Friday, October 31, 2008

Why (Malaysia) needs an economic strategy

Actually I just want to refer you to the longish piece written by Michael E. Porter, a Professor in the Harvard Business School that focuses on competitiveness issues. The title of his essay, reported in Businessweek is, Why America Needs An Economic Strategy.

In a broad sense, you can read the essay with occasional interpositioning of Malaysia instead of U.S. just to make the read more interesting.

UPDATE Nov. 2: Courtesy of walla, further references are a snapshot of Porter's Diamond Model and slides from his 2003 paper on Malaysia's Competitiveness: Moving to the Next Stage, where Porter introduced us to the concept of clustering and elements of the process that is commonly called the supply chain.

And, don't ignore the many, many, many underlying value-laden terms used by Porter like competitiveness and, labour productivity. This was probably another international seminar that Malaysia's economic managers attended and all they heard was "clusters" and the imagined call by Porter to "build more venues for FDIs".

The economic planners completely side-stepped the issue of productivity growth that Porter was highlighting. Maybe Malaysia's economic managers don't understand what productivity means, which should make everyone wonder what the Malaysian Productivity Council (MPC) has been doing all this time and, what the MPC has done with its funding?

The ineffectiveness of Malaysian economic programmes that focus only on venue-providing comes from the failure, refusal and ignorance of the economic planners to even attempt to understand many of the underlying assumptions that all consultants and advisors use in the course of submitting an advice. It is no wonder that we are left with many white elephants like the Port Klang Free Zone (PKFZ). The focus was on acquiring land and building infrastructure and buildings. Once those deals are completed and all parties duly paid, there is zero regard for how the place is to be managed and operated. The Malaysian economic development motto seems to be: Build lots of hardware, ignore the software.

Ong Ka Chuan's supply-side economics

The Minister of Housing and Local Government, who has a Bachelor of Arts degree in Literature from University Malaya, is reported to have made the call that housing developers should launch their projects now that fuel prices and the cost of building materials have dropped.

He said that over the past six months many projects had been stalled by the rising cost of building materials. He has pointed out an average of 100,000 homes were built each year, but as of October, only half that number had been delivered. He also said that Malaysia always needs the sale of houses to generate economic activity saying that every house has 140 components, so if the developers stop building, then this also affects the factories producing the building materials.

That is clearly supply-side thinking. Is that going to work?

Fortunately, there is clear evidence that the private sector are rational players. There are clear indications that the private property development sector are not foolish enough to heed the Minister's naive statement.
Evidence of this rational realism comes in the form of the International Real Estate Federation (FIABCI) Malaysia president Datuk Richard Fong's reported observation that some real estate agencies in Penang had started to bring in groups of foreign tourists under a “property” tourism package that included visits to property launches and show houses.

FIABCI has suggested that Malaysia should promote “property” tourism to bring in foreign direct investment that would benefit not only the economy but also the retail industry. The idea, is to encourage these tourists to buy local property. As these visitors also shopped and stayed at hotels, their visits had benefited the hotel and retail industry.

Whether this strategy works effectively or not, it is sensible thinking.

Domestic consumption trends
As if to underline the weaker sentiment in the softening demand in Malaysia's property sector, a recent poll report by Synovate Research points towards the recent phenomenon where more than half of Malaysians have reduced “impulse” purchases and postponed major life decisions. Malaysians are delaying getting married, having children, moving house, changing jobs or furthering their education due to the current downbeat economic conditions. Despite this weaker consumption sentiment, 45% of the Malaysians surveyed were optimistic that the weak economy would improve soon while only 22% thought the economy was going downhill and that the domestic economy would worsen before it recovers.

Now that's not a bad statistic for the Malaysian economic managers to work on.

Muhiyiddin learns his lesson
In an earlier blog post entitled, The dreaded "R" word, I had panned the Minister of International Trade and Industry's glib and throwaway remarks about not fearing declining exports to the US, Europe and Japan since Malaysia had other trading partners.

It is heartening to see that the Minister has now demonstrated more respect for the Malaysian public being reported as saying, Obviously what we need to do is to take pre-emptive steps at this stage so that the impact will not be too negative to the extent of lowering export figures. Significantly, the Minister also said that it was critical to say what the impact would be on Malaysia's projected 7% export growth for 2009. The Minister also said the Government would gather feedback on the orders for export from exporters and manufacturers after which the impact on individual sectors like electronic, pharmaceutical, petroluem, metal, metal-based, wood, and wood-based would be analysed.

Now that's more like it.

Dissonance in understanding the policy approaches to economic management
Frankly, all political leaders, especially members of the Malaysian Cabinet needs a solid grounding in economics and economic policy. Then, they need to be given a solid grounding in modern governance.

For one thing, the Minister of Housing and Local Government needs to understand that supply-side economics doesn't work in an environment of weak consumer demand. If his call is taken literally, there will be another huge property inventory overhang...again! I don;t think we've even cleared the property inventory overhang from 1998. You can ask the people at Jabatan Perumahan Negara, if you can stop them snickering at the Menteri's statement.

Another thing that arises from FIABCI's suggestion is that the Minstry of Housing and Local Government needs to work with the Ministry of Tourism to discuss the FIABCI suggestion and assist the industry players.

Both Ministries, then, need to also earnestly hold discussions with the state governments, especially in Penang, Selangor and Johor where most of the property inventory exists. The fact that Penang and Selangor are Pakatan Rakyat states is completely irrelevant in the context of Malaysia's economic health. Maybe it's wishful thinking. Maybe we have to wait until there is a real recession in Malaysia before such bipartisan approaches can be worked out. Silly. Stupid.
Raja Nazrin
It is apposite to end with Perak Regent Raja Dr Nazrin Shah's advocacy of the principle of inclusiveness in tackling challenges, arguing against formulating policies, laws and regulations on a discriminatory basis and in an ethical vacuum.

He said, No segment of society must be disrespected, discredited and disenfranchised. No group should feel that their efforts and contributions go unrecognised and unwanted.

Bringing this about is one of the greatest challenges of governance today.

We must abandon the ‘silo’ mentality where we only look up at what is happening and not beside us at what others are experiencing. Diversity is only strength if the unity of the whole, and not the differences, are being emphasised.

Thursday, October 30, 2008

Maybank and the Mark-to-market Rule

The Star Online report on the travails of Maybank's corporate indigestion over its acquisition of PT Bank Internasional Indonesia (BII) first announced in March and, a 20% stake in MCB Bank of Pakistan announced in May leads in to the topic of my interest today.

It is about the mark-to-market accounting rule contained in what is known globally as International Accounting Standard (IAS) 39 or, in Malaysia as Financial Reporting Standard (FRS) 139. What is that, you ask?

FRS 139 is an accounting standard that requires companies or banks to adopt fair value accounting in valuing financial instruments in their books. I stand to be corrected, but, as I understand it, FRS 139 requires company auditors to use the prevailing market price of equities and instruments owned by companies or banks as the true and fair value of those assets.

At the moment, the controversial mark to market ruling in relation to accounting principles is confined to the financial sector.

But come Jan 1, 2010, the ruling will apply to all industries across the Malaysian economy, from finance and plantations to construction.

On that day, all listed companies in Malaysia will have to comply with the FRS 139. The Malaysian Accounting Board of Standards (MASB) is reported on October 13, to have finally given an ultimatum on the date of its implementation after deferring it to enable companies to get ready for the much-talked-about standard.

Maybank's risk of impairment losses
The Star Online's report goes on to say, In a sense, the acquisitions have become casualties of circumstances as global asset prices plummeted further in the last couple of months.

Maybank’s investments in the two countries are sizeable. It has spent RM5.5bil for a 71.86% stake in BII and a mandatory general offer for the rest of the shares would probably draw all minority shareholders to accept. Maybank’s offer, which closes on Nov 19, is 510 rupiah a share compared with BII’s price of 455 rupiah yesterday, which would probably have been much lower if not for the offer.

Full acceptance to the offer would cost Maybank an additional RM2.4bil for the balance of 28.14% of BII. Its cost would then be about RM7.9bil for the whole of BII.

