Economic fundamentals

Let's dive straight in, shall we?

First example, the Star Online report on August 12, Malaysia’s economy is experiencing severe external pressures but it is doing quite well in terms of the economic fundamentals, Datuk Seri Abdullah Ahmad Badawi said. This was said when the PM chaired the inaugural meeting of the Economic Council. I wonder what has happened to that august body of eminent persons and what they have to say about the state of the Malaysian economy?

Second example, the Star Online report on October 1, Malaysia’s economy has the capacity to weather the destabilising consequences of developments in the US economy and international financial markets, said Deputy Prime Minister Datuk Seri Najib Tun Razak. He said the country’s economic fundamentals were strong and that Malaysia’s international reserves were high at US$119bil (RM410bil), with a large current account surplus.

Third example, Time online article this week, John McCain's claim that "the fundamentals of our economy are strong," uttered just before the financial crisis turned dire, may go down as one of the great blunders of presidential-campaign history. "Senator McCain, what economy are you talking about?" Barack Obama exclaimed hours after the words escaped his opponent's mouth. The mocking TV ads soon followed, and as the weeks wore on and financial jitters gave way to near collapse and certain recession, McCain's statement began to evoke unsettling memories of Herbert Hoover, who said similar things in the early 1930s.

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I also heard the Minister of International Trade and Industry, Tan Sri Muhyiddin Yassin say something to the effect that Malaysia's economic fundamentals were strong, on TV recently.

What economic fundamentals really should mean

Time's Justin Fox explains economic fundamentals in this way:

When economists talk about such matters (as economic fundamentals), they focus on the concept of productivity. "Productivity growth," wrote economist (and now Nobel laureate and NewYork Times columnist) Paul Krugman back in 1990, "is the single most important factor affecting our economic well-being." It was growth in productivity — most commonly measured as economic output per hour worked — during the Industrial Revolution that powered the rise of the West out of millenniums of stagnation. It was a productivity boom that ushered in America's postwar era of mass affluence.

And it was a lengthy productivity slump beginning in the early 1970s that created concern among economists such as Krugman. Low productivity growth explained much of what had gone wrong with the U.S. economy: stagnant wages, high inflation, ground lost to Japan. But what caused it? The most convincing explanation came from Northwestern University's Robert J. Gordon. In the early and mid-20th century, he argued, the U.S. benefited from a spectacular confluence of technological innovation involving electricity, the internal combustion engine, petrochemicals and communications. By the 1970s the economic impact of innovation in these fields had waned, and nothing came along to replace it.

Until the mid-'90s, that is, when productivity growth rebounded, from about 1.5% a year to more than 2.5%. The engine apparently was the rise of the computer and the Internet. And the boom continued even after the technology bust of 2001. In 2006-07, productivity growth slumped to pre-1995 levels, before rebounding somewhat in the first half of this year. But year-to-year numbers can be confusingly noisy; it's the trend that matters.

Okay, next assignment. What is Malaysia's current productivity levels and, what is the projected productivity level for 2009? Anyone? Walla, can you help me out here?