Undermining Bank Negara's policies - Allowing developers to become moneylenders is a HUGE mistake

The move by the Malaysian Government to allow property developers to obtain moneylending licences is a HUGE mistake. There is no way to sugar coat this.

Many of us are aware of the long, long time it took for Bank Negara Malaysia to bring the non-bank financial institutions such as Bank Rakyat and the Malaysia Building Society Berhad (MBSB) into its regulatory purview. This effort was to allow the monetary authority to more efficiently manage the monetary aspects of Malaysia's economy.

The likes of Bank Rakyat and MBSB were able to implement fairly liberal and generous financial products below the radar of Bank Negara previously. 

With the onset of the Financial Services Act 2013, Bank Negara's reach over Malaysian financial-type institutions was almost complete.

This new move by the Urban Well-being, Housing and Local Government Ministry to issue moneylending licences to property developers threatens to undermine Bank Negara's monetary management.

We thought it was clear as the light of day that Bank Negara instituted measures over the recent 2 years to cool down the overheated property market and prevent property bubbles from forming. Property bubbles that burst can have very serious implications for the country's economy.

And, moneylending, being a financial transaction has a direct causal link to the overall monetary health of the Malaysian economy. A fragmented moneylending market that is outside Bank Negara supervision is a bad thing. Worse, this fragmented moneylending market will have ZERO SUPERVISION because the Urban Well-being, Housing and Local Government Ministry does not have any competency in understanding the impact of possible aggressive lending methods by desperate property developers.

This is where the nightmare scenario may happen and property bubbles start to form.

I am already so terribly annoyed with the fragmented property development sector. That is largely under the purview of local councils and state governments.

Judging from the volatility of the property sector, it is clear that there really is no national property development policy. 

Property developers appear to be no different from farmers. The supply and demand of the property market exhibits all the bad traits warned by the Cobweb Theory in economics. One basic definition can be found here and I reproduce it for you-

The cobweb theorem is an economic model used to explain how small economic shocks can become amplified by the behaviour of producers. The amplification is, essentially, the result of information failure, where producers base their current output on the average price they obtain in the market during the previous year. This is, to some extent, a non-rational decision, given that a supply side shock between planting and harvesting (such as an unexpectedly good or bad harvest) can lead to an unexpectedly lower or higher price. This results in either a higher output or a lower output in subsequent years, and moves the market into a long-term disequilibrium position.

The structural regression of Malaysian manufacturing

The economists at the ADB has given a cogent analysis of the structural economic challenge now being faced by Malaysia. This has been bothering me for the longest possible time. Perhaps the part of the analysis set out below that annoys me the most is the view that the present structural deformities could have been avoided if Malaysia's economic planning had been more objective and less dogmatic. This may be one of the matters haunting the likes of Dr M and, if it isn't, it should. Not the least reason being the fact that he had a good 22 years of dominance to get it right. Structural economic deformities are not things that happened overnight. It is a slow and debilitating accretive process that could have been treated.

Malaysia’s manufacturing sector is reversing to a state reminiscent of its post-colonial stage of development. Regrettably this situation was avoidable.

When the Federation of Malaya gained independence from Britain in 1957, economic conditions were ripe for rapid and sustained growth. Its primary export sector was showing immense potential for expansion. Primary commodities — particularly tin ore and natural rubber — accounted for a third of Malaysia’s GDP and over 75 per cent of exports by 1970, a legacy of its colonial past.

But manufactured exports accounted for less than 10 per cent, raising concerns that heavy reliance on a few commodities left Malaysia vulnerable to terms-of-trade shocks from swings in commodity prices. There was little economic diversification up to the 1980s, with already undersized manufacturing focused on little more than processing agricultural and mining output.

Several terms-of-trade shocks in the early 1980s — followed by global recession a few years later — did ultimately balloon fiscal and current account deficits, setting the stage for radical reform. A new National Development Policy was introduced in 1990, easing the affirmative action strictures of the pro-ethnic Malay New Economic Policy (NEP) and placing wealth creation ahead of wealth redistribution. The Promotion of Investment Act of 1986 extended generous incentives for private investors and relaxed regulations on foreign direct investment (FDI), allowing for full foreign ownership of export-oriented companies. Massive FDI inflows ensued.

These reforms opened Malaysia’s gates to the global production network and it succeeded in developing a vibrant and competitive electronics sector. Manufacturing grew sharply from about 12 per cent of GDP in 1970 to over 30 per cent by the mid-1990s. The share of electronics in manufactured exports soared from below 50 per cent in 1980 to peak at more than 70 per cent in 2000. But its share has fallen to below 50 per cent again in 2015.

While Malaysia had an early start in electronics, it could not build on this technological advantage. As wages started to rise, skills remained weak. After the Asian financial crisis (AFC) struck in 1997, FDI in Malaysia never recovered and domestic investment slumped as well. Since 2006, Malaysia has been a net exporter of capital, a process many suspect is driven more by capital flight than outward FDI.

Although a net labour importer, Malaysia remains a net skills exporter, with growing numbers of professionals migrating to Singapore and other welcoming industrialised countries. With these developments, Malaysia’s good fortunes have reversed in recent years, both in manufacturing and across the economy.

Like its early post-colonial phase, Malaysia is moving back to processing its agricultural and mineral resources. The only difference now is that the commodities themselves have changed. Rubber and tin have shifted to palm oil and petroleum. Petroleum refining and palm oil processing accounted for almost 19 and 12 per cent of manufacturing output in 2012, respectively — with both of these industries now bigger than electronics.

While developing countries are often encouraged to process agricultural or mineral outputs before exporting to increase their value, Malaysia appears a rare example of an upper-middle-income country — aspiring to high-income status — that is stunting or even reversing its previous successes in manufacturing.

This manufacturing retrenchment has been demonstrated by the overall contraction of this sector’s share of GDP, which fell gradually to 24 per cent in 2008 to remain roughly at that level ever since.

Why should we care about Malaysia’s manufacturing contraction? The main concern about petroleum refining and palm oil processing is that they are capital-intensive and generate few jobs. Despite their importance in overall output, just 14,400 workers are employed in petroleum refining, compared to the nearly 200,000 workers employed in electronics. Furthermore, agro- and petrol-processing industries generate relatively low-productive, low-skilled jobs and so wages are also low. The largest share of manufacturing workers are plant and machine operators who have an average annual salary of around US$4000 when per capita incomes average US$11,000.

Malaysia may be experiencing ‘premature deindustrialisation’, having transitioned to a service led economy before it has fully reaped the benefits of industrialisation. But unlike many other countries with similar experience, Malaysia’s case appears to be driven more by policy than technological disruption, trade or globalisation. There is growing recognition that many of the country’s problems — including the slump in private investment — are rooted in the distortions resulting from the design and implementation of the NEP and its subsequent incarnations. The government-linked corporations spawned to serve racial economic redistribution now crowd-out private investment in most sectors of the economy, including manufacturing.