Maybank’s purchase of a 20% stake in MCB Bank for a total of RM2.87bil was completed in August. Its cost was about 470 rupees a share compared with MCB’s price of 235.75 rupees yesterday. In total, Maybank would have spent about RM10.8bil cash for its investments in the two banks.

The FRS 139 mark-to-market rule will require Maybank to state the investment value based on the current market values and prices as at the date when it closes its accounts in each quarter. This is where the impaired value of the BII and MCB Bank investments will send Maybank's board of directors running for cover and, when shareholders, analysts and the general Malaysian public go super-ballistic.

A perspective: Defer the mark-to-market rule
Let's leave the Maybank investment saga for the other hyenas to devour. I'm more interested in looking at the bigger picture about FRS 139.

MASB's members are quoted as saying that the need to establish the IFRS framework is imperative to ensure Malaysia is not left out of the globalisation wave, especially since more than 100 countries are converging or have converged with it.

Let's pause here for a bit. Let's wear our Malaysian hat instead of the globalisation hat. Let's be a bit nationalistic and look at what's best for Malaysia now.

If you've read the various posts in this blog and many in the blog list, it is quite evident that Malaysia is not immune to the economic turmoil that is now threatening to spill over from the Malaysian capital market into the real economy.

In this context, would it not be a wiser strategy for MOF1 or MOF2 to pick up the telephone to call MASB's chairman Datuk Zainal Abidin Putih and MASB to defer the application of FRS 139.

The forex market is behaving irrationally. The capital market is behaving irrationally. In the US, Europe and Australia, the financial markets are behaving irrationally.

So, what would the mark to market rule be marking the values at? Obviously depressed prices. Is that a true and fair valuation? I don't think so.

Do you think I'm being absurdly out-of-the-box again?

A further perspective: US defers the mark-to-market rule
In the wake of the Wall Street financial and market turmoil, it has been alleged that the mark-to-market rule played (and, is playing) a significant role in the crisis.

Whether this is true or not is difficult to conclusively prove. Certainly the proximity of the mark-to-market rule (called FAS 157 in the US) going into effect and the credit crisis made the US regulators suspicious. And logically it appears that the mark-to-market rule could have a deleterious effect on Wall Street's sentiments.

To be more specific, Section 132 of the US Emergency Economic Stabilization Act of 2008, titled Authority to Suspend Mark-to-Market Accounting restates the Securities and Exchange Commission (SEC)’s authority to suspend the application of the mark-to-market rule if the SEC determines that it is in the public interest and protects investors.

Furthermore, Section 133 of the Act, titled Study on Mark-to-Market Accounting, requires the SEC, in consultation with the Federal Reserve Board and the Department of the Treasury, to conduct a study on mark-to-market accounting standards as provided in FAS 157, including its effects on balance sheets, impact on the quality of financial information, and other matters, and to report to Congress within 90 days on its findings.

The US Emergency Economic Stabilization Act of 2008 was passed, and signed into law on October 3, 2008.

On September 30, 2008, the SEC and the FASB issued a joint clarification regarding the implementation of fair value accounting in cases where a market is disorderly or inactive.

This guidance clarified that forced liquidations are not indicative of fair value, as this is not an orderly transaction.

Further, it clarified that estimates of fair value can be made using the expected cash flows from such instruments owned by the financial institutions, provided that the estimates reflect adjustments that a willing buyer would make, such as adjustments for default and liquidity risks.

My message is:
Put Malaysia first, globalisation second.

10 Principles to repair the Malaysian economy

Blogger etheorist's most recent posting entitled, How To Repair the Malaysian Economy is very pertinent and instructive. It is a clear and concise exposition on the ten key principles that Malaysians, particularly the political leaders and economic managers, should have in mind NOW instead of waiting for the coming years when Malaysia's oil spigots inevitably runs dry. I am reproducing the posting in full here. It is, indeed, worthy of your attention.

When the dust settles, what would we see?

An OECD paralysed, with a financial system staying barely afloat.

China may use the opportunity to refocus growth from foreign-owned export industries to local-owned domestic-oriented firms especially in major inland cities. There will be oppportunities for investors outside China to produce quality inputs for Chinese industries.

What will happen in the Malaysia economy? What must be done to repair the Malaysian economy?

The traditional Malaysian society and economy that we all have grown up in have been drastically changed - some would say destroyed.

We are no more Malays, Chinese, Indians and native Sarawakians and Sabahans.

Malaysia is now a mixture of billionaires, foreign workers, a whole bunch of speculators in shares and real estate, and consultants to government departments and GLCs.

We are all in for the quick gain. As opportunities for windfall gains evaporates as the oil money runs out, we are all assassinating politicians for being empty handed.

First, beef up internal security to prepare for a spate of recession-induced crimes in the street.

Second, repartriate low-wage foreign workers. They are the ones that keep wages low and inhibit the use of technology in the economy - including construction.

Third, focus on investments - for exports to China. Malaysians should try to hire local professionals of all races. It is far better than attracting foreign investors to hire local professionals of all races.

Fourth, Malaysians should close ranks to work on putting together the fragmented economy (and the fragmented institutions). The divisive politics has destroyed the economy, and we do not need any 80-year olds to paddle us old-fashioned ideologies. For goodness' sake, we are in a globalised world - and what race are we talking about or are we really talking about power, monopoly, disgraceful wealth and opulence on the backs of those who toil.

Fifth, create a Third Force - the Liberals who care for the creation and spreading of economic opportunities throughout the whole society regardless of race or religion. We should take all key issues in Malaysia including the NEP-type and work out effective and transparent ways of balancing out wealth distribution, instead of the very crude old-fashioned quotas and licenses. There should be price-incentives to induce productivity gains and market-based wealth creation.

Sixth, sit down and do some proper political and economic analyses and publish them in peer-reviewed journals, even if of local origin. We have too much of foreign models using local data, and not enough original local thinking taking into account local conditions.

Seventh, we should take the Minister of Finance portfolio away from the PM and the DPM and give it back to the Minister of Finance. The PM should concentrate on national harmony and the DPM on internal security. The Minister of Finance on government spending and finance. The Central Bank on fighting inflation and financial speculation. Let the private sector a free hand to undertake investment. Remove politics from investment decisions.

Eighth, we have enough infrastructure to last another generation. We have expanded the aggregate supply curve. Let us work to use the infrastructure efficiently. Move the aggregate demand curve.

Ninth, reinstate the role of professionals in the economy. Remove politically-oreinted managers from public places.

Tenth, reinstate the role of markets in the economy with price movements doing the resource allocation. Let the people work, sweat, earn and keep. .

Wednesday, October 29, 2008

Walla on Malaysia's future economic challenges

I present the very considered and thought-laden commentary made by a wonderfully constructive regular commentator who goes by the call-sign, walla. It is a thought-provoking piece that challenges our minds to consider new frontiers of uncharted economic strategies for Malaysia. Read on.

The blogger has written an important and meaty post. Let's amplify on it:

1)After a whirlwind tour of Southeast Asia, Deng went back to launch China's promarket reforms in 1978 that within thirty years put her right up the world charts in almost all fields. In fact Deng started it all by opening up Shenzhen first. Only a few years later, Mahathir stood with him atop one of the spanking new towers in that city and marveled at the rapid transformation of that city from sleepy fishing village to thriving centre of an industrial metropolis evidential of the region state concept mooted by Ohmae way back in 1993. What happened in Shenzhen was replicated in thousands of other places all over the eastern half of that monumentally huge nation.

If we are to revive our own economic transformation, we need someone right away with the same slapdash courage and pragmatic vision of a Deng. Looking at the present pool of political leaders in our midsts, that'd however be asking too much - a leader who will use any cat to catch rats and who will shake people from their dogmatic slumbers and awaken them in no uncertain terms to the peril at our doorstep.

2)Success tends to bring its own failure. In the past we were successful in attracting FDIs, particularly from the japanese who came because of our look-east policy. We thought it was because we made them welcome that they came, not seeing that they came because of their flying-geeze formation - indeed we were used because our address enabled them to circumvent the quota to restrict japanese goods that had avalanched into the US directly from Japan then.

