BOOK REVIEW: Shankaran Nambiar’s The Malaysian Economy: Rethinking Policies & Purposes


July 30, 2014

BOOK REVIEW: Shankaran Nambiar’s new book, The Malaysian Economy: Rethinking Policies & Purposes 

by Tricia Yeoh@ http://www.thesundaily.com.my

FEW writers and analysts are able to both identify precisely the challenges facing the Malaysian economy as well as communicate these in a manner easy to digest. Shankaran Nambiar’s new book, The Malaysian Economy: Rethinking Policies & Purposes does so with bold and relevant commentary. Dating from 2003 to the present, this compilation of writings focuses on six broad themes including the need to strengthen institutions, the importance of competitiveness, regional trade, fiscal reform and finally, the reality that is the influence of elections and politics over economic policy.

?????????????????????What is prevalent throughout the book is the clear economic position he takes, arguing for a more open and free economy, one in which companies and traders would be able to compete without the shackles of a large and interventionist government. He takes cognisance that our neighbours are moving at a rapid pace, and mentions specifically China in its ability to out-compete many in the region, but that Malaysia would need to “develop our human capital and readjust our institutional framework to align it with global requirements.”

Of course, on the economic ideological continuum, criticisms often abound of the far-right leaning liberal position. More specifically, public sentiment in Malaysia has weighed heavily against the free market and privatisation. This is not surprising, since the Malaysian version of “free market” and “privatisation” is anything but. It has been but a muddied example of what a free market could actually do to improve the quality of goods and services.

Nambiar does not shy away from this oftentimes-controversial debate. He states explicitly, “privatisation, in theory, implies giving markets a bigger role … privatised companies have to be efficient … and cannot rely on the government to bail them out.”

Theoretically, yes. But in the execution of it – and Malaysia has done a poor job at this – privatisation has not been done in a fair, competitive way. In fact, what took place in our context is that when public entities were privatised, instead of improving efficiency, things got worse. Again, Nambiar hits it squarely on the head: “What was once a government monopoly now becomes a private monopoly. One form of inefficiency is substituted with another.”

Reading the book, one would initially conclude that he is a hard-hitting liberal – libertarian in American circles – and based on many principles, indeed this is so: his firm belief in competition, economic freedom, strong institutions and a legal framework, property rights and so on.

But what is refreshing to note is that he does not blindly accept what would typically be a liberal’s position, but views all subjects with a critical mind. Instead, he agrees with the need for a minimum wage because based on empirical research, this would transform the economy into one that is technologically advanced and contribute towards high value-added growth. A hardcore liberal economist would usually argue against the minimum wage as it is a false and forced imposition by government, which does put many small and medium companies out of business.

 

Finally, as many things seem to be in Malaysia, economic policy is subject to political influence, and this is evident in the many examples Nambiar provides, such as how the federal government transfers revenue to individual state governments, Najib’s electoral position determining whether or not the goods and services tax is introduced, and other “inappropriate policies” that are introduced “because of the polls”, which is “as if we have an economy balancing on the tip of a pin”, which is dangerously accurate.

Many proposals have been expressed elsewhere, on the need for fiscal reform and discipline, addressing structural issues (income distribution, corruption, crime, education), and so on. But the book’s beauty lies in its concise and deft articulation of problems and solutions. The commentaries are candid, and arguments tight. He also comes across as rational and fact-based, criticising or praising whenever necessary. This neutral, non-partisan position of analysing economic (or any other) conditions in the country is rare and must be valued.

As Malaysia enters into its final year of the 10th Malaysia Plan in 2015, and draws up its next set of policies for what would be the last five-year plan before the year 2020 – the 11th Malaysia Plan (2016 – 2020) – it is certainly worth examining Nambiar’s publication that spans the last decade or so. Where exactly are we going? Will the problems raised in his book 10 years ago start to manifest themselves in the next 10? What happens to an economy that pays little attention to such recommendations, and fails to strengthen its institutions?

Policymakers, politicians, academics and students ought to pick up this slim and thoroughly readable volume to gain a historical perspective of good and bad policy. History may not repeat itself, but its leaders may very well do – so it is up to the electorate like us to know which pressure points to press, well before the alarm bells start ringing.

ASEAN political-security community challenges


July 13, 2014

ASEAN political-security community challenges

Munir Majidby Tan Sri Dr. Munir Majid@www.thestar.com.my (07-12-14)

 THE People’s ASEAN would not be a reality if the politics is not right – both the domestic political systems in which the people live and the wider regional order that underpins the peace, stability and prosperity of their lives.

Economic Growth and Political Rights

As ASEAN member states are increasingly discovering, the previous contention that economic growth andASEAN_logo_1 benefit will satisfy citizens without need to be over-excited about political rights, is wearing thin. That model does not work any more, if it ever did. Certainly, if nothing else, the ICT revolution and social media have provided a shared marketplace of experiences in political societies across the globe. It is no longer possible to pull the wool over people’s eyes. So state authorities have to get smart to it, whatever political system they profess.

In this connection, the notion of an ASEAN political-security community (APSC) is apposite. The APSC blueprint actually is hard to be faulted. Whoever writes these things, and those who adopt them, must really know what’s happening around them, even if they do not quite come along in action against their profession in words.

Read this: The APSC… ”will ensure that the peoples and member states of ASEAN live in peace with one another and with the world at large in a just, democratic and harmonious environment.” Some more: “The ASEAN states will offer democracy, rule of law and good governance, and will ensure respect for the promotion and protection of human rights and fundamental freedom”.

All good intention. However, even if this is all aspiration, it stretches credulity when it is observed how some states in ASEAN have stagnated as communist regimes, others have regressed into persecution and murder of minorities and workers, and yet another has introduced draconian religious laws.

APSC and Human Rights

Little wonder then that there is so much cynicism about, for example, the ASEAN Inter-Governmental Commission on Human Rights (AICHR) set up in 2009 under the auspices of the APSC “to promote and protect human rights.” Where in ASEAN, through the AICHR, are human rights being protected on their violation?

It is in their promotion that refuge is taken. Even so, the promotion is gentle. Go to the AICHR web-site and you will see many pictures celebrating numerous workshops to promote human rights. More ASEAN meetings while religious minorities are being persecuted and put to the sword in enough ASEAN member states.

These are all difficult situations to handle no doubt. ASEAN Foreign Ministers try to discuss the Rohingyas issue but Myanmar would not have it, and will only do so on a bilateral basis with states facing refugee problems as a consequence of its human rights violations. And it comes to pass.

Well, the UN Universal Declaration of Human Rights was adopted in 1948, and where has the world been? Rwanda-Burundi, Bosnia, Syria, Palestine… the list is endless and the suffering never-ending. So why pick on ASEAN? But, shall we say, ASEAN is talking about community-building and higher standards of commitments to good governance? Therefore, there is every reason to hold ASEAN to a better protection on human rights and treatment of citizens.

The laudable objectives of the APSC, and in the setting up of the AICHR, should not be left on the shelf as we approach the end of 2014. The blueprint itself provides for biennial review. This review process should be reported and be held in a more open fashion, with the participation of representatives of civil society, who must however appreciate the issues of state sovereignty and ASEAN cohesion.

