SMEs

In terms of its importance and market size, SMEs at the moment contributes about 32% of the country’s gross domestic product and makes up 59% of total employment. In totality, this segment accounts for 99% of business establishments and contributes 19% of Malaysia’s exports.

Sourced from here.

Some perspectives

These are interesting times for Malaysia. For the many who trawl the cyberspace for alternative news the hunting must be deliriously good. There is no shortage of negative views.

This gives rise to an interesting question. Many people blame the media for propagating sensational and negative news. But, then, why do cyberspace trawlers, who have the power to decide what websites to click on, decide to visit sites and blogs that spew bad news and negative views?

We would think that people who abhor sensational news would actively avoid it. But it never happens.

Let's face it. There is a dark, voyeuristic tendency in all of us. If there is a hole in the fence cladding that has a sign, "Do not peep", most of us will not be able to resist the temptation of a peek.

This is where things stand.

Malaysians read the mainstream news and Malaysians read the alternative media.

Too much information (not necessarily knowledge) results in information overload. Those who have no perspective and who do not read books and rely chiefly on the internet for reading material will suffer from a form of vertigo.

It is not easy to remember good news. It is impossible to forget bad news.

So, it is likely that you will forget this posting because it's about good things.

I have been associated in an advisory capacity with a European multinational for some years. They've had a sales office outpost in Malaysia for several years. The brands and products they sell reaches the retail level. So, it is likely that you would have had contact with their range of brands and products. Since this is not a paid advertorial, I will not give you any names.

Two years ago, this MNC decided to acquire a Malaysian SME based in Johor. The gross annual revenue for the SME was about RM20 million a year. It had good manufacturing and production practices that impressed the MNC.

Post-acquisition and fastforward to today, this SME is no longer an SME by definition. It's gross annual revenue has ballooned to nearly RM100 million a year. The SME is now part of the MNC's global supply chain.

Mind you, the MNC's Asian footprint is very large with a natural gravitation centred in its production bases around the coastal manufacturing hubs of mainland China. 

But, after the successful experience of acquiring a Malaysian SME this MNC continued to scour Malaysia to look for more gems - more diamonds in the rough.

And, you know what?

They found not one, but two more SMEs that met with their high production and manufacturing criteria. One is in Selangor,the other in Malacca.

So, the acquisition process is in earnest progression.

The good news, my fellow Malaysians, is that there are many Malaysian SMEs that are capable of becoming world-class.

Having said that, our challenge as a nation is to nurture these SMEs to go beyond making products for international brands (OEM - original equipment manufacturing) to creating and establishing their own brands.

In this way, Malaysian SMEs will be able to sustain its Malaysian ownership.

Although I am proud to have seen three Malaysian SMEs being highly regarded by my MNC associates, I will be prouder still if it is our Malaysian SMEs that can hold their own and grow themselves into partners of equal standing with the MNCs.

SME

Just over half or 56% of total employment comes from this sector where 19% to the nation's total exports stem from. 

The segment also represents 99% of total business establishments and is a substantial contributor to the country's gross domestic product at 31%.

Sourced from here.

Given the stats above, why do my SME friends still feel orphaned and unappreciated and are finding difficulty with obtaining funding support?

More action, less words, please.

Malaysia's Quantum Leap Criteria: Help the SMEs

As a nation, Malaysia is wasting far too much energy with racial economics and racial polemics.

Check any statistics in the correct way and we will find incontrovertible proof that the largest employers are SMEs. Likewise the largest economic output is generated by the SMEs.

But, read any papers and watch any business media reports and, it's all about large corporations and GLCs.

SMEs are virtually invisible and unrecognised.

When Malaysian policy makers urge more private investments from within the country, I wonder who they are making the call to?

Large statutory funds like Khazanah Nasional and EPF are looking outside of Malaysia for yields and returns.

Large Malaysian corporations are expatriating funds overseas.

These large entities may be making purely rational decisions. There is no harm in that at all and, in fact, I applaud it.

But, who, then, form the bulk of the Malaysian private investment pool? It is obviously the SMEs.

I want to know if the policy makers are truly sincere in wanting to encourage more private investments? For, I know that many SMEs that wish to expand their productions lines and increase their capacities to respond to increasing demand are desperate.

The banks are the worst business sector in Malaysia in my books. They just want to lend to entities that are cash-rich and, who do not need further borrowing.

The banks do not want to lend to most SMEs.

Banks do not want to extend further loans to SMEs in large part because bank lending practices are now so de-personalised that the traditional bank manager who was part of the community are extinct. They have been replaced by faceless automatons in their respective head offices or, some central loan and security documentation units located in a faraway place that uses a meaningless check-list matrix for bank lending decision-making.

What are the SMEs to do?

My colleagues have helped clients apply for matching grants and soft loans from SMIDEC (now known as SME Corp)when the Malaysian Government announced the Stimulus Packages. We were told that the processing would take 6 months. When 6 months elapsed we were told that the allocation had been used up.