If Malaysia is to realise its aspirations and enjoy living standards associated with high-income countries, it must arrest this structural regression and revive private investment in manufacturing. But regenerating manufacturing is unlikely without an overhaul of current policies. And while Malaysia may still reach the technical threshold of high-income status in a few years — assuming an economic crisis can be averted till then — this will still mean little to the welfare of workers in manufacturing if it continues its journey backwards.

Foreign workers v Malaysian workers: The Importance of the Minimum Wage

Malaysia seriously needs to review the very liberal policy on the importation of low-skilled manual workers.

This is an economic policy issue. It's not an issue for the Immigration Department or Home Affairs to decide willy nilly.

Young Malaysians who are entering into the workforce are accused of being choosy and selective and spoilt. Is that true?

As with all other countries, anywhere in the world, many young Malaysian men hate studies and they find the need for further education appalling. Is that a bad thing? Do we abandon them?

Young Malaysians will make their own choices. No amount of legislation can change the decision of a young Malaysian to not pursue further education.

So, where do they go to make a living? They will invariably migrate from smaller towns and hamlets into larger towns and cities. 

After they arrive they discover that with their low skill sets, they can only get factory jobs and logistics work as drivers and delivery staff. They can also get jobs in food and beverage outlets.

The wages they receive in those jobs are in the RM5.00 to RM6.00 per hour band.

Work in "dirty jobs" sectors like construction and waste disposal is not much better than that wage band.

Young Malaysians can handle that kind of pay for the first 2 to 5 years of working life. Every Malaysian will have some relative or friend who can provide some room and board during these early years. 

What happens when the young Malaysian want to settle down and start a family?

How much does it cost to get married, start a family and start a home?

This is where the policy on Minimum Wage becomes important.

There are many critics of the Minimum Wage. All of these critics are, of course, employers. Most of them are in labour intensive sectors such as property development, manufacturing and plantations. These are "dirty jobs" sectors that choosy and selective and spoilt Malaysians are accused of avoiding.

Consider this; what if the Minimum Wage is imposed at, say, RM10.00 per hour instead of the current prevailing market rate of RM5.00, or less.

Of course, business owners will experience profit margin compression during the transition. And, there will be many reverberations and percolating implications.

But, this is where the Malaysian Government needs scenario planning and econometric simulations to consider these possibilities and come up with a slew of possible policy responses.

Regardless of the political convulsions that are taking place and issues of serious corruption and abuse of power at the highest levels of the Malaysian government, issues such as economic policy planning to address issues of concern to Malaysian workers and their livelihood must constantly be addressed.

I am against the liberal policy of importing foreign labour. There is adequate human capital at all levels of skills in Malaysia that can handle Malaysia's capacity and economic output.

I believe a sensible start to an inquiry into the matter of the Malaysian workforce must start with a putative position on a Minimum Wage that allows a young Malaysian to dream of a decent start to his or her working life.

A sensible Minimum Wage will give the average Malaysian a sense of dignity in living and it is a starting point for the average Malaysian to consider whether his or her current skill set is adequate or, needs improvement through further vocational training or tertiary education. It is merely a starting point in a Malaysian's journey as a good and citizen.

SPM Forecast Results - A clear case of over legislation

In the matter of the Ministry of Education's notice to private colleges to stop the practice of relying on SPM forecast results to assessing student applicants, it is abundantly clear that the Ministry has overreached.

This is a clear case of over legislation. Let me be categorical about this-

Firstly, when a private college - emphasis on the word "PRIVATE" - chooses to rely on a student applicant's SPM forecast results that private college is taking a risk. It is, if you will, a BUSINESS RISK. It is a risk in the sense that if that student applicant's actual SPM results falls below the minimum requirements set by the private college the private college will have a vacant position.

It is a BUSINESS RISK in the sense that the number of places available with each intake is, theoretically, finite. So, if a student applicant proves to be below par and, therefore, needs to be ejected, there is a vacancy. Proportionate fees collected by the private college will need to be refunded causing a loss of revenue.

Secondly, when a student applies to a private college using the SPM forecast results, that student is also taking a FINANCIAL RISK and OPPORTUNITY RISK in the sense that if the actual SPM result falls below the private college's minimum entry requirements that student may NOT receive a full refund of the fees paid because time has elapsed and he or she has consumed the teaching services provided by the private college.

The opportunity risk comes in the form of having lost the time and opportunity to have done something else - like join Raleigh International to enrich the student's life through charitable and welfare work...for instance.

This type of transactional relationship is rooted in a private contract between the private college and the student applicant.

It is a free market exchange in the PRIVATE SECTOR that eases the burden on the PUBLIC SECTOR public universities.

All Malaysians understand the need fore private colleges to be licensed and regulated to ensure that there are no scam colleges and, that all academic curriculum offered is in line with Malaysian academic requirements.

But, in the matter of the MOE's notice to private colleges to disregard SPM forecast results the MOE has clearly over legislated.

It is very odd that to date, the MOE has not offered any reasons at all on the basis and intent behind the notice.

Will the Ministers (it is plural because there are apparently 2 Ministers in charge of the education portfolio) or any one of them step up to explain this odd decision on SPM forecast results?

Or, will they abdicate their responsibility and push forward a nameless official with an impassive expression who will drone inanities and irrelevancies on this matter in the vain hope that journalists and parents of students will just tear their hair out and just curl up and shrivel themselves to death - a death caused by exasperation with the Malaysian Ministry of Education which, in recent times, has started to resemble Monthy Python's Ministry of Silly Walks?

GST and a Robin Hood/Sheriff of Nottingham Government

After much vacillation and hesitation, the government finally fixed a date for the implementation of the GST. And, it had to be April Fools Day in 2015.

Be that as it may, I see the GST as a necessary move. It is inevitable. I'll tell why it is inevitable.

Our country has a lot of cheap labour. Most of us fail, refuse or ignore the necessity to acquire higher value skills. So, the average working citizen does not pay any tax.

Why many Malaysians fail, refuse or ignore the need to acquire higher value skills should be the subject matter of serious study (pun intended).

Is it race? Is it culture? Is it the social environment? Is it religion? Is it the hot tropical weather? Is it the abundance of food?

Or, is it plain indolence (which emphasises our slothlike approach to pretty much everything)?

Why aren't every young Malaysians scrambling to get a better and higher education so as to go higher up the value chain?

Why has the education system spat out and churned out only low-skilled citizens who love to complain and do no work of any value?

And so, here we are.

We have a bunch of politicians in government who are handing out freebies like there is no tomorrow. These guys need to collect more tax money so that they can give out more money (and, keep a lot too).

It does sound like the Malaysian government has acquired a Robin Hood complexion, does it not? 

At the same time, it does seem like the Malaysian government maintains its Sheriff of Nottingham demeanour of collecting tax, does it not?

This is political and leadership schizophrenia.