The hard question is not how to put aspiration down in words but how to implement it in difficult situations and circumstances. That review process should come up with creative ideas of making the words turn into at least some action, at least in respect of protection of human rights, and not just kick the matter to long grass by having more workshops and meetings to study it.

ASEAN, China and South China Sea

South China Sea

When it comes to international relations and the wider regional order, the gap between verbal exhortation and actual action is just as wide. For the longest time, ASEAN behaved as if there was no serious situation arising from the South China Sea disputes. And when ASEAN got real about it, emboldened China would suggest, it was only after US intercession. This was not good for relations with China or for the resolution of the dispute.

While no doubt there is a grave threat of the outbreak of conflict, especially from various stand-offs between China and Vietnam, China with the Philippines, the damage already done is to China-ASEAN relations. These have been extremely beneficial economically for the region. Their further development could be retarded by this “spoiler”, not to mention the threat it poses to existing economic links.

Of course, if there was actual conflict, it is something else again. We will be in new territory of uncertainty, suspicion and fear which, as we know, are bad bedfellows for investment and economic activity.

Against these near existential threats, ASEAN has been reticent and not united in addressing the South China Sea disputes. Whereas, in the APSC blueprint, it is clearly stated ASEAN will seek full implementation of the Declaration of Conduct (DOC) of States of 2002 and the establishment of a binding code of conduct under the declaration in the South China Sea.

Has there been any urgency to achieve all this before matters came to a head, before America got more involved again in regional affairs and, yes, before China got more assertive with its claims? It could be charged that ASEAN’s desultory approach has carried a cost to the stability of the regional order.

ASEAN is, of course, not one unit, it is only inter-governmental, but it makes claims for itself and gives false hope of its effectiveness by proclaiming all sorts of things in so many words, including this blessed thing about ASEAN centrality in the regional architecture. These last six exact words are to be found word for word in the blueprint and, indeed, have been repeated countless times at diplomatic convocations where those who know very well this is not the case repeat it for ASEAN’s happiness.

The APSC blueprint has been too extravagant, especially measured against ASEAN inaction. Not just on the South China Sea, but also in other pronounced areas such as conflict resolution mechanisms and the pacific settlement of disputes in the broader context.

ASEAN-a great economic prospect but...

ASEAN is a great prospect, especially its economies. But the market does not buy on prospective earnings indefinitely. If that was the case, it would be buying Latin America which, in terms of total economic size (against ASEAN’s combined much touted 7th largest in the world) is three times the Indian or Russian economy, and almost as large as China or Japan.

The point is ASEAN does have great prospect, but it will not come of itself. There has to be a more realistic mission statement, better structure and management – and better managers. Then the prospective earnings ratio might even rise.

So there has to be a reset and a rethink about how ASEAN can improve performance against all its limitations. But not just among government leaders and officials. And not to be assigned to some council of elders who would come back some years later with a document even older. It has to be fresh and dynamic involving people with ideas from all levels of society.

Yes, ultimately the political leaders of the region would decide – based however on a good and realistic plan for the future of the People’s ASEAN.

 Tan Sri Dr Munir Majid, chairman of Bank Muamalat and visiting senior fellow at LSE Ideas (Centre for International Affairs, Diplomacy and Strategy), is also chairman of CIMB ASEAN Research Institute. The views expressed are entirely the writer’s own.

 

The Regional Octopus to merge with rivals to create mega Islamic bank


July 11, 2014

The Regional Octopus to merge with rivals to create mega Islamic bank

by Reuters-www.themalaysianinsider.com

OctopusCIMB Group Holdings Bhd is seeking to acquire two lenders to create the country’s biggest bank in a move that is likely to push larger rival Maybank and others in the region to bulk up too.

CIMB, the nation’s second-largest bank, is likely to offer an all-stock deal to buy RHB Capital Bhd and Malaysia Building Society Bhd although details have yet to be hammered out, a source familiar with the matter said

The three banks confirmed today they had obtained approval from Bank Negara Malaysia to begin merger talks.

The “three parties have entered into a 90-day exclusivity agreement to negotiate and finalise pricing, structure, and other relevant terms and conditions for a proposed merger of the three entities and the creation of a mega Islamic bank,” the three banks said in a statement.

The statement came after shares in all three banks were suspended on Thursday pending an announcement. Shares will resume trade on Friday. The proposal comes ahead of a planned partial integration of Southeast Asian economies that is due to begin by the end of next year, with countries in the 10-nation alliance keen to build national champions to bolster their banking systems.

CIMB has been the most acquisitive of Malaysia’s banks and a deal would be the last major move by CEO Datuk Seri Nazir Razak, brother to the Prime Minister, before he relinquishes the helm in September after 15 years.

A successful deal would see CIMB’s assets climb to RM614 billion, 6% bigger than Malayan Banking Bhd (Maybank), and could help with pricing power in an intensely competitive domestic market.

“We believe that we can structure a value creating combination between our three groups and that is worth taking the next steps,” Nazir told employees according to an internal memo.

“I would urge everyone to look forward to the possibility of a significant scale change for us overall, but specially in Malaysia and Singapore, with the caveat that we have only just begun negotiations.”

But some analysts warned CIMB may pay too much and that there could be too much overlap between CIMB and RHB – the nation’s No. 4 bank, as they have similar portfolio mixes and strengths. RHB and Malaysia Building Society have a combined market capitalisation of around US$9 billion (RM28.5 billion), almost half of CIMB’s US$19 billion market value.

“We opine that such a merger could be value destructive to the merged entity given the degree of operational and revenue duplications between CIMB and RHB Capital,” brokerage UOB KayHian said in a client note.

Representatives for CIMB did not respond to requests for comment while RHB said there was no further update at this stage. Representatives for Malaysia Building Society were not immediately available for comment.

A deal would make CIMB the fourth-largest bank in the Association of Southeast Asian Nations (ASEAN) after Singapore’s three biggest lenders. By comparison, the largest, DBS Group Holdings, has assets of US$337 billion.

CIMB's Nazir3Malaysia’s Top Banker in ASEAN

Nazir is the architect of the bank’s expansion over the past decade that saw it buy domestic rival Southern Bank, the Asia equities and investment banking business of RBS as well as lenders in Indonesia and Thailand.

A new deal is bound to heap pressure on Maybank to acquire a rival too, analysts said, with some speculating that Public Bank Bhd could fall within its sights.

“Maybank might want to take over Public Bank, which compared to RHB Capital, is much better in terms of asset quality, and is well-managed and well-capitalised. This makes Public Bank a vulnerable target,” said Ei Leen Tan, an analyst with Affin Investment.

A key player in any acquisition by CIMB of its two smaller rivals will be the Malaysian state pension fund, Octo2the Employees Provident Fund (EPF). It owns 41.3% of RHB and 65% of Malaysia Building Society. The fund also owns a 14.5% stake in CIMB, according to Thomson Reuters data.

Another will be Abu Dhabi-based Aabar Investment which bought a 25% stake in RHB for RM10.80 per share in 2011 – regarded as a particularly high valuation.

Both CIMB and Maybank walked away from a deal to buy RHB in 2011 after failing to secure support from Aabar. The state fund currently owns nearly 22% of RHB. The EPF said in an email it would not be able to comment on the matter as it is very preliminary in nature and specific details are still pending.