I don't even want to ask who benefited from and, received these matching grants and soft loans.

Check websites like this and you'll feel encouraged. Contact them and go through the process and, you'll feel despair.

It is in scenarios like this, beyond all the politics, that the real Malaysia exists.

After experiences like these, being spurned by commercial banks and, receiving no assistance from SME Corp aka SMIDEC, those of us who choose to survive learn to live by our wits and street-smarts.

But, I laugh out loud when I read the print media and watch the evening news because of the sheer disconnect that ordinary, hardworking, honest-to-goodness Malaysians must feel between their experiences with the banking sector and SMIDEC and, to read and listen to the cooing sounds made by politicians, civil servants and big industry leaders on the need to foster greater private investments in Malaysia.

It ain't happening.

Not for the want of SMEs trying to increase their private investments.

...but due purely to the structural nonsense that exists in our banking policies and badly implemented SME-assistance programmes.

Cakap langsung tidak serupa bikin.

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

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

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

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

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

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

Many fell by the wayside. Many succeeded.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This will catalyse greater awareness of innovative ideas for SMEs.

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

M'sia's strategy in a climate of falling trade and rising protectionism

One of the unfortunate fallout from the economic turmoil is the decline in the volume and value of international trade. As the trade data from the last quarter of 2008 has shown, Malaysia is not immune from this.

Another effect is the rise of protectionist measures. These are barriers to importation of goods.

Malaysia's official stance has at all times been against trade protectionism. We are, after all, an overt mercantilist nation that depends on export earnings for a wide range of finished manufactured goods, oil and gas products and agricultural commodities, namely, palm oil and rubber.

Tariff-based protectionism
During the Great Depression tariffs were the protectionist weapon of choice. In the U.S., the infamous Smoot-Hawley Act 1930, increased nearly 900 types of import duties. This move received widespread retaliation from U.S. trading partners.

Many believe that there are sound reasons for assuming that there won't be a rise in excessive protectionism nowadays when compared to the past.

International agreements to limit tariffs, built over the post-war decades, are regarded as a bulwark against all-out tariff wars.

Moreover, the increase in global supply chains have bound national economies together tightly making it more difficult for governments to increase tariffs without harming producers in their own countries. This appears to be Malaysia's position.

But, it should be noted that many countries are able to raise tariffs, because their applied rates are below the maximum allowed by their WTO commitments. They may choose to do so despite the possible disruption to global supply chains. And, since global sourcing amplifies the effect of tariff rises, even action that is permissible under WTO rules could cause a lot of damage.

The point that should not be ignored is that a slight lowering of trade barriers can cause a huge increase in trade. By the same token, if tariff barriers rose above a certain point, which might still be below the maximum agreed on at the WTO, global supply chains would become unfeasible. Trade would drop even more steeply than it has in recent months.

Non-tariff protectionism
This time round, despite the economic turmoil few tariffs have been raised. But tighter licensing requirements, import bans and anti-dumping, which imposes extra duties on goods supposedly dumped at below cost by exporters, are being used instead. India appears to be particularly adept at using this protectionist weapon.

Certain developed countries have begun using discriminatory procurement provisions in their fiscal-stimulus bills and offered subsidies to ailing national industries.

These count as protectionist measures.

Use of subsidies as a form of protectionism
International trade agreements provide little protection against domestic subsidies. Nor do they provide immunity from greater use of anti-dumping laws. The subtler variants of protection may be similarly disruptive.

WTO action against subsidies is not straightforward. To complain successfully, a country has to show that a subsidy offends the numerous criteria used to measure protectionist conduct.

We also cannot ignore the double-edged problem that an aggrieved country has when lodging a complaint. Having subsidies of your own does not stop you from challenging someone else’s, but if you pick a fight they may challenge yours.

It is this uncertainty and ambiguity that may encourage many countries to use subsidies as a form of protection. For example, the Malaysian governments can aid national carmakers and, at the same time criticise others for their protectionist ways.

Threats to supply chain strategies
Many will recall that just before the economic turmoil began festering, global supply chains were all the rage. Outsourcing was sexy.

Protectionism threatens to dismantle the grand conventional wisdom of the 1990s and the millennium. Countries like Malaysia stand to lose from its policy of relying on FDIs. Multinational companies move into countries like Malaysia to establish manufacturing bases due to supply chain efficiencies. The icing on the cake are the incentives such as tax exemptions offered by MITI. But, a key attraction was Malaysia's low-cost labour.

Forwards or backwards
A positive thinker will see the ruptures in global supply chain strategies as opportunity for domestic manufacturers to pick up some advantages in the vacuum left by missing FDIs.

The sad truth is that in countries like Malaysia the decades-old dependence on FDIs to formulate industrial and economic development plans have left domestic industries to play ancillary support roles. These domestic industries are mostly SMEs who are far from being world-beaters. Most SMEs are still in labour-intensive activities.