Yes, this posting meanders like the Klang River. In so doing, it mimics the political and governance landscape.

An overhaul of the theory of consumer choice

Nobel economics prize winner Daniel McFadden is on to something really interesting about debunking some conventional ideas about how consumers behave and make choices. Read here. I'm not able to put my observations into writing right now. Read on ...

“SOVEREIGN in tastes, steely-eyed and point-on in perception of risk, and relentless in maximisation of happiness.” This was Daniel McFadden’s memorable summation, in 2006, of the idea of Everyman held by economists. That this description is unlike any real person was Mr McFadden’s point. The Nobel prizewinning economist at the University of California, Berkeley, wryly termed homo economicus “a rare species”.

In his latest paper* he outlines a “new science of pleasure”, in which he argues that economics should draw much more heavily on fields such as psychology, neuroscience and anthropology. He wants economists to accept that evidence from other disciplines does not just explain those bits of behaviour that do not fit the standard models.

Rather, what economists consider anomalous is the norm. Homo economicus, not his fallible counterpart, is the oddity. To take one example, the “people” in economic models have fixed preferences, which are taken as given.

Yet a large body of research from cognitive psychology shows that preferences are in fact rather fluid. People value mundane things much more highly when they think of them as somehow “their own”: they insist on a much higher price for a coffee cup they think of as theirs, for instance, than for an identical one that isn’t.

This “endowment effect” means that people hold on to shares well past the point where it makes sense to sell them. Cognitive scientists have also found that people dislike losing something much more than they like gaining the same amount. Such “loss aversion” can explain why people often pick insurance policies with lower deductible charges even when they are more expensive. At the moment of an accident a deductible feels like a loss, whereas all those premium payments are part of the status quo. 

Another area where orthodox economics finds itself at sea is the role of memory and experience in determining choices. Recollection of a painful or pleasurable experience is dominated by how people felt at the peak and the end of the episode.

In a 1996 experiment Donald Redelmeier and Daniel Kahneman, two psychologists, showed that deliberately adding a burst of pain at the end of a colonoscopy that was of lower intensity than the peak made patients think back on the experience more favourably.

Unlike homo economicus, real people are strongly influenced by such things as the order in which they see options and what happened right before they made a choice. Incorporating these findings into models of consumer behaviour should improve their power to predict everything from which loans people choose to which colleges they apply for.

 Trust is something economists already incorporate into their models. But trust turns out to be not just a function of history and interactions, as dismal scientists tend to think, but also a product of brain chemistry. Pumping people with oxytocin, the so-called “love hormone”, has been found to make them much more generous in games where they have to decide how much of their money to entrust to another person who has no real incentive to return any of it.

Sovereign, indeed. Much of this may be alien to modern-day economists, but it is in line with the conception that other disciplines have of human decision-making. Psychologists have long known that people’s choices and preferences are influenced by others.

Biologists have a much clearer understanding of altruism and kindness, whether to kin or strangers, than economists, who typically emphasise the dogged pursuit of self-interest. This way of thinking would also have been recognisable to their intellectual forefathers. Adam Smith wrote extensively about the central role of altruism and regard for others as motivators of human behaviour.

The idea of loss aversion would have made sense to Jeremy Bentham, the founder of utilitarianism: he spoke of increased pleasure and reduced pain as two distinct sources of happiness. Mr McFadden believes that economists need to do things differently if they are truly to understand how people make decisions. Manipulating brain activity is one way of delving into where economic choices really come from.

Analysing the information people get through social networks would help them understand the role of influence and identity in decision-making. Such tools have implications for policy. Plenty of poor people in America are wary of programmes like the Earned Income Tax Credit (EITC) because the idea of getting a handout from the government reinforces a sense of helplessness. Dignity is not something mainstream economics has much truck with.

But creating a sense of dignity turns out to be a powerful way of affecting decisions. One study by Crystal Hall, Jiaying Zhao and Eldar Shafir, a trio of psychologists, found that getting poor people in a soup kitchen to recall a time when they felt “successful and proud” made them almost twice as likely to accept leaflets that told them how to get an EITC refund than members of another group who were merely asked about the last meal they had eaten.

A nudge and a think

Taking the path Mr McFadden urges might also lead economists to reassess some articles of faith. Economists tend to think that more choice is good. Yet people with many options sometimes fail to make any choice at all: think of workers who prefer their employers to put them by “default” into pension plans at preset contribution rates.

Explicitly modelling the process of making a choice might prompt economists to take a more ambiguous view of an abundance of choices. It might also make them more sceptical of “revealed preference”, the idea that a person’s valuation of different options can be deduced from his actions. This is undoubtedly messier than standard economics. So is real life.

* “The New Science of Pleasure”, NBER Working Paper No. 18687, February 2013

Legacy

I read with great interest the latest blog post by etheorist here. The blogger wrote about the fixation many of us have with the accumulation of wealth and went on, wistfully, to reflect on the implications of this wealth-fixation of ours. The blogger raised much food for thought (if we have time for that).

I also read, with sadness, the Obituary of Datuk Khoo Eng Choo. Datuk Khoo was the leader of PriceWaterhouseCoopers in the 1990s together with YM Raja Arshad.

I didn't know Datuk Khoo personally nor have I ever worked with him.

The anecdotal information that I have suggests that Datuk Khoo and his team built the old PWC from the foundation and legacy left by the late Jaafar Hussein who had moved on to helm the Malayan Banking group and, later, became the Bank Negara Governor.

Datuk Khoo and Raja Arshad and the team they had built PWC's reputation and sealed its dominance of the accounting profession in Malaysia. 

To acquire market leadership in any field, in any market jurisdiction, requires great skill, care, industry and foresight. By all accounts Datuk Khoo had these qualities in abundance.

As any great leader will attest, the path to success is littered with injured egos and perceived unfair treatment by team members who were found wanting. I am certain that Datuk Khoo who is said to have possessed Napoleonesque qualities has his fair share of detractors.

This should not cloud his legacy and the achievements of the team that he led at PWC in the 1990s.

I hope that those who worked beside him will not consign him and his work to ignominy. 

Where etheorist's blog post and the matter of Datuk Khoo's legacy merges in my mind is the issue of what types of goals and values that we should have and what we want our offspring and successors to embrace.

I wish to hazard a proposition that perhaps a life well lived should, ideally, leave a zero sum legacy where people will say that in our lifetime we did not leave the world worse off that when we first arrived.

I would hazard a corollary proposition that if we were to be excessively exuberant during our lifetime, that excessive exuberance led to an improvement to the world that we lived in.

For, if we left the world a worse off place than it was when we first arrived, we would have committed a crime, or, as the people of faith calls it, a sin.

So, picking up on etheorist's thread, our industriousness in wealth accumulation should lead us to acquire and enjoy a comfortable and reasonable luxurious life of happiness and when the time comes for us to depart, we should only leave behind enough for our children to receive a decent education and an adequate stipend for them to get started on their life's journey.

