Air Asia battles "swine"

YB Wee Choo Keong's question to the Prime Minister/First Minister of Finance on the RM65 million debt due and owing by Air Asia to Malaysian Airports Holdings Berhad and, whether any special privileges were accorded Air Asia met with a reply that MAHB did not take any drastic action to claim the arrears in airport tax owed by AirAsia because it will only affect the operation of the low-cost carrier terminal (LCCT).

The response does seem to confirm that Air Asia is not without some leverage borne from its commercial impact on air passenger transportation in Malaysia despite suffering widespread opprobrium over the Sime Darby Labu LCCT proposal a few months ago.

But, perhaps Air Asia's greatest challenge is the threat of implosion from the debt edifice that it has had to create in its aggressive and, almost Icarian (i.e. from the Greek myth of Icarus) obssession to gain dominance over large parts of the Malaysian skies and niche parts of the international skies.

I should state that, like many Malaysians, I am an admirer of Air Asia and the entrepreneurial prowess of Tony Fernandes and his team. Air Asia is an excellent example for all Malaysians to emulate. Having said that there are some perturbation over the the manner in which airline operators, admirable as they are, deal with the matter of debt financing. Often, it appears as if the airline operators are racing just one pace ahead of the debt tsunami that they create to support their business model. Of particular concern is the size of the debt and, the risk prospects of public investors who subscribe to their airline adventure. I do wish Air Asia well. But, at the same time, like many, I do not choose to be blinkered and submit to blind adulation.

Read Bloomberg columnist William Pesek's recent sympathetic opinion on Air Asia's continuing travails below. Pesek's piece uses Air Asia as a focal point. But, his central thesis is clear. It is a harsh critique on the unwieldy global banking and finance practices that have come into stark relief over the past year. I have taken the liberty to emphasise in bold the apects of the opinion that is worth reflecting on:

Journalists strive to be objective, while opinion writers try to give their side of the story without being too biased.

Where Tony Fernandes is concerned, it’s a difficult balancing act. The truth is, I’m rooting for the founder of Kuala-Lumpur-based AirAsia Bhd. This region needs more entrepreneurs like him if it’s going to thrive, and I want Fernandes to succeed.

So it was with a tinge of sadness that I read his recent comments about how difficult it still is to borrow money. His words explain, perhaps better than anything, why the global recession may have a long way to go.

The worst of the financial crisis may be past, as hedge- fund manager George Soros argues, yet that’s different from the recession. Even if markets stop reeling, the fallout from the loss of wealth is still filtering through to broader economies - - and it will for some time.

Just ask Fernandes, an executive who is as much on the front lines of today’s uncertainties as anyone.

“We’ve been through SARS, bird flu, the tsunami, you name it,” the chief executive officer of Southeast Asia’s biggest discount airline said at the Paris Air Show on June. 19. “The only swine now are bankers.”

Fernandes, 45, says he made that comment in jest. Yet there’s as much truth as hyperbole to it.

Stingy Financiers

For all the hysteria about swine flu -- the mask-wearing passengers, the long queues at customs, even the risks of death -- the biggest threat to global industries is stingy financiers. In AirAsia’s case, the challenge is to find banks willing to finance aircraft purchases.

Liquidity trap, anyone? That’s the imminent threat right now. If companies can’t grow during economic hardship, more jobs may be lost. That dynamic, more than any, will ensure that healthy growth remains elusive.

Granted, AirAsia is a contrarian outfit. As most industries hunker down, it is expanding apace, adding new planes and routes to prepare for an eventual rebound. Here, it’s possible that bankers have a point that Fernandes’s ambitions may be running ahead of demand.

When I rang Fernandes yesterday, he was as bullish as ever: “For seven years now, people have been saying we are overstretched, and we have proved them wrong. We’ve been very aggressive, but we haven’t been silly about it.”

McDonald’s Dynamic

Fernandes launched the budget carrier in December 2001. Starting the airline just after the Sept. 11 terrorist attacks in the U.S. seemed like commercial suicide. AirAsia was soon turning profits. In the first quarter of 2009, earnings climbed 26 percent as Singapore Airlines Ltd. and Cathay Pacific Airways Ltd. reported mounting losses. It’s not unlike how McDonald’s Corp. thrives in recessions; no-frills beats the rest.

It’s also impressive that Ferdandes did it in Asia’s 10th- biggest economy. Malaysia has long picked national champions and protected its flagship airline. Getting the go-ahead to compete directly with Malaysian Airline System Bhd. was no small feat.

Risks abound. A surge in oil prices would be problematic, as would the global economy experiencing a Japan-like lost decade. That could make the 175 Airbus SAS planes that Fernandes has on order rather hard to pay for.

AirAsia also may suffer from a bit of a Steve Jobs-like problem. The company is built largely around Fernandes’s charisma, as Apple Inc. is around Jobs. Investors were reminded of that on June 1, when Fernandes fainted in Kuala Lumpur, reportedly from exhaustion.

Swine Flu

Should the swine-flu pandemic unfold, AirAsia’s long-haul affiliate, AirAsia X, could be in for a rough ride. AirAsia owns about 15 percent of closely held AirAsia X. Other investors include Richard Branson, the Virgin Group billionaire.

It’s not surprising that Fernandes would be down on bankers. Politicians watching bailed-out banks refuse to extend credit also have reason to be annoyed. An even bigger concern may be how the global credit system is malfunctioning.

U.S. Treasury Secretary Timothy Geithner was right when he said on June 13 that “it is too early to shift toward policy restraint.” His appeal was to Group of Eight finance ministers looking to roll back budget deficits and bank bailouts as economies show signs of recovery.

The real issue is devising a new financial system that makes sense. The current one, decades in the making, was all about rich nations being at the center and financing poor ones. The emerging one features poorer nations financing the richest. Research into how that shift is affecting credit channels and monetary-policy links is in its infancy.

In the meantime, the walls of money that central banks are pouring into markets aren’t likely to have the intended effect. Inflation, for example, is less of a threat in a liquidity trap. The multiplier effects that make monetary policy so potent aren’t working as they once did.

Bankers are an obvious target. Another is how little is going on to fix the problems that grounded markets in the first place. Getting them aloft again will help innovators such as Fernandes improve Asia’s economies.

Services sector as growth driver?

The Prime Minister/First Minister of Finance says that the target is to have the services sector grow to 70% of Malaysia's annual GDP from 54% currently: Govt to emphasise on services sector. Let's take a closer look, shall we?

Services sub-sectors

The major services sub-sectors are in banking and finance, tourism and transportation.

Malaysia's also has superlative strengths or efficiencies or capacity linked to traditional activities such as plantation management services, professional scientific services for rubber production and for downstream rubber goods production, engineering services for modern oil palm and rubber estates, support services for selected manufacturing such as engineering services for electronics industries, infrastructure and property planning and development services, and construction related services.

With respect to tourism, there are opportunities for further development of resort services.

A need to identify market niches

The niche markets will depend on the following factors:

First, the service products need to be identified. This includes higher education conducted in English for domestic and export markets (currently Malaysia has more than 20,000 foreign students drawn from about 100 countries enrolled in private colleges and universities), Islamic banking services, trading agencies for Malaysia's rubber, palm oil and oil and gas-related products.