Because they saw us as just a place for wire-harness making, aircond assembling, metal stamping and the like, the net between value of semifinished goods imported and value of final finished products reexported was often just enough to pay for the wages of the thousands of starry-eyed low-cost labor those factories deployed. Much less if you consider how much tax-free incentives we had also given them and the multinationals from other countries.

You know that Miti knew this from the way it tried to hide the figures - just by using approved projects to equate as landed projects year after year, when the true state of matters is actually less encouraging.

When the japs finally left, their last word of warning was to ask us what we have been doing to build our human capital all those years they were here.

Which might as well be the answer to the MDC for why they have not come in the same droves as envisaged for the MSC, our epitome of value-added high-worth knowledge capital.

In other words, we have been in complete denial regarding the type of human capital that is invariably needed to continue to attract the best-of-breed FDIs needed to add values to our GDP that will make us remarkable amongst emerging nations as a preferred profit centre in a galaxy of other profit centres to which those coldeyed MNCs can park.

If Singapore, Shenzhen, Hong Kong and Mumbai had done it with less, why didn't we?

3) Now we are caught. We are caught in the lacuna of:

3-1 the three trends mentioned in the businessweek article that has weakened the global FDI flow; in a strong position, we could coast through it, but in a weakened position as attractor of those with real manufacturing prowess, we will probably tank; and

3-2 the hollowing out of our position - right now we are neither an Indonesia or Vietnam to be low-cost again, and not yet able to ascend to a Singapore or Korea to be high-value; we are probably sliding to be another Thailand for brown goods if not a Philippines for services, and

3-3 we haven't been sterling in our international reputation in many regards lately.

So while we are having those problems, we have a federal government shaky at best and faced with a humungous financial challenge to try and make its new budget work when its estimated sources of income have all been decimated, and one of them will have to depend on foreign oilfields for revenue when foreign governments would naturally see their assets as too much their own life-savers to want to give highly profitable terms.

And the old man had to come out and talk about the NEP. One wonders whether he really knows what investors think of that term as much as it has been denied the targets of the NEP had already been reached long ago - if one believes those who process the data.

What can be next, it may be asked?

a) find that Deng;

b) adopt the Hong Kong model;

c) work to reamalgamate Singapore;

d) unsentimentally change the entire paradigm of our education policy for best fit to international requirements based on Malaysia as a region state of preferred choice;

e) make this whole country the sassiest, most open and funniest place to be in the world;

f) emphasize cost efficiency in everything we do, even the way we think;

g) educate and rehabilitate those who object just because they want to maintain their comfort zones or fear-borne supremacy;

h) create a new rationalisation:

"if everyone or enterprise is fully supported by the government in accordance with his or its ability to do the best and make the most, then that will ultimately create more opportunities for others to also benefit more in the long-run than any benefit that comes out of playing zerosum games on the races."

And i think the fastest way to fulfill all this is to adopt (b) first. Let it create the new engine to pull everyone up. Or push those to excel. Either way, if we don't, we will perish so one might as well perish while trying rather than sit, wait, hope and pray.

Let's say we don't. The govt will soon be shaving its budget. Which means a lot of development will be jettisoned when they are needed to keep industries afloat. And if Singapore retrenches those 70,0000-100,000 malaysians, we will have an abnormal human resource sector of too many chasing too few viable jobs because all the others have to be filled by those foreign workers whose lower wages are what makes our export products still competitive. So what does the govt expect these retrenched workers to live - on their savings, perhaps on the aid that the govt has to give from its already red budget that has still to work out for those thousands of new graduates who will be coming out of our paper mills by May next year.

There are so many whammies here it feels like being knocked out in a boxing ring, doesn't it?

Did i hear someone in the back say 'we will still survive; somehow we will muddle through as we have done before....'?

Of course we will, but for one, we need to make tourism really efficient - read the complaint about the TDC customer service at one northern airport; understand why travel agents are complaining that Chinese tourists are made to spend too little time here owing to the way their itinerary has been structured to favour one neighbour..and so on.

Of course we will, but for two, remember those free trade zones in another country have been overbuilt to the extent they are ready for fast move-in and each of those industrial hubs are at least ten times in size and more modern and infrastructurally connected than the six we have that can still be called free trade zones for the amount of kinetic energy one must try to imagine they still have.

Of course we will, but for three, we should be discarding buddy-networks to keep some existing assets alive and building better place seaports and airports to take advantage of the fact that the new locus of the world is Asia, to be specific east Asia. That means the eastern seaboard of West Malaysia, and the two states in East Malaysia.

A future without oil money

Today, oil money, courtesy of Petronas, constitutes 44 per cent of Federal government revenue. Oil revenues is the single largest contributor to the GDP of Malaysia.

We are all aware that world oil prices have declined to less than half of its high-point of USD145 per barrel. We are also aware that the Malaysian government used US$125 per barrel of oil as its benchmark price for the 2009 Budget to estimate the revenue it assumed it would earn.

Clearly, Malaysia's economic managers are now forced to recalculate the 2009 Budget assumptions. The deferment of the Eurocopter deal is the most high-profile response to the expected decline in Federal government revenue. We can expect more of such measures come November 4, when Najib as MOF1, takes to the floor of the Parliament.

But, this is the immediate future. We should be even more concerned about the near-distant future.

In the not-too-distant future of, say, 2012 or 2014, Malaysia's oil spigots are expected to run dry. What does this mean for a Malaysian nation that has enjoyed the oil largesse since 1974? If oil revenues constitute 44% of the Federal government revenues in 2008, wouldn't that mean that Federal government revenues will decline significantly, even if Petronas has oil revenues from non-Malaysian sources?

This is a real spectre that all Malaysians need to accept in the next four to six years.
Strategies to deal with an oil-less future
I believe that when Najib spoke of liberalising elements of the NEP, he has been adequately briefed to be fully aware of an oil-less future for Malaysia. In a sense, looking at ways to liberalise elements of the NEP is the pragmatic and, highly necessary, strategic and tactical view.

I believe that the effect of the mooted NEP liberalisation is directed at foreign direct investment (FDIs). The Malaysian government needs to highlight the highly liberal and decentralised FDI strategies of competitor countries like China. The autonomous economic zones stretching from the Pearl River delta to Shanghai did not become the factory of the world by accident. In the 1990s, Beijing empowered provincial governments with very wide discretion even on equity structures and land ownership for FDIs. This strategy was highlighted by Kenichi Ohmae to be one of the key success factors for coastal China's economic leap. Our economic managers may have this in mind.

Key elements of the Malaysian economy
In a future where oil revenues as a contributor to the Federal government has declined, Malaysia's economic growth drivers will, more so than ever, have to come from:

1. Industrial-manufacturing base.

2. Primary industries such as palm oil and rubber.

3. Tourism.

4. Services sector, encompassing banking and finance, especially Islamic finance will become even more prominent since Kuala Lumpur is already recognised as a centre for Islamic banking. But, do not, for one moment, forget that Singapore is already equally recognised as a center for Islamic banking. That's competition for you.

One of the key routes that all nations take to foster economic growth, Malaysia being no exception, is the search for good quality FDIs. That was the idea that drove the numerous Economic Corridors under the Badawi Administration. But, as I have previously stated in earlier blog posts, at Malaysia's present stage of development, such Corridors are no more than mere venue-providing and construction opportunities for a select few. Underlining such an approach is the ready supply of cheap labour for low-skill assembly, soldering and packaging.

Industrial-manufacturing activity
Let's face it. Most of Malaysia's E&E (electrical and electronics) exports are generated by FDIs. While the Ministry of International Trade and Industry has crowed about this sector for years and years, the truth is that Malaysia is only a venue provider and a supplier of cheap labour. The FDIs can uproot themselves at any time. I saw with my own eyes how, despite having spent ten years in Malaysia, the giant US toy manufacturer, Mattel, uprooted itself from the North Port, Port Klang area within months to relocate in Indonesia. It paid all severance and retrenchment benefits and left. We are a mere budgetary item for the multinational companies (MNCs).
That leaves us with surgical gloves and furniture. In the case of furniture, Malaysia suffers from poor industrial design or, even the lack of it. As I said in a previous post, industrial design is a key value chain element. But, we are short of it. It is a skill that can be learnt. But is our education system churning out the correct type of skill sets?