Anything exceeding that should be bequeathed for the betterment of the community.

Those, I believe, are reasonable goals and values for each of us. 

Credit Growth v Asset Bubble

I am bothered by a report in Star Online containing this statement, "Analysts expect property loans to maintain their position as a key growth driver of credit expansion with some estimating them to grow between 10% and 12% this year due to the low interest rate environment and ample liquidity in the banking system.". 

Where does "credit growth" end and "asset bubble" begin?

This is something that should trouble Bank Negara Malaysia and Malaysia's economic planners. 

I have always believed that property-led credit growth implies asset-bubble formation since there are really no material salutary effect from property booms to the wider economy.

And, why do I say that?

If housing property booms are linked to genuine economic growth led by, say, manufacturing or commodities, then, we can safely assume that there is a growth in income to the nation's workforce who can then invest their surplus income to buy their dream home or invest in property. 

If there is loan growth from borrowings by businesses to fund expansion, then, there is some real economic action going on.

But, if loan growth or credit growth is led by property purchases, not led by business expansion, then, alarm bells should be ringing in the head of all rational people.

This phenomenon strongly suggests that Malaysians with savings are fed-up with low yields from fixed deposits. They are desperately looking for alternative things to park their savings with. 

These people seem to have found that buying properties in recent years gives them better financial returns in the form of capital appreciation.

Because of this series of transactions between and amongst these people, there is a perceived demand for properties above and beyond the norm.

People are buying properties, expensive properties, purely for investment in expectation of capital gains. They don't intend to live in these residential properties. They look down at the rental yields, which are paltry. They only want the capital gains. But, how long can this game go on for?

Banks are fueling this mania.

This is just my humble opinion. 

Euro: The downside of common currency

I'm not sure if the architects of the Euro could have envisaged a widespread economic contagion that covers Portugal, Ireland, Italy, Greece and Spain (hence the porcine acronym of PIIGS).

Were it not for the Euro, I would imagine that if any nation goes into economic turmoil for whatever reason, say, the bursting of asset bubbles, the national currency will depreciate because that nation's debt will invariably increase. The conventional response to economic crisis is the printing of money to finance fiscal deficit.

Where a common currency is in play, which is the case of the PIIGS, there are many more variables. 

One such variable is the obvious differences in the economic health of member countries sharing the common currency.

Unlike the PIIGS, leading member countries like Germany and France are in relatively robust economic health. They would cherish a stable currency at a reasonable value relative to other currencies so that their cross-border trades within and outside of the European Community are predictable. 

But, the dilemma of the economically robust member countries is that they are now reluctant participants to bail out (or, to be politically correct, support) the PIIGS.

The common currency has become the unintended tether that threatens to pull down the healthy economies as they bailout the ailing ones. The awful metaphor is that of the mountaineers who have to deal with fallen colleagues whose lives are, literally, hanging by a thread.

Without the Euro, the PIIGS would have taken a depreciation of their currencies. Such depreciation would have made their exports cheaper. It would have made their tourist attractions cheaper relative to other destinations. Thus the natural ebb and flow of economics would have taken place.

With the Euro, the dilemma of the PIIGS is that their exports remain at a higher value than otherwise. And, visitors would still find the price of hotels, restaurants and trinkets still relatively expensive.

This scenario validates the stubborn resistance of the United Kingdom and many of the Scandinavian countries that resisted the pressure to join the Euro. 

Perhaps it is time to consider the dismantling of the Euro.

Rating the U.S. and S&P

It is tempting to gloat. "Told ya!", our minds scream while we sip our caramelised teh tarik to wash down the roti canai at our favourite warung.

It is an ugly, awful spectacle that has unfolded in the U.S.

For those of us of a certain vintage, our minds may have wandered to the possible range of sarcastic remarks that our dear erstwhile leader, Dr M would have spewed at the frail, fratricide that is unfolding in the democratic political process that the U.S. has so earnestly and ideologically promoted over the past century.

Our minds would also have wandered back to the difficult, challenging insults and invective hurled against Malaysia in the despairing days of 1998.

Every orang utan has its day.

We have now witnessed a troubled giant continue an implosion that started in November 2008.

Flashback to 1998. They said that we, in Malaysia, were in denial.

Flash forward to 2008 and, again, to 2011. We see the U.S. printing money to support its government's pump-priming efforts since 2008. They don;t call it "pump-priming", of course. It's nebulously called "Quantitative Easing".

Mind you, I'm not gloating. I'm not gleeful.

These are troubling times.

The U.S. is finding that the pump-priming is not working at the level of Main Street. The pump-priming appears to have only favoured Wall Street and selected Fortune 500 corporations. The average U.S. worker is in economic danger. 

The U.S. Congress is practising partisanship politics in a leaking vessel. The U.S. President is floundering in a hamstrung attempt to lead on a populist line. They call it brinksmanship.

The unkindest blow came when Standard & Poor downrated the U.S. economy, ironically, because of the political chicanery that took the U.S. Government to the brink of bankruptcy (many say it is already bankrupt anyway...or, at least, technically insolvent).

This meandering post is meant to lead to one point. 

I am impressed with how quickly the U.S. eco-system rallies around a perceived threat. This time the threat comes from within. It comes from the S&P downrating.

The amount of criticism heaped at S&P from the U.S. politicians, media commentators and intelligentsia is quite breathtaking.

This leads me to the second point.

Who's the conductor in this cacophonic symphony?

Is it a grouping of vested interests who have designed the greatest economic coup imaginable?

Might the coup be the sovereign default on U.S. Treasury Bills to the extreme detriment of China? (Japan, South Korea and the others will be collateral damage)

This would be one way to re-boot the downward spiralling U.S. economy.

The other would be war.

Think about it.

Minimum wage

Whether or not to implement a policy on minimum wages for workers in Malaysia. As the owner of services-based SMEs, I don't have a problem if the Malaysian government decides to implement a policy on minimum wages. In fact, I support the idea of minimum wages.

But, I am aware that the issue is not a simple one. The Malaysian economy still depends on fairly labour-intensive industries. The primary industries sector of oil palm plantations is particularly labour-intensive. The workers are unskilled.

On the other hand, Malaysia aspires to be a Knowledge-based and Services-based economy. Our macroeconomic indicators point to the growth of Services-based industries. Workers in these sectors are semi-skilled and skilled. Extensive training is required. Even hospitality and tourism industries require some degree of certification now. This is a good thing. It ensures that there are minimum standards of services.

There is indication that the Malaysian government is taking a sensible approach of segmentation of minimum wage policies based on the peculiar labour supply-demand matrices of each economic sector. This is the correct approach. One size can never fit all.

To engender a sensible discussion on this matter (as opposed to brainless hysterics), here's a pro and con view of the matter of whether a formal minimum wage policy should be instituted. It is sourced from here. 

