It's the economy, stupid

As if you don't already know, most of the unhappiness index in Malaysia today is connected to the prices of consumer goods and services. 

Why are prices so sticky, as in why didn't the price of consumer goods and services adjust downwards after the change of government on May 9, 2018?

This is something that the Malaysian government has failed to explain to the Malaysian public.

The fact is that while political players come and go, the economic players pretty much remain unchanged. The consumption patterns remain unchanged. The supply chain remains unchanged.

So, what can new political masters do with the levers of power in government? Push the wrong button and shit may happen. So, what to do?

To avoid being blamed (though it's a little late in the day now because the shit has already hit the fan) the government needs to explain to the Malaysian public on why the price of so many consumer goods and services haven't fallen.

It's a sticky wicket.

This is a failure of communication by the new Malaysian government. 

It's been a year now. Time to get the act together. 

GST removal and the Malaysian economy

There has been a large amount of reportage by so-called analysts who have expressed concern over the Pakatan Harapan election promise to dismantle the Goods and Services Tax regime. To my mind this so-called concern is borne of laziness on the part of the analysts. Worse still, the so-called concern reflects a marked lack of understanding of Malaysia's National Budget in the recent 5 years.

Anyone with sufficient focus and industry would not have missed the ballooning Operating Expense portion of Malaysia's National Budget. With some effort, one can find enough items that can be pared down. I would hazard a guess that much of the National Budget was leaked due to corrupt practices.

Other parts of the National Budget involved massive (mis-)allocations to ministries and agencies for use in different types of disbursements and grants that lacked accountability.

Plug these items earnestly and the massive fiscal deficit spending will be pared down significantly. Malaysia may not see a budget surplus immediately. But, my hunch is that future fiscal deficits will be due to growth imperatives in sectors such as education, tourism and agriculture where targeted fiscal spending will boost knowledge, skills and relevant infrastructure that will multiply Malaysia's economic growth instead of useless monetary handouts that feed Malaysians for a short spell of weeks without any lasting benefits.

This is where I completely agree that the new economic team that is being put in place by the Pakatan Harapan federal government will not be so stupid as to dismantle the GST without a plan.

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.

It's the economy, stupid...

To paraphrase Sir Humphrey Appleby of Yes, Minister: At the end of the day... in the fullness of time.... when the cows have come home... 

And, to reissue the phrase that so parenthesised Bill Clinton's 1991-1992 successful run for the Presidency of the U.S., a whiteboard writing attributed to James Carver: It's the economy, stupid.

It's the economy, stupid, that affects our perception.

It's the economy, stupid, that decides whether we be happy or suffer a feeling of malaise.

And, the economy is in terrible shape. Stupid.

Boycotting nonsense

The new Minister of Domestic Trade and Consumer Affairs has made a major misstep when he merely said that the federal government did not approve of the boycott of Chinese goods and services but proceeded to defend the right to boycott.

Sometimes you can be legally correct but wrong on the economics.

Usually it is not a big deal because everyone knows that political motivations are usually irrational exuberance.

But...when you are a Minister responsible for an economic portfolio as important as Domestic Trade and Consumer Affairs you have to be a big picture person. 

You are running the entire Malaysian economy.

You cannot be pandering to petty politicking even if it is just a fortnight since your party won by a whisker. 

You have to check that tribal, petty, parochialism.

You are the Minister in the Malaysian Cabinet with a portfolio to manage Domestic Trade and Consumer Affairs.

Malaysia holds itself out as an open economy. Malaysia measures itself by trade competitiveness. Malaysia aspires to obtain foreign direct investments.

For instance, how would the Minister reconcile his defence of racial boycotting to investors and businesses from mainland China or Taiwan? 

Would he say via an interpreter, "Sorry, this boycott of Chinese goods and services apply only to Malaysian citizens of Chinese ethnicity and descent. It definitely does not apply to you people because you are from mainland China/Taiwan".