Second, the services need to match demand. Using tertiary education services as an example, this is a matter of pricing of fees and quality of higher education. Another example is specialist medical and health services targeted at new segments, such as patients from neighbouring countries with less advanced services, who are motivated by Malaysia's relatively low price for similar services offered.

Third, the identification of where the demand can be tapped. For example there are tourists from the Asia Pacific and Middle East who prefer Malaysia's geographic location for any number of reasons such as language or cultural familiarity between buyers and providers of the services. There are specific demands for eco-tourism for rain forest tours or deep sea scuba diving packages or golfing trips. Such niches are sustainable only if service providers continuously maintain and improve their facilities to ensure safety, hygiene and quality standards that meet expectations of the niche markets.

Fourth, there is a perception of value - how much bang for the buck, so to speak. For example, highlighting that tertiary education and training in the English language at a competitive level of quality and cost. The centrality of Malaysia as a launching board for visiting other Southeast Asian countries is another example.

The imperatives in developing services

Within Malaysia's domestic economy, the development of the services could be ordered along the following lines:

• Accelerate import substitution in areas such as education and training services and, freight and transport services.

• Enhancing and deepening the consumption of existing services such as telecommunication, multimedia and information service products. This is where content is important.
• Developing new consumers through new business strategies, new ways of promotion and new approaches towards the delivery of services.

• Developing new service products or new modes of delivery for existing market niches. For example, in domestic tourism, the creation of strategic alliances between the core service provider with the providers of other products or services especially for foreign in-bound tourist.

The many steps required

Many believe that despite the overwhelming economic dominance of China and India, Malaysia still has a role to play and, remain relevant. That is true, of course.

The path towards services contributing 70% of Malaysia's annual GDP will be a tricky one. Economists may become exasperated with the manner in which the value of services are collated, computed or imputed.

Players may not have the skill sets in spite of the sincerest efforts of the government of the day. This may be due to declining standards of education and a decline in English proficiency.

The aspirational focus on services over other traditional sectors such as primary industries and manufacturing is obviously due to the clear realisation that Malaysia cannot compete strongly in these sectors.

It is believed that economic growth must come from the development of services. Greater value-added can be achieved. It is believed that these are the ingredients for shifting Malaysia's workforce from the low-cost, low-pay regime today to the high-cost, high-pay regime of tomorrow.

Musings

I want to jot some thoughts that I have explored in previous posts:

Is the economic growth paradigm the only model that Malaysia can subscribe to?

Will the declining education standards and level of English proficiency in Malaysia affect our competitive ability to shift from the low-cost, low-pay regime to the high-cost, high-pay regime?

If so much of Malaysia's scarce financial resources are to be allocated in favour of the services sector, what becomes of the brick-and-mortar primary resources and manufacturing sectors?

I am a big fan of the brick-and-mortar economic sectors. Although I am personally involved in the services sector, I am more comfortable with the thought that Malaysia has strengths in the primary industries and manufacturing because I have always felt that no matter what Malaysia does, these are the two sectors that will keep Malaysia close to some form of self-sufficiency.

This may not seem important in a globalised world. But we should give pause to consider the security aspects. Just remember how vulnerable the feeling was just less than 10 months ago when crude oil prices were at stratospheric heights and food prices were skyrocketing. We even feared where our rice supplies were going to come from. What happened to all that?

So, I hope that in allocating Malaysia's scarce economic resources, the economic planners maintain a balance. 70% of Malaysia's annual GDP coming from services is a good aspiration. But let us remain focused on things like food security which is derived from agricultural productivity.

Ronnie Liu do something about the street lights along Jalan Pelabuhan Utara

The last time I checked, Ronnie Liu is the ADUN for Selat Klang which pretty much covers that part of Port Klang that I'm complaining about. Yes, this is a complaint. And, I believe I am expressing what everyone who has the misfortune to drive along Jalan Pelabuhan Utara at night has to put up with.

This is only a representation. Pix from here.

I believe Ronnie Liu is also the Selangor State Exco in charge of local councils. So, he certainly has the power.

I believe that Jalan Pelabuhan Utara falls under the jurisdiction of the State and the Majlis Perbandaran Klang.

Why are key sections of Jalan Pelabuhan Utara between the Northport and West Port not properly lit at night? The street lamps don't work.

To be fair they weren't working when Khir Toyo was Mentri Besar. But, the point is that they still don't work.

All the offices and warehouses in Port Klang pay quit rent to the Selangor State Government and, they pay assessment to the Majlis Perbandaran Klang.

Container trucks race along Jalan Pelabuhan Utara alongside motorcycles. It is a matter of time before many more road fatalities happen along this road at night.

The poor condition of Jalan Pelabuhan Utara makes Malaysia's premier port as great an embarassment as the PKFZ issue.

Unity Talks: The elephant in the room

All the piruoetting and tip-toeing about the true intention of that section of PAS that wishes to pursue unity talks with UMNO is just puerile spin.

I share Dr Mahathir's view that PAS must come in clean with the true intention of the unity talks.

The elephant in the room in this entire episode that the so-called "unity camp" in PAS has experienced a culture shock of sorts in experiencing Pakatan Rakyat state governments in Perak and Selangor where the front bench and back bench are, to put it circumspectly, too rainbow-like in pigmentation.

That is why this PAS faction wants to crawl back into a comfort zone of monotone.

What does that say about their claim to a deeper faith and belief?

Many who supported Pakatan Rakyat in the 12th General Elections are perturbed by this purported "unity talk". It is a stern reminder that PAS is, at the end of the day, a Malay political party. More Malay than Islamic. More about politics than faith. More about ethnicity and less about principles.

These concerned Malaysian voters may soon opt for a lesser evil, a dalliance with the known Devil, so to speak. And, that would be Barisan Nasional. In their view, at least BN calls a spade a spade.

At the rate this PAS "unity talk" fiasco is going, will Malaysian voters be prepared to regard a hypocritical PAS as being worse than a corrupt UMNO-BN?

Where does all this lead? This leaves Malaysian voters between a rock and a hard place. What is needed is sensible political leadership. If the UMNO leaders lean towards unity talks, the non-Malays will not feel at home with UMNO-BN. Neither will they feel comfortable with Pakatan Rakyat either.

It is Hobson's Choice. It is a choice between the Devil and the deep blue sea.

Strategic aspects of the Malaysian steel policy review

This may sound like a boring topic best left to excite the people in the Chambers or Commerce and Industry. It probably is, though it shouldn't be.

There are strategic issues that underlie the steel policy review which is said to have surprised analysts. Unlike the analysts I am not surprised. And, I'll tell you why.

The PM's trip to China
It is a follow through from the Prime Minister's successful trip to China recently. While the spin in the media was mostly about the living link between Tun Razak's historic breakthrough trip to Mao's China in 1974 Najib's recent visit was clearly about notifying China that Malaysia is a strategic Southeast Asian trading partner that China can tap into.