The following table summarizes the arguments made by those for and against minimum wage laws:

Arguments in favor of Minimum Wage Laws Supporters of the minimum wage claim it has these effects: Increases the standard of living for the poorest and most vulnerable class in society and raises average.[1] Motivates and encourages employees to work harder (unlike welfare programs and other transfer payments).[32] Stimulates consumption, by putting more money in the hands of low-income people who spend their entire paychecks.[1] Increases the work ethic of those who earn very little, as employers demand more return from the higher cost of hiring these employees.[1] Decreases the cost of government social welfare programs by increasing incomes for the lowest-paid.[1] Encourages the automation of industry.[33] Encourages people to join the workforce rather than pursuing money through illegal means, e.g., selling illegal drugs [34][35]

Arguments against Minimum Wage Laws Opponents of the minimum wage claim it has these effects: As a labor market analogue of political-economic protectionism, it excludes low cost competitors from labor markets, hampers firms in reducing wage costs during trade downturns, generates various industrial-economic inefficiencies as well as unemployment, poverty, and price rises, and generally dysfunctions.[36] Hurts small business more than large business.[37] Reduces quantity demanded of workers, either through a reduction in the number of hours worked by individuals, or through a reduction in the number of jobs.[38][39] May cause price inflation as businesses try to compensate by raising the prices of the goods being sold.[40][41] Benefits some workers at the expense of the poorest and least productive.[42] Can result in the exclusion of certain groups from the labor force.[43] Is less effective than other methods (e.g. the Earned Income Tax Credit) at reducing poverty, and is more damaging to businesses than those other methods.[44] Discourages further education among the poor by enticing people to enter the job market.[44

The Inequality Wildcard

To continue with the matter of the economic factors that is triggering off the socio-political unrest in Tunisia and Egypt, in addition to the issue of unemployment, we have to also be mindful of the issue of income inequality or, the growing gap between the rich and the poor.

The matter of the rich-poor gap is beyond the mandate of economic planners. This is a matter that falls squarely in the domain of political leaders.

Economic planners can merely point out the dangers of the rich-poor gap. But, greedy and avaricious political leaders who are interested in making themselves, their family and crony friends rich will ignore the warning of the hapless economists.

This rich-poor gap is increasing in Malaysia.

Of course, the rich-poor gap is not unique to Malaysia. In fast-developing economies like China and Vietnam the gap will increase very fast before narrowing over time. But, countries like China and Vietnam are unleashing years of languid development. There is a sense of being in a hurry.

In contrast, Malaysia is at an economic developmental crossroad. Too expensive to be in labour-intensive activities and, yet, not skilled enough to get into high value-added and innovative knowledge-based activities.

In Malaysia's current position, the rich-poor gap is discomfiting. Unless Malaysia's political leaders address this issue urgently, this rich-poor gap may cause socio-political tension over time.

My biggest fear is that such tension will be distorted by stupid Malaysian politicians who will frame the issue in terms of race when the issue is actually one of poor ethics and abusive governance.

Anyway, read what Kenneth Rogoff has written in the sidelines of the Davos summit here. 

The Youth Unemployment Bomb

The events in Tunisia and Egypt should rightly scare all governments throughout the world. There will be many different views on the catalytic factors that led to the groundswell of public emotions that are threatening to ignite various nations in the Northern African and Middle Eastern belt.

The obvious commonality between Tunisia, Egypt and, Yemen is that these nations have predominantly Muslim populations. I'm no so sure about the relevance of Islam as a common factor for these events. Nor do I think that authoritarianism and lack of freedoms are relevant catalytic factors.

To me the more interesting and relevant common denominator in these nations is the high level of unemployment. Unemployment is the main trigger cause of the unrest.

And, equally so, the preponderance of youths among the unemployed of these nations is another key factor.

My view is that it is the poor economic health of these nations that have created huge numbers of unemployed youth that, in turn, have channeled their considerable restless energies into political protests in these nations.

This is the lesson that we have to quickly learn in Malaysia.

I suggest that the first module be the piece from Bloomberg-Businessweek here.

I sincerely hope that our economic planners and political readers read it and start reviewing how our economy is planned and managed. Prevention is better than cure.

The moral is that if everyone has a fairly decent job that pays a decent wage that puts decent food on the table, there will peace and harmony.

Alternatively, no jobs, no food and plenty of idle time is a dangerous combination.

Ronald Coase turns 100

Many blogger buddies may be piqued to learn that part of Ronald Coase's work, if properly applied by Rais Yatim's Ministry, would have prevented much of the criticism levelled at the Minister, the Ministry and the Commission that regulates telecommunications in Malaysia.

Read Coase's description of his work in this area (emphasis added by me):

"I made a study of the Federal Communications Commission which regulated the broadcasting industry in the United States, including the allocation of the radio frequency spectrum. I wrote an article, published in 1959, which discussed the procedures followed by the Commission and suggested that it would be better if use of the spectrum was determined by the pricing system and was awarded to the highest bidder. This raised the question of what rights would be acquired by the successful bidder and I went on to discuss the rationale of a property rights system." 

I stumbled onto Ronald Coase's considerable corpus of work on economics and law when I was pursuing postgraduate academic studies. 

Coase is best known for the following work which I have embedded links to Wiki:

Nature of the firm;

The problem of social cost; and, most especially (to me)

Economic analysis of law aka Law and Economics.

More to the point, Coase's work is extremely helpful when we try to evaluate the costs and benefits of government regulation. Malaysia can certainly use Coase's methodology when deciding on economic policy and regulations within the context of fair economic competition. But, this is not the time and place to discuss the matter. This post is about honouring Coase and his contribution to our understanding of the economics of commercial transactions and government regulations for which he was awarded a Nobel Prize in Economics.

Coase, born on 29th December 1910, will turn 100 next week. An amazing longevity achieved by an amazing mind.

The Schumpeter column of The Economist has rightly honoured the man who was born in the United Kingdom and, since 1951, resided in the United States.

Coase was awarded the Nobel Prize in Economics in 1991. I offer you his autobiography written by Coase himself in 1991 on the occasion of the Nobel Prize award:

Laffer Curve + Irish Implosion

To me an interesting article begins with an anecdote. So, Chris Farrell's piece on Arthur Laffer and his Curve, weaved with supply-side economic thinking as lead-ins to the current Irish economic crisis is, most certainly, an interesting article.

Basically, the point is that reduction of taxes a'la Ireland, is not a panacea to the challenges of managing an economy. But, then again, what policies are ever permanent? Of course, Farrell is dealing with the current set of economic challenges in the Western world - dealing with an era of tax cuts and deregulation - and witnessing the sheer and wanton abandon with which financial institutions failed to apply common sense and risk management principles.

Let me not get carried away.