A spokesman for Aabar said it doesn’t comment on any of its investments.While plans for ASEAN integration are widely expected to suffer delays, bankers and analysts expect more deals done as the banks from Singapore, Malaysia and Indonesia prepare for a more competitive landscape.”This will give impetus to other countries in the region to think of something similar,” said a M&A banker who advises on bank deals. – Reuters, July 10, 2014.

IMD (Switzerland) World Competitiveness Survey: Malaysia moves up to 12th position


July 8, 2014

IMD (Switzerland) World Competitiveness Survey: Malaysia moves up to 12th position

img_enewletter-issue7-01Malaysia  ranked 12 in List of 60 economies

Malaysia moved up the world competitiveness ranking again, securing a spot in the enviable top dozen and improving the country’s attractiveness to investors.

The International Institute for Management Development (IMD), a Switzerland-based top-ranked business school, lifted Malaysia to 12th position from 15th last year in a list of 60 economies.

“The improved rankings will renew interest and attract investments to the country,” IMD World Competitiveness Center director Professor Arturo Bris told the New Straits Times. The country also continues to be ahead of the United Kingdom (16th), Australia (@17th), Finland (18th), New Zealand (20th), Japan (21st) and South Korea (26th).

Malaysia, Bris said, improved its openness to foreign markets and attracted capital and investment at increasing rates.

In a separate statement, International Trade and Industry Minister Datuk Seri Mustapa Mohamed saidMiti's Mustapa 12th position was Malaysia’s best performance in the past four years and reflected the progress of the Government Transformation Programme and the Economic Transformation Programme.

“Malaysia expects a much better performance in the next three to five years as more of its initiatives begin to bear fruit,” he said.

The Survey

The World Competitiveness Yearbook 2014 is the 26th publication since 1989.The findings are compiled each year by IMD’s World Competitiveness Center in a survey of 60 economies called the World Competitiveness Yearbook.

The yearbook analyses and ranks the ability of each nation to create and maintain an environment that sustains the competitiveness of enterprises.The survey rates at the availability of fixed telephone lines, broadband, railroad network, part-time employment market, illiteracy, medical assistance and other criteria.

The report is based on statistical data and perception data obtained through a survey that reviews 338 criteria in four categories:

  1. Economic Performance covers the domestic economy, international trade, international investment, employment and price.
  2. Government Efficiency looks into public finance, fiscal policy, institutional framework, business legislation and societal framework.
  3. Business efficiency looks at productivity and efficiency, the labour market, finance, management practices, attitudes and values.
  4. Infrastructure rates technological, scientific, health, environmental and educational infrastructure.

In the category of countries with gross domestic per capita of less than US$20,000 (RM64,300), Malaysia remained at the top among 29 economies. Among countries with populations above 20 million, Malaysia climbed up to 4th position from 5th last year.

In ASEAN, Malaysia remains number two after Singapore and ranked third in the Asia Pacific region compared with fourth last year, while Thailand, Indonesia and the Philippines are fourth, fifth and seventh respectively.

Malaysia has consistently performed well in other international surveys, including being ranked 6th by the World Bank in Ease of Doing Business 2014, 24th in the World Economic Forum’s Global Competitiveness Report 2013-2014 and 32nd in the Global Innovation Index 2013 by INSEAD Business School.

Monetary Policy and Financial Stability by Fed Chair Janet Yellen


July 7, 2014

Chair Janet L. Yellen

At the 2014 Michel Camdessus Central Banking Lecture, International Monetary Fund, Washington, D.C.

July 2, 2014

Monetary Policy and Financial Stability

Janet_Yellen_FEDIt is an honor to deliver the inaugural Michel Camdessus Central Banking Lecture. Michel Camdessus served with distinction as governor of the Banque de France and was one of the longest-serving managing directors of the International Monetary Fund (IMF).

In these roles, he was well aware of the challenges central banks face in their pursuit of price stability and full employment, and of the interconnections between macroeconomic stability and financial stability. Those interconnections were apparent in the Latin American debt crisis, the Mexican peso crisis, and the East Asian financial crisis, to which the IMF responded under Camdessus’s leadership. These episodes took place in emerging market economies, but since then, the global financial crisis and, more recently, the euro crisis have reminded us that no economy is immune from financial instability and the adverse effects on employment, economic activity, and price stability that financial crises cause.

The recent crises have appropriately increased the focus on financial stability at central banks around the world. At the Federal Reserve, we have devoted substantially increased resources to monitoring financial stability and have refocused our regulatory and supervisory efforts to limit the buildup of systemic risk. There have also been calls, from some quarters, for a fundamental reconsideration of the goals and strategy of monetary policy. Today I will focus on a key question spurred by this debate: How should monetary and other policymakers balance macroprudential approaches and monetary policy in the pursuit of financial stability?

In my remarks, I will argue that monetary policy faces significant limitations as a tool to promote financial stability: Its effects on financial vulnerabilities, such as excessive leverage and maturity transformation, are not well understood and are less direct than a regulatory or supervisory approach; in addition, efforts to promote financial stability through adjustments in interest rates would increase the volatility of inflation and employment. As a result, I believe a macroprudential approach to supervision and regulation needs to play the primary role. Such an approach should focus on “through the cycle” standards that increase the resilience of the financial system to adverse shocks and on efforts to ensure that the regulatory umbrella will cover previously uncovered systemically important institutions and activities. These efforts should be complemented by the use of countercyclical macroprudential tools, a few of which I will describe. But experience with such tools remains limited, and we have much to learn to use these measures effectively.

I am also mindful of the potential for low interest rates to heighten the incentives of financial market participants to reach for yield and take on risk, and of the limits of macroprudential measures to address these and other financial stability concerns. Accordingly, there may be times when an adjustment in monetary policy may be appropriate to ameliorate emerging risks to financial stability. Because of this possibility, and because transparency enhances the effectiveness of monetary policy, it is crucial that policymakers communicate their views clearly on the risks to financial stability and how such risks influence the appropriate monetary policy stance. I will conclude by briefly laying out how financial stability concerns affect my current assessment of the appropriate stance of monetary policy.

Balancing Financial Stability with Price Stability: Lessons from the Recent Past

When considering the connections between financial stability, price stability, and full employment, the discussion often focuses on the potential for conflicts among these objectives. Such situations are important, since it is only when conflicts arise that policymakers need to weigh the tradeoffs among multiple objectives. But it is important to note that, in many ways, the pursuit of financial stability is complementary to the goals of price stability and full employment. A smoothly operating financial system promotes the efficient allocation of saving and investment, facilitating economic growth and employment. A strong labor market contributes to healthy household and business balance sheets, thereby contributing to financial stability. And price stability contributes not only to the efficient allocation of resources in the real economy, but also to reduced uncertainty and efficient pricing in financial markets, which in turn supports financial stability.

Despite these complementarities, monetary policy has powerful effects on risk taking. Indeed, the accommodative policy stance of recent years has supported the recovery, in part, by providing increased incentives for households and businesses to take on the risk of potentially productive investments. But such risk-taking can go too far, thereby contributing to fragility in the financial system.1 This possibility does not obviate the need for monetary policy to focus primarily on price stability and full employment–the costs to society in terms of deviations from price stability and full employment that would arise would likely be significant. I will highlight these potential costs and the clear need for a macroprudential policy approach by looking back at the vulnerabilities in the U.S. economy before the crisis. I will also discuss how these vulnerabilities might have been affected had the Federal Reserve tightened monetary policy in the mid-2000s to promote financial stability.