China has been made to feel unwelcome in the Anglo-Saxon countries like the U.S. (e.g. CNOOC's rebuff last year) and Australia (Chinalco's rebuff in recent months). Malaysia is in a good position to tell China that it is very welcome in Malaysia.

Malaysia's foreign investment policies are being liberalised. The liberalisation is clearly targeted at countries like China.

China as a solid foreign investor and trade partner to offset the weakening U.S. trade demand
In time, with hard work and bridge-building (couldn't resist the pun for Penang and Johor scenarios), China will start pouring in its large surplus into Malaysia. This will offset the lowering trade with the U.S. and Europe in the forthcoming 12 months.

The U.S. and Europe can expect green shoots to turn into yellowing weed (to borrow an expression from Nouriel Roubini). Unemployment is still mounting in the U.S. and Europe. The economic implosion will take some time to run its course.

So, China will be an excellent entity to offset the lower trade.

China will also be a good source of foreign investment into Malaysia.

Malaysia will be an excellent gateway for China into Southeast Asia. Apart from Singapore, Malaysia has a population that will make Chinese investors feel at home just as we have made Taiwanese investors feel at home for so many years.

Steel policy liberalisation in context
Given the above excursus, the steel liberalisation makes eminent sense since it will be a clear gesture to China that its export of steel to Malaysia will be welcomed.

While the response from China remains to be seen in the coming months, it is clear that in certain respects the Malaysian economic strategies remain sound despite political challenges.

A solid and positive response from China to Malaysia's overtures will put the Najib Administration in a good position as positive trade with China and Chinese foreign investment pouring into Malaysia may significantly cushion the economic blow from the reduced trade with the U.S. and Europe.

I know that in previous posts months ago I have expressed scepticism about the long term benefits of an aggressive foreign investment policy since this policy has created a false comfort zone that kept Malaysia as a low labour cost jurisdiction. This policy is in the process of being rectified, I hope. I still maintain the view.

In the short term, however, given the prospects of negative GDP growth, Najib's overtures to China is an astute and necessary strategy. I believe that the prioritisation of policies is sound and appropriate.

1,000,000 words!

On 10th June 2009 at 10.22 a.m. GMT, the Global Language Monitor determined that Web 2.0 became the 1,000,000th word in the English language.

I had written about the run-up towards the 1,000,000th English word in a post on 30th April 2009. But here's Simon Winchester (to whom and whose book on the creation of the Oxford English Dictionary, The Surgeon of Crawthorne I had referred to in that post) writing in the Daily Telegraph on 6th June 2009 on the impending arrival of the 1,000,000th word. Naturally he does a much better job of writing than I do.

Here's why you should click on the link to read Winchester's piece in toto:

The doctor (i.e. the Surgeon of Crawthorne) was a clever man, with a vast library in his cell, and in an effort to rehabilitate himself he had volunteered, anonymously, to help make contributions to the Oxford English Dictionary, then under construction in a tin shed in the back garden of James Murray's house on Banbury Road.

But his madness, which ebbed and flowed during his 40-year incarceration, became exceptionally florid one day in 1902, and in a sudden spasm of self-loathing he sliced off his penis with a knife, and flung it into the prison fire.

My discovery of this remarkable event answered a small but singular question: just why the man's work for the OED had suddenly faded away. Delighted with the find, I went promptly up to the OED offices in Oxford to tell everyone and then I walked over to Oxford station.

At the ticket window were two elderly women lexicographers, off to London for the theatre. As we boarded the train, I warned them: have I ever got a story to tell you.

And so, in every gruesome detail, and in an open-plan Thameslink carriage, I related the saga: the sharpening of the blade, the tying of the ligature, the gritted teeth, the fatal slice – and, as I said this, so every whey-faced businessman in the carriage crossed his legs reflexively. There was a sudden corporate gasp.

But not from the two old ladies. They remained quite impassive, thinking. I could see the lexicographical gears grinding in their minds. Then suddenly, and in unison I swear, they spoke: "Autopeotomy!" they cried. Then one to the other: "Yes, Mildred – peotomy is the amputation of the penis. But doing it yourself – that must be autopeotomy. A neologism, I am sure. And Mr Winchester, if you can include this new word in an illustrative sentence in the book you are writing, then we will include it in the next edition of the OED, and you'll be a small part of history."

And so I did, and it duly was and I duly am, and there autopeotomy lies for ever, part of the glittering marvels that make up the English language and which, on Wednesday, is set to celebrate the creation of its one millionth word, according to the Global Language Monitor, a Texas-based association of academics that tracks the use of new words.

I love his typically droll English humour that tells a good yarn with a deadpan tone and timbre.

You may be interested to know that the also-rans for the 1,000,000th word were as follows:

* Chengguan Urban management officers, a cross between mayors, sheriffs and city managers.

* Jai Ho! From the Hindi, “It is accomplished”; achieved English-language popularity through the Oscar-winning film Slumdog Millionaire.

* Mobama Relating to the fashion sense of the US First Lady, as in “that is quite mobama-ish”.

* Noob From the gamer community; a neophyte in playing a particular game; used as a disparaging term.

* Phelpsian The accomplishments of Michael Phelps at the Beijing Olympics.

* Quendy-Trendy British youth-speak for hip or up-to-date.

* Wonderstar As in Susan Boyle, an overnight sensation, exceeding all reasonable expectations.

* Zombie Banks Banks that would be dead if not for government intervention.

Source: The Global Language Monitor

Personally, I would have been more thrilled if the more inspiring and emotive Jai Ho! had entered into the English lexicographical respectability as the 1,000,000th word than the completely inorganic and emotionless Web 2.0.

Jai Ho! still has a chance to resonate and inspire just as Nike's now immortal tagline, Just Do It! The only damnable thing is that it isn't the 1,000,000th word, it had been recorded as the 999,999th word! This is one time when being "second" to Web 2.0 would have been better!

The Myth Of the Rational Market

Justin Fox, who has just published a book (positively reviewed by The Economist here) with a similar title, has written a piece that describes the travails of the efficient capital market hypothesis and the rational market postulation. It is written in his usual high standards and, of course, well analysed and highly readable. The piece is in Time and you can access it here.



pix from here.

It's certainly a better read than what I wrote when touching upon similar matters recently.

Fox ends his piece thus:

The issue isn't whether financial markets are useful--they are--or whether the prices of stocks or bonds or collateralized debt obligations convey information--they do. There's also much to be said for the insight at the heart of efficient-market theory: markets are hard to outsmart. But when we give up second-guessing the market, we suspend our judgment. And without participants' exercising judgment--applying research, heeding a broker's opinion--markets stand no chance of ever getting prices right.

This summation is essentially a reminder that anyone that invests needs to put on his thinking cap and attempt to analyse the stock objectively.

I'm sceptical about Fox's suggestion that heeding a broker's opinion is a good idea without proper consideration since many people I know deal with brokers (read remisiers, which is a French word that means intermediary and, has a unique application to France, Malaysia and Singapore. How a French word found its way into the local stockmarket lexicon is, itself, an intriguing piece of research. There's an unsatisfactory description here) who merely utter the infamous words, Well, it's up to you.