I will just tease you with the opening lines of Farrell's piece. Then you can click on the "read more" to, well, read more:

It may be the most famous dinner in economic history. Arthur Laffer was a professor at the University of Chicago. In December 1974 he dined at the Two Continents Restaurant in Washington, D.C., with Donald Rumsfeld, chief of staff to President Ford; Dick Cheney, Rumsfeld's deputy; and Jude Wanniski, associate editor at The Wall Street Journal. According to Wanniski, Laffer grabbed a napkin and pen and sketched out the Laffer Curve, illustrating the trade-off between tax rates and tax revenues. In a few more years the tax-cut philosophy dubbed supply-side economics would dominate fiscal policy under President Ronald Reagan.

1MDB and IDR in the landscape of GTP, NKRA and ETP

I love History. I love it because there is much wisdom in having a context and perspective of how we arrived at where we are. Without knowing History, we will be forever groping in the dark. Not knowing which direction to take. Let's see how this post pans out.

Economics of development

In terms of the economics of development, the role of government is to decide how resources are to be allocated. There has to be a presumption that the resources must be allocated equally. There must also be a corollary rule that equal allocation be subject to merits.

"Merits" in the economic sense must mean the positive impact that such an allocation has on economic development and growth for the whole country.

This positive catalytic effect is termed the "multiplier effect".

Having put out the boring contextual matters let us dive into the issues at hand.

In the 1960s and 1970s, our economic planners were exemplary in identifying foreign investment to generate economic development. We had limited financial resources. We needed foreign money in the form of direct investment.

This meant getting foreign investors to set up shop here.

The name of the game at the time was industrialisation. We had a literate workforce. Wage levels were affordable to foreign investors.

Our economic planners made sure there was ample and reliable utilities in the form of roads, electricity and water supply.

Geography of development

But, beyond this generalisation, I wish to emphasise that our economic planners had to face up to the reality that the foreign direct investments (FDI) being manufacturing-based, needed access to a good supply of workers.

The logical location was Petaling Jaya first. PJ met the criteria. Next was Shah Alam, the logical extension since the direction of growth was towards Port Klang where the manufactured goods could be cost-effectively exported.

In the 1980s, Penang got into the game. The economics and locational principles remained the same.

From industrialisation to knowledge and services-based activities

Fast forwarding into the millennium, we witness the shift in emphasis from industrialisation to knowledge and services-based activities.

The reasons are obvious. Over time, the wages have risen. Industrial activity needs cost-effective wages since the skills of the work is limited and repetitive. Easy to train freshies. Experience is not a factor. That is why industrial FDIs have relocated elsewhere.

This situation is where our country is at. This is what people call the "middle income trap". We have become too expensive for industrial processing. But, we may not be skilled enough to get into creative work that pays well.

Finally, we get to 1MDB, IDR, GTP, NKRA and ETP

You may now ask what the relevance of such a long preamble on 1Malaysia Development Berhad (1MDB), Iskandar Development Region (IDR), Government Transformation Programme (GTP), National Key Results Area (NKRA) and Economic Transformation Programme (ETP) is?

Well, first, I need to say that this post is my way of expiating reasonably sceptical analyses done previously on these self-same matters.

I have felt strongly since Najib's tenure as Prime Minister began that the government has recognised the urgency of the "middle income trap" situation.

I have also felt very troubled that this urgent economic situation has been clouded by the ripple-effect of over-politicisation and power plays.

The message that the rakyat sent on March 8, 2008 was that change is needed. What the nature of the needed change was is something that we can debate until the cows come home.

Economics trumps politics

The takeaway from March 8, 2008 that I am recommending for your consideration is that the rakyat sensed the urgency of dwindling economic opportunities.

I am aware that many of you will not agree with this narrow interpretation. But, if you adopt the Abraham Maslow heirarchy of priorities, I will resoundingly say that economic welfare trumps any other issue in terms of priority. If you are not convinced, I suggest that you read about Mikhail Gorbachev and the perestroika saga.

So, what we have here today, is a set of nebulous principles in the form of GTP, NKRA and ETP.

If we were to take a helicopter to rise above the thicket of nebulous words in the GTP, NKRA and ETP, we may be able to get a better idea of the socio-economic landscape that confronts Malaysia.

Crossroads

We are at a crucial economic crossroad.

Yes, the GTP, NKRA and ETP are imperfect roadmaps. But, I don't have a better roadmap than this. So, yes, I have been prepared all along to buy-in. Of course, my buy-in is done with eyes wide open. That's the whole point of the exercise of buying-in, anyway. As citizens, taxpayers and stakeholders we must not be indolent. We have to be a part of the thought process.

And, what of IDR?

IDR makes geographic sense, I suppose. It's proximity to Singapore means that the chances of its key investment criteria succeeding is that much higher. The key areas of the IDR are:

6 categories of service-based sectors:

• Creative
• Education
• Financial advisory and consulting
• Healthcare
• Logistics
• Tourism

And, of course, the attractive features are:

• Exemption from the Foreign Investment Committee (FIC) rules
• Flexibilities under the foreign exchange administration rules as follows:
  • Make and receive payments in foreign currency with residents;
  • Borrow any amount of foreign currency from licensed onshore and non-residents;
  • Invest any amount in foreign currency assets onshore and offshore; and
  • Retain export proceeds offshore.
• Unrestricted employment of foreign knowledge workers
• Eligibility for tax incentives

The tax incentives are:

• Exemption from corporate income tax for a period of 10 years in respect of statutory income derived from qualifying activity carried out within the approved node for customers situated within the approved node and outside Malaysia or wholly for customers outside Malaysia. Such activities must commence on or before 31 December 2015; and
• Exemption from compliance with the withholding tax provisions on payment of royalty and services fee to non-residents for a period of 10 years from commencement of operations.

And, what of 1MDB?

Well, from my previous postings you will, no doubt, have gotten an idea of my concern about the debt edifice of 1MDB.

Be that as it may, I do wish for the Sungei Besi Airport redevelopment and KL Financial District projects to be successful.

Here comes the reason for my long preamble.

In a sense, the 1MDB projects can be seen as the present day equivalent of the industrial parks of past decades. Where industrial parks were meant to house and cluster manufacturing concerns, the 1MDB projects are intended to house services-based concerns. This is consistent with the ETP goals, I suppose.

And, I am making a strong assumption that to ensure the financial viability of the 1MDB projects, there will be IDR-like incentives in the pipeline. And, like IDR, the incentives will be legislated by Parliament and decreed by MIDA.

Calling the Klang Valley "Greater KL" is, I suppose, a branding exercise to the global customer base. I have no problems with that just as most of us have no problems with the KLIA being called KLIA even though it is in Sepang. It's about global branding.

Two key takeaways for you

All the foregoing is intended to lead to 2 points that I wish to make:

• First, how about extending the IDR-type incentives to the whole country?
• Second, how about (here I go again) reducing the corporate and personal income tax rate to 18%?

What a stimulus and seriously positive economic multiplier these will have on the whole country.