For Malaysia, as with other countries, there are many economic policy challenges that has arisen in this negative economic climate.

One of the key challenges is to decide to move away from labour-intensive industries to higher value-added manufacturing.

Education is a key component
One suspects that in order to give effect to this strategy, Malaysia needs to step up its education policies to produce the high-quality workforce that is needed to form the foundation for this strategy.

Otherwise, we can only look forward to competing with other low-cost labour jurisdisctions like Vietnam and Thailand.

Bad vibes

The economic challenges are increasing. The First Minister of Finance has stated in Parliament that the 3.5% GDP growth projection is no longer a viable target.

And, thus, it is coming to pass that reality has bitten the country's economic managers.

As if to further underline this candid albeit gloomy prognosis, we now have to watch the incidence of credit card defaults which are expected to escalate in the coming months.

To make matters even more dire, the SMI Association of Malaysia has reportedly indicated that about 1.35 million small and medium industries (SMIs) in the country will face an operational crisis due to dwindling revenue if the government does not raise domestic consumption in the next six months.

There are 1.5 million companies and businesses registered under the Registrar of Companies or Companies Commission of Malaysia, and of these 90% come under the micro- and small-industry categories.

It is estimated that of the 11 million workers in Malaysia, 56% are employed in SMIs and these SMIs are facing survival test in the next six months.

Electronics industry needs sufficient human capital

There is a need for sufficient human capital for the electronics industry, as it is a significant contributor to the Malaysian economy, said the Minister of International Trade and Industry Tan Sri Muhyiddin Yassin.

The industry is the largest sub-sector within the manufacturing sector in Malaysia in terms of output, employment and exports, he added.

“For the period January to July 2008, the industry recorded a 28.8% of total employment in the manufacturing sector,” he said in his speech at the Panasonic Scholarship Award 2009 ceremony here yesterday.

Muhyiddin also said from last year until August 2008, the electronics industry recorded the second largest investment of RM16.3 billion (147 projects), after basic metal products which had a total capital investment of RM39.5 billion (93 projects).

The electronics industry was mainly driven by foreign investment with projects approved accounting for 95.9% of the RM15.6 billion total in 2007.

Muhyiddin said the initiative by Panasonic would complement government efforts to provide a sufficient supply of human capital for the industry. Apart from upgrading the skills of employees locally, the group also sends them to Japan for training. Source: Edge Daily

The Minister has shown an awareness that the workers of Malaysia need sufficient skills to support the Electrical and Electronics (E&E) industry.

Will there be a plan to improve education and skills training for Malaysians?
Now, will the Minister earnestly work with the Minister of Human Resources, the Minister of Education and the Minister for Higher Education to improve the education and training pipeline to ensure that there is sufficient education and skills for the E&E industry and all other industries in Malaysia?

Will there be a strategy to increase SME involvement in E&E?
Will the Minister earnestly put in place the necessary policies that will help Malaysian SMEs in the E&E sector and all other manufacturing sectors to move up the value chain with new production technology so that Malaysia does not remain overly dependent on FDIs to drive the E&E sector?

Will there be consultation and financial support for SMEs?
And, will the Minister consult with the SMEs and provide financial support to the SMEs to ensure that the goal of increasing the SMEs share of the E&E sector is met?

Will the Minister keep us informed?
Finally, will the Minister keep the Malaysian public informed of all measures planned?

An agenda to deal with economic crisis

Well, if you doubted my pseudo-economics view on the importance of SMEs in my posting just now, then, I'm pleased to state that the eminent Malaysian economics thinker, Terence Gomez, who is an Associate Professor of Political Economy at the Faculty of Economics & Administration, University Malaya, has urged the Malaysian government to focus on SMEs in a more concerted manner. Read his essay published in Malaysiakini this morning. Posting Gomez's proposal here is a bit like the ancient Chinese martial arts where the exponent is trained to borrow the someone else's energy to embellish the exponent's moves ;). Read what Prof Gomez has to say:

A growing number of Malaysian individuals and groups have called on the government to initiate a constructive agenda to deal with the potential onslaught of the financial crisis that has erupted in the United States and Europe.

MCPX

The present crisis draws attention to issues that require prompt and serious consideration by the government, including the extent of its ownership and control of the banking sector, the provision of mechanisms to support small and medium-scale enterprises (SMEs), the effective and productive employment of government-linked companies (GLCs), the availability of viable incentives to draw foreign direct investments (FDI) and the volume of infrastructure development spending that has to be made available to sustain efforts to reduce poverty and stimulate growth.

While these issues require careful review, the key lesson the Malaysian government must draw from this is the need to conceive feasible measures to promote domestic entrepreneurship, even in the absence of a crisis. This is imperative if the economy is to be able to generate investments locally to curb Malaysia’s heavy dependence on FDI.