How lame is that?

Do I need to remind everyone that Cabinet Ministers hold a federal portfolio? 

Do I also need to remind everyone that people cannot be fooled all the time?

You cannot have the Prime Minister himself, Husni, Mustapha, Idris Jala and Wahid running around telling all and sundry that the Economic Transformation Plan is still on foot when your fella in charge of Domestic Trade and Consumer Affairs cannot send the correct signals out as a Federal Minister and, he is still labouring under the misapprehension that the stupid General Elections is still on.

As I said before, GET TO WORK!

Malaysia: Headlines for the wrong reasons

Much as I hate to say it, Bloomberg columnist, William Pesek has made a pertinent point in his latest piece on Malaysia.

Malaysia has been hitting the international headlines for the wrong reasons for some time now.

This grates on me like an itch that is buried in the subcutaneous layer. It's bad and self-wounding.

A "sweet" Budget 2012

I will say this, Najib is nimble.

Big Dog has declared it an Election Budget. I am in agreement. The Budget contains a lot of sweets for many categories of Malaysians; from the civil servants to parents.

The fact that the "kaya" of goodies is spread quite thin must surely be because Treasury is mindful that one of the greatest concerns of financial observers, local and international, is the fiscal deficit. Well, the deficit is not expected to increase in spite of the goodies. In this sense, Najib is nimble.

Neither corporate tax nor personal income tax was touched. This, to me, is a prelude to the expected rollout of the GST after GE13. In this sense, Treasury has to hold the keel steady until more revenues can be extracted from the Malaysian economy when GST is rolled out.

Real Property Gains Tax

The part I quite like is the tweaking of the Real Property Gains Tax. From next year, anyone who buys a piece of property and flips it within 2 years must pay 10% of any gains. If he or she sells the property between 3 to 5 years later, the tax is 5% on any gains. There is no RPGT if the property is sold more than 5 years later.

I like it because a reversion to the much earlier 3-tier structure where the top RPGT rate was 30% is likely to have created a bubble-bursting effect (yes, I believe there is a bubble or, if you like understatement, then, "excessive frothiness" might be a substitute phrase). 

So, this is an attempt to effect a controlled release of air from the property bubble. 

Liberalisation of 17 services subsectors

An interesting matter is that among the 17 sub-sectors that will be liberalised include private hospital services, medical and dental specialist services, architectural, engineering, accounting and taxation, legal services, courier services, education and training services, as well as telecommunication services.

The one subsector that stands out is legal services. This is one sector that has been cloistered forever. The  other one is architecture. These 2 service areas will see major structural changes.

I foresee that the immediate impact is not so much that a lot of foreign lawyers will literally parachute into Malaysia so much as foreign law and architectural brands will become more prominent. They will hire lots of Malaysians and a sprinkling of expat (remember, there's still the issue of work permits...aha!!!).

I see this as a good thing because the work processes for the legal and architecture professions will be immeasurably improved over time.

No, I don't see the loss of too much market share by local players to foreign service providers because, from my observation, foreign service providers are mainly interested to handle international work entering Malaysia in the form of foreign investments, direct or indirect. And, they are also interested in doing work for Malaysian companies investing or exporting overseas. This is their cachet...the international reach. 

Malaysian-based clients can't afford to pay these international firms anyway!

The accounting firms won't feel a thing with this liberalisation because Malaysian accounting firms from Tier-1 to Tier-3 are already under foreign brands and varying legal ownership structures.

Anyway, this move has been a long time coming. Some say, it's overdue.

To borrow Stan Lee's expression, "Nuff said".

Govt revenue from taxes unch over 3-4 yrs

It's always useful to capture vital statistics. Sourced from here-

The government's revenue from taxes has not been increasing for the past three to four years, Deputy Finance Minister Senator Datuk Donald Lim Siang Chai said.

He said on Tuesday, Sept 20 the amount was around RM160 billion a year even though expenditure was on an increasing trend.