Looking Back at the Mid-2000s

Although it was not recognized at the time, risks to financial stability within the United States escalated to a dangerous level in the mid-2000s. During that period, policymakers–myself included–were aware that homes seemed overvalued by a number of sensible metrics and that home prices might decline, although there was disagreement about how likely such a decline was and how large it might be. What was not appreciated was how serious the fallout from such a decline would be for the financial sector and the macroeconomy. Policymakers failed to anticipate that the reversal of the house price bubble would trigger the most significant financial crisis in the United States since the Great Depression because that reversal interacted with critical vulnerabilities in the financial system and in government regulation.

In the private sector, key vulnerabilities included high levels of leverage, excessive dependence on unstable short-term funding, weak underwriting of loans, deficiencies in risk measurement and risk management, and the use of exotic financial instruments that redistributed risk in nontransparent ways.

In the public sector, vulnerabilities included gaps in the regulatory structure that allowed some systemically important financial institutions (SIFIs) and markets to escape comprehensive supervision, failures of supervisors to effectively use their existing powers, and insufficient attention to threats to the stability of the system as a whole.

It is not uncommon to hear it suggested that the crisis could have been prevented or significantly mitigated by substantially tighter monetary policy in the mid-2000s. At the very least, however, such an approach would have been insufficient to address the full range of critical vulnerabilities I have just described. A tighter monetary policy would not have closed the gaps in the regulatory structure that allowed some SIFIs and markets to escape comprehensive supervision; a tighter monetary policy would not have shifted supervisory attention to a macroprudential perspective; and a tighter monetary policy would not have increased the transparency of exotic financial instruments or ameliorated deficiencies in risk measurement and risk management within the private sector.

Some advocates of the view that a substantially tighter monetary policy may have helped prevent the crisis might acknowledge these points, but they might also argue that a tighter monetary policy could have limited the rise in house prices, the use of leverage within the private sector, and the excessive reliance on short-term funding, and that each of these channels would have contained–or perhaps even prevented–the worst effects of the crisis.

A review of the empirical evidence suggests that the level of interest rates does influence house prices, leverage, and maturity transformation, but it is also clear that a tighter monetary policy would have been a very blunt tool: Substantially mitigating the emerging financial vulnerabilities through higher interest rates would have had sizable adverse effects in terms of higher unemployment. In particular, a range of studies conclude that tighter monetary policy during the mid-2000s might have contributed to a slower rate of house price appreciation. But the magnitude of this effect would likely have been modest relative to the substantial momentum in these prices over the period; hence, a very significant tightening, with large increases in unemployment, would have been necessary to halt the housing bubble.2 Such a slowing in the housing market might have constrained the rise in household leverage, as mortgage debt growth would have been slower. But the job losses and higher interest payments associated with higher interest rates would have directly weakened households’ ability to repay previous debts, suggesting that a sizable tightening may have mitigated vulnerabilities in household balance sheets only modestly.3

Similar mixed results would have been likely with regard to the effects of tighter monetary policy on leverage and reliance on short-term financing within the financial sector. In particular, the evidence that low interest rates contribute to increased leverage and reliance on short-term funding points toward some ability of higher interest rates to lessen these vulnerabilities, but that evidence is typically consistent with a sizable range of quantitative effects or alternative views regarding the causal channels at work.4 Furthermore, vulnerabilities from excessive leverage and reliance on short-term funding in the financial sector grew rapidly through the middle of 2007, well after monetary policy had already tightened significantly relative to the accommodative policy stance of 2003 and early 2004. In my assessment, macroprudential policies, such as regulatory limits on leverage and short-term funding, as well as stronger underwriting standards, represent far more direct and likely more effective methods to address these vulnerabilities.5

Recent International Experience

Turning to recent experience outside the United States, a number of foreign economies have seen rapidly rising real estate prices, which has raised financial stability concerns despite, in some cases, high unemployment and shortfalls in inflation relative to the central bank’s inflation target.6 These developments have prompted debate on how to best balance the use of monetary policy and macroprudential tools in promoting financial stability.

For example, Canada, Switzerland, and the United Kingdom have expressed a willingness to use monetary policy to address financial stability concerns in unusual circumstances, but they have similarly concluded that macroprudential policies should serve as the primary tool to pursue financial stability. In Canada, with inflation below target and output growth quite subdued, the Bank of Canada has kept the policy rate at or below 1 percent, but limits on mortgage lending were tightened in each of the years from 2009 through 2012, including changes in loan-to-value and debt-to-income caps, among other measures.7 In contrast, in Norway and Sweden, monetary policy decisions have been influenced somewhat by financial stability concerns, but the steps taken have been limited. In Norway, policymakers increased the policy interest rate in mid-2010 when they were facing escalating household debt despite inflation below target and output below capacity, in part as a way of “guarding against the risk of future imbalances.”8 Similarly, Sweden’s Riksbank held its policy rate “slightly higher than we would have done otherwise” because of financial stability concerns.9 In both cases, macroprudential actions were also either taken or under consideration.

In reviewing these experiences, it seems clear that monetary policymakers have perceived significant hurdles to using sizable adjustments in monetary policy to contain financial stability risks. Some proponents of a larger monetary policy response to financial stability concerns might argue that these perceived hurdles have been overblown and that financial stability concerns should be elevated significantly in monetary policy discussions. A more balanced assessment, in my view, would be that increased focus on financial stability risks is appropriate in monetary policy discussions, but the potential cost, in terms of diminished macroeconomic performance, is likely to be too great to give financial stability risks a central role in monetary policy decisions, at least most of the time.

If monetary policy is not to play a central role in addressing financial stability issues, this task must rely on macroprudential policies. In this regard, I would note that here, too, policymakers abroad have made important strides, and not just those in the advanced economies. Emerging market economies have in many ways been leaders in applying macroprudential policy tools, employing in recent years a variety of restrictions on real estate lending or other activities that were perceived to create vulnerabilities.10 Although it is probably too soon to draw clear conclusions, these experiences will help inform our understanding of these policies and their efficacy.

Promoting Financial Stability through a Macroprudential Approach

If macroprudential tools are to play the primary role in the pursuit of financial stability, questions remain on which macroprudential tools are likely to be most effective, what the limits of such tools may be, and when, because of such limits, it may be appropriate to adjust monetary policy to “get in the cracks” that persist in the macroprudential framework.11

In weighing these questions, I find it helpful to distinguish between tools that primarily build through-the-cycle resilience against adverse financial developments and those primarily intended to lean against financial excesses.12

Building Resilience

Tools that build resilience aim to make the financial system better able to withstand unexpected adverse developments. For example, requirements to hold sufficient loss-absorbing capital make financial institutions more resilient in the face of unexpected losses. Such requirements take on a macroprudential dimension when they are most stringent for the largest, most systemically important firms, thereby minimizing the risk that losses at such firms will reverberate through the financial system. Resilience against runs can be enhanced both by stronger capital positions and requirements for sufficient liquidity buffers among the most interconnected firms. An effective resolution regime for SIFIs can also enhance resilience by better protecting the financial system from contagion in the event of a SIFI collapse. Further, the stability of the financial system can be enhanced through measures that address interconnectedness between financial firms, such as margin and central clearing requirements for derivatives transactions. Finally, a regulatory umbrella wide enough to cover previous gaps in the regulation and supervision of systemically important firms and markets can help prevent risks from migrating to areas where they are difficult to detect or address.