Primary industries
Let's look at rubber. Natural rubber, as far as I'm aware, has certain unique properties that makes it the only shock absorption material for heavy loads such as bridge spans. Natural rubber has properties that maintain its quality in high-performance tyres that are put in punishing conditions such as Formula One racing cars, aircraft and, even the Moon Rover. Synthetic rubber falls apart under extreme conditions.
But, what happened to Dunlop tyres owned by Sime Darby once upon a time? Non-rubber producing countries have global brands like Michelin, Goodyear, Silverstone and, even the Korean Kookmin. What happened? Dunno. We only tap rubber, smoke them into SMRs and sell them semi-processed.
Let's look at palm oil. Extract the palm oil and it becomes crude palm oil (CPO). Add additional processes and it becomes oleochemicals. Then it can be processed into margarine, soap and cooking oil. Wonderful.

The only problem is, all the world wants is palm oil in CPO form. The oleochemical part is usually done in the importer countries. It is a prime candidate for import substitution industries in the importer countries.

By the way, most of Malaysia's palm oil based soap brands are non-Malaysian. Owned by the Japanese-owned Kao or, the US-owned Procter & Gamble or, the European-owned Unilever.

This is one possible bright, shining star. But we need to clean the public toilets and, get the taxi drivers not to over-charge.
Education is a key factor
Seriously, Malaysia needs to move up the value chain. Dr M mystically describes this as making Malaysia a high cost centre. By high cost, Dr M means moving up the value chain.

There seems to be a disconnect in the minds of the Minister of Education(MOE), the Minister of International Trade and Industry(MITI) and the Minister of Finance(MOF). Let me help to connect the dots.

To move up the value chain, we must start with Primary and Secondary education. Two key elements are needed:

1. English language proficiency is crucial. Teaching Mathematics and Science in the English language is crucial. This will allow Malaysians to be assimilated into the modern world of knowledge and, into the modern economy.

2. More resources must be put into training teachers to become more proficient in English. The current crop of teachers come from a 100% Bahasa Malaysia medium. Forget about investing in ICT, computer labs and all that nonsense. We need software NOT hardware.

After the Secondary education level, Malaysians must have the option of going to vocational schools to learn mid-level technical skills or, pursue tertiary or high-level skills at the universities. Here, a sound command of the English language will be a significant advantage.
Why is it so difficult for MOE, MITI and MOF to take this holistic view and jointly tell the Malay, Chinese and Indian tribes that teaching English in Mathematics and Science secures the future of their children and, advances the economy of Malaysia by ensuring that their children will get higher pay due to higher skills?

Employment and entrepreneuring
With higher skills, Malaysia will move up the value chain to become the high cost centre that Dr M spoke of. This means higher incomes and more high-level jobs for Malaysians.

It can be jobs from the FDIs. It can be jobs from Malaysian SMEs that produce components such as solar cells and, possibly, nanobots.

In a future without oil money, money can only come from our brains. And, if Malaysian brains are not properly prepared, the shock of becoming poor or, less rich can be a dangerous threat to social stability and national security.

Tuesday, October 28, 2008

Leadership lesson from Obama

This passage from an essay written by Joe Klein in Time was resonant. In my opinion, this piece, read in its entirety, describes the key reason why the Americans should vote for Obama, particularly in relation to the economic turmoil and the Iraq war. Obama has demonstrable instincts as a true leader. He is measured and considered in his thoughts, words and deed. This extract does not do justice to Joe Klein's piece which should be read in its entirety. Malaysia's political leaders of every shade should read it for its description of how to behave as a leader. But, as a teaser, I give you this extract. I have highlighted the pertinent lines that resonated with me. Read the full essay here.

I asked Obama about gut decisions, in an interview on his plane 17 days before the election. It was late on a Saturday night, and he looked pretty tired, riddled with gray hair and not nearly as young as when I'd first met him four years earlier. He had drawn 175,000 people to two events in Missouri that day, larger crowds than I'd ever seen at a campaign event, and he would be endorsed by Colin Powell the next morning.

He seemed as relaxed as ever, though, unfazed by the hoopla or the imminence of the election. Our conversation was informal but intense. He seemed to be thinking in my presence, rather than just reciting talking points, and it took him some time to think through my question about gut decisions.

He said the first really big one was how to react when incendiary videos of the Rev. Jeremiah Wright's black-nationalist sermons surfaced last spring. "The decision to make it big as opposed to make it small," Obama said of the landmark speech on race relations he delivered in Philadelphia. "My gut was telling me that this was a teachable moment and that if I tried to do the usual political damage control instead of talking to the American people like ... they were adults and could understand the complexities of race, I would be not only doing damage to the campaign but missing an important opportunity for leadership."

It's Not a Crisis of Confidence

Read this most excellent piece by Businessweek's chief economist, Michael Mandel. For your convenience, I'm reproducing it in full. It may help us all understand some of the elements that led to the economic turmoil and give the Malaysian government some clues. Heaven knows, Najib could do with some blogger assistance. Perhaps, after reading this the Ministers and their coterie will stop using the word confidence as if they knew what it meant:

Is the market and economic turmoil nothing more than a crisis of confidence? To listen to Ben Bernanke and Hank Paulson, you might think so. "At the root of the problem is a loss of confidence by investors and the public in the strength of key financial institutions and markets," Bernanke told the Economic Club of New York on Oct. 15.

On Oct. 20, Paulson went further, explaining the bank recapitalization program this way: "Our purpose is to increase confidence in our banks and increase the confidence of our banks so that they will deploy, not hoard, their capital. And we expect them to do so, as increased confidence will lead to increased lending."

The implication of the Bernanke-Paulson view is that the underlying economic system is fundamentally sound, so that restoring trust in the financial system will put us back on a growth course. From that perspective, the infusion of massive amounts of capital into banks, which replaces the money lost in bad mortgages, will enable lending to begin again. Once investors see that all is well, then they will cease their irrational behavior, and start putting money back into stock markets and companies around the world.

Treating the Wrong Problem?

But what if the Bernanke-Paulson view is wrong? What if financial stress is a symptom, not a cause?

What if we face a wrenching readjustment of the global real economy rather than a crisis of confidence rooted in the financial system? What if Bernanke and Paulson are treating the wrong problem? What if investors, realizing that their long held assumptions about the global economy are wrong, are rationally bailing out of stock markets in almost every country, at least for now?

In fact, there's good reason to believe that the current crisis reflects a growing realization: Long accepted patterns of cross-border technological transfer, foreign trade, and global finance are simply not sustainable.

Three Big Flows

For the past 10 years, global growth has been driven by three big flows. The first flow was the transmission of knowledge, technology, and business know-how from the U.S. and other industrialized countries to low-wage emerging economies such as China and India. Under the neutral name of "supply chain management," multinationals taught local suppliers to make shirts, laptop computers, and airplane rudders that could be sold around the world. Moreover, U.S. and European companies gave suppliers access to enough information that they could develop their own cell phones, software, and other tech products. The result: a massive improvement in productivity and living standards in emerging economies.

The second flow was the movement of goods and services from China and other emerging economies to the U.S. Massive amounts of production capacity was built around the world, assuming that the U.S. was always going to be the consumer of last resort. Indeed, the value of U.S. imports—over $2.3 trillion in 2007—was larger than the entire output of Britain, the sixth-largest economy in the world. The result: Rising living standards in the U.S., rising employment, and production around the world.

The final flow, of course, was financial. The rest of the world lent U.S. consumers trillions of dollars to finance the trade deficit. The money flowed into the country in all sorts of ways, including cheap mortgages and cheap credit for cars and televisions that were made overseas. At the same time, companies in emerging markets were borrowing heavily to build the factories that were going to supply the developed world.

Something Had to Give

This tri-flow worked as long as everyone believed that American consumers could finance their debt. But here's the problem: At the same time Americans were borrowing, their real wages were falling—and not just for the least educated. By BusinessWeek's calculations, real weekly earnings for college grads without an advanced degree have dropped every year since 2002.