He said one third of the government's revenue came from oil and gas, one third from taxes from companies and individuals while the remaining one third from indirect taxes such as stamp duties and Customs duties.

"There is a need to increase the number of skilled labour so that the government would be able to collect more taxes and increase its revenue," he said at the launch of a new Malaysian Financial Planning Council (MFPC) secretariat office and signing of a memorandum of agreement between MFPC with UCSI University and UMSLink Sdn Bhd on registered financial planner (RFP) programmes here.

In Malaysia, Lim said, out of the 12.8 million workers, only 29% were skilled labour as compared to developed countries where 40% of their workers were skilled labour.

"Out of the 12.8 million workers in Malaysia, only 1.65 million pay taxes," he said.

The finance sector, he said, was one sector which has a lot of potential to create skilled professionals with its certification standards.

He said the government was looking at ways how Form 5 school leavers could gain certain skills such as to be a mechanic.

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. 

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.

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.

Reinventing Malaysia’s economy

I must warn you that I have reproduced a very long piece from the Edge Daily. It is a first-part distillation of an interview that RB Bhattacharjee conducted with the Universiti Malaya Professor Rajah Rasiah:

Malaysia’s diminishing appeal to both foreign and local investors has been in the news of late. Energising the country’s economy will need some strategic policy shifts, Universiti Malaya Professor of Technology and Innovation Policy Rajah Rasiah, who has been appointed the Holder of the Khazanah Nasional Chair of Regulatory Studies, tells R B Bhattacharjee in a frank and free ranging interview. Here are some excerpts in the first of two parts:

TEFD: To what extent is Malaysia’s poor investment performance in recent years, as reported in the UN’s World Investment Report 2010, due to internal and external structural factors?

Rasiah: Investments have gone up this year, so the outlook isn’t bad. The government has made some changes that have had a positive impact. If the investment flow sustains, it is good.

Obviously the global recession has had an effect. Among members of a good neighbourhood that has done relatively well in relation to the global economy, foreign direct investment (FDI) having contracted only by 17% for Asean, you have us as really a bad example, showing a drop of 81%. That has sent a wrong message that things are not okay here, especially that Malaysia is probably the worst place to go and invest, because they have had the largest contraction.

But it could also be seen differently, that this is a country that does not really need massive FDI because it has the capacity to invest abroad, not only domestically.

There must be a holistic approach to investment dynamics, with government policy identifying FDI as an integral part of development policy.

The New Economic Model (NEM), as well as the 10th Malaysia Plan (10MP), addresses the need to focus on economic activities that provide the value-add required to bring Malaysia’s growth path back to the trajectory required to achieve Vision 2020.

We need to see how FDI can contribute. So far, a whole lot of FDI goes into manufacturing, and that’s one of the reasons why there has been a trend fall from the golden years of 1988-1993. It is because they are no longer competitive in low-end, labour-intensive manufacturing. We have delayed that by importing foreign unskilled labour.

It is recognised by the NEM, and 10MP, that we are facing a severe human capital deficiency problem. There have been attempts since the 1990s to overcome this, through the Private Investing Bill and a whole range of other instruments that were created. But they haven’t solved it; The deficit has been growing.

Malaysia is facing the problem of matured industrialisation. It is deindustrialising, meaning the share of manufacturing in GDP has started to fall since 2000, although the sector has not reached maturity status. The target is to achieve 20% value-add in Malaysia’s output, against 32% in Korea. In some sectors like steel, it is about 13%, it’s that low.

What that means is we are not migrating or upgrading our manufacturing sector sufficiently fast to keep up or at least stay in touch with Korea and Taiwan, as well as Singapore.

Prof Rasiah says there must be a holistic approach to investment dynamics, with government policy identifying FDI as an integral part of development policy.