It is, indeed, up to you as to where to put your hard-earned savings astutely or, to bovine-like, merely accept a "buy" recommendation without processing the "advice".

Govt has no plans to implement GST

The Malaysian government's confirmation that it has no plans to implement the Goods and Services Tax is a sensible decision.

The GST is a consumption tax. It is effectively a value-added tax. From a theoretical standpoint consumption taxes are intended to be broad-based and indiscriminate. It is an efficient source of revenue to governments.

The reality is that consumption taxes like GST are effective only when certain elements are in place. What are these elements?

First, you need to have a large middle-class base. This base provides the foundation upon which a large group of taxpayers with a significant disposable income provides the source of GST revenue. It is the consumption from this large middle-class base that drives a GST scheme.

Second, you need an economy that is in growth mode to gain acceptance.

The key is, of course, the first point. Malaysia has a narrow middle-class base. Only a small segment of income earners actually pay income tax.

Third, which is a corollary of the first point, the income disparity in Malaysia is still great.

The most widely accepted measure of income disparity is the Gini Coefficient. To amplify this point, I can do no better than to extract a recent post by my blogger friend, Sakmongkol AK47 here, where he displayed the following:

<Gini Coefficients by countries:

Country	HDI	GINI
Singapore	0.902	42.5
Malaysia	0.793	49.2
Thailand	0.768	43.2
Philippines	0.753	46.1
Indonesia	0.692	34.3
Vietnam	0.691	36.1
Cambodia	0.568	40.4
Laos	0.534

Source: UNDP Human Development Report

A commonly-used measure of development is the Human Development Index (HDI) devised and calculated annually by the United Nations Development Programme (UNDP). The HDI is preferable to a simple measure of per capita income because it takes into account other factors as well, including life expectancy and other measures of general 'well-being'. In the UNDP's 2004 Human Development Report, Malaysia ranked 59 out of 177 countries. With an HDI score of 0.793, Malaysia is just on the threshold of the UNDP's own definition of a 'Highly Developed Country', which is a score of 0.800 or above.

DBKL and a Serpentine tale

I don't normally do personal narratives. But this has to be written and posted.

I've got a leafy compound. Very shady. Keeps the place relatively cool in our tropical heat and humidity.

I've got canine companions. Three of them, in fact. But, to keep them in line I've created zones for them.

There is one zone that is free of my canine pets. That zone is probably the most leafy and shady part of the compound. And, that is the zone where squirrels, tree shrews, a variety of birds and butterflies like to occupy. The tropical live-bearing fish (assorted guppies, swordtails, mollies) and, tilapia and sepat are kept in this zone.

There is the occasionally pesky biawak that disdainfully plod across this zone.
pix from here.
But, today was different. Today, a baby reticulated python measuring nearly 4-feet successfully caught an unfortunate baby tree shrew. It coiled itself around the tree shrew and proceeded to ingest the poor bugger. That's Nature, right?
pix from here
pix from here.
But, because this event took place in the shady part of the driveway it disturbed my "quiet enjoyment" of the compound. This is a figure of speech, of course. I was actually on the way to the office.

DBKL has an interesting unit that deals with rodents, serpents and any organic, non-human moving thing. Upon being notified, a SWAT-like team of five DBKL men from this unit showed up in about twenty minutes. Great response time.

But, the serpent was nowhere to be found. After scouring the driveway, they discovered the slippery thing behind the umbrella palm where the dastardly ingestion had occurred. It was going from ingestion to digestion!

Needless to say, the men from DBKL caught the baby python. Before they left I gave them a generous tip.

Oddly enough, they left me with a different kind of tip. Firstly, rock salt is a better reptilian deterrent than sulphur. Second, a python can lay up to twenty eggs.

As I write this, I have arranged for Mr Raja to drop by for a spot of major pruning this weekend. I hope he and his crew won't meet the other nineteen siblings of the baby python!

And, I have had a change of heart. I have decided to make the compound zone-free after dusk so that my canine companions may mark their territory all over the compound. That should send a clear message to all unwelcome would-be reptilian visitors.
pix from here (a good picture at several levels).

Did I mention that I have OPHIDIOPHOBIA?

And, may I say another sincere and relieved TERIMA KASIH to the DBKL men who must have one of the most interesting jobs in Kuala Lumpur.

Paul Samuelson: No one knows when recovery will happen

Just as the previous post attempted to highlight the perils and pitfalls of economic components, this one pushes a similar proposition, with one major exception. This time I can point you in the direction of a respected economist.

By now, everyone who is interested would know that China has been manufacturing everything that the U.S. and the rest of the world needs. For this effort, China has made a lot of money. This surplus is so huge that no bank can manage it. So, China put its "savings" into U.S. Treasury Bills, which are basically IOUs issued by a sovereign nation. Over the past many decades, U.S. Treasury Bills have been regarded as the best sovereign IOU anyone can get...until now?

There are many voices on this matter. The ones in the mainstream will tell us that economic recovery is just around the corner; that the U.S. economic malaise has bottomed out.

Worst of all, is the current faddish use of a horrible gardening metaphor, that green shoots are sprouting. I really can't stand that expression. It means nothing. It's nebulous and, therefore, entitles the maker of the statement to slip through any number of excuses when the forecast is found wanting...Oh! I meant the green shoots that are sprouting in the other economic sector, not this one. I think it's major BS!

The people who know are precise. The people who don't know just waffle. The usage of the expression green shoots is a reminder of the great Peter Seller's 1979 movie, Being There in that a simple-minded guy is feted for discussing gardening which was mistaken to be great pearls of economic and political insight. Needless to say that movie was political satire and great social commentary.

And, here we are. Paul Samuelson is concerned about the risk that China, which holds many American IOUs, will start balking at the myth that U.S. economic recovery is around the corner. That is when China may start selling down its American IOUs, an event that will trigger off a serious economic situation. Okay, enough build-up. Read Samuelson directly here. Or, read what I have extracted below. And, for the uninitiated, this is who Samuelson is, a mainstream economist, an economics textbook writer, no less, as anyone who has pretensions to have read economics should know.

China is the new important factor.

Up until now, China has been willing to hold her recycled resources in the form of lowest-yield U.S. Treasury bills. That's still good news. But almost certainly it cannot and will not last.

Some day -- maybe even soon -- China will turn pessimistic on the U.S. dollar.

That means lethal troubles for the future U.S. economy.

When a disorderly run against the dollar occurs, I believe a truly global financial panic is to be feared. China, Japan and Korea now hold dollars not because they think dollars will stay safe.

Why then? They do this primarily because that is a way that can prolong their export-led growth.

I am not alone in this paranoid future balance-of-payment fear.

Warren Buffett, for one, has turned protectionist. Alas, protectionism may well soon become more maligned.

President Obama struggles to support free trade. But as a canny centrist president, he will be very pressed to compromise.

And he will be under new chronic pressures. His experts should right now be making plans for America to become subordinate to China where world economic leadership is concerned.

The Obama team is a good one.

But will they act prudently to adjust to America's becoming the secondary global society?

In the chess game of geopolitics between now and 2050, much stormy weather will take place. Now is the time to prepare for what the future will likely be.

