation of the assets at issue. Because this is also the main concern of the Auditor's qualification, my comments can embrace this also.Land Ownership and TitleFirst, there is reference to the treatment of land claimed as "forfeited" by the developers as revenue. The argument is made that because the land has reverted to the Crown[4], "nobody" owns it. It would be more consistent with the common view of public administration to claim that "everybody" owns it – in the sense that it is administered in trust for the community as a whole. To use the concept of the Australian nation itself, it is part of the "common wealth[5]."The commonly-used terminology is that public property is "vested" in the authority with the statutory right to deliver the service. Thus, if the Brisbane City Council is designated as the "highway authority[6]" for the roads in question, it is appropriate to show all the property administered for this purpose as its assets.There is further justification. Even if there is not a titled legal ownership, the "highway authority" can be deemed to be the holder of a long term financial lease. It has, in other words, been required to accept financial responsibility for the use (and, therefore, the "rent") of the property, without which it could not deliver the service. The inclusion of a financial lease in a balance sheet, under these conditions, and to depreciate it annually[7], is wholly consistent with standard commercial accounting practice.Payment for Land by the Public AuthorityAnother contention put forward, with respect to imputed ownership, is that Brisbane City Council did not pay for the land. This is, of course, too narrow an assertion. Many assets change their legal ownership otherwise than by the actual payment of cash. To extend the example used by Ms. Pender in her text, if your friend deeds a house to you as a gift or legacy, or you recover it as part of a lawsuit, you become its legal owner. This is a very close analogy, on the one hand, to a donation and on the other, to a compulsory purchase[8].Furthermore, there is still the question of whether, at least implicitly, the public sector had, indeed, paid for the land. When property owners develop land for commercial purposes, this almost always leads, sooner or later, to a need for public sector expenditure on infrastructure, including roads. Depending on the location of a particular piece of property, this expenditure may enhance or (less commonly) detract[9]from its value.Overall, it must be asserted that the property values will, almost certainly, increase, as a result of the public expenditure. Furthermore, it must be assumed that a developer is aware, in advance, of this probability. He will also be aware that, consistent with standard practices, the portion of the land required for infrastructure - most usually, roads and drainage[10]- must be legally vested in the appropriate authority, to be subsequently operated and maintained by it - in perpetuity.For a road, this clearly represents a valuable right - access to his commercial property - for the developer. Indeed, it might even be claimed that it increases, implicitly, the capital value of the business. Yet, it has been paid for by the highway authority in exchange for the land donation. Is there always an exact trade-off? Clearly not. But neither is there in many commercial transactions, where the objective is to seek a competitive advantage at the expense of another party. Indeed, if transactions were not perceived of as seeking mutual advantage, there could be no commerce! What can usually be claimed is that the developer is not forced to make the transactions. He is aware of the involvement of the public sector interest, in advance. He will, thus, make investment decisions freely under these conditions.In the unusual case of a compulsory purchase – which governmental authorities will usually "bend over backwards" to avoid, just compensation[11] will, typically, be paid. Thus, the implication is that anything better than this, achieved by negotiation, would also be a fair deal (i.e. “just”) for the developer. This very standard practice contrasts with the implication in the "Open letter", that the Brisbane City Council must be assumed to be acting in an almost "predatory" manner.Conditionalities Restricting Assessment of Beneficial OwnershipBy an extension of my argument, the variety of conditionalities put forward in the third paragraph of the "Open letter" are not essential, in my opinion, to a designation of beneficial ownership of land, for the purpose of including it in the accounts. Indeed, in my experience, a standard practice for a public authority is that it does not – and would not normally be allowed to – mortgage public property, for fear of it losing control to a private lender in the event of default. This is usually considered contrary to public policy.There are several claims made as to legal limitations on the use of the land. These are, of course valid. However, should it become necessary to use the land in an alternative way, it is open to the public authority to invoke these legal procedures. It might also be noted that even the owners of private land do not normally have the right to use it in an unfettered manner. Under “town planning” or “property zoning” law, is standard practice, even in the most capitalistic of societies, for land use to be confined to that which is not in conflict with declared public purposes. Thus, a common practice is for loans to be raised by public institutions either by mortgage against future (general or specific) revenues, or else by the pledge of sovereign (or sub-sovereign) taxing power.A Northern Virginia ExampleThe comparison, between privately-owned and publicly-owned land offers another, defining, example. Close to my home, in Northern Virginia, there is an area known as Springfield. Its developmental centerpiece is an area which includes a main highway intersection, between two motorways. One is the Greater Washington Beltway (US – 495). The other is the main U.S. north-south route from the Canadian border to Florida (US – 95). Close by is a major covered shopping center, known as Springfield Mall. Connecting the arterial roads and the shopping center, as well as providing other local access, is a network of state roads[12].The shopping center, typical of many in the USA and Australia, comprises a central covered area, surrounded by a large parking lot and access roads. Thus, about two-thirds of the land area comprises "land under roads and parking lots." These roads and parking lots are not in the public domain. Clearly, however, the land has substantial commercial value for the owner of the shopping center(s), as it provides necessary access to and by customers.For as long as I can remember, both the road system and the shopping center have been subject to continuous reconstruction, to allow for changes in the commercial and traffic patterns. This has involved the purchase, disposal and exchange of land, as well as alterations to its use. For example, a recent change to the shopping center has involved: the acquisition of additional land on its periphery; encroachment of buildings on the existing roads and parking lots; and, construction of a multi-storey car park, to compensate for the loss of parking space at ground level. More recently, an entire wider area has been substantially redeveloped, to allow for the construction and use of light rail (subway), commuter-rail and bus facilities. Quite clearly, the planning decisions were taken with considerable regard to the relative values of the land areas.Similarly, the national and state road systems have been reconstructed, involving the acquisition of additional land, thus depriving others of its use, for alternative purposes, including shopping center expansion. Indeed, currently, the entire intersection is being reconstructed, yet again, over an estimated twelve-year time period. This is to deal with ever-worsening road traffic congestion. Thus, this valuable land is now incorporated under, or adjacent to the road improvements or the right of way. By implication, therefore, the community - acting collectively - has decided that this use of land is more valuable, for the time being, than any other alternative.Comparison of Private and Public LandIt seems clear that, under circumstances of dynamic development, shifts of land use from a private to a public purpose do not nullify its value. Instead, the value, for public purposes, is implicitly increased. Otherwise it would be used for the alternative (non-public) purpose. This decision, incidentally, comes about by the free-market purchase and sale of land. Even where it is compulsorily “taken,” in the U.S.A., the Supreme Court has ruled that “just compensation” implies “market value.”The Use of "Deprival value"The "Open letter" brings up the matter of whether it is appropriate to value the public use of "land under roads" at what is described as a "deprival" value. The claim in the "Open letter" is that this terminology is not commonly used within the accounting profession. This does not, however, invalidate it, for it is introduced to clarify a concept not hitherto addressed. After all, new terminology is being introduced all the time, especially within the domain of management information, of which accounting is a part.The question to be addressed is, therefore, whether the term is useful for effective action. In my opinion, it is. Furthermore, it is an expression which is very well grounded in economic principles, which accounting is attempting (albeit imperfectly) to reflect. "Deprival" in its dictionary definition, means "to withhold or take away something desirable or necessary." Thus, the term has a very close analogy to the economic concepts of "demand" in the sense of a scarcity of wants and needs. If there is no scarcity, there can be, almost by definition, no significant "deprival." "Deprival, therefore, withholds a "supply" which would otherwise fulfill a demand for scarce resources. This is totally consistent with the economic concepts of "opportunity cost" and "alternative use" in the establishment of value.This concept is especially important when, as in today's discourse, there is growing concern about the environment. Many are now questioning whether the motor-car has become an economic tyrant, twisting the tail of urban economies without becoming fully accountable for the cost. Whether or not this is so, the accountability issue cannot begin to be addressed unless the cost is actually determined. This cost, in turn, will not be comprehensive unless it includes the “rent.” This, finally, cannot be determined without reference to the capital value of the asset, including all of its costs, adjusted for alternative use and inflation.Thus, deprival value, for land under roads, must recognize its potential alternative use for: agriculture; commerce; industry; other public purposes; health-care facilities; recreation; and, environmental protection.There is also another issue, almost Keynesian in its implications, relating to the concept