But government policies to cultivate local entrepreneurial firms have long been tempered with the need to achieve other social goals that are also held to be important, such as the promotion of bumiputera firms as part of Malaysia’s affirmative action plan, or the New Economic Policy (NEP).

The government has vigorously endeavoured over the past three decades, for instance, to create a ‘Bumiputera Commercial and Industrial Community’ (BCIC) that is actively involved in the industrial sector. The absence, however, of bumiputera companies in the current crop of leading publicly-listed manufacturing firms raises questions about the government’s success with BCIC.

More importantly, the question the government will have to squarely confront is whether its promotion of policies such as the BCIC has been at the expense of entrepreneurial firms owned by non-bumiputeras. And the other question requiring serious consideration is whether such policies have played a role in hindering Malaysian firms from moving up the technological ladder or from developing internationally recognised brand products.

Supporting SMEs

What Malaysian corporate history cogently indicates is that the high degree of government intervention in the market and the pattern of implementation of affirmative action have impacted negatively on a majority of non-bumiputera businesses in manufacturing, curbing their willingness to invest further in their enterprise. Inevitably, companies that may have had the capacity to upgrade their technology in a way that would have helped foster domestically-driven industrialisation have been constrained.

The fundamental reason for the presence of only a handful of large entrepreneurial firms with a long corporate history, or for the demise of firms owned by some of Malaysia’s leading business people, or for the limited potential of SMEs to scale up the technology ladder is that these companies have failed to invest sufficiently in production, distribution and organisation. This failure in turn can be attributed to inadequate support and encouragement by the government for research and development (R&D).

It is quite probable that non-bumiputeras are reluctant to invest in R&D and learn new technology for fear that ethnically-based policies would work against them as they develop their ventures. Recent government policies by Prime Minister Abdullah Badawi have favoured SMEs, but the response to these public incentives has been poor. This suggests the government has yet to convince domestic investors that their investments will be protected from policy instruments adopted to redress ethnic wealth inequalities.

During the serious economic recession of the mid-1980s, for instance, affirmative action in corporate activities was ‘held in abeyance’, only to be actively promoted even after the New Economic Policy had lapsed in 1990, an issue that probably did not encourage non-bumiputeras to invest liberally in their enterprises.

The need now felt by the government to support SMEs is urgent as small firms worldwide have shown that they are capable of being more responsive to market demands as they are far more flexible and better equipped to engender and adopt innovations.

Importantly too, a government review of its policy orientation on enterprise and economic development may compel it to consider more explicitly its broader developmental orientation, including how it thinks about issues such as public-private cooperation.

With the government now playing a major role in steering resources to companies to attain its development and social goals, including redistributing wealth and reducing poverty, its conception of public-private compacts must be one that is seen to be inclusive.

Social compacts

In industrialised East Asian and European countries, social compacts have included not just government and business, but also labour. Such social compacts have provided for much-needed stability in policy planning and implementation and have served to control wage increases.

In Japan and the Nordic countries, it was social partnerships between employers, trade unions and the government that helped them register significant economic progress, provide for social protection measures and reduce poverty appreciably. In such models, the importance of the small firm in terms of promoting innovation, developing industrial capacity, generating employment and redressing regional (and ethnic) inequities has been noteworthy.

Taiwanese SMEs, for example, offer an outstanding model of small entrepreneurial firms that are highly capable of competing globally. In Singapore, after a long cultivation of GLCs, the government began emphasising the need to support SMEs to foster domestic entrepreneurial capacity.

In the US, studies reveal that business organisation can shape markets in the industrial sector. Small firms can similarly pattern the form of the industrial sector if they acquire the capacity to learn and develop technology.

Britain provides other useful lessons. The Thatcher government recognised the importance of the small firm in creating employment when the economy began in 1979 to move into a deep recession that continued into the early 1980s. A 1992 OECD study showed that Britain had the fastest growth rate of self-employment among European countries between 1979 and 1990, rising from 7.5% in 1979 to 12.2% in 1990.

From 1981, as civil unrest began to spread, Thatcher’s government also began to focus attention on enterprises owned by ethnic minorities. One factor that had precipitated tensions was that the government had not heeded the needs of businesses owned by minorities, an issue that was subsequently addressed, but which also helped to reduce unemployment.

Need to reassess ethnic-based policies

There are other reasons why the Malaysian government needs to reassess its ethnic-based policies in the business sector. Chinese enterprises have survived and thrived in the Malaysian economy, in spite of the implementation of affirmative action, because they have been exposed to intense competition.

Since the Chinese retain a large presence in manufacturing, they remain an important avenue through which the government can promote the rise of an independent domestic industrial base, if Malaysia hopes to reduce its persistent dependence on foreign firms in this sector.

With adequate and appropriate government support, and with policies that transcend racial boundaries, it is probable that the dynamism of private companies that clearly prevails in the corporate sector can be gainfully nurtured. It would also encourage SMEs to overcome systemic problems, such as inadequate investments in R&D and low productivity, which may help them evolve into firms of international repute.