______________________

I should tip my hat to Mankiw's blog for having alerted me to Samuelson's views.

KLCI's barometric influence

The cliche that a stock market index is a barometer of business or economic confidence still writs large. Or so, it would appear.

It's not just a localised phenomenon, of course.

The moods of many are still determined by Wall Street.

It's scary how irrational that is. But, there it is.

In recent months there has been recriminations and reviews of the Efficient Capital Market Hypothesis. The high priest of the ECMH is Eugene Fama whose co-blog I keep up with whenever I can.

The ECMH, which is a hypothesis, not even a theory, was the flimsy and slippery foundation upon which many sexy financial instruments were built on. These sexy financial instruments that were built one upon another using complicated language and calculations were, in the truest emperor with no clothes sense, caught when the financial and securities edifice started collapsing in the first quarter of 2008.

The ECMH supports the view that information must be symmetrical i.e. I know what you know and, therefore, all our investment decisions are rational.

But, everyone I know who dabbles in the stock market are completely insane, not just irrational! Is it not insanity if you make a decision to put money into a stock based on what you read in the Internet and the newspapers and a word from an acquaintance?

The worst of it is that beyond the street level, investment advisors are making decisions based on mathematical models without checking the assumptions. The assumptions. The root word is assume. Old-timers like to say that when you assume, you make-an-ass-of-you-and-me.

Have lessons been learnt? Have lessons been learnt even in the relatively calm backwaters of the Malaysian economy?

Judging from what the reminder issued by MIER as reported today, it appears that irrational investment decisions are still being made on the strength (or, weakness) or asymetric information i.e. information that I think I know but, which is only a fraction of what other people (market manipulators?) know much more of.

Yet, truth be told, the information is all out there. It's the analysis that lacks quality. And, most investors, even those highly paid investment analysts, are indolent, preferring to use the grapevine over careful analysis.

It's a scary thought.

PKFZ special task force

One observation that needs to be made in relation to the PKFZ "special task force set up to recommend to the government ways to correct the mistakes and pursue appropriate legal actions" is the inclusion of the two PwC officials.

Since PwC produced the special audit and made inferences and recommendations in a report submitted to PKA, PwC has taken a stand on record.

As such, the two PwC persons in the PKFZ special task force have an inherent conflict of interest in that they will be inclined to cling to the PwC report and defend it. At best, they should only be input resource participants, not full members of the task force.

Furthermore, what happens if they are drawn as parties to any litigation arising from the PwC report? Wouldn't their objectivity as members of the special task force be lost there and then? Would they defend themselves harder against allegations made against them compared with their obligations as members of the special task force.

This is something that needs to be examined if the PKFZ matter is to be dealt with without fear or favour.

Just to be sure, the observations here are purely on the fact that the special task force is intended to do specific matters, particularly, in anticipation of litigation. The two gentlemen from PwC are inestimable in their professional conduct. Of that, there is no doubt. But, saying that, does not cure the inherent conflict of interest that exists. That is why someone needs to address this issue.

Meeting the FT Minister

Brother Rocky was kind and generous enough to add a nondescript blogger like me to a dinner session with the Minister of Federal Territories, YB Datuk Raja Nong Chik bin Datuk Raja Zainal Abidin and his charming wife last night at the Sime Darby Convention Centre. The Minister has a dotcom that you can check out here.

Rocky has indicated the other, more luminous bloggers who were also present at the dinner here.

What struck me was the down-to-earth persona of the Minister and his wife. Absent was any air of condescension that tends to waft across whenever one meets a person with power. Maybe it's early days yet. But, that would be an unfair assessment of the Minister, who came across as someone who is sincere and, under no illusions as to the task that is before him.

The biggest single challenge for the Minister must be the cloistered and, comfortable super-bureaucracy that exists in Dewan Bandaraya Kuala Lumpur. Putrajaya and Labuan pales in comparison. And DBKL is at the veritable centre of the Malaysian urban universe, the great city of Kuala Lumpur.

From the lofty perch of the leafy Bukit Tunku, Damansara Heights and Bangsar, to the stench of the depths of Chow Kit Market, to the frenetic traffic that criss-crosses Kepong, Jinjang and, of course, Cheras - that is the empire and fiefdom of the DBKL.

If you believe Syed Akbar Ali of OutSyed the Box and, it is hard to ignore Syed's in-your-face candour and brutal frankness, DBKL practises multiple standards. The level of attentive care and diligence that DBKL displays in Bukit Tunku, Damansara Heights and Bangsar is replaced with abject disdain and neglect in lesser suburbs. That is what he told the Minister last night. The Minister and his aides listened with rapt attention.

But, that point paled in comparison with Syed's pet peeve - the alleged shenanigans of DBKL in the Jalan Masjid India precinct. For that peeve, I shall circumspectly leave to whatever bolts of lightning that good 'ol Syed may choose to throw from his popular blog. I have no doubt that whatever "input" Syed gives on the matter will receive the necessary attention since he gives his views in good faith as a rate-payer.

The governance or, the lack thereof, of Kuala Lumpur is a super high-profile matter. Obviously, the overwhelming number of Pakatan Rakyat MPs in the Federal Territory of Kuala Lumpur is a stern reminder to the Minister that his task is made all the less easy for that matter.

From the standpoint of the ailing rate-payer, the preponderance of Pakatan Rakyat MPs in the Federal Territory of Kuala Lumpur that is being governed under the leadership of an UMNO-BN Minister is a positive tension that should engender better practises by the bureaucratic behemoth that is DBKL. Both sets of politicians from opposite sides of the aisle, so to speak, should put the necessary squeeze on DBKL's bureaucracy. That much still needs to be done in spite of that healthy political tension speaks volumes about the degree to which vested interests have embedded themselves into the DBKL superstructure.

So, our hope is that the Minister will find much common ground with the likes of Wangsa Maju MP, YB Wee Choo Keong and Lembah Pantai MP, YB Nurul Izzah Anwar, to place DBKL under intense scrutiny. That level of positive political cooperation can only benefit the ratepayers. And, it is a healthy competition for their voting sympathy.

I wish the Minister all the best in his heavy task and, I hope that he will reach out to the other FT MPs for the benefit of all ratepayers in Kuala Lumpur.

Redhuan Oon's inspirational story

Oon’s story starts with the dotcom bust in 2001 when he became a “burned-out chief ­technology ­officer in the city.” Married and a father of two, he had just lost his high-flying, five-figure-salary job.

In despair, he searched his ­feelings and realised that “I actually hated my job. It was meeting after meeting, day in and day out, and I felt straitjacketed in a coat and tie,” said the 47-year-old.

His worsening financial situation brought on by the loss of his job eventually drove him to move his family to the two-acre farm in Kuang. He rented the place to hide and recover financially, and to regain his heart and soul.

He found it a pleasant change from his previous time in the city and his family soon embraced the idyllic lifestyle of living in the ­countryside.

“I learned how to catch fish from the pond, plant taugeh (bean sprouts) and did my own plumbing and wiring for the house,” Oon said.

He and his wife Fatimah, and their his two young kids Naguib and Mira (who are now 14 and 18 years respectively), lived on a shoestring budget.