of liquidity preference. Were the cash invested in the land not used for that purpose, it could have been invested (by the government or the taxpayers) to earn a rate of return that would – in a relatively “clean and open” market – equate to (or exceed) the real value of its opportunity cost, plus (anticipated) inflation. Thus, its compounded nominal value would equate to the value of the land under the road at any point in time.Since a large part of the management of public finance consists of making choices to spend money on scarce alternatives, this approach to accounting appears entirely appropriate.It is interesting to note that, in theSpringfieldcontext, the competition for land use covers almost all the normal urban development possibilities. Under separate ownership and control, for almost every separate purpose, are the following: mall shopping; neighborhood shopping; housing; schools; offices; hotels; a light-rail (metro) system; communter-rail; long-distance (inter-city) rail; commuter bus; inter-city bus; inter-neighborhood taxi-van; taxis; van-pooling; car-rental; vehicle dealers; and, freight rail. In addition, there are (interstate) trunk highways; intermediate roads, and, local roads, each carrying freight and passenger vehicles, both local and long-distance. There is privately owned and publicly-owned parking space – free, subsidised and market-rate. Finally, publicly-owned school buses run peak services to convey the school-children back and forth.If land cannot be said to have alternative uses – and therefore values – in these complex circumstances, how can choices possibly be made? Moreover, these circumstances demonstrate, beyond all reasonable doubt, that land cannot have values which are different merely because it is owned or controlled by the public sector, rather than the private sector.The Debt/Equity RatioThe "Open letter" has asserted that one purpose of claimedly overstating the asset value of the "land under roads" was to improve the debt/equity ratio. There are two points to consider here.The first point is that the ratio itself should not assume an overblown importance. It is only an accounting ratio, capable of useful assessment within the domain in which it is used. To claim, for example, that an alternative commercial entity, with a different activity, raising its capital by different methods and subject to different disciplines, would not view the ratio with favour is not really very useful.The second point addresses the ratio calculation itself. The claim that it is "spectacularly good" must, as already implied, be assessed against the concern: "relative to what?" However, what is also true is that the debt/equity ratio does improve dramatically under circumstance where fixed asset and debt values are both influenced by inflation. This, however, has nothing to do with the action of the Brisbane City Council, nor of any other individual entity. Instead, it is a result of the fact that "assets" and "debt" are treated in different ways by the commercial market-place.A fixed asset is, initially, brought into the books at its original cost. When and if its value changes, either because of alternative use or inflation, it will stay in the books at this cost, unless it is deliberately and periodically revalued. This, currently, would be done only under a regime of current cost (or current value) accounting. Such a regime is now being introduced and practiced by Brisbane City Council[13]. Therefore, it is appropriate for fixed asset values to be either indexed or individually revalued, as now done in the Brisbane City Council accounts. The use of a "deprival value", as already indicated, appears to be a reasonable way of achieving this.Long-term liabilities are typically treated by the financial market-place in quite a different manner. Here, the principal sum is retained in the books and never, normally, revalued, unless indexing is used, in situations of severe inflation. It is adjusted, of course, when paid off, whether in a lump sum or periodically. However, the interest rate includes not only the expected real return for the use of money and operational risk. It also includes an element for anticipated inflation. Thus, the interest really includes a component for "adjustment of principal."Whenever inflation occurs, debt repayment and interest payments represent continuously decreasing values, in real terms[14]. Thus, in these real terms, the public debt is being discharged at faster rates than asset values are being depreciated (used or destroyed). Land, of course, is not depreciated at all, so the effect is even more startling than for other fixed assets.The Single Reporting NumberFinally, the "Open letter" makes far too much of the concept of a single reporting number. One advantage of a more comprehensive set of financial reports is that the information can be conveyed to the reader in a variety of ways. The use to be made of this will depend on the purposes of the various observers.Modern financial statements almost always draw clear distinctions between "cash-flow" and "net income" concepts. This does not make one "right" and the other "wrong." Instead, it provides alternative presentations for a wider range of useful and effective actions. Instead of making a claim to re-state the financial position of Brisbane City Council in a revised form, it would be much more useful, in my opinion, merely to appeal to the intelligence of the normal observer.Thus, it could be said, by way of explanation or footnote, something like:"If the land under roads, valued at its assessed "deprival value" were to be excluded from these accounts, the net assets would be shown at only $3 billion, instead of $10.5 billion. Concurrently, this would require the omission of new land acquisitions for this purpose, amounting to $24 million, which would reduce the declared "increase in operating capacity." However, since the reduction relates to the non-monetary part of this operating capacity, it does not reduce the value of liquid assets currently available for this purpose. It merely omits certain of the fixed asset values from valuation and recognition."The Urban Transport ContextAs a final set observations, I would like to address, somewhat more broadly, the importance of valuing the resources which are appropriated to any particular purpose by public sector institutions. Because this issue deal with roads, a principal reference-point is a paper entitled: "Environmentally Sustainable Urban Transport – Defining a Global Policy." by Ismail Serageldin – (then) Vice President, Environmentally Sustainable Development, The World Bank. Ironically, it was delivered in Sydney, Australia, at the UITP 50th International Congress, on May 3, 1993. It opens with a statement of concern for sustainable development. This, it defines by a quote from the Brundtland Commission:"Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs."It is interesting how close this idea comes to the Brisbane concept of its equity as an "Operating capability." In effect, this is "the ability of a generation to meet its own needs."With particular reference to transport issues, the paper goes on to say:"Environmental issues in the urban transport sector stem mainly from the proliferation and use of private motor vehicles and the failure of Governments to address the real costs that these vehicles place on our society.""The private automobile, which makes up the largest proportion of the world vehicle fleet, is a major consumer of resources. It consumes 60 percent of all natural rubber, 20 percent of steel production, 10 percent of aluminium products, and requires between 5 and 10 meters of road for every vehicle in the major cities."Clearly, there is a need for costs to be addressed by public sector accounting systems, in ways which have – hitherto – been largely ignored or significantly distorted. This is one of the things which Brisbane's new accounting system is attempting to remedy. In particular, Mr. Serageldin emphasizes how much road-space is needed for each vehicle in major cities. This is a direct function of land-use and – by extension – land availability and cost.Mr. Serageldin goes on to say:"Infrastructure Needs: The studies of Newman and Kenworthy[15], mentioned previously, examined 31 cities around the world and divided them into five categories. At one end of the spectrum were the heavily auto dependent cities (Los Angeles, Houston, Detroit, Perth and Brisbane) and at the other were the transit orientated cities (Munich, Singapore, Paris, Hong Kong and Tokyo). In the "auto" cities, the provision of road space was eight times greater than in the "transit" cities and the provision of parking was three times greater...."Reference to the case ofBrisbane, as one of the "auto" cities, should not go unnoticed. Clearly, a substantial proportion of the city's land is being appropriated for the use of the motor vehicle. This is depriving the land of other, alternative, uses. If this is the wish of the city's residents, well and good. However, they can only make sound judgements, through the ballot-box and by other public and collective processes, if they are as well-informed as possible. One important component of this information ought to be how much, in current dollars, has already been invested in road construction, including the use of land for this. Clearly, one major source of this information is that of financial reporting.The Lord Mayor, again at some political risk, has given his authorization to the city officials to make the publication of this information as transparent as possible. Stockholders of public companies must receive comprehensive financial information on which to base their financial investments. In making the choice of where to place their funds, they are making assessments about whom to trust - and to what extent.In the same way, stockholders in the public sector – the electorate – must make similar judgements about whom to trust, for the next several years, with the stewardship of their funds and the delivery of the services which those funds help to provide. The provision of this information is the mandate of the City's Finance Manager. It is my belief that he is taking this responsibility seriously and discharging it with integrity.Municipal Accountability for Costs (Results) and ResourcesMost large or medium-sized private businesses are legally required to keep their financial accounts in compliance with national or international accounting standards. Thus, although neither financial nor economic costs of activities can be directly derived from these, they usually provide sound bases for the development of cost accounting computations and of the cost accounting systems necessary to generate these.As discussed in many places elsewhere, financial accounting systems used in the public sector, and particularly in local government units, may be of two main forms. Firstly, for activities that are revenue-seeking and possibly intended to earn profits, the financial accounting systems are often quite similar to those used in private sector