Since the 9th Malaysia Plan already endorses SMEs, a new round of considerable policy re-configuring would be unnecessary. However, the government’s willingness to adopt a more inclusive and collective orientation towards enterprise development will serve to either deeply inspire or alienate business people. And this is what may ultimately determine whether the government can usher in a form of domestic enterprise development that is highly entrepreneurial.

Doodles on the economy

In the immediately preceding post, I featured this passage:

7. Aseambankers expects the upcoming Economic Package to address this issue with measures to boost consumer spending and the enlarged public sector spending (Federal Government and GLCs), support key growth sectors/areas like tourism, as well as raising the competitiveness and attractiveness of Malaysia as a foreign direct investment location.

Here are my jottings:

Consumer spending
One of the most unfortunate decisions made by the government was the 45% fuel hike. soon after the March 8 General Elections. This contributed directly to Malaysia's inflationary spike to 8.5% by September.

Yes, fuel prices are coming back down in stepladder fashion. But has prices come back down? The Minister of Domestic Trade and Consumer Affairs, Shahrir, has his work fully cut out.

Inflation is sticky. It is sticky because the entire supply chain from producers to wholesalers to retailers want to preserve their profit margins. But, before we take our cudgels to beat their brains out, we have to recognise that overall consumer spending has declined. So, sales turnovers have been dropping.

This is the adverse outcome of the economic risk that the government took when it hiked fuel costs by 45%. It started a vicious downward consumption cycle that it now has to combat.

Word has it that measures afoot may include reducing EPF contributions by employees. Between Shahrir's pressure on the supply chain unstick retail prices and releasing additional disposable income to Malaysians the government hopes to stimulate consumer spending. Will it work?

Public sector spending
The budget deficit for 2008 and 2009 was earlier fixed at 4.6% of GDP and 3.2% of GDP respectively. As analysts and Pakatan Rakyat have been highlighting, those numbers were based on a few key assumptions that has become very, very shaky, if not already obviated.

One assumption was that oil prices would average at USD125 per barrel. Now, oil prices have gone to USD67 per barrel. Petronas, which contributes a whopping 44% to government revenues, may not have so much to give.

Another assumption was commodity prices, especially CPO prices, that were assumed at RM3,000 per metric tonne. Now it hovers at around RM1,200 to RM1,400 per metric tonne.

A reduction of the budget deficit is in order. But, against that is the pressure for fiscal stimulus and pump-priming, traditional Keynesian responses to economic downturns.

To that fiscal challenge, my favourite cryptic remark is, If you don't have enough bullets, don't use a shotgun. Use a sniper rifle instead. Select your targets very, very carefully.

Competitiveness in attracting FDIs
Frankly, I'm sceptical about this traditional obssession with FDIs. If you've been reading this blog you will have sensed my scepticism.

This is a type of quick fix that we can be certain, MOF1 Najib's coterie of fiscal advisors will put on the plate to serve to the Malaysian public tomorrow.

The level of thinking on FDIs is no higher than that of a landlord. Need more tenant's. Got more competition from other landlords in the neighbourhood?

Lower the rentals.

Give three to five years of free rent aka pioneer status tax holidays and, other customs and tariff incentives/waivers.

Those are the conventional and traditional tactics (not strategy) that Malaysia has been using to compete for FDIs.

True competititveness needs long-term planning
There's a sick economics witticism about a student asking an economic lecturer about the long run effects of fiscal policies. The tired old lecturer's reply was, In the long run we are all dead.

But, not to be deterred by such gallows humour, I want to make an observation that Najib's so-called Economic Stabilisation Plan scheduled for tomorrow will, of necessity, be looking at short-term and medium-term fiscal policies. These are quick fixes.

We should not lose sight of the fact that Malaysia's true challenge for true economic competitiveness is in the area of improving skills (which can only come from decent education in a competitive language like English) which, in turn, will have genuine long-term multiplier effects such as higher pay, higher consumption spending and greater productivity.

Malaysia's true economic success will be the creation of high-technology SME clusters that will provide ancillary support to the FDIs and, even large Malaysian industries. Such a development will make Malaysia a true economic competitor. By the way, SMEs are the BIGGEST GROUP of Malaysian employers.

So, it would be a truism to say that the good health of the SMEs will guarantee the good health of the Malaysian economy.

A future without oil money

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

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

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

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

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

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

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

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

1. Industrial-manufacturing base.

2. Primary industries such as palm oil and rubber.

3. Tourism.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

English education needs political courage

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This refers to acquisition of knowledge that is transformed into marketable skills but with increasing value. So, productivity is not just about the number of widgets produced per worker. Productivity, in this context, refers to the value of the work or service generated by each worker. It is the qualitative aspect of productivity that Malaysia should now focus on instead of the quantitative aspects. That is how Malaysia can aim to be competitive. That is how Malaysia can move up the value chain.

