Economic caveats

The pronouncements emanating from the Economic Council is music to the ears of this blogger. It signals an intention to strengthen the important features of the Malaysian economy at a time when the global economic recession is just beginning to set in. It won't be a smooth ride. The job of the Malaysian economic managers is to keep the economy on as even a keel as possible.

Having set aside some time to ruminate, this blogger is ready to examine the Economic Council's pronouncements a little deeper. The blue sections are extracted from the Star Online report.

The Government-initiated Economic Council is working on a “New Strategy Package” to focus on medium and long-term structural issues affecting the economy.

The government will need to provide more details on this nebulous term structural adjustment which can be taken to include matters such as:

• Cutting social expenditures, also known as austerity,
• Focusing economic output on direct export and resource extraction,
• Devaluation of currencies,
• Trade liberalization, or lifting import and export restrictions,
• Increasing the stability of investment (by supplementing foreign direct investment with the opening of domestic stock markets),
• Balancing budgets and not overspending,
• Removing price controls and state subsidies,
• Privatization, or divestiture of all or part of state-owned enterprises,
• Enhancing the rights of foreign investors vis-a-vis national laws,
• Improving governance and fighting corruption.

As you can see, the phrase structural adjustment can mean any or, all of the above and more. Let's have some more details as soon as possible, please.

Minister in the Prime Minister’s Department Tan Sri Amirsham Aziz said the council would identify constraints on the economy and re-look at development strategies. “These measures include attracting more foreign direct investments from high-surplus countries, stimulating domestic investment, taking advantage of China’s and India’s growth, promotion of tourism and construction activities.

First, attracting FDIs is the conventional wisdom for generating economic growth. To-date, FDIs in Malaysia have exhibited an interest in Malaysia as a relatively competitive venue for semi-skilled labour. Malaysia is quite far away from being a high-skilled labour venue despite over a decade of government talk about building knowledge capital. As this blog has said over and over again, the starting point is primary and secondary education. Without a strong foundation in the technical subjects of Science and Maths taught in the English language, the pipeline carries only low-quality products that are good only for low-skills and semi-skilled labour.

Second, domestic investment can be stimulated by lowering the lending rates, something that the Bank Negara is expected to do, perhaps by 50 basis points resulting in a 0.5% reduction in lending rates. The caveat I offer is that domestic investment depends on domestic and export demand and consumption. The SMEs will not invest unless there is demand. So, stimulating demand is also on the cards. This is not a quantitative game of pouring money into the economy from the supply-side and demand-side and, expecting stimulation. Rather, it is a qualitative game of identifying the sectors of the economy that has genuine multiplier effect. I can tell you that the property sector isn't the correct place to suntik modal...the multiplier effect of that sector is dodgy. But, let's leave that for another blog post.

Third, tourism is a no-brainer. It's already the third largest contributor to Malaysia's GDP. Tourism has genuine multiplier effects on the economy. But, there are so many structural problems in the Malaysian tourism sector. Public toilets need to be even cleaner. Taxi services are still appalling. Public transportation, in general, is very badly connected from one sector to another...and, yes, it affects tourism because many, many tourists like to move around by themselves.

Finally, construction is a nebulous term. Construction for infrastructure must also be qualitative not, quantitative. More money needs to be given to local councils to repair infrastructure. The Second Penang Bridge needs to get going even faster. But, tenders must be kept open. The days of negotiated tenders are over.

Amirsham said the country needed to rely less on low-skilled foreign workers and step up human capital development to move up the value chain.

“We have plans to reduce reliance on low-skilled foreign workers in the construction, manufacturing and services sectors to 300,000 from the current 600,000 over the next two years,” he said.

Well, if you've read earlier entries in this blog, you will know how well-received these words must be to this blogger. The Minister needs to quickly unveil the plans. And, this blogger is very, very curious about how the low-skilled foreign workers that are mostly involved in the construction and plantation sectors will be replaced by Malaysian workers. The key factor to facilitate the shift from foreign workers to locals must lie in the wages. Will there be a national minimum wage policy. RM1,300 to RM1,500 is a good range to start with.

And, as for human capital development and moving up the value chain, the starting point, just to reiterate, must be in the education system. No solid Mathematics, Science and English grounding and we may as well file the Minister's words as pure rhetoric.

Economic Planning Unit director-general Tan Sri Dr Sulaiman Mahbob said the reforms being looked at included liberalisation of business and professional services, a high-income policy and flexibility in employment of foreign experts.

My position on liberalisation is quite strongly made earlier. However, I am in a generous mood this morning. I am now prepared to agree with liberalisation. To Hell with the consequences. Maybe Malaysian professionals need a swift kick in the backside to get going. So, bye-bye low-skilled foreign workers, welcome skilled foreign professionals. Maybe the unemployable local graduates can be re-trained by the foreign skilled professionals or, replace the low-skilled foreign workers in the construction and plantation sector....why not?

He (Sulaiman Mahbob) said measures to promote entrepreneurship included reviewing rules and regulations pertaining to the Foreign Investment Committee.

The FIC rules are a protectionist disincentive to Malaysia's competitiveness in attracting FDIs. With the rise of Vietnam, Malaysia's past attractiveness is fast losing its allure. Like a narcissistic ageing Hollywood actress, Malaysia badly needs elective surgery to get a facelift and various augmentations. Eliminating the 30% Bumiputra equity in more and more industrial and manufacturing enterprises is long overdue. But, I want to warn Pemudah that talk is cheap. From experience, we hear all these pronouncements. But the FIC administration has a mind of its own. It will still issue conditional approvals with a 30% Bumiputra equity. Wanna bet? And, they wonder why investors complain...

He said for long-term sustainability, there was a need to broaden and raise the efficiency of revenue collection, review subsidies and accelerate the implementation of projects.

Efficiency of revenue collection is one thing. But, it is very strange that the Inland Revenue has revenue collection targets. It's a scary thought that a revenue collection body behaves like a sales and marketing entity. And, if you know the income tax laws, you will know that the principle is pay first, talk later. I believe that the revenue collectors must be taught some sensitivity to the likelihood that they may be one key factor in dampening the investment climate by treating taxpayers in their usual roughshod manner. The last time I checked, the Income Tax Act and Customs Act were classified as economic regulations, not penal codes.

“Moving forward, we’ll promote projects with higher domestic content, less leakage and higher returns while looking at the efficiency of expenditure,” Sulaiman said.

This awareness is necessary. But, again, the economic managers have to identify the areas where Malaysian SMEs can be assisted to enter into the higher value-added sectors that produce the components are currently being imported. This will plug the leakages from the economy.

On human capital development, he (Sulaiman Mahbob) said there would be a review of the wage structure.

“Measures include strengthening skills training and retraining, firming up collaboration between industry and universities as well as raising productivity,” he added.

Review of the wage structure. Is that a reference to the national minimum wage policy that I touched on above? The are many salutary effects to having a minimum wage policy. But the major caveat is that minimum wages MUST come together with higher productivity. This is the challenge for all stakeholders in the Malaysian economy.