In the United States, considerable progress has been made on each of these fronts. Changes in bank capital regulations, which will include a surcharge for systemically important institutions, have significantly increased requirements for loss-absorbing capital at the largest banking firms. The Federal Reserve’s stress tests and Comprehensive Capital Analysis and Review process require that large financial institutions maintain sufficient capital to weather severe shocks, and that they demonstrate that their internal capital planning processes are effective, while providing perspective on the loss-absorbing capacity across a large swath of the financial system. The Basel III framework also includes liquidity requirements designed to mitigate excessive reliance by global banks on short-term wholesale funding.

Oversight of the U.S. shadow banking system also has been strengthened. The new Financial Stability Oversight Council has designated some nonbank financial firms as systemically important institutions that are subject to consolidated supervision by the Federal Reserve. In addition, measures are being undertaken to address some of the potential sources of instability in short-term wholesale funding markets, including reforms to the triparty repo market and money market mutual funds–although progress in these areas has, at times, been frustratingly slow.

Additional measures should be taken to address residual risks in the short-term wholesale funding markets. Some of these measures–such as requiring firms to hold larger amounts of capital, stable funding, or highly liquid assets based on use of short-term wholesale funding–would likely apply only to the largest, most complex organizations. Other measures–such as minimum margin requirements for repurchase agreements and other securities financing transactions–could, at least in principle, apply on a marketwide basis. To the extent that minimum margin requirements lead to more conservative margin levels during normal and exuberant times, they could help avoid potentially destabilizing procyclical margin increases in short-term wholesale funding markets during times of stress.

Leaning Against the Wind

At this point, it should be clear that I think efforts to build resilience in the financial system are critical to minimizing the chance of financial instability and the potential damage from it. This focus on resilience differs from much of the public discussion, which often concerns whether some particular asset class is experiencing a “bubble” and whether policymakers should attempt to pop the bubble. Because a resilient financial system can withstand unexpected developments, identification of bubbles is less critical.

Nonetheless, some macroprudential tools can be adjusted in a manner that may further enhance resilience as risks emerge. In addition, macroprudential tools can, in some cases, be targeted at areas of concern. For example, the new Basel III regulatory capital framework includes a countercyclical capital buffer, which may help build additional loss-absorbing capacity within the financial sector during periods of rapid credit creation while also leaning against emerging excesses. The stress tests include a scenario design process in which the macroeconomic stresses in the scenario become more severe during buoyant economic expansions and incorporate the possibility of highlighting salient risk scenarios, both of which may contribute to increasing resilience during periods in which risks are rising.13 Similarly, minimum margin requirements for securities financing transactions could potentially vary on a countercyclical basis so that they are higher in normal times than in times of stress.

Implications for Monetary Policy, Now and in the Future

In light of the considerable efforts under way to implement a macroprudential approach to enhance financial stability and the increased focus of policymakers on monitoring emerging financial stability risks, I see three key principles that should guide the interaction of monetary policy and macroprudential policy in the United States.

First, it is critical for regulators to complete their efforts at implementing a macroprudential approach to enhance resilience within the financial system, which will minimize the likelihood that monetary policy will need to focus on financial stability issues rather than on price stability and full employment. Key steps along this path include completion of the transition to full implementation of Basel III, including new liquidity requirements; enhanced prudential standards for systemically important firms, including risk-based capital requirements, a leverage ratio, and tighter prudential buffers for firms heavily reliant on short-term wholesale funding; expansion of the regulatory umbrella to incorporate all systemically important firms; the institution of an effective, cross-border resolution regime for systemically important financial institutions; and consideration of regulations, such as minimum margin requirements for securities financing transactions, to limit leverage in sectors beyond the banking sector and SIFIs.

Second, policymakers must carefully monitor evolving risks to the financial system and be realistic about the ability of macroprudential tools to influence these developments. The limitations of macroprudential policies reflect the potential for risks to emerge outside sectors subject to regulation, the potential for supervision and regulation to miss emerging risks, the uncertain efficacy of new macroprudential tools such as a countercyclical capital buffer, and the potential for such policy steps to be delayed or to lack public support.14 Given such limitations, adjustments in monetary policy may, at times, be needed to curb risks to financial stability.15

These first two principles will be more effective in helping to address financial stability risks when the public understands how monetary policymakers are weighing such risks in the setting of monetary policy. Because these issues are both new and complex, there is no simple rule that can prescribe, even in a general sense, how monetary policy should adjust in response to shifts in the outlook for financial stability. As a result, policymakers should clearly and consistently communicate their views on the stability of the financial system and how those views are influencing the stance of monetary policy.

To that end, I will briefly lay out my current assessment of financial stability risks and their relevance, at this time, to the stance of monetary policy in the United States. In recent years, accommodative monetary policy has contributed to low interest rates, a flat yield curve, improved financial conditions more broadly, and a stronger labor market. These effects have contributed to balance sheet repair among households, improved financial conditions among businesses, and hence a strengthening in the health of the financial sector. Moreover, the improvements in household and business balance sheets have been accompanied by the increased safety of the financial sector associated with the macroprudential efforts I have outlined. Overall, nonfinancial credit growth remains moderate, while leverage in the financial system, on balance, is much reduced. Reliance on short-term wholesale funding is also significantly lower than immediately before the crisis, although important structural vulnerabilities remain in short-term funding markets.

Taking all of these factors into consideration, I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns. That said, I do see pockets of increased risk-taking across the financial system, and an acceleration or broadening of these concerns could necessitate a more robust macroprudential approach. For example, corporate bond spreads, as well as indicators of expected volatility in some asset markets, have fallen to low levels, suggesting that some investors may underappreciate the potential for losses and volatility going forward. In addition, terms and conditions in the leveraged-loan market, which provides credit to lower-rated companies, have eased significantly, reportedly as a result of a “reach for yield” in the face of persistently low interest rates. The Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued guidance regarding leveraged lending practices in early 2013 and followed up on this guidance late last year. To date, we do not see a systemic threat from leveraged lending, since broad measures of credit outstanding do not suggest that nonfinancial borrowers, in the aggregate, are taking on excessive debt and the improved capital and liquidity positions at lending institutions should ensure resilience against potential losses due to their exposures. But we are mindful of the possibility that credit provision could accelerate, borrower losses could rise unexpectedly sharply, and that leverage and liquidity in the financial system could deteriorate. It is therefore important that we monitor the degree to which the macroprudential steps we have taken have built sufficient resilience, and that we consider the deployment of other tools, including adjustments to the stance of monetary policy, as conditions change in potentially unexpected ways.

Conclusion

In closing, the policy approach to promoting financial stability has changed dramatically in the wake of the global financial crisis. We have made considerable progress in implementing a macroprudential approach in the United States, and these changes have also had a significant effect on our monetary policy discussions. An important contributor to the progress made in the United States has been the lessons we learned from the experience gained by central banks and regulatory authorities all around the world. The IMF plays an important role in this evolving process as a forum for representatives from the world’s economies and as an institution charged with promoting financial and economic stability globally. I expect to both contribute to and learn from ongoing discussions on these issues.