You can't pay back rising debt with falling wages; something had to give.

The first thing that broke were subprime mortgages, given to less creditworthy borrowers. But once investors started to look, they realized that the entire global edifice was built on an impossibility. The tri-flow that had built global prosperity could not be sustained.

Good News and Bad News

That's why the financial crisis has spread across the globe. Investors are peering at every country, from Kuwait to Korea, asking the question: Is it sound enough to survive if American demand for imports falls? The problem is in the structure of the global real economy, not the financial system.

This is both bad news and good news. The bad news is that government injections of capital into banks around the world can slow the damage, but they cannot fix the basic problem. The global economy has to go through a readjustment process that will be difficult even if policymakers can restore confidence in the financial system.

The good news is twofold. First, the productivity gains in the emerging economies are real. Sooner rather than later, their growth will resume. Second, we do have a tool for easing the adjustment, and that's fiscal stimulus. With private demand for credit weak, governments can judiciously borrow and spend to help pump up growth and employment.

The final implication: Policymakers should stop talking about investor confidence as if it exists in a vacuum. Instead, they should focus on the real goal of stimulating the creation of innovative new goods and services that the U.S. can produce and sell on global markets. That would reduce the amount of borrowing the country has to do, and help create a sustainable global economy. This crisis is not any fun. But if it shakes up companies and government, and forces them to focus on innovation, the end result will be stronger, more solid economic growth.

Policy makers may need to shut down financial markets for a week or two

I can't help posting this. I'm sure a lot of people thought me insane to have made the post entitled, Economic turmoil: Standstill, where I suggested a 30-day standstill for global markets.

Bloomberg reports that four days ago, in Madrid, Nouriel Roubini said something similar:

New York University Professor Nouriel Roubini said curbs placed on U.S. futures trading today shows his prediction that markets will be shut down amid panic selling is coming true.

``This morning, even before the markets in the U.S. opened, the S&P futures fell by more than their daily limit,'' resulting in curbs on futures trading, Roubini told a conference in Madrid today. ``What I said yesterday has already started.''

Roubini said yesterday that policy makers may need to shut down financial markets for a week or two as investors dump assets. Trading in futures on the Standard & Poor's 500 Index and the Dow Jones Industrial Average was limited today after declines of more than 6 percent. Trading of U.S. stocks would be suspended for an hour should the Dow Jones Industrial Average decline 1,100 points to 7,591.25.

``Things are getting worse, they are not getting better,'' Roubini said. There's an increased risk of a ``multi-year economic stagnation'' in the U.S. and ``we have a whole set of emerging market economies in trouble. Even a few of them going bust may cause systemic trouble.''

See, sometimes, Malaysia Boleh!

Ani Arope, TNB and IPPs

It is always a good time to re-visit some recent history to obtain some perspective on things. First, read the interview that Tan Sri Ani Arope, ex-TNB boss, gave in The Star published on Tuesday, June 6, 2006. I am relying on the database of Jeff Ooi (I'm sure he doesn't mind).

The interview sheds some light on the circumstances under which the Independent Power Producers (IPPs) came into being. That is the historical context.

This post is pertinent because the Malaysian government is in the midst of preparing a National Energy Policy. The Malaysian public deserves to be involved. When the first draft of the Policy is ready, it should be made public for input. But, will the government do it? Or, will they just ram-rod it through as "business as usual"?

As for the politico-economic context of IPPs, like all important things in Malaysia, I had to dig up an excellent paper written by Jeff Rector of Stanford University, California entitled, The IPP Investment Experience in Malaysia. I implore you to read this paper if you wish to have a good idea of what the IPP issue is all about.

But, to lend you a quickie on the paper, I have extracted below the summation pages of Rector's paper:


A. Was the IPP Program a Success or a Failure?

Given what we know about the Malaysian IPP experience, we must assess that the experience from the investors’ perspective was very positive.We don’t know exactly how much money the sponsors made,but all accounts indicate that the first wave of investment was very profitable.

One analyst said, “The first batch of IPPs, namely YTL Power, Malakoff, Genting Sanyen, Powertek and PD Power Bhd derived between eighteen and twenty-five percent internal rate of return (IRR). Other observers said that the first five IPPs had been “‘laughing all the way to the bank’ as they had been enjoying favourable terms ‘not found anywhere else in the world.’”

Additionally, all of the original players are still in the business and willingly entering new contracts at rates lower than agreed in the first round of investment. As to the second wave of investment, an analyst said that “the market expectation is that any new PPAs signed with [Tenaga] will give an IRR of only about twelve per cent.”

That Tenaga was willing to threaten unilateral revision of the contracts and withhold payment for two months may have hung a cloud over the sector, but during the crisis period, IPPs were perceived by at least one analyst to be one of the best sectors in which to invest. Publicly listed IPPs have provided a better return than both the Kuala Lumpur Stock Exchange index and Tenaga during the relevant period. Separately, it seems that bondholders and lenders to the project companies were paid according to originally contracted schedules without difficulty.

B. Why did the Contracts Hold?

It is notable that the PPAs were not altered during the economic crisis—a period when there must have been tremendous pressure on Tenaga to unilaterally change the terms of its expensive obligations to the IPPs. The national off-taker was forced to manage a debt crisis while it was hemorrhaging due to the expensive IPP contracts coupled with low power demand.
Nor were they altered in 2001 as some reports have indicated.

This conclusion would be hardly a surprise to those close to the deals but others have somehow been given a different impression. In 1998, IPPs constituted about thirty-five percent of Tenaga’s capacity (and even more of production) and were more expensive than Tenaga’s own generating capacity. Power demand was low and Tenaga was contractually bound to purchase power that it could not sell. The drop in electricity demand brought on by the Asian financial crisis exacerbated these problems, but the fact that fuel for the IPPs was produced domestically and the projects were financed exclusively in local currency significantly mitigated the stress of the crisis.

In light of the breaches of contract and forcible renegotiations seen in the IPP sectors of Pakistan and Indonesia, we might not have been surprised if in a country like Malaysia, with a weak rule of law, the state-controlled power company under serious duress decided to change the rules on investors after the investment was in place and the balance of leverage shifted. But this did not happen.

How was it that the IPPs could withstand Tenaga’s pressure to renegotiate in a time of national crisis? Was it because of the strength of their legal protections, or was it something else?

We offer the following hypothesis, which has two distinct parts.

First, the outcome of the 1998 renegotiation attempt was not the result of a two-party negotiation. Nor was it influenced by the expected value of the legal claims that either party may have brought. While the public position of the government at the time was that the dispute was not a government affair and that it should be resolved by Tenaga and the IPPs themselves, behind the scenes, the exact opposite was true. The outcome of the 1998 renegotiation attempt was determined and orchestrated by one actor, the Malaysian government.

Second, we identify a handful of considerations that might have influenced the government’s decision not to allow a renegotiation of the PPAs. The Malaysian government was the final decision maker and orchestrator of an agreement not to re-open the PPAs. Because the government had connections or control over each major stakeholder, there was no need to resort to the courts. It may very well be that because the courts were not believed to be reliable, an organizational structure that was held together with personal and ownership relationships was deliberately chosen so as to have a mechanism for commitment enforcement and dispute resolution without the courts.

In the aftermath of the crisis, the Malaysian government was involved in each of the key stakeholders in the IPP sector:

1. The government was a controlling shareholder in Tenaga. It appointed the Tenaga board and had final authority over any significant corporate decisions.

2. The government was an indirect shareholder in the IPPs. The government's super majority shareholdership in Tenaga flowed through Tenaga’s ten to twenty percent stake in all but one of the IPPs at the time of renegotiation.

3. The principle lenders to the IPPs were state-controlled. Most of the banks lending to theprojects were state banks. The state pension fund was by far the largest bondholder lending funds to the IPPs. In some cases it was the only bondholder. Needless to say, the government had influence and control over the decisions of state controlled banks and the state pension fund.