enterprises. This is especially so if the public sector revenue-seeking activities are performed by an entity with some degree of legal separation from core local government activities, funded mainly from taxes and other general revenues.Secondly, financial accounting systems for activities to be funded from general revenues have often been much simpler in form from those used in the private commercial sector. However, although the form may be relatively simple, the substance of the accounts may be very complex, covering a huge variety of activities, possibly ranging from “archive management” to “zoos”! Some of these services, moreover, are very large. Many are very capital-intensive. For example, outside of national defense services, education is one of the world’s largest public sector or private sector activities, with “teachers’ salaries” probably by far the largest single cost element.Unfortunately, however, even more than within the private sector, public financial accounting systems typically fall short of what is necessary to achieve cost measurement, either for pricing or for other policy decisions. Moreover, the huge quantities of capital resources, held as “fixed assest” are often treated, for accounting purposes, with disdain. Yet, in the public sector, the concepts of “costs” and “resources” are almost constantly used in the policy discourse. They are also frequently misunderstood and misused concepts. Decisions that should be based on costs or resources are based on almost anything but these.In all sectors of business and public activity, therefore, cost accounting systems are needed, in addition to financial accounting systems. Ideally, cost accounting systems should be capable of providing accurate information about the consumption of economic resources for specified activities. These should either be the economic resources actually consumed or at least those attributed, allocated or ascertained, in some mathematically acceptable way. Cost accounts, almost always, produce financial and other information about more activities, in much more detail and sometimes in different ways, than financial accounts. Thus, although soundly-based financial accounts are necessary, they are usually not sufficient for the purposes of costing.Comprehensive cost accounting systems can be perceived of as being firmly “bolted on” to the related financial accounting systems. They should derive much of their necessary information from the financial accounting and be capable of being wholly reconcilable with them. Accounting systems, complete or incomplete, are expected (system-wise) to balance debits against credits and (more conceptually)to match resources against results. This is as true of cost accounting systems as of financial accounting systems.There are at least two approaches to the need to set up cost accounting systems. The first is to derive from the financial accounting system whatever information is available in it, in whatever form it exists. Then, an attempt is made to arrange the information in forms that will be useful in calculating costs. This may well require the addition of supplementary information that is not currently available in the financial accounting system, at least in usable form. Indeed, where financial accounting systems are crude or incomplete, the balancing of cost accounting systems against these may prove to be difficult, sometimes impossible, and often futile to attempt. In other words, the costs of deriving costs may exceed the benefits of having them available.With many accounting systems currently in use in local governments, in many different countries, this is typically the case. Therefore, costs derived from these accounts will only be partial. They may, indeed, be relatively useless as a basis for many policy decisions. However, “the perfect is the enemy of the good,” it is sometimes said[16]. Therefore, as a second alternative, one does what one reasonably can with the information and systems available, producing figures that, while not closely approximating costs, are at least more useful than mere cash payments or expenditures. They are, however, likely to be more useful if taken from the accounting system than if derived, more or less informally, from a variety of other documents, of varying and dubious credibility.In recent years, the “magic of the market-place” has been held out to all as an unbridled paragon of virtue in financial and economic management. Thus, deregulation, privatization, contracting out, public-private partnerships and (as in UK) the “Private Finance Initiative,” have all been used as adjuncts to more traditional methods. These largely relied on the financing of fixed assets by long-term public debt and operating them by public employees.The newer approaches have often been a mixed blessing. Without doubt, they have provided useful alternatives in financing and operating public services. They have also opened the public sector more widely to many innovations and efficiencies, hitherto seeming to be largely exclusive to the private sector. One particular domain where this has been so, is to increase the pressure for more accurate accounting, within the public sector, to facilitate more rational comparisons of cost and resource use with those offered by the private sector. However, the world is now littered with disasters relating to privatization and deregulation. The “California Energy Crisis,” the “British Rail” debacle and the financial failure of the “Channel Tunnel” are just a few of the most obvious that come to mind. Moreover, many major frauds and financial failures have been in sectors highlighted as good candidates for privatization: electricity[17], telecommunications, water and solid waste management. So far as accounting is concerned, after Enron, Worldcom and Waste Management Inc. to mention just a few, is it necessary to say any more?Greater accountability has also been demanded by the voting and taxpaying public. As the private sector’s superiority has been emphasized, less financial resources have been available to the public sector. Clearly, in improving public sector accounting, we are at early stages in most countries. Relatively few are currently setting the pace, such as New Zealand, Australia and the United Kingdom. There is still much to be done and this work is continuing. The International Federation of Accountants is also involved. Unfortunately, the private sector has hardly covered itself with glory, either in the private delivery of public services or in credible and effective accounting.It used to be thought that the private sector was clever and innovative, in contrast to a dull and cumbersome public sector. Indeed, the relatively perceived “rough and ready” attitude of the public sector engendered the expression: "Close enough for government work!" Unfortunately, this is, now, not nearly close enough! The Economist, some time ago, stated as follows:"The government has gone wrong, however, on the first point -- the mix of its spending between investment and consumption. To see this, the idea of a public-sector balance-sheet is helpful. It would be a short-sighted company that minimized its liabilities and ignored its assets. So, too, for governments. Like companies, they should aim, at least, to maintain their net worth -- the value of assets less liabilities. This highlights the distinction between borrowing to finance spending on (say) salaries (which reduces net worth), and borrowing for investment (which generates future income, so should leave net worth unchanged)…The balance-sheet approach also exposes tricks such as selling public assets, which most governments wrongly treat as cutting their deficits".The issue of greater accountability – within both public and private sectors – was also addressed by a well-known economist, Kenneth Boulding, as follows:"Although I...with all modern economists, owe an enormous debt to Keynes' brilliance of insight and imaginative sweep, his system shows a number of weaknesses that have not been corrected by his followers. One of these weaknesses is a general failure to distinguish between two very different processes in economic life, the exchange or payments process, on the one hand, by which existing assets, including money, are circulated among various owners, and the processes of production, consumption, income and outgo on the other, by which assets are created, destroyed and accumulated”[18].Elsewhere, Professor Boulding writes:"The usual marginal analysis treats the firm as if it had nothing but an income account; it has no balance sheet, no capital problems and no dynamics;...Consequently, the economist has been able to give only fragmentary accounts of inventory changes, investment structures, liquidity positions and like problems[19]."Over a century ago, a judicial ruling in the United Kingdom stated the following:‘A full and fair balance sheet must be such a balance sheet as to convey a truthful statement as to the company’s position. It must not conceal any known cause of weakness in the financial position, or suggest anything which cannot be supported as fairly correct....[20]’Finally, in my own writing[21], I emphasize the points made by the Economist and Professor Boulding, by the following:“An accountant records and interprets variations in financial position. He or she records, in money values, the results of variations during any period of time, at the end of which he or she can balance net results (of past operations) against net resources (available for future operations)”.The results of past operations – the use, consumption, transformation, degradation and destruction of economic resources – are costs. The resources available for future operations are the assets and liabilities that remain, after the costs incurred during the preceding accounting period have been fully accounted for. Integrating these, for useful and effective purposes, is “A full and fair balance sheet [that] must be such a balance sheet as to convey a truthful st[1] Municipal Accounting for Developing Countries, by David C. Jones, a joint publication of The Chartered Institute of Public Finance and Accountancy and The World Bank – 1984 (Now being republished) [© David C. Jones and The World Bank][2] Since the ownership of assets has not been questioned by the auditor, only their valuation, I choose not to treat this as a contentious issue. In any case, as it is a legal matter, I am not competent to comment on this.[3] The leading case on this is from the U.K: “Attorney General v. De Winton,” otherwise known as the “Tenby Case.”[4] For British Commonwealth countries, in Her Majesty’s Dominions, “Crown” is a legal term for “Government.”[5] Interestingly, the term “Commonwealth” is still used, also, for four states of the U.S.A., including Virginia.[6] As indicated in the text, no claim is made as to the legal status of the Brisbane City Council in this regard.[7] The "land" element, of course, would normally not be depreciated.[8] In the U.S.A., this is referred to, from the Constitution, as the “taking of private property for public use.”