1. The possibility that periods of relative economic stability may contribute to risk-taking and the buildup of imbalances that may unwind in a painful manner is often linked to the ideas of Hyman Minsky (see Hyman P. Minsky (1992), “The Financial Instability Hypothesis (PDF),” Leaving the Board Working Paper 74 (Annandale-on-Hudson, N.Y.: Jerome Levy Economics Institute of Bard College, May)). For a recent example of an economic model that tries to explore these ideas, see, for example, Markus K. Brunnermeier and Yuliy Sannikov (2014), “A Macroeconomic Model with a Financial Sector,” Leaving the Board American Economic Review, vol. 104 (February), pp. 379-421. Return to text

2. For a discussion of this issue encompassing experience across a broad range of advanced economies in the 2000s, including the United States, see Jane Dokko, Brian M. Doyle, Michael T. Kiley, Jinill Kim, Shane Sherlund, Jae Sim, and Skander Van Den Heuvel (2011), “Monetary Policy and the Global Housing Bubble,” Leaving the Board Economic Policy, vol. 26 (April), pp. 233-83. Igan and Loungani (2012) highlight how interest rates are an important, but far from the most important, determinant of housing cycles across countries (see Deniz Igan and Prakash Loungani (2012), “Global Housing Cycles,” Leaving the Board IMF Working Paper Series WP/12/217 (Washington: International Monetary Fund, August)). Bean and others (2010), examining the tradeoffs between unemployment, inflation, and stabilization of the housing market in the United Kingdom, imply that reliance on monetary policy to contain a housing boom may be too costly in terms of other monetary policy goals (see Charles Bean, Matthias Paustian, Adrian Penalver, and Tim Taylor (2010), “Monetary Policy after the Fall (PDF),” Leaving the Board paper presented at “Macroeconomic Challenges: The Decade Ahead,” a symposium sponsored by the Federal Reserve Bank of Kansas City, held in Jackson Hole, Wyo., August 26-28). Saiz (2014) suggests that about 50 percent of the variation in house prices during the 2000s boom can be explained by low interest rates, and finds that it was the remaining, “non-fundamental” component that subsequently collapsed–that is, the interest rate component was not a primary factor in what Saiz terms “the bust” (see Albert Saiz (2014), “Interest Rates and Fundamental Fluctuations in Home Values (PDF),” Leaving the Board paper presented at the Public Policy and Economics Spring 2014 Workshops, hosted by the Harris School of Public Policy, University of Chicago, April 8). Return to text

3. The notion that tighter monetary policy may have ambiguous effects on leverage or repayment capacity is illustrated in, for example, Anton Korinek and Alp Simsek (2014), “Liquidity Trap and Excessive Leverage (PDF),” Leaving the Board NBER Working Paper Series 19970 (Cambridge, Mass.: National Bureau of Economic Research, March). Return to text

4. See, for example, Tobias Adrian and Hyun Song Shin (2010), “Liquidity and Leverage,” Leaving the Board Journal of Financial Intermediation, vol. 19 (July), pp. 418-37; and Tobias Adrian and Hyun Song Shin (2011), “Financial Intermediaries and Monetary Economics,” in Benjamin Friedman and Michael Woodford, eds., Handbook of Monetary Economics, vol. 3A (San Diego, Ca.: Elsevier), pp. 601-50. For a study emphasizing how changes in the response of monetary policy to financial vulnerabilities would likely change the relationship between monetary policy and financial vulnerabilities, see Oliver de Groot (2014), “The Risk Channel of Monetary Policy (PDF),” Leaving the Board International Journal of Central Banking, vol. 10 (June), pp. 115-60. Return to text

5. This evidence and experience suggest that a reliance on monetary policy as a primary tool to address the broad range of vulnerabilities that emerged in the mid-2000s would have had uncertain and limited effects on risks to financial stability. Such uncertainty does not imply that a modestly tighter monetary policy may not have been marginally helpful. For example, some research suggests that financial imbalances that became apparent in the mid-2000s may have signaled a tighter labor market and more inflationary pressure than would have been perceived solely from labor market conditions and overall economic activity. Hence, such financial imbalances may have called for a modestly tighter monetary policy through the traditional policy lens focused on inflationary pressure and economic slack. See, for example, David M. Arseneau and Michael Kiley (2014), “The Role of Financial Imbalances in Assessing the State of the Economy,” FEDS Notes (Washington: Board of Governors of the Federal Reserve System, April 18). Return to text

6. For a summary of house price developments across a range of countries through 2013, see International Monetary Fund (2014), “Global Housing Watch.” Leaving the Board Return to text

7. For a discussion of macroprudential steps taken in Canada, see Ivo Krznar and James Morsink (2014), “With Great Power Comes Great Responsibility: Macroprudential Tools at Work in Canada,” Leaving the Board IMF Working Paper Series 14/83 (Washington: International Monetary Fund, May). Return to text

8. See Norges Bank (2010), “The Executive Board’s Monetary Policy Decision–Background and General Assessment,” Leaving the Board press release, May 5, paragraph 28. Return to text

9. See Per Jansson (2013), “How Do We Stop the Trend in Household Debt? Work on Several Fronts,” Leaving the Board speech delivered at the SvD Bank Summit, Berns Salonger, Stockholm, December 3, p. 2. Return to text

10. For a discussion, see Min Zhu (2014), “Era of Benign Neglect of House Price Booms Is Over,” Leaving the Board IMF Direct (blog), June 11. Return to text

11. These questions have been explored in, for example, International Monetary Fund (2013), The Interaction of Monetary and Macroprudential Policies (PDF) Leaving the Board (Washington: IMF, January 29). Return to text

12. The IMF recently discussed tools to build resilience and lean against excesses (and provided a broad overview of macroprudential tools and their interaction with other policies, including monetary policy); see International Monetary Fund (2013), Key Aspects of Macroprudential Policy (PDF) Leaving the Board (Washington: IMF, June 10). Return to text

13. See the Policy Statement on the Scenario Design Framework for Stress Testing at Regulation YY–Enhanced Prudential Standards and Early Remediation Requirements for Covered Companies (PDF), 12 C.F.R. pt. 252 (2013), Policy Statement on the Scenario Design Framework for Stress Testing. Return to text

14. For a related discussion, see Elliott, Feldberg, and Lehnert, “The History of Cyclical Macroprudential Policy in the United States.” Return to text

15. Adam and Woodford (2013) present a model in which macroprudential policies are not present and housing prices experience swings for reasons not driven by “fundamentals.” In this context, adjustments in monetary policy in response to house price booms–even if such adjustments lead to undesirable inflation or employment outcomes–are a component of optimal monetary policy. See Klaus Adam and Michael Woodford (2013), “Housing Prices and Robustly Optimal Monetary Policy (PDF),” Leaving the Board working paper, June 29.

http://www.federalreserve.gov/newsevents/speech/yellen20140702a.htm

Thanks to Matthew Goldman. For reaction to Chair Janet’s Speech read this:

http://www.acting-man.com/?p=31577

Has GDP outgrown its use?


July 7, 2014

Has GDP outgrown its use?

By David Pilling, July 4, 2014@ http://www.ft.com

Governments and the media obsess about it while statisticians endlessly fiddle – but what is the real point of GDP and can it ever be accurately measured?