Pee Pee Pee Budget Issues

I found Budget 2011 to be a strange document. It is strange at many levels.

For one, there was really only one big expenditure item. That was the allocation for Operating Expenditure. No austerity measures there. There was, in fact, a marginal increase in allocation.

Another, is the great store put on the so-called Public-Private Partnership (PPP) formula. At a cursory level, PPP seems to mean that the private sector will foot most of the developmental bill. At another level, PPP seems to mean projects for private sector parties with access to the political masters.

The third feature is that this is a largely a budget for large scale (some say "mega", others say "grandiose") construction and property development.

The fourth matter that struck me, going back to the concept of PPP, is that the Government recognises that it is cash-strapped. The "innovative idea" is to take developmental matters to, what I will term, "off-balance sheet" transactions.

What do I mean by "off-balance sheet"? Well, I have deliberately put the expression in inverted commas (just like the way Dr. Evil did with his fingers in Austin Powers) because I don't mean it in the way that accounting standards mean it.

The "off-balance sheet" that I allude to is that PPP arrangements has less transparency than a basic, garden variety budgetary allocation that is open to Parliamentary and public scrutiny.

Take the case of the 100-storey Warisan Merdeka Tower. I was puzzled that the matter was even included in a Budget speech. Essentially, the RM5 billion outlay will be borne by Permodalan Nasional Berhad (PNB), not the Government. I imagine that the only involvement of the Government would be at the Economic Planning Unit level - to approve the project for its perceived salutary economic "high-impact".

In a sense, the Warisan Merdeka Tower project is more akin to the proposed Sungei Besi Airport project the land ownership of which is in the process of being transferred from the Government to 1MDB. That is "off-balance sheet". Not open to direct Parliamentary and public scrutiny.

In this sense also, there is a precedent in the KLCC Project. It was also "off-balance sheet". It was not open to Parliamentary and public scrutiny.

But, this is where the similarity starts and ends.

The KLCC Project was destined never to fail. It could never have failed because it had the financial clout of Petronas behind it. That the KLCC District has become the success that it has is due, in my humble opinion, to the benefit of a central location in the heart of Kuala Lumpur. It also had the benefit of Petronas, which is a Fortune International 500 company, occupying one whole tower block effortlessly. By the way, Petronas was also instrumental in keeping Dayabumi alive in terns of occupancy during Dayabumi's first decade of existence.

In contrast, new-fangled PPP projects such as Warisan Merdeka Tower will rely on PNB's finite resources. What is PNB? Unlike Petronas, which is a commercial going concern in the substantial oil and gas industry that generates significant revenue streams, PNB is at best a fund management entity and a passive asset owner.

How will PNB be able to acquire the skill sets and the commercial gravitas to fill up the floor spaces in the 100-storey Warisan Merdeka Tower? RM5 billion is a substantial outlay. And, lest we forget, PNB is the trustee of Malaysia's institutional wealth - especially for Bumiputras. Failure is not an option.

As for the Sungei Besi Airport project, I have touched on it previously. But, the analysis is substantially similar with one worse addendum - 1MDB is based on an RM5 billion bond issue. 1MDB is in the process of raising yet another RM5 billion bond issue.

A bond is a debenture instrument. It is a hypothecation. A debenture is a debt. A debt must be repaid.

Therefore, it is obvious even to the untrained mind that 1MDB's financial feasibility relies in large measure in its hoped-for ability to parlay the Sungei Besi Airport land into a valuable piece of real estate. This is something real estate developers do. Any member of REHDA could have done the job. Why is there a need for 1MDB? I'm just asking....

Finally, I just want to make an observation that, in recent decades, we have placed great store on Corporate Governance.

The International Financial Reporting Standards (IFRS) on mark-to-market valuations, property development sales revenue accounting treatment and, recently, leasing arrangements demonstrate a great concern for off-balance sheet transactions.

The IFRS Exposure Drafts on these and many other business practises are intended to ensure transparency so that investors and stakeholders that have dealings with corporations have a clear idea of the financial health of corporations as going concerns.

In this context, PPPs may not be a march forwards. History may see it as a troglodytic concept.

So, I leave you with this question: Should governments have a different accounting standard from corporations?

Facing the human capital challenge

This is Part 2 of the interview that RB Bhattacharjee conducted with the Universiti Malaya Professor Rajah Rasiah as reported in the Edge Daily:

In part 1 yesterday on Malaysia’s economic direction and the constraints that are holding it back, Universiti Malaya Professor of Technology and Innovation Policy Rajah Rasiah talked of the strategic initiatives needed to raise its economic prospects. In the second and final part, he tells R B Bhattacharjee about fixing the public delivery system and how Malaysia can draw on its diaspora for help


TEFD: What are the priority reforms needed to make the public delivery system a selling point for the country?
Rasiah: The best is probably in Penang. For some reason, there is much more involvement. But even there, things have flattened. During Tun Dr Lim Chong Eu’s time as chief minister, at least during the tail end of his career, they had evolved a system where it was the Penang Development Corporation’s (PDC) responsibility to keep firms happy.

Penang was one of the success stories, because in 1970 the incidence of poverty was something like 50% and it went down to 0.3% or thereabouts by 2005. How was that possible? The state recognised that it may not enjoy much support from the federal government, because it is dominated by the Chinese, even though the ruling party was with Barisan Nasional.

They often did things that included providing the requisite service that is necessary to see that firms continued to upgrade or involve firms in the network, promote linkages so that greater progression of synergies.

Some of their methods come from Singapore and Ireland. They knock on doors to identify species of firms. At one time they realised that consumer electronics is too labour intensive, then they mistakenly went to disk drives, then they realised that too was labour-intensive, then they scaled down.

Later, they went to different species of industries, knocking doors and requesting them to relocate.

Penang was among the first to face the problem of a lack of skills. The Penang Skills Development Centre evolved in response to that. PDC was the facilitator. The old PDC building was rented out at RM1 a year as their contribution. The firms came in because they knew the group of stakeholders there were interested in helping each other. Firms put in the equipment and a whole range of other things.

While providing this state-of-the-art training, it also made sure that Penangites were being trained. Some of the training went to people who were not working in those firms.

That sort of initiatives also led to linkages. PDC tried to match multinationals with local firms, and facilitated the birth of local firms from employees of multinationals. That is well recorded.

But that did not evolve into the scale of upgrading necessary to match Taiwan, Korea and Singapore because of a number of institutions governed by the federal government.

The rules of the game were established by the federal government. Say, whether Penang can have enough professionals from abroad in a particular area. That’s a decision the federal government has to make.

Rasiah uses Penang to illustrate the example of a successful public delivery system.

Whether the government will provide the requisite educational infrastructure to create the human capital they require, those instruments are governed by the federal government, and whether the federal government would put up these labs.