“Money was so tight my kids had to sell nasi lemak in school to help us get by,” said Oon.

Oon couldn’t get another job after the dotcom bust. “There was no demand for technology workers at that time,” he said.

He started his 20-year career as a programmer, writing in Cobol, or Common Business-Oriented Language. “But I ended up giving tuition in Maths and English to secondary school students to eke out a living,” he said.

“And then I also began breeding tilapia fish.”

But Oon was just as unlucky with fish breeding. A mud slide wiped out his pond and any dreams he had of becoming a successful commercial fish breeder about a year into the endeavour.

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OPEN-SOURCE evangelists seem to be everywhere these days. But you’d still never expect to find one on a farm in Kuang, on the outskirts of Kuala Lumpur.

Redhuan Oon certainly looks the part of an evangelist, working intently on his notebook amidst fruit trees swaying to a cacophony of goats, cows and chickens.

But don’t let the rustic simplicity fool you. Oon is a giant in the open-source community and proof that the Internet enables people to work from anywhere.

He leads some of the most savvy and cutting-edge open-source ­practitioners in the world as they push the envelope of distributed collaboration and the concept of software designed and supported by volunteers.

“Not just an evangelist. He’s better, he’s also an open-source expert,” said Datuk Badlisham Ghazali, chief executive officer of the Multimedia Development Corporation (MDeC), singing Oon’s praises.

“He has helped put Malaysia on the world technology map thanks to his community developed and supported enterprise resource ­planning (ERP) open-source effort,” he said.

“This proves to the world that Malaysians can not only embrace technology but also lead in ­improving, even building new ­technology.”

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I have actually only posted swatches of the report. Read the whole piece here.

Redhuan Oon is well and truly one of MDeC's greatest success stories. His tale is intriguing and inspiring at so many levels that I really needed to put this post up.

First, this is someone who went into very adverse conditions and stuck it out.

Then, it's about innovating on open source technology to become a world leader in the field.

It's also got a wonderful work-life balance angle. Working from a farm and, yet, imposing a presence globally.

Let's not forget the private-public collaboration between MDeC and Redhuan's team.

It's the stuff that we need to ingest. It's Malaysia Boleh free from any cynicism.

Barcelona's Big Bet On Innovation

This is an interesting and, if I may say, very relevant piece in Businessweek on what Spain has been working on since 2004 to engender innovation. The cluster effect situated in the beautiful city of Barcelona is regarded as a work-in-progress Even with 70 science parks already in existence in Spain. 22@Barcelona Chief Executive Josep Miquel Piqué is quoted as saying, "But these are not enough to transform an economy". "Knowledge infrastructure is not just fiber and telecom. You also need things like good food, wine, and aesthetics. So cities have become the new neuro-centers of the knowledge economy."

The aim is to create what Piqué describes as a "cluster of clusters," where professionals in emerging tech and service sectors can co-mingle and serendipitously dream up hybrid industries.

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Few neighborhoods more dramatically illustrate urban planners' shifting attitudes toward industry than Barcelona's Poblenou district. In the late 19th century, Poblenou was promoted as the industrial center of Spain. Over time, Barcelona's citizenry wanted its polluting factories moved outside the city. Recessions and Asian competition did the rest. By 1990, the district was a cemetery of 1,300 factories that once made everything from textiles to foodstuffs.

Now Poblenou illustrates the reurbanization of industry. The 115-block district is being transformed into 22@Barcelona, a global hub for "knowledge industries" such as digital media, clean energy, design, medical devices, and information technology.

Since construction of office and lab space began in 2004, 1,440 companies employing 40,000 workers have moved in. Google (GOOG), Yahoo! (YHOO), Orange, Telefónica (TEF), Lego, and Alstom all have research and design centers. Tenants of the media cluster include Spanish National Radio and Mediopro, the film studio behind the Woody Allen movie Vicky Cristina Barcelona, for which Spanish actress Penélope Cruz won an Oscar. Several universities also are relocating their campuses to the district, bringing 30,000 students. Within two decades, 22@Barcelona is expected to employ 130,000, have 4,000 new housing units, and have cost around $15 billion.

"Cluster-of-Clusters" Science Park

Spain already has an estimated 70 science parks. "But these are not enough to transform an economy," argues 22@Barcelona Chief Executive Josep Miquel Piqué. "Knowledge infrastructure is not just fiber and telecom. You also need things like good food, wine, and aesthetics. So cities have become the new neuro-centers of the knowledge economy."

The aim is to create what Piqué describes as a "cluster of clusters," where professionals in emerging tech and service sectors can co-mingle and serendipitously dream up hybrid industries. "We want to be a platform for mini-science parks," Piqué says.

Developers also want to integrate these clusters thoroughly into the urban environment: Companies are urged to use Poblenou as a "living lab" where they can test-market products before attempting to sell them broadly. They also are being encouraged to recruit local artists for design help and to get involved with primary schools to inspire young talent early.

Spain's economy could use the boost. After years of heady growth, the nation was hit especially hard by the real estate crash and global financial crisis, pushing unemployment above 17% in May.

Companies already have begun using the city as a living laboratory. One street is lit with lamps powered by light-emitting diodes, supplied by a consortium led by Spanish electric utility Endessa and engineering design firm Santa & Cole. Police plan to try out new low-energy motorcycles made by Barcelona's SunRed, which recently unveiled models of a solar-powered motorcycle shaped like a large snail.

Artist Recruitment

Local IT companies, meanwhile, can use the urban setting to launch new services for wireless telecom, health care, and security. "Our goal is to create new Spanish companies that think globally from the outset," says Piqué. "This is a good place for companies to learn in Barcelona before they sell to the world."

Barcelona's large community of artists is another asset. The district is setting up programs in digital arts, while companies developing everything from satellite software to workspaces using novel materials are hiring artists to create innovative designs.

To develop a long-term stream of local talent, the government is encouraging companies to set up programs in neighborhood schools. Lego, for example, is demonstrating robots to 8-year-olds. "We learned from Silicon Valley that only 4% of California secondary students choose to be engineers," Piqué explains. "It is good to attract the best talent from India and China, but we need to also attract talent from our own cities and regions."

And what about Poblenou's industrial legacy? Dozens of 19th century factory buildings complete with their towering brick chimneys have been preserved to echo the Old Economy past.

Measuring Malaysia's economic performance: GDP vs GNP

etheorist in his usual austere and direct clarity in his Economic Policy blog has made a very pertinent observation on the way in which Malaysia's economic performance should be measured. There is a fundamental difference between the items that are used to estimate the Gross Domestic Product (GDP) and the items used for Gross National Product (GDP). Which is the more relevant measure of the true contribution of Malaysian businesses and enterprises? GDP measures every economic activity within Malaysia, whether by Malaysians or by foreign investors.

The concern here is that Malaysia's investment policies of attracting foreign direct investments (FDI) have given Malaysia's economic managers and, Malaysians, a false sense of comfort and security that, as a nation, we are progressing very well. This may cloud over the low skills and low wage regime that we have in place at present.