[9] This could happen, for example, if a road split a commercial property, with consequent restriction of easy access.[10] Many other infrastructure assets, such as undergroung pipes, will not require the perpetual appropriation of land, merely an easement.[11] In the U.S.A., this is specifically required, under the Federal Constitution.[12] Interestingly, the local government for the area – Fairfax County – is not – in general – the highway authority, despite being (arguably) one of the most affluent – and better run – local government units in the USA (AAA Bonds!). The highway authority (notably for this particular improvement) is the Commonwealth (State) of Virginia. This does not affect the basic premise.[13] “Accrual at current value” accounting is now legally required, for example, in U.K. local Government.[14] For example, assume Brisbane City Council to borrow $1,000 for 20 years at (say) 15.5%. Further assume that this nominal interest rate includes (by compounding) a 5% real rate and 10% for inflation. Using the “annuity” or “level-payment” method, the nominal annual payment, usually dictated by the lender, would be $164. At the end of year 1, the price index would be 110, so the level payment would be equal to only $149 in real terms. Moreover, at the end of year 20, with a price index of about 673, the real value of the annual payment would be only about $24, only about one-seventh of the real value in the first year.[15] Transport and Urban Form in Thirty-two of the World's Principal Cities, Peter W.G. Newman and Jeffrey J. Kenworthy, Transport Reviews, 1991, Vol 11, No. 3, pp. 249-272.[16] In cost accounting, this may be a necessary postulate only because of the inadequate quality of input data. However, for cost outputs, the emphasis should be the converse. Thus, the “merely good” is the enemy of “as near perfect as one can get.”[17] A former senior trader at the Enron Corporation pleaded guilty yesterday to engaging in a conspiracy that illegally manipulated theCaliforniapower market during the state's energy crisis, driving up prices and generating millions of dollars in excess profits for his employer. [New York Times,18 October, 2002][18] A (1950) text "A Reconstruction of Economics," by Kenneth Boulding (1910-1993)][19] Boulding (Op. Cit.)[20] Re London and General Bank (No2) [1895] 2 Ch 673, 692[21] Municipal Accounting for Developing Countries, by David C. Jones [© The Chartered Institute of Public Finance and Accountancy and the World Bank (1984)]

The next generation of wireless technology could affect a wide range of industries, from healthcare to financial services to retail.5G is set to enhance connectivity across networks. This is especially important as the number of Internet of Things (IoT) devices rises, along with the amount of data they generate.20 Industries The Tech Could Transform1. Manufacturing5G technology could help production operations in the manufacturing industry to become more flexible and efficient while enhancing safety. This would enable manufacturers to enhance “smart factories,” which leverage automation, artificial intelligence, augmented reality, and IoT.Tethered and untethered robots could be controlled, monitored, and reconfigured remotely over the 5G mobile network.This next-gen wireless technology might also result in increased adoption of augmented reality (AR), as 5G networks offer the high bandwidth and low latency required for sustained augmented image quality. In a factory setting, this means AR could support training, maintenance, construction, and repair.For example, an Ericsson factory in Tallinn, Estonia has adopted AR for troubleshooting to help mitigate the costs of breakdowns and reduce production downtime. It has reported that adopting AR has boosted productivity by 50%.As networks continue to adopt 5G, more manufacturing use cases will come to light. Samsung and AT&T have partnered to create the United States’ first manufacturing-focused 5G “Innovation Zone” in Austin, Texas. This testing ground aims to demonstrate how 5G can impact manufacturing.2. Energy & Utilities5G could lead to innovative solutions in energy production, transmission, distribution, and usage. It is also expected to unleash the next wave of smart grid features and efficiency.With more connected smart grids, energy management will become more efficient, reducing electricity peaks and energy costs overall.Moreover, 5G dramatically increases the lifespan of battery-dependent devices, sometimes up to 10 years. This makes mass deployment of IoT sensors a more practical solution for the energy industry.5G also supports the use of drones to monitor and maintain transmission of production assets, leading to improved grid uptime. This alone could generate a 30% reduction in costs.3. AgricultureFarmers around the world are using IoT technology to optimize agricultural processes such as water management, fertigation, livestock safety & maturity monitoring, crop communication, and aerial crop monitoring. 5G technology could lead to increased adoption of IoT devices that make this possible.5G could provide real-time data for farmers to monitor, track, and automate their agricultural systems, resulting in increased profitability, efficiency, and safety. In a high-risk industry such as agriculture, these increases in production and precision are vital, especially as climate change poses new threats to farmers around the globe.The technologies currently available are not advanced enough to cope with the massive data quantities and speeds required for smart farming.In the UK, for example, approximately 80% of rural areas are outside of the 4G range. In the US, over half of all Americans in rural areas lacked access to broadband services as of 2015.It is important to note that the agriculture industry will have to wait longer than most industries to reap the benefits of 5G, as 5G networks will largely be deployed in urban areas first.4. RetailMobile shopping has become incredibly popular among consumers worldwide. Over 100M Americans made a purchase on their smartphones in 2018.This migration to mobile shopping largely occurred thanks to 4G/LTE. Imagine how mobile shopping experience could be affected if mobile connections were 10 times faster.5G could open the door to VR dressing rooms as well as mobile AR experiences in stores and at home. 5G’s low latency enables mobile AR/VR applications without the motion sickness some experience when using technology today. With 5G, it will be possible to try on an array of outfits virtually from the comfort of your home.Worldwide spending on AR and VR applications for retail showcasing is expected to reach approximately $59B by 2020.5. Financial ServicesAs financial institutions increasingly focus on mobile operations, 5G technology is poised to accelerate this digitization, from internal operations to customer engagement.The increased speed made possible by 5G could allow users to make payments transactions instantly on their devices.5G connectivity could also allow wearable devices to share biometric data with financial services to authenticate user identity instantly and accurately.6. Media & Entertainment5G is set to disrupt media and entertainment on many levels, including mobile media, mobile advertising, home broadband, and TV. It will also be crucial for improving experiences across emerging interactive technologies such as AR/VR.Thanks to 5G’s low latency, streamed videos are less likely to stall or stop. On a 5G network, movie downloads will decrease from an average of 7 minutes to just 6 seconds. 5G will save people an estimated average of 23 hours of loading time per month while browsing social media, gaming, streaming music, and downloading movies and shows.Expanded AR/VR experiences could also create a new channel for content producers to reach consumers, allowing people to connect with media through virtual items and characters in different ways — and 5G will facilitate these experiences.Over the next decade, the global media industry stands to gain a staggering $765B in cumulative revenues from new services and applications enabled by 5G technology, according to a study conducted by Ovum.7. HealthcareThere are many ways in which 5G could improve healthcare around the world while increasing efficiencies and revenue for the healthcare industry. Using 5G technology in healthcare is estimated to represent a $76B revenue opportunity in 2026.The healthcare system needs faster, more efficient networks to keep up with the huge amounts of data it deals with, from detailed patient information to clinical research to high-resolution MRI &CT images.By 2020, the healthcare industry will produce an estimated 2,314 exabytes of data — that’s 2.314 quadrillion gigabytes. 5G’s low latency could allow these massive amounts of data to be transmitted without impacting speeds experienced by others on the network.5G could also enable remote monitoring devices, like wearable tech, to have much longer battery lives while they send patient health data to doctors in real time.Remote robotic surgery could improve, as well. Because these procedures require high-definition image streaming, low latency, and high throughput communication are essential. 5G networks could facilitate remote surgery procedures as they enable lag-free and ultra-fast connections.8. TransportationConnecting public and private vehicles with 5G could change the way people and goods travel around the world.5G technology could provide increased visibility and control over transportation systems, from public buses to private logistic fleets. As 5G networks become more prevalent, cities will gain invaluable access to real-time, end-to-end visibility into their transportation systems.5G could allow enhanced vehicle-to-vehicle (V2V) communications, a key component to improving road safety in the emerging world of driverless vehicles.It is essential that V2V communications take place in real time, as a matter of milliseconds could be the difference between a close call and a fatal collision. Achieving this high speed of interconnectivity requires vehicles to transmit large amounts of data between each other without any lags. 5G networks could make this possible with their low latency.5G could also play a crucial role in vehicle-to-infrastructure (V2I) communications. V2I communications connect vehicles with infrastructures such as traffic lights, bus stops, and even the road itself. This could improve traffic flow, reduce external danger factors, increase vehicle reaction time, and make public transportation more efficient.9. AR/VRThe future of augmented reality (AR) and virtual reality (VR) is dependent upon reliable 5G networks. Both AR and VR technologies require a cheaper, more extensive network with lower latency and more consistency to continue developing successfully, according to Qualcomm.AR and VR require massive amounts of data to be processed. An unreliable and lagging connection can ruin the immersive experiences, even making users physically sick.With a 10x decrease in latency, 100x improvement in traffic