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How do we move the Malaysian workforce in sizeable numbers from minah karan skills of soldering, assembling and packaging of electrical and electronic (E&E) products to higher levels such as industrial design which requires higher order thinking and skills?
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Just one example
I personally believe that given Malaysia's multiracial, multicultural and multireligious millieu, the fundamental exposure of each Malaysian to the cultures of the Malay, Chinese, Indian, Iban, Kadazan and other suku kaum and, within each of these cultures, so many subcultures based on geographic origins, Malaysia is a potential world leader in the field of industrial design.

But...how do we know that our designs can be used for mobile phones, satellites, cars, light bulbs or even pencils, without exposure to knowledge of areas such as production engineering?

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

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

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

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

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

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

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

Political courage
So, back to the Minister of Education.

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

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

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

SME and exports

Small and Medium-scale Enterprises (SME) are truly one of the key backbone of the Malaysian economy. As a percentage of Malaysia's Gross Domestic Product, SMEs contributed 32% in 2005 and, the contribution is expected to increase to 37% in 2010. In 2005, SMEs contributed 19% of the total value of Malaysian exports. This is also expected to increase to 22% by 2010. Bank Negara publishes the SME Annual Report.

The Minister of Finance 1's reference to the need to strengthen SMEs through new initiatives by financial institutions and access to special Bank Negara funds underlines the importance of this sector and its multiplier effect on the wider economy.

SMEs can look forward to credit supply and, possibly an opportunity to restructure their loans. The government will, no doubt, be trying to urge banks to keep the credit supply lines going and, not hold back on good loan proposals.

Trade finance
The supply of credit must also be available for trade finance in imports and exports by SMEs who usually arrange for Letters of Credit and related instruments.

This leaves another important feature that needs to be looked into quite seriously and earnestly.

Export finance
To assist the SME exporters to reach out internationally, we have the Malaysian Industrial Development Authority (MIDA) and Matrade.

Sometimes, foreign buyers need sweeteners to get into an export deal. This is quite commonplace in new markets.

This is where the EXIM Bank can play a pivotal role where private commercial banks shrink during a tough economic environment such as the one we see today. Where commercial banks chicken out the EXIM Bank is supposed to step in.

Any plan by the Ministers of Finance I and II and, the Minister of International Trade and Industry, must include a significant allocation of funds to support these elements that form part of the process of exporting Malaysian goods.

Calendaritis

In what was probably expected to be his most significant statement since assuming the post, the Minister of Finance I appears to have made very tepid comments on the state of play of the Malaysian economy.

Like his boss, the Prime Minister and, his nemesis, the Opposition Leader, the MOF I appears to have fallen victim to a new disease called calendaritis. This hitherto rare disease is said to exhibit a characteristic symptom in its victims. The symptom is a propensity for identifying future dates after initial deadlines are reached with nothing to show.

In an act that confirmed his being afflicted with this disease, MOF I is reported to have said that the details of the stabilisation plan will be announced on November 4 in his winding-up speech in Parliament for Budget 2009.

RM5 billion for Valuecap Sdn Bhd
While making generalisations on the state of the economy, MOF I was very specific on one matter. RM5 billion will be injected into Valuecap Sdn Bhd.

If you visit Khazanah Nasional Bhd's website here, you will, upon scrolling down, come upon this description of Valuecap Sdn Bhd:

Established in 2002, Valuecap is a fund management company which was created to invest specifically in the Malaysia equities market. Owned jointly by Khazanah, PNB and KWAP, Valuecap’s key mandate is to undertake investments in equities listed on Bursa Malaysia on a portfolio basis, based on superior fundamental investment research.

It is not as if Valuecap Sdn Bhd is a great White Knight in shining armour as the innocuous description above suggests. The venerable DAP Adviser, Lim Kit Siang is on record as having made this statement on Valuecap Sdn Bhd at the time of its inception in January 2003. There was also an interesting letter written to Malaysiakini on January 15, 2003 cautioning on the role and scope and mischief that could befall Valuecap Sdn Bhd.

I am sure that others will have plenty to say about the rationale for MOF I to be so specific about Valuecap Sdn Bhd receiving RM5 billion while remaining sagely nebulous about other key areas of the Malaysian economy, preferring to wait until November 4. Read additional information on Valuecap Sdn Bhd furnished by a commentator by clicking the link here.

Source of the RM5 billion?
By the way, where's the RM5 billion coming from? Petronas Bhd?

Focus on the real economy, please
MOF 1 should ignore the capital market. As Wall Street and ALL bourses have shown, the capital market is NOT the barometer of confidence. It has turned out to be the barometer of greed and fear. THEY are the ones talking up a recession. I suggest that MOF 1 save the RM5 billion and inject it into a more worthy vehicle like the EXIM Bank to support SME exporters, instead. Focus on the real economy, please.
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Meanwhile, I read with great pleasure that the Selangor State Government is tabling a BALANCED BUDGET of RM1.4 billion. Whatever detractors say about Tan Sri Khalid or the Selangor Pakatan government, this is the most complete answer to their criticism. At times like these we need less politicking and fuss over party elections. We need more economic management, please. As a Selangor voter, I am heartened to see that the state is being managed by a conscientious and competent economic manager. Read more here.