4. Finally, the promoters and principal investors in the IPPs reportedly had close personal ties to the prime minister and his close associates. The government was also the regulator of the IPPs and therefore capable of imposing future costs on the IPPs.

Given these extensive relationships, the fallout from the crisis for the IPPs in Malaysia was constrained by a number of factors. These include, concern over the reputation effects of instigating a dispute in the IPP sector, particularly given the troubles that were facing foreign investment throughout Asia at the time, and Malaysia’s successful incorporation of FDI in its own manufacturing sector as a driver of economic growth. Because of the broad reliance on domestic capital markets to finance the IPPs in Malaysia, decisions regarding the IPP sector here affected a distinct constituency than in many other IPP sectors. At the time, foreign equity investment in Malaysia was broadly spread in the power sector—including substantial investment in both IPP sponsors (e.g. National Power’s 15% stake in Malakoff), and in Tenaga itself.

Policy decisions on this front were made in an environment characterized by two factors unique to Malaysia.

First, Tenaga’s obligations (and the project companies’ financial structure) were comparatively less vulnerable to currency risk, due to reliance on local capital and fuel inputs.

Second, the network of relationships that connected equity holders and sponsors to debt holders and other lenders to government policy makers (and to Tenaga itself) likely opened avenues of communication and accommodation that were not available elsewhere in the IPP universe. IPP arrangements in Malaysia thus faced less pressure than in other countries that faced macroeconomic troubles, and were manageable through a range of relationships that also were not common in other countries.

Electricity tariffs: Feeling tricked

I've just paid another round of electricity bills. I can't help feeling very negative about the manner in which this issue has been handled by the government.

For the record, in the Star Online report of Thursday, June 5, the Prime Minister had announced that the electricity tariffs will rise due to, the restructuring of the fuel subsidies and the increase in coal prices, the Government had approved the new electricity tariff structure to allow Tenaga Nasional to absorb the cost for both commodities.

Recently, we are told that, Electricity tariffs will not be cut despite the massive drop in global crude oil prices.

Energy, Water and Communications Minister Datuk Shaziman Mansor said that oil did not directly affect the cost of electricity generation which was mainly sourced from gas and coal.

"We must bear in mind that 60% of electricity produced in this country is generated from gas and another 30% from coal. We cannot expect a reduction in electricity tariffs as there is no direct link here," he said at his Hari Raya open house. This was reported in the Star Online Saturday, October 25.

Read Aliran's analysis of this issue on Friday, June 6 and Saturday, August 5.

The BN government created the IPP monster (click here to see how many posts I have made on IPPs). It has an opaque structure cost structure such that the Power Purchase Agreements is not open to public scrutiny.

No matter how anyone sympathises with UMNO or any BN component parties, it is issues like this that is contributing to the downfall of UMNO and BN.

They can spin this issue all they like. But, come every month, when Malaysians examine their TNB electricity bill, they will be reminded that they are being treated with contempt by UMNO and BN.

UMNO party elections can come and go. MCA elections, MIC elections and, even, Gerakan elections can capture the headlines for as long as they can. But, unless there is proper economic management of issues like the cost of electricity, the rakyat is reminded every month that if Pakatan Rakyat can offer better economic management, then come the next general elections, their sentiments will be even more clearly expressed than on March 8, 2008.

Sunday, October 26, 2008

Commodity price falls spell trouble for Malaysia

The Malaysian Insider reported this. We'll all have to spend some time thinking the points raised in this piece.

OCT 25 - The global economic turmoil is at Malaysia"s doorstep.

And the first severe challenge facing the government is its ability to collect revenue and push growth ~ a fact being drive home by the slump in crude oil and palm oil prices.

The price of crude oil is hovering around US$62 per barrel, a mere US$2 per barrel above Petronas production costs. If the price of crude drops further and reaches US$50 per barrel, Malaysia"s oil giant and the country will be in a lose-lose situation.

A sensitivity analysis by Aseambankers showed that a US$1 per barrel drop in crude oil prices will result in the Government losing RM600 million in petroleum-related income over a year. Some 40 per cent of the country"s
revenue is derived from the oil and gas sector.

The Malaysian Insider understands that the government is also watching with great concern the freefall in the palm oil price. The price is slightly under RM1,400 per tonne, while the cost of production is between RM1,200 and RM1,700.

Big players like Sime Darby, IOI and United Plantations are already feeling the pinch though their cost of production is among the lowest in the country.

If the CPO price hits RM1,200 per tonne as expected, then the earning capability of all the plantation companies will be affected significantly as will their contribution to the country"s economy. The situation is already dire for many of the small and medium planters, with their cost of production between RM1,300 and RM1,700.

The government is hoping to collect RM60 billion from the oil palm industry this year. The drop in commodity and oil prices is presenting the government with a dire situation.

For example, during the 1998 Asian financial crisis, the rural population was not adversely affected, but instead benefited from the weakened ringgit that increased their commodity exports revenue.

The Malaysian Palm Oil Board estimates that almost a quarter of the country"s oil palm-planted area is smallholdings, either as part of government schemes or owned by independent smallholders. The Federal Land Development Authority (Felda) alone has some 113,000 settlers in oil palm and rubber schemes. Smallholders have lower yields and higher cost of production.

So, unlike 1998, Malaysians will have to brace themselves for much slower growth, unemployment and real pain ~ both in the urban centres and rural areas.

This time around, no enclave will be spared from the economic tsunami that is about to lash Malaysia.

Happy Deepavali


Saturday, October 25, 2008

Guan Eng: Leave EPF money alone. Cut taxes, pay oil bonus instead

The Malaysian Insider reports:
PETALING JAYA, Oct 25 - The DAP is urging the government to put together a RM48 billion stimulus package instead of using RM5 billion from the Employees Provident Fund (EPF) to address the economic situation.

In a statement released from its headquarters, it further condemned the government for only proposing RM364 million in income tax cuts in its 2009 Budget.

"Why did the government only give RM364.2 million in tax cuts to 10 million workers or a mere RM36 each when it is willing to put workers' funds at risk by using RM5 billion from EPF to bail out selected companies?" secretary-general Lim Guan Eng asked.

According to him, the drop in the Kuala Lumpur Composite Index (KLCI) to 859 points, its lowest close in four years, is a clear indication of the failure of Barisan Nasional's move to inject RM5 billion into Valuecap Sdn Bhd, a company set up by the government to invest in undervalued companies.

"What is RM5 billion to buy shares in a few counters compared to the Bursa Malaysia's capitalisation of around RM700 billion?" the Penang Chief Minister remarked.

"Risking RM5 billion to buy shares in companies belonging to BN cronies only helps the few at the expense of money belonging to all Malaysians."

As an alternative, he suggested a four-prong RM48 billion package:

* An annual oil bonus of RM6,000 to all families earning less than RM6,000 a month, or RM3,000 annual bonus to bachelors earning less than RM3,000 a month, will cost RM35 billion - a mere one-third of Petronas' gross profits of RM107 billion in 2007.

* A progressive reduction of the corporate tax rate from the present 25 to 17 per cent which will cost RM13 billion.

* A daily revision of petrol prices to take into account changes in the international price of oil.

* An immediate reduction in electricity tariffs which was increased by 26 per cent due to escalating oil prices which has since been reversed.

"Cutting costs and putting money into people's pockets will help generate both jobs and businesses. The RM48 billion will be shared by ordinary Malaysians who will put the money into the local economy.

"This will drive the economy and the multiplier effect will help grow and contribute to the GDP and maintain the quality of life of working Malaysians," the Bagan MP said.

He also condemned EPF for agreeing to the measure without calling for a full Board meeting to discuss the issue thoroughly, resulting in representatives from the workers not having a say on how the funds are putat risk "to save those few companies who never remember to give back to workers when they reap huge profits."

"This is another classic case of BN's unique public-private partnership where profits are privatised to individuals but losses are socialised and borne by the public. Such a policy is discriminatory against workers as their funds in EPF should be used to help workers and not employers."

PRS: Umno is a bully, so is PBB

Malaysiakini reported about the Balleh PRS publicity chief Beginda Minda's complaint that UMNO is a bully. By so doing, this politician who is a minor position holder in a branch or division of a minot BN component party joins the chorus that includes the ex-MCA President Ong Ka Ting.