capacity, and 100x improvement in network efficiency, 5G could address these issues. This is critical for the mass adoption of AR and VR.10. Insurance5G could help insurers across the board make decisions more effectively and efficiently.With more efficient data sharing, health and life insurers could make more informed and accurate decisions when it comes to providing quotes. As wearable 5G-connected healthcare devices gain popularity, health insurers could offer “positive reinforcement” policies, where premiums would be reduced if a certain level of activity or fitness is maintained. (While remote monitoring exists today, the technology is limited by the capacity of the network to handle massive amounts of data, and stands to gain from higher capacity and more efficient 5G network).As 5G ushers in a new era of autonomous and driverless vehicles, real-time data and reports could also be instantly sent to car insurance companies following a customer’s accident.11. Education5G has the potential to transform how children and adults are educated.As 5G paves the way to better AR/VR experiences, teachers could use these technologies in a variety of new education techniques. For example, students could go on virtual field trips around the world, from the Egyptian pyramids to the Great Wall of China.AR/VR educational platforms provide a number of benefits over traditional educational methods, including cost-effectiveness, lower risks, and increased retention. A study conducted by Next Galaxy Corp and Nicklaus Children’s Hospital found that medical personnel retained as much as 80% of the course material after being trained with VR, compared to retaining only 20% of information from a traditional training session.For students in high-risk fields such as medicine and aviation, these VR learning experiences could prove to be especially useful.12. Cloud ComputingDue to mobile devices’ low throughput, high latency, and inconsistent connectivity, cloud applications are often watered down in terms of features and functionality.With 5G, mobile apps could become more sophisticated than ever before — the technology could make it easier for mobile devices to communicate in real-time with a central server.The technology’s ultra-low latency and high throughput would also allow the cloud computing experience to rival corporate LAN connectivity to desktops.13. GamingIn a world where streaming subscriptions such as Netflix and Spotify are extremely popular, 5G’s solutions could open up a whole new market for the video game industry to flourish.5G could solve the latency problems that currently face cloud-based gaming. Feedback would feel instantaneous, as latency would be reduced from 4G’s 10 milliseconds to 1-2 milliseconds. This technology would benefit those playing complex multiplayer games like Fornite on their phones — or any other mobile device, for example.Video game streaming services have been criticized for their high costs and inconsistent gaming experiences. 5G could improve their quality and make them more cost-effective.Big tech companies are already jumping on the gaming-as-a-service bandwagon. Microsoft’s Project xCloud will stream Xbox games to PCs, consoles, and mobile devices. Meanwhile, Google just announced Stadia, which allows users to stream video games from their Chrome browser. 5G would be especially beneficial for streaming on mobile devices.14. Real EstateThe real estate industry could be impacted as 5G paves the way for emerging technologies like AR and VR.Real estate agents could begin offering virtual home tours. Prospective buyers could use virtual reality to view several homes without ever having to step outside of the brokerage’s office.For those looking to purchase or rent property in a different state or country, accessing VR tours via a mobile application would prove invaluable. Individuals could virtually tour vacation rentals before booking, for example. 5G technology would allow for these applications to run more efficiently than any existing process today.5G small cells could also provide an additional income stream for many properties, as millions of new small cells will need to be installed and leased on buildings all over the world.However, this could ultimately create liability on real estate properties. If 5G small cells prove to be detrimental to the public’s health, real estate owners could end up being liable for installing them close to human populations.15. Public Safety5G could enhance public safety capabilities, thereby improving emergency response times.Through the 5G network, applications such as real-time video, security communications, and media sharing could be used to assist first responders in emergency situations. Firefighters, for example, could use augmented reality to walk through a home when they can’t see.5G networks could improve information sharing within the public safety community, with secure and reliable video sharing from bodycams, drones, group chat, file sharing, and location sharing.In post-disaster situations, 5G-connected drones could deliver relief materials and assist in locating missing individuals. (This is given that the drone never loses line of sight to a 5G small cell).An enhanced network of sensors, cameras, and other automated devices would become help create a fuller picture of any public safety situations, potentially making cities around the world safer to live in.16. Supply Chain ManagementInstalling 5G-enabled IoT sensors on products could easily make a large amount of data could available to stakeholders in the supply chain in real time.The data may include location, temperature, moisture, pressure, and other information that can be crucial to properly managing products in a supply chain.Introducing 5G IoT sensors into supply chains could mean fewer losses due to manual inefficiency or misplaced containers. As 5G technologies introduce more intelligent supply chain management, there could be potential for increases in production, streamlined logistical processes, and reduced costs.The way restaurants interact with customers, prepare food, and deliver meals will continue to evolve as 5G gains adoption.5G-enabled IoT devices could improve food tracking and waste disposal. Ordering platforms, from menus to drive-throughs, could evolve into more immersive and interactive experiences for customers, as 5G allows enhanced performance with better speeds and lower latency.5G-connected drones could allow restaurants to send out more food deliveries.Kitchen employees could be trained using 5G-connected AR/VR experiences, saving valuable inventory. 5G connectivity could also finally enable the widespread adoption of robotics in restaurants.With all of these new 5G technologies, the restaurant industry is likely to see reduced costs, more efficient food production, and enhanced consumer experiences.18. Tourism5G is providing the wireless infrastructure for the concept of “smart tourism” to emerge. It could bring in more tourists to destinations and provide them with more immersive experiences.Many tourism organizations are already researching and developing 5G-connected technologies to improve their tourist destinations.For example, the West of England Combined Authority has awarded a £5-million grant to trial AR/VR experiences in major tourist attractions in Bath and Bristol. The BBC, Aardman, and the University of Bristol will work on content and tech developments for the project.“Imagine a virtual Roman soldier showing you around the Roman Baths, now imagine this moving 360 degrees on your mobile phone at a resolution you have never experienced before — that’s what 5G technology can offer,” said West of England Mayor Tim Bowles.Ericsson has partnered with leading Russian telecommunications operator Rostelecom to deploy a 5G trial network at the State Hermitage Museum in St. Petersburg, one of the largest art museums in the world. Ericsson’s 5G technology is currently being used to enhance museum tours and even restore art with remote-controlled robotics.19. MilitaryCommunication is key when it comes to military strategies. Real-time data collection and transmission to devices within communication networks are crucial, and 5G technology could minimize the speed of data transmission.Enhanced connectivity could minimize confusion and delay while relaying information in a life-threatening situation in the field. This could help prevent injuries and deaths in war zones.5G technology will be important in military supply chain upkeep, as well. Better data collection on material usage can help with future military budgeting by providing a clearer understanding of spending and resources.20. Marketing & Advertising5G could play a key role in transitioning display advertising toward social immersive experiences, bringing content and audiences closer together.Mobile display advertising is expected to become a $178B global market by 2028, according to Intel research. 5G could help businesses overcome the scale, delivery, and measurement issues they currently face when dealing with mobile ad campaigns.5G could help marketing and advertising transition from banner-based ads to moving images and video. It could even give rise to new ad formats in VR and AR. 5G could also make it possible to measure ad effectiveness in real time through eye tracking and biometrics.

1 Introduction One of my three major obsessions for four and a half decades is Hegemonic Power Transfer Theory, about how a declining economic power like the USA accommodates itself to a rising economic power like China. (See Power transition theory - Wikipedia)That mathematical science is based upon the consideration and the statistical analysis of the data relating to behaviour of major economic powers over the last two centuries and was principally progressed by Abraham Fimo Kenneth Organski (1923–98) and Jacek Kugler (1923-now, and seebut there are now many other major contributors. Most people I have met (who are sometimes very highly educated) are not well informed about that subject so I have written a primer about it which you can read at George Tait Edwards's answer to Does the USA have a good reason to destroy the military base of China in South China Sea now? Would the US find it too late 5 or 10 years later?1.1 US Hegemony Has Been Ended By American Political Actions And Not By The Rise of China or by Foreign Economic ActivityOne bias in the above question above is the implicit idea that China is somehow responsible for the economic decline of the USA. The principal cause of US relative economic decline is US Government policy particularly since the 1980s and not the actions of China or foreign governments.After 1980 President Ronald Reagan’s deliberate policy to relocate abroad what he regarded as “old, smokestack industries” such as the US companies’ manufacture of the basic inputs of steel and aluminium and also the export of US light motor vehicle industries (along with the export of the feeder SME industries which provided the sub-components to enable the construction of these cars) accelerated US economic decline. These policies