Meanwhile, other countries that are growing rapidly — China, India and Vietnam — are closing the gap. Even more scary is their sheer size. Imagine, as India and China get closer, then surpass us, the consequences will be more difficult to deal with.

If you plan properly and address the shortcomings raised in the NEM and 10MP, at least you give yourself a fighting chance to make yourself attractive to those sectors where FDI is likely to come.

We must have the requisite human capital and macro-organisations that deal with R&D labs. This can be through specific sector specialisations, for example, R&D labs on electronics, like the Electronics Research and Service Organisation (ERSO) in Taiwan, and incubators then that are co-located.

That produces knowledge, which is critical. You have this systemic effect of knowledge that spills over into firms, which will find it attractive.

What advantage have we got in relation to India and China? We have much better basic infrastructure, comfort and choice of residence. These are things I’m picking up from interactions with CEOs of firms.

Once you have those serious deficiencies addressed, we will be better placed than our competitors, including Taiwan and Korea in many ways.

In these countries, there were clear government initiatives to develop indigenous capital. They saw that development meant the development of domestic capabilities.

They also recognised it is pointless reinventing the wheel. There are different paths to reach the frontier. They sought technologies that they thought the country should focus on.

Korea went into steel, electronics, shipbuilding and industries of that sort. They looked at the flagship firms in these industries in an attempt to catch up. Initially, because the gap was so wide, they went into licensing. Secondly, they hired Korean personnel working in those big firms because they carried passive knowledge, which includes experiential knowledge.

This allowed them to acquire a labour force that can really perform. They also remained networked to markets and R&D labs in all these places. They had a strategy of ensuring that all these flows of knowledge, either by licensing, using their own human capital or bringing back their diaspora, generated results.

They developed vetting, monitoring and appraisal instruments by evolving these capabilities. The equivalent of the Economic Planning Unit of Malaysia led the drive in Korea, Singapore, Taiwan and Japan. They improved by continuing to appraise and remove their mistakes, identifying new thrust areas and so on. They evolved planning and execution capabilities.

They relied on their diaspora for advice as well as foreigners whom they thought could contribute to them. If you have a mechanism with that sort of standards, then you can subject any performance to that measurement. They have that. We don’t. If you have that, then you can plan against the countries and firms you are catching up with, and close the gap. These are very critical.

FDI should not just be seen as capital flowing in, but includes multinationals which may not relocate here. One channel for developing our own skills is by either establishing an outsourcing link, and growing from there, or accessing technology through licensing.

What short- and medium-term measures are needed to restore business confidence in Malaysia?

In the next five years, the 10MP is seeking inward investment growth of RM115 billion, which translates to RM23 billion a year. This is not really impossible because we got more than that in 2007 and 2008. Only in 2009 it crashed.

If we say that we need FDI reviving, rebounding to the amounts that we recorded in 2007 and 2008, then we need to find out why those figures have gone down.

The dominant players that are coming in are industries that typically did not come here previously. In the 70s and 80s, it was electronics, garments. All that were big, and they went into manufacturing.

Now, it is Kuwaiti oil, even Indian firms into infrastructure and properties that are bringing in FDI. We need to go back to the drawing board and see if that is the sort of capital we still want. In those areas, we’ll have competition for our own producers.

Because we are also investing abroad a lot, and if you want them to allow us to build infrastructure in India, then you have to allow them to come here. Otherwise, bilateral arrangements don’t work.

But if you want to pursue the new growth policy, then we need to address and convince the firms that are here. Firstly, firms like Intel, for example, have been asking government leaders whether its plan to fast track applications for permanent residence (PR) has been executed.

Some, however, are concerned that this policy might lead to a dualistic economy where the set of foreigners who come may not have a long-term responsibility to the country.

It is still a fact that the government needs to tell investors that it means action. The officials must take the steps and put it out that we are already doing this, that foreigners working in firms here can now apply for PR.

We now have a one-stop agency that deals with the entire range of issues on this. So, those things must immediately take effect.