Krugman

Paul Krugman, latterly the Nobel Prize honouree in the field of Economics, was one of the first people to acknowledge the effectiveness of Malaysia's policies to combat and contain the effects of the so-called Asian contagion in 1998.

In his latest piece as columnist in the New York Times Krugman tips his hat to the British Prime Minister, Gordon Brown. I highlight some of Krugman's observations on Brown and the British Government's unusually decisive moves as a lesson in economic management. Mind you, neither Britain, nor the other Western economies, not, for that matter, the rest of the world, Malaysia included, are out of the woods. It is hard to forecast and project ahead in the thick fog of an economic turmoil. We appear to be in the eye of the economic hurricane. Weather buffs will know that when placed in the eye of a hurricane there is a disturbing calm followed by anything else.

Krugman observes that the Brown government has shown itself willing to think clearly about the financial crisis, and act quickly on its conclusions. And this combination of clarity and decisiveness hasn’t been matched by any other Western government.

Krugman also said that, The bursting of the housing bubble has led to large losses for anyone who bought assets backed by mortgage payments; these losses have left many financial institutions with too much debt and too little capital to provide the credit the economy needs; troubled financial institutions have tried to meet their debts and increase their capital by selling assets, but this has driven asset prices down, reducing their capital even further.

What can be done to stem the crisis? Aid to homeowners, though desirable, can’t prevent large losses on bad loans, and in any case will take effect too slowly to help in the current panic. The natural thing to do, then — and the solution adopted in many previous financial crises — is to deal with the problem of inadequate financial capital by having governments provide financial institutions with more capital in return for a share of ownership.

This sort of temporary part-nationalization, which is often referred to as an “equity injection,” is the crisis solution advocated by many economists.

But, he cautions, we still don’t know whether these moves will work. But policy is, finally, being driven by a clear view of what needs to be done. Which raises the question, why did that clear view have to come from London rather than Washington?

Yesterday in the morning Q&A session in Parliament, MOF II used his stentorian voice to remind all and sundry that the Malaysian solution of 1998 appears to be emulated by the West in dealing with the economic turmoil. That was a good lesson in recent economic history.

That aside, what troubles me is that the Malaysian government is still choosing to stick with the paternalistic playbook that requires the stern and aloof parent to tell the rakyat that they are safe and secure ... for now. Those last two words or, similar words and phrases also typify recent analyst remarks about Malaysia's liquidity comfort zone in the banking sector.

The problem is that the Malaysian government is choosing not to disclose their concerns about the economic sectors in the Malaysian economy that are most at risk of being affected by the economic turmoil. Some members of the Establishment have even uttered bizarre remarks that exports constitute a mere 30% of Malaysia's GDP. Therefore, they do not see a major problem even if there was a major reduction of exports due to a global recession. Really? The mind boggles at this approach to dispense placebos that achieve little effect when real bad things start to happen.

Surely the Malaysian government can start on the premise that there will be problems. In doing their job as economic managers, the MOF I and MOF II needs to provide guidance in the form of alerts and warnings. That will enable economic players to anticipate problems that may arise. The ones in risky sectors can manage their finances and inventory. The economic players that I mean are NOT the large corporations who have direct access to economists and analysts. I mean the poor fellows in the small- and medium-enterprises, the SMEs, who are so busy trying to make a living that they have no time to ruminate and reflect on high finance and mull over economic data.

Why can't the economic data be made available to the general public? This is where the Opposition's call for more economic information to be made available becomes relevant.

Two financing facilities to help SMEs weather hard times

The Star Online reports that Bank Negara will set up two financing facilities of up to RM1.2bil to help small and medium enterprises (SMEs) cope with the impact of higher costs due to rising prices.

Prime Minister Datuk Seri Abdullah Ahmad Badawi announced yesterday that the RM700mil SME Assistance Facility and the SME Modernisation Facility with an allocation of RM500mil would commence on Aug 1. He said special measures were being introduced to assist SMEs weather hard times.

“The measures also include loan restructuring, provision of advisory services on effective cost management and incentives to invest in energy-saving and energy-efficient initiatives, “ he said when launching the SME Annual Report 2007 at Bank Negara yesterday. Read the full report at Star Online.

I hope due consideration will also be given to the plight of very, very small people who are doing very, very small businesses; literally, the kueh, pisang goreng and kari pap operators. They fall within the microfinance category that I had a rather prolix entry on yesterday. Read here.