This post is timely and, it is highly relevant, not just for economic planners but, also for the rest of Malaysia as we all are trying to figure out how to improve our individual and collective lot. Read on:

Is Malaysia's GDP losing out to GNP?

GDP measures the output produced in Malaysia, regardless of whether by locals or foreigners.

In trying to boost GDP, we have invited FDIs and foreign workers to Malaysia to invest and to work.

We have built massive infrastructure for these foreign investors and foreign workers to use - for them to make a profit and for them to earn a wage.

The whole purpose is to boost the "economic growth" as measured by GDP.

But I can tell you, a priori, that GNP may or may not be growing under the present circumstance as fast as GDP.

You have to net out foreign profits and foreign wages from GDP to get GNP.

GNP measures incomes that accrue to Malaysians, whether at home or abroad.

To be fair, therefore, we must add the incomes of Malaysian firms and Malaysians abroad to get a proper GNP.

Now, we have grown local Malaysian firms to become large so that Malaysia becomes too small for them and they have to get jobs from abroad.

(What happens to the strategy that Malaysian firms, when made large, will be able to reinvest in Malaysia and regenerate growth at home? Could it be that their lack of ability to innovate is forcing them to do the same stuff elsewhere - having learnt the tricks of dealing with politicians at home?)

Of course it is good that Malaysian firms can do well abroad and create jobs abroad - but that does hollow out the local economy - when we do not invest at home - why? - because the investment climate at home is not so good any more - because easy money is no more?

For accounting purposes, we can require Malaysian firms to declare their global income and add that to our GNP.

For Malaysians abroad, I am not so clear.

It has to do with how we treat fellow Malaysians who have decided to work abroad.

If they take up a PR or a foreign citizenship, Malaysia seems to be very happy to "get rid" of them.

If that is the case, then we may not technically be correct to include the earnings abroad of fellow Malaysians who have decided to make a foreign country their home - although they may each feel every inch a Malaysian in their hearts.

In the meantime, we seem to be quite happy to trade our well-educated multi-lingual born-and-bred Malaysians for illiteral foreign unskilled labourers.

We seem to have traded off our middle class for a low-class manufacturing sector and basic services sector that relies on cheap third-world labour.

As we now stop the inflow of illiteral labour, are we changing our policies to bring back our talented professionals?

For 1Malaysia to work, we may have to redefine Malaysians.

Who's planning the economy now?

I had a good chuckle reading Anita Gabriel's piece, Alphabet soup of economic councils, which quite aptly captures the perplexing array of abbreviated agencies that were created and created and created for the purpose of dealing with Malaysia's economic challenges.

If Anita Gabriel is correct, the final name of this body is called the National Economic ADVISORY (as opposed to "Action") Council carrying the bland albeit and vaguely familiar abbreviation, NEAC.

Regardless of the acronym or abbreviation, the NEAC has no members yet. But, it does have a Chairman in the form of Tan Sri Amirsham Aziz (formerly of Maybank and ex-Minister). Is he the right man for the job? Always, there are differing views. He did steer a relatively quiet tenure in Maybank. This is not a bad thing for a bank. And, he also steered a relatively quiet tenure as the Minister in charge of the Economic Planning Unit and the old NEAC. That was a bad thing for a Cabinet member.

Who else is going to join him in the NEAC? I am not holding my breath.

Given the manner in which the Prime Minister has gone about in making his Cabinet appointments and, given the Honours List for the Hari Keputeraan Yang Di Pertuan Agong, one suspects that the NEAC will comprise the usual suspects. Who these "usual suspects" are is not a stretch of the imagination. Check out the previous NEAC members. Check out the previous Economic Council members. Those who are still alive (and, I believe ALL of them are still alive) stand a better than even chance of being in the NEAC.

It certainly gives the impression that the economic planning and strategy talent pool in Malaysia is very, very small. Lots of in-breeding. And, we all should know what in-breeding results in. Dr M had a few paragraphs on in-breeding in his seminal book, The Malay Dilemma.

Don't get me wrong. As a stakeholder who prays every month-end and year-end for the good economic health of Malaysia, I desperately want the Malaysian economy to be planned and managed with the greatest profundity of wisdom and the executed with a high level of excellence, brilliance and anticipatory insight. Perhaps that is why I focus so much on economic matters instead of creating a blog that dwells (or wallows) ad nauseum about the past glories and, erstwhile travails of Leeds United (and, while we're on this, is Liverpool about to join Leeds in the middling depths of the English League One?)

But, I digress....

The continuing relevance of SMEs in the "new economy" (and fiscal policy suggestions)

It is true that the services sector is fast becoming a major revenue source for Malaysia. In fact, it is the fastest growing sector of the economy. The Ministry of International Trade and Industry's recent pronouncements confirms this.

At the same time, by the recent initiatives of one of MITI's agencies, SMIDEC, MITI is has also shown that it regards the SME component of the manufacturing sector as being a highly important part of the Malaysian economy. This is good and sensible.

Sadly, the SMEs are still dogged by poor forward planning.

Characteristics of SMEs
SMEs are businesses that are born from Malaysians that have a thirst for independence and a sense of adventure. All SME owners used to be a part of a larger set-up. They used to be employees.

When opportunities came by, these entrepreneurs grabbed it. Using whatever financial resources they could find, they rented premises, bought equipment, hired people, called up old business contacts and, off they went.

Many fell by the wayside. Many succeeded.

Some SME owners have been able to parlay their initial success by transforming the nature of their businesses. Through organic growth they moved up the value chain.

Others, through prompting from business partners, were made aware of new businesses that there was a demand for.

Those that provided ancillary services and goods for the large corporations, especially in the electrical and electronics sector and, automotive sector, have found that they are not immune from global economic forces. These SMEs are recoiling with few alternatives in sight.

All the SMEs share one challenge, though. They lack the resources for forward planning. This is in the area of Research and Development.

What is R&D, really?
To many, R&D means having a room full of gleaming equipment and technicians in white lab-coats pottering around with graph pads looking at beakers, Bunsen burners and coloured liquids bubbling away.

To others, R&D means a geeky, bespectacled, skinny fellow staring at several computer screens with reams of paper strewn all over the cubicle.

The reality of R&D for SMEs is quite different.

What is R&D to an SME, really?
To an SME owner, R&D means any of the following:

Staff-pinching. Lure technicians with the know-how away from another organisation to help start-up a new business or, a new production process. Lure marketing stars away from another organisation to create the new business unit with a ready maket demand.

Visit other countries. This is to get an idea of the next stage of development and, the new products that the SME's existing production lines can adapt to.

Call it innovation. Call it copy-catting. Call it underhand.

But, this is the reality of what an SME can do to conduct "R&D" given limited resources.

This is how the Japanese and South Koreans has done it. And, how they have excelled at it.

The Chinese (as in the People's Republic of China) experience is a little different. Due to their sheer size, people with superior technologies have actually begged to set up shop there. So, all the Chinese had to do was to reverse engineer everything worth reverse engineering right in their own backyard.

What's my point?
Malaysia is a small economy by global standards. But, (with a tip of the hat to E.E. Schumacher) small can be quite beautiful.