I think it is poppycock.

These guys have the courage of a churchmouse. If the component parties truly want to make a serious point they shouldn't ask little boys and girls to do a man's job.

Roll out the big guns and have a serious four-eyed talk with UMNO. Otherwise, it goes back to my many postings about Aesop's fable about Belling the Cat.

There's enough hot air to fill up several hot air balloons.

There. I've said it.

Friday, October 24, 2008

Keynes needed

Going by the imagery produced by Hollywood you would not be wrong to think that the U.S. is a nation that is extremely open to new ideas. That the U.S. is extremely nimble with their minds. That Americans (with apologies to the Canadians, Central and South Americans who have equal claim to being called Americans. But, what to do. Like everyone else, I'm a victim of Pax Americana) are pragmatists.

But, in truth, you would be wrong.

Ideologists disguised as rugged pragmatists
Americans are actually very ideological. They are actually very parochial and insular. But, due to their size, both geographically and in their economy, and, due to the imagery transmitted via Hollywood, we don't realise this.

Let's zoom straight into the current market turmoil in the U.S. Just yesterday, the ex-Guru himself, Alan Greenspan, who had advocated and permitted a climate of deregulation of the financial system, admitted that he was stumped that the banks were unable to regulate themselves.

Self-regulation was the hallmark of the Greenspan-American ideology of free market capitalism. And, it has been proven to be a major failure.

But, instead of attacking the failure of self-regulation and asking hard questions about this underbelly of free market capitalism, we saw U.S. Treasury Secretary, Hank Paulson, apologising profusely to the American public for violating the free market principles by asking Congress to approve the bailout package.

Then, we saw President Bush taking great pains to emphasise that the bailout package was an exceptional exception to the free market principles that America espouses.

Yes, Americans have shown that they are pathologically ideological.

Similar ideology before the Great Depression
When the market turmoil hit Wall Street in 1929, the New York Stock Exchange was purely self-regulatory. Likewise with the banks that started suffering systemic failure co-tandem with the stock market. They, too, were largely self-regulatory.

When panic set in the U.S. government stood by and watched. Conventional wisdom dictated the ideology that the free market would correct itself. The role of the government was completely benign and passive.

Thus, the turmoil spread from Wall Street to the Main Street. Banks stopped lending. There were bank collapses. Businesses started to fail. People started to lose their jobs. the s**t had hit the fan.

There are striking parallels between that story and the present, unfolding one. But we'll have to leave that to the historians to deal with at a later date.

Keynes and the debunking of classical economics
I'm not an expert economist nor am I an economic historian. Historical evidence informs that during the U.S. economic turmoil of 1929, John Maynard Keynes had worked out his magnum opus, The General Theory of Employment, Interest and Money. This was the basis for Keynesian economics.
Basically (and, I stand to be corrected), Keynes' theory dealt with the imbalance caused by the dynamics of free market supply and demand. During the bad economic times supply will exceed demand. So, according to Keynes, the role of the government cannot be benign. Government must play an active role to correct the over-supply imbalance by stimulating and creating demand. This is done by fiscal policies. Only then can the economy return to a state of equilibrium.

Keynes needed
During the 1960s and 1970s, the U.S. government, President Kennedy, in particular, was quite comfortable in declaring that he was a Keynesian. But I noticed that came the 1980s, President Reagan was quite happy to travel the ideological route of monetarist economists like Milton Friedman. Reagan was a staunch advocate of the ideology of the free market.

It is ironic that a non-intellectual ideologue like Reagan came to be so dominant that even by the Clinton presidency, the influence of Reaganomics still loomed large. The ideology of the free market was carried on seamlessly by the Federal Reserve, particularly during the long spell of Alan Greenspan.

Now that the pigeons have come home to roost, it is actually a great time for an economist, anywhere in the world, possibly even from Malaysia, to offer a compelling economic framework that can be adopted by the global financial and capital markets.

A new Keynes is needed.

English education needs political courage

I don't know what's wrong with the Minister of Education. Maybe he's preoccupied with his party's politics. Or, to borrow an expression from the wise and erudite blogger Sakmongkol, perhaps the Minister is being dragged down by his hikayat advisors.

But, he really needs to display more political courage to do what is right for the country, our beloved Malaysia.

The Minister needs to play a leadership role in the matter of maintaining English as a medium of instruction for the technical subjects of Mathematics and Science.

A golden opportunity
Once in a while, an issue arises that represents a golden opportunity for stakeholders, people who have a direct interest in the matter, to rise above themselves, their community and constituents for the sake of a greater good. I believe that the issue of teaching English in the subjects of Mathematics and Science to be one such issue.

As a parent with three children in various stages of schooling in Malaysia's public schools and, as someone who is part of the Malaysian SME community, I am such a stakeholder.

Tower of Babel
What has disturbed me over the past few months is the unstructured noises and opinions over this matter. Educationists from various communities appear to be united in wanting to see the end of the teaching of English for the subjects of Mathematics and Science. Instead, they prefer the medium of instruction to be in their own non-English languages.

Some academics have decried the fact that their quarrel is over the emphasis on technical subjects like Mathematics and Science as opposed to teaching the foundations of English grammar. They may have a point.

The myth of language and cultural identity
There are even groups that fear the loss of cultural identity, silly as it sounds. How can a Chinese Malaysian be any less Chinese or any less Malaysian by being conversant in an international language of knowledge and commerce such as the English language?

I can lay some claim to being very comfortable speaking, writing and thinking in English.

But, I still wave the Malaysian flag like a madman whenever I can.

I can't stand being without my regular bakuteh (bringing my own collection of ti kuanyin, pu er or oolong tea to brew), wantan noodles, chicken rice and nasi lemak. I break into Bahasa Malaysia whenever I can in my daily conversations. And, come Chinese weddings I lustily do my yam seng cries. I've read, to the best of my ability, the Analects, Tao Te-ching, Three Kingdoms, The Art of War, some works of Lu Xun (all English translations, of course. *blush* *blush*) and I watch lots of Chen Kaige and Zhang Yimou movies (with English subtitles, of course. *blush again*). During the Chinese New Year my family organises a lion dance troupe to perform homage before the family altar.

All this, with a limited knowledge of the Mandarin language. Some people have called me a banana (yellow on the outside, white inside). So what? It doesn't make me any less Chinese, does it?

I am certain that Malays have the same inclination and predilictions in their culinary preferences and cultural conduct. Likewise with the Indians, Ibans, Kadazans and all suku kaum that is conversant in English but know and understand their cultural identity and sensitivities.

Truly, the non-English educationists need to explain this irrational fear of loss of cultural identity when they use this issue in the discourse on the usage of English as a medium of instruction in Malaysian schools.

National competitiveness
In my previous post I tried to deal with the aspect of value chain and knowledge capital. To build on the matter a bit further, let's look at the expression national competitiveness which has also been widely used by the political leaders.

The expression national competitiveness is still a matter of debate among economists. But, to avoid being caught in the thicket of concepts and the bark of words, I will declare here that for this post, I am using the Paul Krugman view that the expression national competitiveness should refer to productivity.

This refers to acquisition of knowledge that is transformed into marketable skills but with increasing value. So, productivity is not just about the number of widgets produced per worker. Productivity, in this context, refers to the value of the work or service generated by each worker. It is the qualitative aspect of productivity that Malaysia should now focus on instead of the quantitative aspects. That is how Malaysia can aim to be competitive. That is how Malaysia can move up the value chain.
How do we move the Malaysian workforce in sizeable numbers from minah karan skills of soldering, assembling and packaging of electrical and electronic (E&E) products to higher levels such as industrial design which requires higher order thinking and skills?
Just one example
I personally believe that given Malaysia's multiracial, multicultural and multireligious millieu, the fundamental exposure of each Malaysian to the cultures of the Malay, Chinese, Indian, Iban, Kadazan and other suku kaum and, within each of these cultures, so many subcultures based on geographic origins, Malaysia is a potential world leader in the field of industrial design. do we know that our designs can be used for mobile phones, satellites, cars, light bulbs or even pencils, without exposure to knowledge of areas such as production engineering?