GDPWhat do the price of hair-salon services in Beijing and sexual services in London have in common? The answer is that, depending on how you measure them – or indeed whether you measure them at all – the size of the Chinese and British economies will expand or contract like an accordion.

In April, statisticians working under the aegis of the World Bank determined that China’s gross domestic product was far bigger than they had previously realised. China was, in fact, just about to overtake the US as the world’s largest economy, many years earlier than expected. The reason? Statisticians had been overestimating the prices of everything from haircuts to noodles. As a result, they were underestimating the purchasing power of Chinese people and thus the size of the economy.

Last month, British statisticians worked some magic too. They declared that the UK economy – admittedly only a fraction of China’s size – was 5 per cent bigger than previously thought. It was as if they had suddenly discovered billions of pounds in annual revenue at the back of the nation’s couch. Here the explanation was simpler. Among other tweaks to their methodology, statisticians started counting the economic “contribution” of prostitution and illegal drugs.

Diane CoyleGross domestic product has become a ubiquitous term. It is how we measure economic success. Countries are judged by how much they have of it. Governments can rise and fall according to how effectively their economies create it. Everything from debt levels to the contribution of manufacturing is measured against it. GDP is what makes the world go round. Yet what exactly does it mean? Outside a few experts, most people have only a shaky understanding. In fact, the more you delve into the whole concept of GDP – one of the most centrally important ideas in modern life – the more slippery it becomes. In the words of Diane Coyle, an economist who recently wrote an entire book on the subject, “GDP is a made-up entity.”

Coyle is a defender of GDP as a tool for understanding the economy so long as we grasp its limitations. When I spoke to her by phone, she was nevertheless amused at what she called “the regular fandango” and “public ritual” that accompanies the quarterly release of GDP data. Even though those numbers are often within the margin of error and routinely revised, we invest them with as much meaning as a priest does his liturgies.

The title of Coyle’s book, GDP: A Brief But Affectionate History, makes clear her basic allegiance to the concept. Yet, she warns, “There is no such entity as GDP out there waiting to be measured by economists. It is an artificial construct … an abstraction that adds everything from nails to toothbrushes, tractors, shoes, haircuts, management consultancy, street cleaning, yoga teaching, plates, bandages, books and all the millions of other services and products.” The people who measure GDP, then, are not involved in a scientific enterprise, such as discovering the mass of a mountain or the longitude of the earth. Instead, they are engaged in what amounts to an act of imagination.

GDP is a surprisingly new idea. The first national accounts that resemble modern ones were produced in the US in 1942. It is not particularly odd that governments didn’t bother much about sizing up their economies before then. Until the industrial revolution, agricultural societies barely grew at all. The size of an economy was thus almost entirely a function of national population. In 1820, China and India made up roughly half of global economic activity by sheer virtue of the number of people who lived there.

Simon Kuznets (right), the Belarusian-American economist often credited with inventing GDP in the 1930s, had severekuznets reservations about the concept right from the start. Coyle told me, “He did a lot of the spade work. But conceptually he wanted something different.” Kuznets had been asked by US president Franklin Delano Roosevelt to come up with an accurate picture of a post-crash America that was trapped in seemingly interminable recession. Roosevelt wanted to boost the economy through spending on public works. To justify his actions, he needed more than just snippets of information: freight-car loadings or the length of soup-kitchen lines. Kuznets’ calculations indicated that the economy had halved in size from 1929 to 1932. It was a far more solid basis on which to act.

When it came to data, Kuznets was meticulous. But what, precisely, should be measured? He was inclined to include only activities he believed contributed to society’s wellbeing. Why count things like spending on armaments, he reasoned, when war clearly detracted from human welfare? He also wanted to subtract advertising (useless), financial and speculative activities (dangerous) and government spending (tautological, since it was just recycled taxes). Presumably he wouldn’t have been thrilled with the idea that the more heroin consumed and prostitutes visited, the healthier an economy.

Kuznets lost his battle. Modern national income accounts include both arms sales and investment banking services. They don’t distinguish between social “goods” – say, spending on education – and social “bads” (or necessities) – say, gambling, repairing the damage after hurricane Katrina or preventing crime. (Countries without much crime miss out on related economic activity such as security guards and repairing broken windows.) GDP is amoral. It is defined simply as the total monetary value of everything that has been produced in a given period.

The first thing to understand about GDP is that it is a measure of flow, not stock. A country with high GDP might have run down its infrastructure disastrously over years to maximise income. The US, with its ageing airports and less-than-pristine roads, is sometimes accused of precisely that.

…At the heart of the GDP debate is an anxiety that our societies have been somehow hijacked by pursuit of a single data point. No one seriously imagines that simply making an abstract number bigger and bigger can be a worthy goal in its own right. Yet GDP has become such a powerful proxy for what we do hold dear that we find it hard to see past it. Few economists are blind to its many limitations. Most, nevertheless, give the impression of wishing to maximise it at all costs.

Coyle argues that we should invent new ways to reflect economic reality. She advocates what she calls the “dashboard approach”. The Better Life Index, developed by the Organisation for Economic Co-operation and Development, for example, allows users to compare the performance of countries according to 11 criteria ranging from income and housing to health and work-life balance. By plugging in the criteria you value most you can see how a particular economy performs. If, say, employment is your priority, then Switzerland and Norway are best. If, on the other hand, you’re more interested in a combination of high income and education, then the US is the place to be.

In theory, this approach would allow voters to decide what is important and politicians to craft policies to achieve desired results. In practice, the combination of multiple criteria measured according to multiple yardsticks renders the exercise subjective and fuzzy. GDP may be anachronistic and misleading. It may fail entirely to capture the complex trade-offs between present and future, work and leisure, “good” growth and “bad” growth. Its great virtue, however, remains that it is a single, concrete number. For the time being, we may be stuck with it.

David Pilling is the FT’s Asia editor

 

Inequality Is Not Inevitable


July 2, 2014

J StiglitzAN insidious trend has developed over this past third of a century. A country that experienced shared growth after World War II began to tear apart, so much so that when the Great Recession hit in late 2007, one could no longer ignore the fissures that had come to define the American economic landscape. How did this “shining city on a hill” become the advanced country with the greatest level of inequality?

One stream of the extraordinary discussion set in motion by Thomas Piketty’s timely, important book, “Capital in the Twenty-First Century,” has settled on the idea that violent extremes of wealth and income are inherent to capitalism. In this scheme, we should view the decades after World War II — a period of rapidly falling inequality — as an aberration.

This is actually a superficial reading of Mr. Piketty’s work, which provides an institutional context for understanding the deepening of inequality over time. Unfortunately, that part of his analysis received somewhat less attention than the more fatalistic-seeming aspects.

Over the past year and a half, The Great Divide, a series in The New York Times for which I have served as moderator, has also presented a wide range of examples that undermine the notion that there are any truly fundamental laws of capitalism. The dynamics of the imperial capitalism of the 19th century needn’t apply in the democracies of the 21st. We don’t need to have this much inequality in America.