I have brokered this myself, with the federal government’s backing. I assisted Khazanah on it. The Indian Institute of Technology Kanpur had a MoU with Universiti Sains Malaysia, for the federal government. The idea was to undertake research, using Masters and PhD students who were some of the supervisors from there. For the moment, they are targeting what firms want, which is the research focus.

We need to get into things the firms may not want, namely some elements of those technologies that will go to the poor. That means they won’t make money, so the government will have to buy the research products and pass the benefits to the poor.

Or you can have situations where firms have not recognised the potential in their sector. There you need incubators.

At one level, you serve the firms, and at another, you provide technology for incubators. At another level, you produce the graduates that firms and others can hire.

We should give green cards to these guys. Target the whole world for employees. At the same time, take in local participants. You need this networking between the best around for them to capture the best practices, and for the improvements to stick.

I also recommended a leading Taiwanese university for that. But the reason why the university is not in the equation now is because of some political considerations then.

Can Malaysia wean itself from its dependency on cheap foreign labour without going into economic shock?
We have broad statistics to show that in a number of industries we are relying on foreign labour. There have been attempts many a time to stop taking new foreign workers, but we have not thrown back those who are already here.

From time to time, there have been raids to check that the foreign workers have not been here for more than five years.

I don’t think the government should take any steps that contravene the joint governmental agreements with Bangladesh and Indonesia to repatriate the workers. Nor with the Filipinos, who even have minimum wage legislation that requires that maids here are paid probably a premium compared to the rest.

What they should do is through policy governance, by introducing levies that make it more expensive to hire foreign workers. Not immediately, because then the immediate retracting factor could be deleterious to the country, but gradually, they should defer recruitment. This would be like in Taiwan, where they imposed a levy if you take in unskilled labour.

You have to start somewhere, but you should not do it abruptly. If you do that, you are actually going back on your word. Firms should be given the assurance that you will stick to the word you gave earlier, otherwise they will lose confidence in whatever you do.

What is the positive news about Malaysia’s economic situation?
The minister mentioned that in the first quarter they had more than RM5 billion already. If they can maintain that they will be able to achieve more or less the annual figure to reach the RM115 billion in five years.

The positive news is the promise that the NEM provides. Of course, there are things that are unclear. Among them, you need to achieve 12.8% annual growth in investment over the next 10 years. Does it make sense? People are reluctant to believe that when it has slackened substantially from 1995 to 2010.

I remain convinced that NEM has provided the motivation that policy should focus on inclusive growth. In other words, embrace corporate social responsibility (CSR) practices as an inherent part of growth itself, not as a detached one, that you take care of afterwards.

NEM has taken head on the need to generate the human capital necessary to reinvigorate economic growth in the country.

Thirdly, the focus on the 40% of families with income levels less than RM1,500 per month. When you enable their thinking faculties, it gives them the opportunity to improve their situation, although the NEM does not explain that much. I would prefer that they look at the Scandinavian countries, so that they will create a welfare state without free riders.

There should be no misallocation of subsidies. There needs to be different instruments to address the problems of targeting subsidies. The focus should not be the distortion they think they are creating. Even if there is distortion, the welfare state will correct that better because you don’t have misallocation of resources.

You now identify the poor, which you know from the Statistics Department’s household income and expenditure survey. Of course, real income varies between locations, and you need to adjust for that. Then, if they divert the current system of providing additional income or coupons or whatever form they give aid in, then I don’t enjoy the subsidy, I don’t become a free rider, and neither does a foreigner.

It also reduces smuggling. That figure will be very small.

Although there are some sceptics, I think the NEM’s good points are that it provides the conceptual and epistemological rationale behind why these 12 economic activities should be done. That to me is exciting. What is not clear to me is that it is not very explicit about how they will go about doing it.

That same thinking is found in the 10th Malaysia Plan. Perhaps more foreigners were involved and they did not understand the workings of the macro organisations. Perhaps they weren’t able to outline the responsibilities to different ministries that the previous Malaysia Plans had done.

Those things need to be made clear, but we at least have the motivation.

You can also see universities now getting into this bandwagon of competition. In the past few years, Malaysian universities have been investing and working towards raising their performance, especially in the science faculties.

That means positioning themselves to hire anyone from any part of the world, provided they meet the standards required to perform. So, we can hire anyone from India, UK or elsewhere, provided they can provide the publications required, because we believe universities should be led by research to drive teaching.

These things weren’t done before. These are things that are happening, but the results may not be immediate, but the long-term effect will be there. Local staff strength is going up, as well as foreign staff standards, and this will have some kind of effect on the economy, including towards supplying the labour force in all fields, including science and engineering.

Is the Talent Corp idea workable and what are the lessons from previous exercises to attract the Malaysian diaspora?
I am a participant because I came back under the brain gain programme. I also coordinated the brain gain report of 2009 for MOSTI. We recommended that a Talent Advisory Council be set up. We called for an R&D investment of GDP of 1%. We wanted the ratio of R&D personnel and scientists per million persons to be raised from 367 to 1,500, if I recall correctly. I think they are looking at 1,000.

The Talent Corp, from the R&D side, again is not very explicit to me. It is hoped that we adapt from the experiences of successful countries. In a country like India, there is no incentive scheme for talent to come back, and yet there are all sorts of talent going back.

Taiwan and Korea are our real models, compared to Singapore, which targets the world, like the US. Taiwan and Korea have talent advisory councils which play an important role because they connected to the diaspora very well, and they gave them recognition to participate in the initiative.

You must look at the whole ecosystem that has been evolved. You must see all the parts, and the way they are organised. This is critical.

In the case of Taiwan, they continue to spin off incubators that are potential world class firms. Then they bring people from similar industries to head them, like Morris Chang, who was senior vice president at Texas Instruments taking over Taiwan Semiconductor Manufacturing Corp or Dr Wang from IBM. There are so many of them in many different things. You have all these hi tech firms like Vanguard, Asus, etc.

The advisory committee is very well linked to them. And they don’t discriminate, at least from 1985, because they recognise the role that they play. Before that, the local people thought they were the most loyal.

In the case of Malaysia, they must see a transition. We have a problem, again, of political economy. Most of these people abroad are not Malays. Of course, there are Malays too. Are they willing, say, to bring a Chinese, who may be the best suited to run Mimos? Or Silterra? This is an area we have to solve, because you are now competing. You cannot suddenly have a sub-optimal performer running a big corporation or a meso organisation without the standards that you put there in order to achieve running those things. Is Talent Corp going to do that?

We have a problem because more often than not the person who comes back plays a secondary role. He is not the boss and has no autonomy to do anything.

Let me give you examples of people who left. They came back, they didn’t mind being second in command, but the first in command often left critical meetings when the minister called. These people were trying to establish MoUs with critical suppliers, even buyers, from abroad.

But when they come, the main person is not there because the minister has called. And his position, if he doesn’t take care of the minister’s interests, he won’t be here. And the real talents are the people who came from abroad.

I thought this would be a rare case, but when I speak to them, I find that it is a common case.