You are dealing with the FDI crowd here. These are flagship firms: Motorola, AMD and others. You are really dealing with the big guys in an industry I think is still important — electronics.

Secondly, Malaysia is known for its universal spread of MIDA offices, that were known to promote FDI, at least in the past, quite effectively, so that potential investors knew the investment opportunities here.

I feel the focus has shifted somewhat to tourism and related sectors. They must bring real information to potential investors. Don’t go back and promote the same thing because nobody believes it now.

In the 1990s, CEOs of Taiwanese companies told me they felt cheated coming to Malaysia. They were clearly told there was an abundant supply of cheap labour and they were literate in English. When they came, they had to go very far to get their workers. Once they got them, they brought them by the busloads to their factories. The next day, they had been poached by neighbouring firms.

Clearly, they didn’t have the labour force. The building was already up, so what could the investor do? One CEO was quite upset about this. It is unfortunate that they had to adopt practices such as holding back workers in the previous shift because they didn’t know how many would turn up in the next shift.

The officials have to recognise the transition that has taken place and they must have the requisite labour force. These need to go hand in hand. You can’t make statements about things you can’t deliver.

The longer you do that, the more people won’t believe you, like the boy who cried wolf.

The prime minister seems sincere in trying to see these things happen. But there must be execution by the officers who are made responsible. The line of responsibility should mean that the range of people involved must be made to recognise that they will be rewarded only if they continue to execute the things required of them.

Otherwise, if loyalty is the only thing that the leaders look for, then their officers won’t deliver.

Another measure would be to connect with the officials of the Ministry of International Trade and Industry and the Economic Planning Unit, who are looking at new species of industries to promote. The idea is not to create for the universe here, but to observe trends elsewhere, identify the right players and attract them here. For example, the planners are looking at solar energy and medical devices, which is already in the field, but now they want to go much broader into these areas.

This goes back to the same old strategy: you connect with a multinational value chain and attract them. The species are not new to the universe, but they are new to the country. Then it grows. It has happened before. The semiconductors moved to consumer electronics, then to disk drives. Suddenly, they went labour intensive, and on to other industries, computers and so on, and Dell came in.

But that strategy, I am reluctant to believe, connects with structural change. The structural change that is expected is not just about moving to different industries.

The most important thing is to move to higher value-add industries. They can be in the same industry category as such. If you’re looking at electronics, then it’s designing and wafer fabrication, where it gives you the higher value add which is necessary.

I’m not clear if they are going to reintroduce the policies which were seen before. You attract one industry, then you see a range of firms growing there, then suddenly they get up and go. That does not make for an economy that wants to progress from one level of income to another.

Taking up medical devices, there must be follow-up panels, comprising industries they want to promote. Previously, there was even avionics. In that case, you need to see that they will have at least design capabilities, if they don’t do basic research.

To do that, you need a different set of policies, which require a link with universities and R&D labs. All of them must be seen as an ecosystem that we need to have in order to have the sort of industries you think the country needs. Not simply industries by name, but industries that can support the value-add required to establish the growth rate so that we bring back the growth path to Vision 2020.

I wouldn’t like simply to do the promotion then, in economic terms, create a bubble; things that grow on the basis of perception. The prime minister is planning for a transformation, but when firms realise it’s not happening, then you see a huge fall because the requisite infrastructure, promotional instruments, macro organisations all have not been created.

You mentioned some concerns that industry representatives have raised about the business environment. What are the main hurdles in the way of attracting investments, from the political economy point of view?

We haven’t been successful at producing a responsible and capable labour force that can evolve with the expectations to become more productive. The kind of workers required can not only earn higher salaries but are able to support the upgrading of firms.

Political economy is one of the reasons why we have not been able to deal with the issue of targeting labour transformation. When the NEP was created in 1971, there were some shortcomings. The government had to introduce quotas for the Malays and non-Malays, for example, for places in education.