Okay, another example
There is also all this talk about biotechnology. Malaysia's different communities have so many different petuas and herbal and mineral remedies. The native communities in Malaysia have even more numerous natural remedies since they live closer to Nature. Western researchers have been scouring our forests and mingling with natives for years and they have been extracting plants, flowers and minerals used by natives to take back home to research on the active ingredients.

Once identified, the process of extraction of the active ingredients are patented. The formula is then sold to giant pharmaceutical companies for commercial production. The royalty payments make these researchers multi-millionaires.

WIPO has helped to create awareness and, regulate this knowledge theft. My point is that there's still a helluva lot of such knowledge. But, we still need Western researchers because we lack the skill sets. These skills can only be acquired with proper education. The foundations must be correctly constructed. The starting point are Malaysian primary schools and secondary schools.

By the way, our southern neighbour has created a joint-sharing biomedical research facilitiy called Biopolis. It is a strategic move. Bold. There is huge potential for moving up the value chain and acquiring knowledge capital.

Lost in translation
As I wrote in my earlier post, if we accept that three-quarters of the world's knowledge in either written in or, translated into, the English language then, a Malay-educated, a Mandarin-educated or a Tamil-educated Malaysian technical worker will need to have a dictionary beside him or her at all times. As he or she comes across an unfamiliar English word (you can check for yourself, most of the technical texts are in English) reference must be made to the dictionary. I can assure you, it is a painful experience.

Some years ago, I had some dealings with partners from a Spanish-speaking country. The correspondence and contracts were in Spanish. I had a Spanish-literate lawyer, of course. But, not being content with the translation, I wanted to read the source documents myself. Let me just say that a document that would ordinarily have taken me twenty minutes of reading to understand, took me two hours. Even then, there were nuanced phrases that I missed. It ain't easy, I tell you.

Just visit any major library in Malaysia. Just count how many books there are in the English language and, how many there are in non-English. I used to frequent the Main Library at University Malaya. In many of the books that I took off the shelves I saw many margin scribbles in Bahasa Malaysia which translated the English words. I thought to myself, these poor students, how painful it must be for them to conduct research for their term assignments and seminar papers. And, what about the nuances contained in these works? Probably missed by the poor student. How to get a distinction or an A?

Political courage
So, back to the Minister of Education.

Will the Minister muster the political courage to rise above the tribalism that now dogs the English-as-a-medium-of-instruction debate?

Will the Minister have the spine to urge and inspire the warring tribes to rise above their petty parochialism for the sake of the country and their children?

Or, will the Minister display the courage of a churchmouse and, wait....and, wait....and, wait.....until the storm subsides, come what may.

Wednesday, October 22, 2008

Value chain, Knowledge capital and education

Malaysia needs to move up the value chain. The government has said it time and again.
Economists and thinkers have said it. Everyone says it.

But it's not really happening in a meaningful way. The way Malaysia has approached the business of moving up the value chain is pretty much like the way Malaysia has handled sports. We depend on the rugged individual to spark off something special. Then Malaysia embraces that individual as a hero. Think of someone like Nicol David in this context.

The role of government is to create the processes that churns out more of these individuals so that the odds of getting more of these individual sparks will improve.

Knowledge capital
When I hear our political leaders talk of knowledge capital I wonder if they really understand what it means. They talk the talk but I don't see the walk.

The creation of knowledge capital starts from the Malaysian schools. Sure, we can import knowledge. That's what Dr M tried with the Multimedia Super Corridor (MSC). The Silicon Valley people came. They liked the infrastructure and the ballsiness of Dr M's audacious vision.

Tentatively, they set up some R&D units in Cyberjaya. They sent one or two or, maybe three guys over. They found few Malaysian technicians with the proper calibre. There were many Malaysians who could handle the reception desk, office administration, despatch, office equipment and low-level software writing. So, they began to pinch talent from Bangalore, India.

After a while, having had their Bangalore talent harrassed by the Malaysian Immigration Department and, worse still, not uncovering any additional Malaysian software writers of any significant imagination, they surreptitiously packed their bags and either went to Bangalore or back to Silicon Valley.

Venue providing
In the 1960s, Tun Razak and his team focused on attracting manufacturing companies into designated places like Petaling Jaya and Shah Alam within the Klang Valley. This was the original and, most successful corridor. Thus, came manufacturers like Matsushita. We provided that venue. We provided the minah karan workforce to perform basic soldering, testing and assembling.

In the 1980s, Lim Chong Eu began his own corridor-type development and scored coups like getting Dell to set up a manufacturing plant in Penang. More minah karan.

Fastforward to the millenium and Malaysia is using the same playbook with the Iskandar Region and the numerous corridors. Venue providers. Landlord. And, more minah karan.

Knowledge capital (Part 2)
As I said above, the process of creating knowledge capital starts from the primary school and, then, the secondary school and, after that, at the university.

First, we must accept the fact that three-quarters of the world's knowledge is either written in or, translated into, the English language.

Second, we must accept that countries that use their own language like Japan has a one hundred-years headstart over countries like Malaysia. Japan took a fifty-year period, from the Meiji Restoration at the turn of the twentieth century to post-war Japan to industrialise. Malaysia cannot do an apple-to-apple comparison with Japan in not wanting to emphasise the English language.

So, for Malaysia to truly move up the value chain, the necessity for a good command of the English language is necessary. With the language foundation, we can then add Mathematics and Science as the next skill layer.

If this is in place from primary level to secondary level, then, at the tertiary level everything is more likely to fall into place for Malaysians to acquire skills that will, collectively, move Malaysia up the value chain.

Detractors may point to China. It is true that despite being set back two decades during the Cultural Revolution from the 1960s to the 1980s, China under Deng Xiao-ping could claw its way within the next two decades after that to become the third largest economy in the world. All this progress with a largely dialect-speaking and Mandarin-literate population.

But China is unique. Being a large country there is a huge disparity between the first world feel of the major cities and the backwardness of the countryside. China has completely thrown out the traditional notion that economies move from agrarian to industrial to services. China appears to be moving at three levels at the same time. It is upsetting the neat economic development theories. But, many, many Chinese are rushing to learn the English language, too.

Knowledge capital (Part 3)
We must accept that in the 1970s, Malaysia needed to overcome the throes of nationhood. Nationalism and patriotism were necessary to create a commonality and unity. So a National Language emphasis was appropriate for the ethos.

Some time in the mid-1990s, Malaysia, together with the rest of the world, began to enter the Internet Age. In the cathartic experience the world realised that it was inter-connected in so many ways and, that the multi-national companies (MNCs) from developed countries were ahead of the game.

More importantly, in Malaysia, we became aware of that there is a real chance that we can become more than mere landlords and low-level employees of the MNCs. Whereas, in the past, we had to travel overseas to obtain new books that described new ways of doing things, now, everything was literally at our fingertips. By searching and surfing the Internet the world's collected knowledge was open and accessible to us in Malaysia. And, then, Thomas Friedman described what we felt, that the world is flat, that the field has become level. Everyone has equal access to knowledge.

Beyond ethnicity
In the area of acquiring knowledge capital and, moving up the value chain, Malaysians must realise that mastering the English language will not mean that we, each, will be any less Malay, any less Chinese, any less Indian, any less ethnic or, for that matter, any less Malaysian. Nothing can change who we are in terms of our culture and identity.

But, we should not eschew the golden opportunity to acquire more skills.

Beyond our generation
Frankly, all the stuff that I have mentioned may no longer apply to those of you who are reading this. We are products of the education system from the 1970s, 1980s and 1990s. We can only hope to enter some training courses or, get an MBA to move up the value chain.

But, for the next generation the possibilities are endless if we start the process of building knowledge capital at the primary and secondary schools. Mastery of the English language is an important foundation. Without such a foundation acquiring knowledge capital will be limited. This, in turn, will slow down Malaysia's desire to move up the value chain.

I only wish the political leaders can have the courage to move beyond political opportunism and pandering to constituents. There needs to be real leadership on this. So far, I haven't seen any.