created a massive rustbelt in the US States below the Great Lakes and much higher unemployment in the USA. See George Tait Edwards's answer to What are some of the ingredients that make the United States stand out in the world? And with regard to Reagan’s policy of relocating US industries abroad, see para 5.2.4 of George Tait Edwards's answer to Why is China’s economy growing significantly faster than the U.S. economy? And for some details of “the Reagan Plan” see the NYT article REAGAN'S HIDDEN 'INDUSTRIAL POLICY' which reports“The Reagan plan to shrink America's basic industries has been enormously successful. Since 1981, when the value of the dollar began climbing to unprecedented levels as the budget deficit ballooned, some 2 million jobs have been lost in old-line manufacturing businesses. Steel, autos and others have been forced to reduce domestic capacity, set up operations abroad (or enter into joint ventures with foreign producers) and diversify into specialized niches.”And these are only the direct employment losses. The USA had an economic multiplier effect of about four or five during the 1980s becausethe shutdown of steel, aluminium and auto manufacturing industries caused the decline and the destruction of the service industries which had served these companies and their employeesthe “feeder firms” which had produced the sub-components of the auto industries were also moved abroadthe response of local authorities (LA) to their loss of revenue was a reduction in their local employment and LA provision andthe employment which still exists in the rustbelt is more often a lower-quality, sometimes no-fixed-contract jobs, with the R&D for the manufacturing plus the related defence industry subcomponents manufacture also moving abroad.The USA largely Republican Governments since 1980 do not recognise these multiplier effects many of which continue to contribute to the US spiral of relative economic decline today. For example, Gordon Ramsay has recently massively improved the food quality of a Detroit Restaurant and in a normal economic background that establishment would flourish. But the working people of Detroit can no longer afford to eat out as often as they once did, so that restaurant has gone bankrupt.Almost identical effects can be observed in the United Kingdom where an official Conservative policy of industrial shutdown and partisan victimisation of the poor has produced the growth of Austerity-enforced starvation and the explosive growth of food banks along with the shutdown of local restaurants and public houses.These consequences of industrial declines have no positive aspects. Of course the loss of domestic production in both the USA and UK creates the opportunity for foreign supply of domestic demand, and the surge in imports of goods no longer produced locally causes a large balance of payments problem in both countries, but it was the lack of an effective industrial policy and the malign neglect of the side effects of that [in the absence of government remedial action} which is the root cause of both UK and US industrial decline.2 My Re-interpretation of the QuestionLarge well populated rising nations become potential hegemonic powers because of their high economic growth. The USA became a hegemonic power in 1945 because FDR understood the process of economic growth. See my 12 June 2013 article FDR’s American Economic Miracle 1938-44, or the First Economic Bomb - The USA from 1938 to 1944 (Part 1)2.1 The Rise Of Any Large Nation to Potential Hegemonic Economic Power Is Not Limited By or Related to the Western Concept of “Legitimacy”Whether countries can become the leading hegemonic power has nothing to do with the Western idea of “legitimacy” but everything to do with the leadership of that country understanding and practising the economic understandings which lead to relatively high economic growth. In particular, the partial or full practice of the five major aspects of Shimomuran-Wernerian Macroeconomics (SWM) has historically produced high-growth economic miracles while Washington Consensus Macroeconomics (WCM) has continually resulted in low growth and relative economic decline.2.1.1 The concept of legitimacy of national actions is a Western-produced Eurocentric and mainly Anglo-centric idea which has been historically used to justify the “legitimacy” of the actions of the Western “Great powers” particularly the many military adventures of the UK and the USA. The central idea in international law is a value system which regards the position of the West as “developed” and the position of other nations as “undeveloped” and “Less Developed Countries” (LDCs) so it includes an embedded Eurocentric value system, which seems to and does devalue the cultural worth and downrates the achievements of other countries.2.1.2 Also inherent in the Western legal system is the primacy of the personal or corporate individual above the the interests of all others, so that issues are set to be prejudicially settled in Western law in favour of these individuals or corporations. In Western Law a basic assumption appears to be that all group and national interests such as the continuation of a life-supporting environment, a safe society based on individuals not carrying small arms, and group or social gains are less important than the massive personal gains made by billionaires. The misinterpretation in American Law of the US constitutional right for a “free people” to bear arms is a collective national right, and does not say that individuals can, but this is the constant US Media misinterpretation of that constitutional Amendment. That individualistic legal bias in favour of corporations is a big factor in how American politicians behave and which their private media supports.2.1.3 In my view it is a justified exaggeration to say that the bias in US Law in favour of the personal and corporate individual is a major factor which is responsible for the enormous political and social mess the United States of America has now arrived at. The elevation of immediate corporate interests or the short-term interests of US billionaires above long-term environmental, personal, group or national outcomes is an unhelpful bias in US Law. It is easy for large corporations to ruin the environment in the USA and elsewhere without risking any significant timely legal challenge to their profit-achieving activities. The profit-seeking behaviour of the US healthcare system is seen by US Republicans as more justified than the establishment of a slightly more adequate healthcare system such as Obamacare. [See George Tait Edwards's answer to Why is the USA’s health spending so high at 17% of GDP compared to the UK’s spending of 11% yet still doesn’t offer universal care?]The continuation of the mistaken policy of individuals bearing small and murderous munitions results in the USA having the highest suicide rate in the world, because the major use of these freely available weapons is to commit suicide (see When will people realize that guns don't kill people; people kill people?) but the social cost in the frequent incidents of the mass murder of some school children and their teachers cannot be justified by a mistaken reference to personal freedom. The LA times has today produced a report saying that https://www.quora.com/link/More-than-15%-of-childhood-deaths-in-America-are-due-to-guns-study-says/redirect but you can’t read that report except in the USA.The US Republican political preference for tax cuts for the benefit of the rich with Austerity for the workers and the political preference for big finance over the activities of local SME-supporting banks has produced a low 5% invention-to-innovation rate in the USA, ruining America’s potential future. And the lack of US industrial policy has produced the collapse of what was once [in 1945] the greatest industrial economy in the world, as US Republicans folded their arms and took no action as the once-great industrial companies of America after 1980 relocated elsewhere with Government encouragement and support, perhaps creating greater profits for their American owners but destroying the US worker employment and local prosperity these companies had previously provided. These are all observations and do not depend on any economic theory.What academic support exists for such a view? It is not something that American academics usually contemplate, trapped as they are within a WCM mindset, because that’s the only economics education taught in the West. See George Tait Edwards's answer to What's Wrong With Washington Consensus Macroeconomics?2.1.4 The US-promoted ‘international? Law of the Sea”Many US individuals have expressed the view that the “International Law the Sea” allows the militarily powerful US Navy to cruise where it pleases, because that “Law” is seen as eternal and universally supported. Yet that Law was created less than three quarters of a century ago, in 1945, in order to enable trade through international waters and sea channels which lie within close proximity to, and within the coastal sea territory of, nation states. The Law was meant to enable peaceful international trading by merchant shipping, not to facilitate military threat by its misinterpretation by the US to locate much of the mighty US Pacific Fleet around Chinese shores.That American activity could lead to a major conflict between the USA and China. I hope it does not. See China Cannot Be Trumped – George Tait Edwards – Medium and Trump is probably not foolish enough to destroy the world.2.2 Florian Matsumoto’s Critical Review of Onuma’s Attempt to Comment From A Transcultural ViewpointAn excellent detailed criticism, dissection and discussion of Onuma’s recent attempt to to define a “new” international Law can be accessed at Florian Couveinhes Matsumoto’s pdf paper The_End_of_the_History_of_Liberalism_and.the last “Transcivilisational” Man? Onuma’s Attempt to Define a “New” International Law.Which is located at The End of the History of Liberalism and the last “transcivilizational” Man? Onuma’s Attempt to Define a “new” international Law” », to be published, Asian Journal of International Law, 2018It should be noted that Florian Couveinhes Matsumoto is Assistant Professor at the École normale supérieure (Paris, Ulm), Université de recherche Paris Sciences et Lettres, member of the Centre de Théorie et d’Analyse du Droit (UMR CNRS 7074) and associate researcher at the Institut de Hautes Études Internationales (Université Paris II).That paper reaches detailed discussion heights not attained in this Answer. The author’s detailed knowledge of international law exceeds mine by many magnitudes. I accept from the outset that my attempt to summarise part of that informationally precise paper is doomed to failure, as was the attempt of Onumo to adopt a transcultural perspective, but his attempt reveals interesting depths and hints at possible transcultural conclusions.I wish to try to summarise why I think this paper is seminal and state some of its aspects and conclusions to illustrate its importance. There is nothing I can find in English (and this paper was originally in French) which illustrates the great difficulty of successfully adopting a transcultural perspective for the hopeful purpose of achieving a valid legal commentary and arriving at transcultural conclusions. My summary is inevitably inadequate and incomplete. The only fair way to treat this original and ground-breaking paper to quote all of it, but the copyright laws prevent that. The interested reader is invited to study the entire paper with probably undoubted benefits to the reader’s understanding.There are four sections in this 8-page paper as follows. These are:I Dealing (again) with the western perspective on international lawInternational Law is actually Western Law and is inevitably embedded within the cultural and personal perspectives of any commenting author. As Florain Matsumoto concludes in part I:“However, Onuma’ s book also undoubtedly displays the considerable difficulty inherent in such an attempt, or more accurately the impossibility of adopting a non-Western perspective without assuming a revolutionary point of view, a point of view that most Western lawyers describe as philosophical, political, or ideological, and, in a sense, as an erroneous or entirely subjective perspective. Indeed, although the trans-civilizational perspective on international law claimed by Onuma seems to imply a revolutionary stance, his book seems more reformist in nature and only a few criticisms appear to be truly transcivilizational. At least two of these need to be highlighted.”II Two “truly” transcivilizational criticismsFlorain Matsumoto continues:“As one might expect, the most visible transcivilizational criticism relates to the (usually Western-oriented) history of international law. In the sections of the book dedicated to this theme (pp.55 et seq. and 149 et seq.), the author accepts the classical view that today international law is a product of European and then Western modernity (pp. 16, 31, 55 et seq.), but rejects the idea that there was indeed international law “in the geographical sense of the term” before the Berlin Act (1885) and the Shimonoseki Treaty between China and Japan (1895) (p.81). Similarly, he is of the opinion that this law was not “globally valid in the formal sense ” before “most nations representing humankind” became “subjects of international law”, namely before people in decolonized countries freely recognized such a law in the 1960s (pp.57, 63) In the same way again, a truly global law of the sea only arose after World War II (p.320)”Matsumoto comments that both the cultures of China and Islam had influence in determining some aspects of the Western legal system but the cultures of other Asian nations, Africa, and pre-conquest North and South American cultures did not. And Matsumoto observes:“Unlike the criticism of the traditional presentation of the history of international Law, the second truly transcivilizational criticism does not relate to a particular area. In a way, it may be argued that it is the main thesis of the book. According to this thesis (if it may be summarized subjectively), contemporary Western lawyers as well as Western governments place an undue emphasis on the role of international judges (and secondarily NGOs and transnational corporations) as international Law makers, whereas non-Western lawyers and governments place their hopes in the capacities of nation States to rule their countries and regulate their relationships with strangers. More specifically, “the ideas, notions or concepts that people use as cognitive and interpretative frameworks of international law have basically been constructed by male international lawyers of powerful Western nations” (pp. 52-53) and “Western nations [...] have always been characterised by a legalistic culture” (p. 39).The use of Western models for transcultural Law is rejected because“litigation is a pathology, not a physiology of law” (pp. 8, 26, 457) and because “[l]aw without court is normal in many societies in human history” (p. 550). Consequently, “the study of international law in the twentieth century seems to have been excessively judicial-centric for gaining a comprehensive picture of international law” (pp. 116, 252, 258, 408, etc.). For instance, “the ICJ is not an important organ in interstate conflict settlement” (pp. 27, 117, 559-560, 579, 662) and more broadly, most international judges do not resolve most inter- State disputes (pp. 557, 571, 662).”Much of Western Law appears to based more on win-or-lose suppositions rather than the often more appropriate mediated settlement of conflict, and many “commonly perceived features of law [righteousness, consistency, universal applicability, rigidity and formality] work [at times] negatively against conflict resolution” (pp. 585 et sq.).”Because mediated war avoidance could be a major function of a well-ordered international legal system, the usefulness the existing Western legal systems seems less than adequate.III The reiteration of problematic narratives deriving from the western perspectiveMatsumoto points out that although Onuma is seeking a “trancivilisational perspective” and lists his credentials (briefly, as an Asian International Lawyer practising in Asia but mentally constructed by modern European civilisation) he cannot help using the Western classifications of states as more or less culturally developed according to Western measures. As Matsumoto observes“If we do not first deconstruct the myth of a world that follows a unique path of progress (towards Christianity, Western-style Law, the market economy, capitalism, human rights, etc.), and more specifically a progress that is exhaustively predeterminable by a small group of self-proclaimed superior people, it is impossible to obtain a critical distance from Western-centrism.”IV Potential solutions suggested by Matsumoto’s Review of this Onuma bookThese are for a new system of International Law with mankind’s place in the environment as central within that system with considerable implications for the future of mankind. This is the best legal argument for the positive restructuring of law on an environmental basis I have ever read.2.2 There Is No Read-Across From Economic or Military Supremacy To Legal Primacy or LegitimacyThe greater scientific, economic, and military development of the West has often been wrongly read across, or assumed, to create a situation of greater moral or legal primacy. The UK and USA do not have a history which involves any gentle, culturally sympathetic, or altruistic treatment of foreign or colonised people. Racism is still at the heart of the UK Conservative ruling party, and Theresa May, the now-Prime Minister, has suffered squirming embarrassment at a Commonwealth Conference because she was instrumental while in the Home Office of creating the Windrush Scandal, in which documents proving the British residential legitimacy and citizenship of Caribbean immigrants were destroyed, justifying a “Send-Them-Home” policy over which she presided and which often relocated Black British (who had lived in Britain for decades) to the Caribbean.The USA - despite Lincoln’s 13th Amendment to the US Constitution, which was intended to free the Black slaves- has continued to practice the legal and informal diminishment of the rights of its native Indian and black and its more recent immigrant populations. The addendum to the 13th Amendment - that slavery is abolished “except for felons” - appears to have created a semi-legitimised Black-slave-creating-culture in some of the Southern states of the USA. Of course the Southern cotton farms needed cheap labour to continue to exist, and the police in the cotton-producing states promptly provided that cheap labour by arresting fit young Black men for minor offences and the Federal Prison system leased their re-created slave labour to the cotton farms. And once imprisoned, Blacks appear to be often mistreated in Federal prisons to ensure their continued incarceration. One statistic tells it all: of blacks arrested, 50% are never released but die in prison.And those who are released run up against a system almost design to deny the restoration of their voting rights. Released black prisoners have to appeal individually to the State Governor and travel to and get a hearing for the restitution of these voting rights and for partisan political reasons these rights may not be restored. Jeb Bush enabled the 2000 election of his brother George W by refusing voter rights restoration in Florida. SeeAll this in the country which the US Media continually describe as “the land of the free.” And see the 2008 now out-of-date but revealing Global Research reportThe Prison Industry in the United States: Big Business or a New Form of Slavery? - Global Research2.3 Gandhi’s Key CommentWhen Gandhi was asked“What do you think of Western Civilisation?” he famously replied“I think it would be a good idea.”2.4 It Is Not What China Lacks But What China Possesses That Is VitalThe last part of the question makes more sense if it is reversed, to read “What does China Have that the USA lacks?”This Answer is an inevitably brief summary of a great deal of research (much of it not mine) and a lot of relevant information.There is no necessary “legitimacy” in the rise of powers and major nations have tended to act in their own interests with no regard for “international law”. The League of Nations and the UN have both been failures when confronted by major nations adopting warlike policies. As Mussolini observed, “The League of Nations is all very well when sparrows shout, but is of no use at all when eagles fall out.”What China possesses isa different form of democracy based upon universal elections of local government officials and a meritocratic, well-educated central Governmenta different objective in its pursuit of economic development (rule for the prosperity of all or most the people and not rule for the increasing benefit of the already rich)a much less racist society (historically based upon the assimilation of different peoples and cultures within the Han Chinese people and their culture)a much deeper understanding of the high-growth, low inflation, no-cost investment credit economics/Shimomuran-Wernerian Macroeconomicsa tolerance of other cultures derived from the constant contact with other religions and cultures over centuriesthe central Sun Tzu/“Art of War” idea that conflicts are best settled without warsa large Initiative (the B&RI/OBOR Project) which rests upon the voluntary bilateral engagement of nations (that is, two at a time) and the currency swaps and further negotiations which present an alternative jointly agreed system of making economic progress and removing all aspects of the American third party involvement in the economic progress. This project removes any reference to the American legal system with its third party win-lose approach to the settlement of disputes, allowing conflicts to be settled perhaps more successfully by bilateral negotiation, removes the Bank of International Settlement and US currency from involvement in the initiative, reducing the