That was already flawed. Affirmative action should target providing equal opportunities. It should never be targeted at some because they have the colour or they think they were underprivileged before.

It gets worse because the community that you favour could have been financially much better endowed compared to the others who are competing for it.

We’ve got many things wrong, I think. The utility of money to the rich is low or zero. RM1 means nothing to the rich, but means a lot to the poor.

The dynamic argument is about moving the poor out of their situation by enabling their thinking faculties. Then they participate productively because they now have equal opportunities, and can perform better than the others. That’s the logic of affirmative action, not going along ethnic lines. If you do that, you may end up misallocating resources such that you may not establish equal opportunity. The beneficiaries could be the rich themselves.

Secondly, you no longer have the same standards for all. It becomes the right of one group to enjoy privileges.

In the initial stage, some good things happened. The restructuring targeted where the Malay communities were. They built canals, drains and roads. That integrated them into markets. That was enabling.

What was not enabling was the provision of 30% equity for bumiputeras. What do you establish from that, by simply fixing an artificial figure? That may even backfire because the poor Malays may not even enjoy it.

Because you have a framework of that sort, then a whole network of macro-organisations are created targeting bumiputeras. You have elements of collusion setting in.

I happened to have the opportunity to study Pusat Giat Mara and Institut Kemahiran Malaysia, both Malay-based.

I was visiting places in Johor, Perak, Selangor, I did not find the kind of skills they were teaching state-of-the-art.

When I spoke to the person in charge, I was told these students couldn’t grasp precision engineering and tool and die-making. I was surprised because this is the age at which you catch people’s attention. You never know how much they can learn. That’s the state-of-the-art skills the industry wanted, as reported in a 1994 World Bank study.

When I asked the Mara and polytechnic administrators, they said they were doing very well, because all their graduates get hired.

But when I went to the firms (this was at the peak of the labour shortage), they said they had no choice but to take them in and train them because they were already here and the misinformation was that skilled labour was in abundance here.

The training institutions claim they are market-oriented, but the firms say we pay lower salaries and we give them training. There’s no premium in that. They should bring the best to train the students. I would have preferred that they go to the poor irrespective of race, then you build nationhood, a society.

Even if you started with the Malays, the trainers shouldn’t have been those whose skills are mediocre. Get quality instructors even if you have to source them from abroad.

I criticised the political hierarchy in Johor on this point, and they said whatever you have said, we recognise and we’ll change, but I don’t think they have.

A World Bank official said, ‘Malaysia is an interesting country. Whatever FDI instrument there is in the world, it has, legislatively. But whether they enforce it and execute the policy properly, the answer is ‘no’.

When they say they don’t have the labour force etc, firms will say, they told us we can get tool and die makers and precision engineers from abroad, but approval is not easy. There is a lag period, sometimes they allow a few, sometimes they don’t. They talk about bureaucracy.

It’s also a tremendous waste of resources, isn’t it?

When I was doing the Iskandar Development Region strategic chapter, I spoke to many managing directors. Five of them told me they were keen on relocating their designing facilities from Singapore. Whatever Singapore has, Johor has. There are things Johor has that Singapore doesn’t have. Big land mass, more options for tourism, and they can have more people to work there, but unfortunately, after looking at a number of details they decided not to work there. Some CEOs decided they would drive to Johor daily from Singapore because Singapore is a better option. For example, education facilities are better.

I brought the matter to the state officials, who said, ‘This is the problem with Malaysians. Most of them run away to Singapore. Just 10% more wages, and they go there.’ One figure is that 50% of Singapore’s engineers are Malaysians.

We found some of these employees and talked to them. They said, ‘You think we’re fools? For 10%, we can’t get to see our children. They are asleep when we leave for work and again when we return. The real reason for choosing Singapore is that their problems with the local authorities are not solved because of bureaucracy. But they say we are a one-stop agency, we solve everything immediately.