Monday, December 22, 2008

Reality bites

Judging from the business and economic news in the mainstream media today, it is apparent that the prospect of economic challenges in Malaysia can no longer be ignored. Bloggers have warned about the economic contraction for some time now.

Lessons for Bank Negara
First, MIER has produced an excellent piece that was carried in The Star. It is an instructive piece that educates us about the hollowness of excessive foreign exchange reserves as a cushion against economic turmoil. I hope the oracular Bank Negara governor is taking notes.

Further interest rate cuts
Second, The Edge Daily reports inter alia that Nor Zahidi of Malaysia Rating Corporation Bhd (MARC) expected the OPR to be trimmed by another 50 basis points before end-2009, and said a more aggressive monetary policy response would be helpful for the economy, considering that the government’s fiscal position is constrained by a relatively high level of budget deficit.

This is what I've been advocating. But, I guess it's more real when MARC says it and The Edge Daily reports it.

FDI plant closures
Third, our so-called Industrial Production Index is very much slanted to the FDIs by virtue of their sheer magnitude. And, FDIs are almost 100% export-driven. Therein lies the fate of Malaysia's export economy - in the hands of the FDIs. I'm too lazy and I don't have the resources to check, but, someone with the government research grants should examine the extent to which Malaysia's export volumes, export values, production indices and so on are based on FDIs and, how much is actually really Malaysian.

We may very well be kidding ourselves if we don't have a transparent measure of the contribution of FDIs to Malaysia's economy. It is no wonder that our human resources are still low-cost and low- to medium-skills based. It is no wonder that the Malaysian government takes such a lackadaisical attitude towards the quality of primary, secondary and tertiary education.

The modus operandi is to get FDIs and more FDIs and everything will sort itself out. Will the FDIs be the panacea or the bane of the Malaysian economy? Let's see about it in 2009. In the mean time, I just want to draw your kind attention to the portents as reported here.

Things to do in 2009
Frankly, I am not impressed with all the talk by the Malaysian government and mainstream economists about stimulus packages and its timing.

The economic contraction in Malaysia is actually an opportunity for the economic managers to seriously revamp the way developmental policies are formulated.

But, I don't have much expectation that our economic managers will take such an attitude. They will keep treating symptoms and completely ignore the opportunity to institute positive change.

They will keep throwing money to prop up the stock market. They will throw money at the property development and construction sector.

What they should do is to:
  • Improve the quality of education at all levels; primary, secondary and, tertiary. Provide greater training of the educators and institute a merit-based promotion for academics.
  • Put more resources into the vocational institutions and technical institutes that train Malaysian workers with higher and higher level skills.
  • Examine the quality of the SMEs and their processes and put resources into assisting the SMEs to improve the way they do business. SMEs are the backbone of the Malaysian economy. We should stop paying so much attention to GLCs, PLCs and FDIs. We need to pay more attention to SMEs. They are the biggest group of employers in the country.
All three matters will NOT help bring the Malaysian economy immediate growth in 2009. But, if these three matters are looked into with great care and, more resources put into these three areas, Malaysia will have a stronger and more robust economic foundation.

They can talk all they want about releasing EPF monies, lending EPF monies, lowering interest rates, deficit spending, stimulus packages and so on.

With the greatest respect, all those are treating symptoms NOT causes. Not that we can do anything about the real cause, a U.S. economy in turmoil...

I leave you to ruminate over this remark made by Greg Mankiw in his blog post, How not to stimulate the economy:

If the government spends a fiscal stimulus package on goods and services without much public value, it could well stimulate the economy as measured by macroeconomic aggregates but leave the participants in the economy worse off. Avoiding this trap requires that the government spend taxpayers dollars only those items that pass a strict cost-benefit test. That is hard to do quickly. Willy-nilly spending is a good way to stimulate the economy only if the outcome is judged by the wrong metric.


satD said...

Bro de minimis

The SRR cut by 50bp as well, look like BNM is back to strategy of 98...

One thing i fear is how can we withdraw back the Deposit Guarantees increased in response to Singapore move....must be done in harmony regionally to avoid capital flight....

Our reserves are much more than the official number per my post before...they have been lending USD into the system for years at least since late for optimum levels, one would like to have enough cushions i think as a safe measure...

Agree with u on doing this more at the second layer i.e SMI's n Enhancing HR Capabilities....

yeah spot on about GDP growth with no real value creation to the Economy. And our "inflation" adjusted number would probably be in negative teritory (by this i mean true inflation not the "official")

Stimulus should be viewed as an investment to propel us futher not chasing absolute short term return, so typical negative returns in early years is me consolidation of resources is key.Do NOT make GOOD after Chase after BAD money into the bailout rabbitholes

satD said...

one more the thing bro

the speed and magnitude of the rate cuts should be monitored more closely going forward as this will be an important signal on a regional/global level to evaluate the state of the "crisis".....

de minimis said...

Bro satD

It is clear that the rate cut is a fairly conventional response to an economic slowdown. Yes, it is a knee-jerk. But it does act as a form of release of liquidity into the system.

The questions are (1)whether banks will lend (they tend to be fair-weather "friends", wanting to lend only to people who don't need to borrow and (2) whether liquidity is of any use given that our economy is quite dependent on exports since export markets are all shrinking. Will rate cuts be effective. I suspect that it may not be so effective.

All govts are using the same playbook. Ours will not be any different. The gameplan seems to be to just throw money at the problem hoping that the problem will sort itself out. But we know it doesn't work that way.

We need a qualitative plan that will yield long-term results.

Commodities was supposed to be an additional facet of our economy. It's gone south.

What we need to focus on is the greatest asset of all, human capital. But the govt planners don't seem to realise or, care about the interconnectedness of things like education, skills training, productivity and local SMEs. Each Ministry seems to be acting independently of the other.

E.g. when Western Digital layoff workers in Sarawak, it's the state govt that complains.

Then we hear the Human Resources Minister mumble some platitudes about protecting workers compensation.

The Minister of International Trade and Industry whose Ministry brought these FDIs in (or so they claim in the good times) is sagely silent.

The Dy Prime Minister merangkap MOF1 then mumbles something about how the Minister of Human Resources is looking into the matter of layoffs.

Not good enough, man.

satD said...

Social Safety Net is missing...people need bailout as well.

Unemployment Insurance is something that government can consider bro....covers u for 12 month salary while trying to get another job.

Structured this in France in 98, we used detail unemployment data of various region/industry to price the product....

Mat Cendana said...

Oh my gosh! What have I been missing!

Sakmongkol AK47 had included your blog among the list that he had recommended for my reading "to get up to speed" a couple of few months ago.

However, I had neglected his advice when it comes to this blog, for a very good reason - I don't like to have a needless headache when reading economic and financial stuff.

I was therefore surprised to discover that ... I actually understand the few economics posts that I had read here! And the ones related to politics are also "extremely sensible and reasonable" - something like what Sakmongkol writes too!!

Well, I've already included the RSS here at the sidebar of my blog.

And I'm also going to download the other posts to my "FeedDemon" RSS reader to store on my harddisk. Have to say that your blog has now become one of the "primary sources" in my own understanding and take on things.

de minimis said...

Mat Cendana

I have been a quiet reader of your blog for some time courtesy of Sak's blog. I am pleased and honoured that you feel that I am worthy of inclusion into your reading list. It makes my day even brighter :D