US power to involve itself or affect these projects, by removing US currency from the project, and even perhaps US knowledge about the extent of the project. [For the data about the declining use of the US dollar as a reserve currency, see George Tait Edwards's answer to With the current state of world affairs, does it look like the US will pay off its debts or will the US lose is standing as economic leader (self proclaimed), and lose the power of the dollar in as the standard universal dollar?] These projects present possible alternatives to the involvement of any part of US Law or reserve-currency dollars in making bilateral real economic progress. Perhaps that is why the post-Spenglerian Western Media continually run down this initiative.3 How Economic Growth Arises I cannot fully cover this topic in this Answer, but very briefly, there are five major sources of economic growthFirst, the SMEs which in all countries are the source of most of the employment and nearly all (about 95%) of the fresh invention and innovation in that country and the major source of further future growthSecond, national prosperity is enabled by a well-developed and well funded industrial factory system upon which the living standards of the workers dependThird, economic growth is increased by a realistic economic understanding which is practised by the government of the country andFourth, the foundation of company success at every scale - in the the small, medium and large enterprises in a country - is only made possible by a system of supporting banks at all sizes within a country, which banks exist to obey Werner’s Third Law that“Thousands of small banks provide thousands or tens of thousands of small loans to small businesses, medium sized banks provide thousands of medium sized loans loans to medium sized businesses and large banks provide many large loans to large businesses.”We can regard these banks as local (like Germany’s SME-supporting Sparkassen banks) or secondary banks (like regional or local authority banks like the Lundesbanks) or primary national banks usually only located in the capital and which also provide loans to national or nationalised industries. The comments that follow are illustrations of the above four key principles but the evidence is so voluminous that it cannot be fully replicated here.Fifth, a Government-funded system to provide a social security net and for the health, education and safety of citizens along with an effective infrastructure is a large and major component of economic development and growth. The best illustration of this aspect of economic growth may be the Nordic countries, where sometimes Government employment is so large that it is the major component in the economy and hence the major reason for high economic development. Another aspect of this issue in modern times is the B&RI/OBOR project where Chinese initiative along with local government funding is upgrading road, rail, pipeline and energy production systems at a speed and on a scale not previously possible.There are numerous examples of each of these five principles and only a brief reference to the major use of each principle is mentioned below with the exception of China, which is applying each principle but sometimes not with full effect.3.1 Funding SMEs is the source of the SME inventions transferred to the factory floor and which pave the way to a greater economic future.The nation which has continually funded its SMEs from local Sparkassen banks is Germany, which has through its local public banking system founded SMEs and funded their development on a scale not present elsewhere. Because SMEs are so numerous these organisations in all nations provide not only the major sources of employment and national output but also the inventions and, where funding exists, the transfer-to-the-factory floor innovations which drive the economy forward.Many large transport-vehicle companies often only provide the body shell of the product and are actually the integration plants for tens of thousands of sub-assemblies which go into making the final product.As Werner von Braun observed about the Apollo rocket“There it goes, over 100,000 moving parts, every one built by the lowest bidder, and it all works.”Modern motor vehicles typically contain about 25,000 sub-assemblies while a Boeing 747 is built from over 5 million parts, mainly fixtures.When major manufacturing industries are closed down in the UK, the number of employees lost which is often quoted by the UK Government are the final numbers of caretakers prior to closure and not the maximum numbers of workers employed in the factory at the height of its production. The many larger tens of thousands of jobs lost in the subsidiary-parts producing and the servicing of the once-flourishing company are not usually mentioned, although these are usually by far the major effect.3.2 The Industrial Manufacturing Economy is the major source of Worker Employment and Dispersed Prosperity in All NationsThe manufacturing industries are the major employers of workers when economic miracles occur. The historical data illustrates that up to 45% of workers are gainfully employed in the manufacturing sector during the greatest dominance of these industries. In WCM economies, their manufacturing industries tends to remain in the range from about 30% to 40% of GDP. [If we look at the Tokyo Zone countries where WCM has been adopted and given up, Japan had a 30.1% share of its economic output originated by industry in 2017, while South Korea has 39.3% from that source and Taiwan has 36%. The still-practicing SWM of China has 40.1%. By contrast, the WCM-practising economies of the USA has 19.1% and the pre-Brexit UK has 20.2%.]3.3 An Understanding of No-Cost Investment Credit Creation at the Central Bank has been and is the Indispensable Key to High Economic Growth Throughout The Last Millennia in nearly all high-growth colonies and nations3.3.1 Wang Anshi’s Chinese Economic Miracle And Its Decline Under The MongolsThe Chinese Prime Minister Wang Anshi was the first investment credit economist whose actions created the world’s first industrial economy and welfare state. This is far too large a subject to be adequately dealt with here.See my limited contributions to that immense subject atHow did Wang Anshi contribute to the economic world?and also see regarding the Rise of the Tokyo Zone economies my blog atShimomuran Economics and the Rise of Japan and ChinaAs well as the first half of my article/Answer about the significance of Wang Anshi at George Tait Edwards's answer to What are major Chinese innovations?4 Financially Restrictive Economic Policies by Political “Conservatives” have Produced The End Of Hegemonic Empires during the Last Thousand YearsIt would take too long to provide the extensive references and data supporting this conclusion, but the interested reader is invite to look up and investigateThe Song Empire and its Decline Under The Conservatives After the defeat of the Mongols, no-cost investment credit creation was once again used by the Chinese governments to stimulate and achieve the then-highest level of economic development in the world. The peak period of the dynastic Ming Empire was the great heights achieved by the Yongle Emperor (who ruled from 1402–1424). That Yongle Emperor was a despotic liberal whose cruelty was as notable as his outstanding economic achievements. The Chinese Conservatives through their restrictive financial policies ended Chinese economic ascendancy in the 15th century.The Scottish Industrial Revolution 1700-1800 and its Decline Under The ConservativesThe pre-independence growth of the three Tobacco Slave states (comprised of Virginia, Maryland and North Carolina) was based upon the denominated-in-pounds-of-tobacco promissory notes (or IOUs) of the Tobacco Lords who created vast amounts of circulating credit based upon the stability of tobacco prices (a “specie-backed” alternative currency) and the conversion of these IOUs to goods at the 125 Trading Posts ( or Tobacco Lord Shops) in these three colonies. This is one of the four papers of my PhD research at the University of Southampton so I will say no more about it than I already have.The first century of Scottish Industrial revolution (1900–1800) was based upon the founding of SME-supporting banks in Scotland (from the first Murdoch bank in Scotland in 1730 to the Tobacco-lord establishment of the Ship Bank and the Arms Bank in Glasgow in 1749 and many others) and 88 of the embryo Scottish SMEs were established with Tobacco and Sugar Lord investments derived from the profits of the American and West Indies slave trade plantations. See The Scottish Industrial Revolution, or The Scottish First Industrial Miracle 1700–1800FDR’s Economic Miracle 1938–44 and US Economic Decline After 1980 Under The Republicans - see para 1.1 aboveThe Japanese Economic Miracle and its Decline After It Adopted WCM in 1991 - see How Japan Zoomed From War Devastation into Prosperity 1945–52 and Professor Richard Werner’s book Princes of the Yen5 Conclusions5.1 The Anglo-Centric Legal System is a product of the UK and US Hegemonies and is too culturally embedded in these nations to achieve an international endorsement by all nations. It is culture-specific in its foundation in and references to the West and is not a transcultural legal system and its formation was not based upon all of the major cultures of mankind. It is not effective at solving international disputes.5.2 It is very unlikely that the current international legal system will survive the demise of the UK and US hegemonies because that structure is a product of their culture. A F K Organski and J Kugler, two of the leading lights of the Hegemonic Power Transfer Theory (see the Introduction above) have pointed out that when a hegemonic power transfer occurs, the arrangements that prevailed in the previous era are likely to be changed because although it is possible for these previous patterns to suit the rising hegemonic power, that is unlikely.5.3 The rising nation of China is already creating bilateral currency arrangements with most participants in the B&RI/OBOR programme. That bipartite system seems to be more readily amenable to conflict resolution than any more remote tripartite Western judicial system.5.4 In its own interests and in the best interests of the world, China needs to develop and lead a system for reversing Global Warming. Whether that needs to done within a Chinese-proposed and internationally-agreed alternative legal system is a moot point, but it does seem that a transnational and transcultural legal system might need to be developed to deal more effectively with the acceleration of national growth and the resolution of international conflicts than the Western-based UN and its underfunded institutions (IMF, World Bank, OECD etc) have done.5.5 The most interesting section of the Matsumoto Review of Onuma’s book review is its Section IV Potential solutions. The major issue is the creation of an international legal system which leads to a balanced environment with mankind within it.