My point is that while much of our resources can and, should be poured into services sectors like tourism (which is a big revenue earner) there is a need for fiscal policy that is directed towards encouraging all levels of R&D.

By "all levels of R&D" I mean, not just providing incentives and allowances for the creation of laboratories and clean rooms and, attendant equipment.

Tax deductions on expenses that can be classified as R&D
There is a need for incentives and allowances for SMEs to claim tax deductions for expenses incurred for non-traditional R&D methods.

For example, if the SME owner travelled to Salt Lake City, Utah and stayed a week and, I attach profiles of companies or products manufactured or services provided there which is similar to the activities that the SME is providing, that the SME can learn and benefit from, then the SME should be entitled to claim a double deduction or triple deduction. Of course, there must be a cap on the number of SME representatives. Probably limited to two claims.

If the SME subscribes to an online service or publication that is related to the SME's activities, then the SME should be entitled to claim a double deduction or triple deduction.

If the SME participates in a local or international conference or meeting that is related to the SME's activities, then the SME should be entitled to claim a double deduction or triple deduction.

In other words, MITI needs to work with the Ministry of Finance and the Inland Revenue Board (IRB/LHDN) to facilitate this.

My penultimate point for reiteration is that a broader, more liberal, more amplified fiscal approach should be taken for the incentivising of R&D in Malaysian SMEs.

This will catalyse greater awareness of innovative ideas for SMEs.

It is one instance where copy-catting is rewarded. If in doubt, don't just ask me, ask the Japanese and South Koreans.

Independent directors (and related matters)

Corporate Governance is an aspirational principle to engender greater integrity, truthfulness and, yes, transparency in companies. The idea is to ensure that companies provide accurate financial and operational information which are timely. This information, it is hoped, will enable everyone having some financial interest in the company to form an accurate view of what's going on in the company.

That's the theory.

Such an aspiration is, then, balanced against the need for companies to maintain some secrecy so that competitors will not be able to take advantage of the competitive edge that companies have against such competitors.

That's the dilemma for everyone who has a stake in the company but, who are not involved in the management and operations of the company.

Open the windows. Draw the blinds.

In the governance of companies, public companies, listed or unlisted, GLCs and PLCs - the apex management body is the Board of Directors.

Within the Board of Directors, there are Executives and Non-executives.

Executives are the people in power. They call the shots. They sign the cheques. They decide on the life and death of everything that a company does. This includes the decision as to who are appointed as Non-executives.

The Minority Shareholders Watchdog Group (MWSG), with the encouragement of the regulators, are trying to create a pool of Independent Non-executive Directors.

This is a good thing. It is a necessary development. It is something to push for. It is consistent with the aspirations of Corporate Governance.

Is it a panacea?

Obviously not.

But, it's something that is better to have than not to have.

I have told everyone who is prepared to lend me an ear that companies are dictatorships. The Executives are all-powerful. None may oppose.

This will not change. Not even with a pool of Independent Non-executive Directors. Not even if GLCs and PLCs are obliged to appoint people from a pool based on the cab rank principle, i.e. first-come-first-served basis.

There are ways for the Executives to neutralise the Independent Non-executives. There are many, many ways.

But, it's something that is better to have than not to have.

The principle is that of having checks and balances. The principle is to have constant audits.

NOTE: A timely development. The SC and Bursa just announced "CG Week". Read here.
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Which leads me to wonder about the constitutional structure of a nation like Malaysia.

There is a Monarch or Head of State, an Executive (Cabinet and Civil Service), a Legislature and, a Judiciary. These institutions are intended to audit each other. They are intended to be checks and balances against each other.

Constant audits are necessary.

Even a country with a strong record of quashing dissent has acknowledged the need for audits. Read here.

The greatest audit is in the ballot box. Even then, as with the corporate context, there are ways to neutralise the ballot box.

But, it's something that is better to have than not to have.

As always, in discussions of this nature, Charles de Secondat, Baron de Montesquieu who wrote the Spirit of the Laws, is accorded the privilege of the last word:

When the legislative and executive powers are united in the same person, or in the same body of magistrates, there can be no liberty; because apprehensions may arise, lest the same monarch or senate should enact tyrannical law, to execute them in tyrannical fashion.

Putting the "new economic model" in perspective

All the talk about the new economic model for Malaysia has to be taken with a huge pinch of salt because the desire to take the Malaysian economy to the next few levels up the value chain must be supported by the fulfillment of many assumptions. These assumptions include raising the quality of education, the technical skills of the workforce and, a clear commitment by policy-makers to economic goals.

I don't really want to belabour the obvious deficiencies in the Malaysian system.

Just take some time to read this KPMG report on China's moves towards becoming a global outsourcing giant.

Whatever aspirations that we, in Malaysia, have about tweaking or drastically reforming the economy; whatever socio-political nonsense that is going on on the language of instruction; and, whatever nonsense that is going on in Malaysia - this nonsense needs to be seen in the context of the reality that exists - that, at any level up the value chain that Malaysia aspires to, we need to be able to compete with a behemoth like China.

The tempurung is going to get smaller and smaller. The sooner Malaysians understand this, the better we will all be.

Bumiputras cannot rely on the economic crutch any longer. It is becoming too expensive for a paternalistic government to pay for economic prosthetics. No to mention, politically expensive.

Non-bumiputras cannot continue to rely on utilising Bumiputra know-who to secure business opportunities.

This modus operandi that has subsisted for 40 years has made Malaysians, Bumiputra and non-Bumiputra, flabby and lazy, mentally and physically.

Read the KPMG report which describes China's ascendancy in the global outsourcing market. It's not just in manufacturing. It's also in high-end, high value-added industries like IT. In every segment that Malaysia dares to imagine our new economic model to be in, countries like China are offering a bigger bang for the buck.

There is no room for rent-seeking behaviour in that context. That means the greatest skill of Malaysians over the past 40 years has become completely obsolete.

It's time to learn new skills. It's time to study hard. It's time to stop arguing. Time to stop talking. Time to start doing.

Removing consumption subsidies

Going by reports, consumption subsidies for general purpose flour, fine and coarse sugar, and standard loaf bread will cease by the end of 2009. This will enable the market forces to determine the prices of these essential goods.

At subsidised rates, the retail price for flour is RM1.35/kg, coarse sugar RM1.45/kg, fine sugar RM1.55/kg, and bread RM2.10/400g.

Without the consumption subsidy, the prices of essential items are expected to increase. The adjusted price of fluor will beRM2/kg, sugar RM2.05/kg, and bread RM2.42/400g.

This will be painful for the lower-income groups.

Food stamps or coupons are needed for lower-income groups
I expect that the government will have to introduce a more target-specific relief model, such as food stamps or coupons. There will be an administrative cost to this approach but, such cost will be nowhere near the cost of a broad-based consumption subsidy that is in place today.

This is a correct policy adjustment.

Consumption subsidies should be directed only at groups that fall below a specified income. In other words, the poorer segments of the Malaysian community.

This policy adjustment is necessary. It is not a moment too soon.

These economic moves are part and parcel of Malaysia's necessary adjustment to wean Malaysians away from the subsidy culture.

It will make Malaysia more competitive in the longer term.