Fuel Hikes: Somnambulism and Insolence

Is the fuel hike necessary? Why now? As reported in Malaysiakini on June 7, 2008 "PM: Understand reasons for fuel hike", the PM has asked for us to understand the reasons for the fuel hike. He says it is due to the global price of oil. That may be true. Certainly we are aware from news reports that fuel hikes have been felt all over the world. Even the United States is not spared. There are demonstrations in India. The stock market melt-down in Vietnam is partly due to its being a net oil importer.

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But, wait a minute, isn't Malaysia a NET EXPORTER of oil?

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The CEO of Petronas has made a public statement that Petronas is not Santa Claus. The Malaysian public is warned that our oil reserves will be depleted by 2014. The underlying message is for us to shut up and put up with this fuel hike.

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We are also bombarded with messages that we have to curb our wanton consumption. Belt-tightening is necessary. But, wait a minute (again!), isn't the PM reported as saying in the Malaysiakini report that the Malaysian economy grew at 6.3% last year. Furthermore, Malaysia is supposed to be at full employment (which probably explains why there are so many foreign workers in our midst). So, things should be looking up. But, while large corporations are announcing bumper profit growth, the small and medium enterprises (SME) are facing challenges. Salaried workers are experiencing the effects of inflation on their disposable income even before the fuel hike.

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Some quarters estimate that since the formation of Petronas some RM3 TRILLION has been received by the Malaysian government. Now there is a major outcry for a full disclosure of where the wealth has gone to.

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There is one aspect of the Malaysian economic policy that may partly explain where the wealth has been frittered away.

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The populist policy of price control and subsidies

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Prior to the 1980s the government applied subsidies for improvement of padi farming, rural land development and resettlement schemes, education and certain manufacturing activities. These were target-specific subsidy policies designed to encourage and enhance PRODUCTION in key areas of the Malaysian economy.

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During the Mahathir era, a more populist approach was used in the realm of economic policy. Subsidies were introduced in the area of CONSUMPTION. For instance, the Approved Price Mechanism (APM) was introduced in 1982 to regulate pricing of petroleum products. This is a price control mechanism for the government to step into the free market pricing mechanism for petroleum products. We now know this as the petrol price subsidy.

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Subsidies and price controls are a distortion of the price-fixing mechanism which is based on the laws of supply and demand. It is not an unusual policy especially in the agricultural sector. Even the United States and Japan has agricultural subsidies.

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But the APM was a GENERAL POLICY that benefitted any consumers of petroleum products. In other words, any motor vehicle owner would benefit from the subsidy. That is why it was a populist measure. Why was it necessary? This is something Che Det may wish to answer in his blog. The APM benefited only owners of motor vehicles. Why couldn't the funds be used for more productive purposes?

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Faustian pact

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The point here is that by introducing populist measures like the APM, Malaysians are offered an addictive drug. This has made the entire country uncompetitive. It is a crutch that was foisted upon us to ensure the popularity of the political party in power. This type of molly-coddling policy affects the cost of goods and, affects the efficiency of the process of producing goods and services. It makes us think that we are productive and efficient when, in fact, we are not.

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To digress a little, this is the self-same approach that has made Proton so price-competitive. Import duties are imposed on imported cars to make imported cars more expensive. Proton's inefficiencies are all absorbed by a slew of special fiscal policies designed to protect a weak car manufacturer.

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But, like all such populist measures, price controls and subsidies are a Faustian pact. It is a deal with the Devil. It will and, it has come back to haunt us. The party is over and we are all suffering a major hangover. Overnight, our cost of living has increased tremendously.

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The cost of the subsidies and price control mechanism is likely to been drawn from and, paid from the Petronas revenues. That is likely to be where the billions of Ringgit of Petronas money has been used. Of course, there are many other "leakages" that we can be sure Pakatan Rakyat will get around to audit at some point in time. But that is another story.

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Understand reasons for fuel hike?

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In the context offered above, we have to wonder if Abdullah Badawi really and holistically understand the reasons for the fuel hike.

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We are now asked to go "cold turkey" as the opiate of price control and subsidies are violently weaned from us. Many Malaysians can adapt. But many more Malaysians in clerical and labouring jobs may not be able to make ends meet.

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This is the type of government policy that we fear the most. A little bit of do-gooding followed by a double- or triple-whammy. It's like being invited to a karaoke party and to be left holding the bill. That is okay between friends (sometimes). But that is not okay between the rakyat and kerajaan.

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There is little point in the current government leaders blaming the previous leaders. BN (and its former guise, the Alliance) has ruled Malaysia for the past 50 years. We have accepted the paternalistic policies for all this time. We implicitly TRUSTED in the political and economic wisdom of the BN leaders. The economic policies have seamlessly morphed from the 1950s to the current millemium. But as time elapsed the fiduciary feelings of the Merdeka leaders have deteriorated into the bunch of leaders that exhibits what Hamlet described as "the insolence of office". For the record that "bunch" includes those from 2 decades or so ago.

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Worse still, certain leaders suffer from a condition that Franklin Roosevelt called "somnambulists walking backwards".