Our current brand of capitalism is an ersatz capitalism. For proof of this go back to our response to the Great Recession, where we socialized losses, even as we privatized gains. Perfect competition should drive profits to zero, at least theoretically, but we have monopolies and oligopolies making persistently high profits. C.E.O.s enjoy incomes that are on average 295 times that of the typical worker, a much higher ratio than in the past, without any evidence of a proportionate increase in productivity.

If it is not the inexorable laws of economics that have led to America’s great divide, what is it? The straightforwardDivide answer: our policies and our politics. People get tired of hearing about Scandinavian success stories, but the fact of the matter is that Sweden, Finland and Norway have all succeeded in having about as much or faster growth in per capita incomes than the United States and with far greater equality.

So why has America chosen these inequality-enhancing policies? Part of the answer is that as World War II faded into memory, so too did the solidarity it had engendered. As America triumphed in the Cold War, there didn’t seem to be a viable competitor to our economic model. Without this international competition, we no longer had to show that our system could deliver for most of our citizens.

Ideology and interests combined nefariously. Some drew the wrong lesson from the collapse of the Soviet system. The pendulum swung from much too much government there to much too little here. Corporate interests argued for getting rid of regulations, even when those regulations had done so much to protect and improve our environment, our safety, our health and the economy itself.

But this ideology was hypocritical. The bankers, among the strongest advocates of laissez-faire economics, were only too willing to accept hundreds of billions of dollars from the government in the bailouts that have been a recurring feature of the global economy since the beginning of the Thatcher-Reagan era of “free” markets and deregulation.

The American political system is overrun by money. Economic inequality translates into political inequality, and political inequality yields increasing economic inequality. In fact, as he recognizes, Mr. Piketty’s argument rests on the ability of wealth-holders to keep their after-tax rate of return high relative to economic growth. How do they do this? By designing the rules of the game to ensure this outcome; that is, through politics.

So corporate welfare increases as we curtail welfare for the poor. Congress maintains subsidies for rich farmers as we cut back on nutritional support for the needy. Drug companies have been given hundreds of billions of dollars as we limit Medicaid benefits. The banks that brought on the global financial crisis got billions while a pittance went to the homeowners and victims of the same banks’ predatory lending practices. This last decision was particularly foolish. There were alternatives to throwing money at the banks and hoping it would circulate through increased lending. We could have helped underwater homeowners and the victims of predatory behavior directly. This would not only have helped the economy, it would have put us on the path to robust recovery.

OUR divisions are deep. Economic and geographic segregation have immunized those at the top from the problems of those down below. Like the kings of yore, they have come to perceive their privileged positions essentially as a natural right. How else to explain the recent comments of the venture capitalist Tom Perkins, who suggested that criticism of the 1 percent was akin to Nazi fascism, or those coming from the private equity titan Stephen A. Schwarzman, who compared asking financiers to pay taxes at the same rate as those who work for a living to Hitler’s invasion of Poland.

Our economy, our democracy and our society have paid for these gross inequities. The true test of an economy is not how much wealth its princes can accumulate in tax havens, but how well off the typical citizen is — even more so in America where our self-image is rooted in our claim to be the great middle-class society. But median incomes are lower than they were a quarter-century ago. Growth has gone to the very, very top, whose share has almost quadrupled since 1980. Money that was meant to have trickled down has instead evaporated in the balmy climate of the Cayman Islands.

With almost a quarter of American children younger than 5 living in poverty, and with America doing so little for its poor, the deprivations of one generation are being visited upon the next. Of course, no country has ever come close to providing complete equality of opportunity. But why is America one of the advanced countries where the life prospects of the young are most sharply determined by the income and education of their parents?

Among the most poignant stories in The Great Divide were those that portrayed the frustrations of the young, who yearn to enter our shrinking middle class. Soaring tuitions and declining incomes have resulted in larger debt burdens. Those with only a high school diploma have seen their incomes decline by 13 percent over the past 35 years.

Where justice is concerned, there is also a yawning divide. In the eyes of the rest of the world and a significant part of its own population, mass incarceration has come to define America — a country, it bears repeating, with about 5 percent of the world’s population but around a fourth of the world’s prisoners.

Justice has become a commodity, affordable to only a few. While Wall Street executives used their high-retainer lawyers to ensure that their ranks were not held accountable for the misdeeds that the crisis in 2008 so graphically revealed, the banks abused our legal system to foreclose on mortgages and evict people, some of whom did not even owe money.

More than a half-century ago, America led the way in advocating for the Universal Declaration of Human Rights, adopted by the United Nations in 1948. Today, access to health care is among the most universally accepted rights, at least in the advanced countries. America, despite the implementation of the Affordable Care Act, is the exception. It has become a country with great divides in access to health care, life expectancy and health status.

In the relief that many felt when the Supreme Court did not overturn the Affordable Care Act, the implications of the decision for Medicaid were not fully appreciated. Obamacare’s objective — to ensure that all Americans have access to health care — has been stymied: 24 states have not implemented the expanded Medicaid program, which was the means by which Obamacare was supposed to deliver on its promise to some of the poorest.

We need not just a new war on poverty but a war to protect the middle class. Solutions to these problems do not have to be newfangled. Far from it. Making markets act like markets would be a good place to start. We must end the rent-seeking society we have gravitated toward, in which the wealthy obtain profits by manipulating the system.

The problem of inequality is not so much a matter of technical economics. It’s really a problem of practical politics. Ensuring that those at the top pay their fair share of taxes — ending the special privileges of speculators, corporations and the rich — is both pragmatic and fair. We are not embracing a politics of envy if we reverse a politics of greed. Inequality is not just about the top marginal tax rate but also about our children’s access to food and the right to justice for all. If we spent more on education, health and infrastructure, we would strengthen our economy, now and in the future. Just because you’ve heard it before doesn’t mean we shouldn’t try it again.

We have located the underlying source of the problem: political inequities and policies that have commodified and corrupted our democracy. It is only engaged citizens who can fight to restore a fairer America, and they can do so only if they understand the depths and dimensions of the challenge. It is not too late to restore our position in the world and recapture our sense of who we are as a nation. Widening and deepening inequality is not driven by immutable economic laws, but by laws we have written ourselves.

This is the last article in The Great Divide.

 

Malaysia’s Top Economist and Mr.Transformer speaks


June 24, 2014

Malaysia’s Top Economist and Mr. Transformer speaks

I missed this one dated June 20, 2014, posted in Malaysiakini because Dr. Kamsiah and I were away in Taipei. Reading it, I thought the authorities in Taiwan should have appointed Dato Seri Idris Jala as their chief propagandist.  So here it is:

idris guitarSenator Dato’ Seri Idris Jala is a Minister in the Prime Minister’s Department and CEO of Malaysia’s Performance Management and Delivery Unit (PEMANDU), an organization tasked with ensuring Malaysia meets the goals set forth under the National Transformation Programme (NTP).

He spoke with The Prospect Group about the Economic Transformation Programme’s (ETP) goals for 2014, which includes Gross National Income (GNI), investment, and job creation, and ensuring Malaysia’s economy is resilient in the face of global uncertainty.

Q: What are the ETP’s main focal points for 2014?

JALA:

Our focal point for 2014 is to make sure we implement. We have to implement what we promised under the ETP as well as the GTP. The public wants results and the way in which we have to fulfill those results is to execute the initiatives within the 12 National Key Economic Areas (NKEAs) that will achieve big results fast.

Q: What are your 2020 GNI, investment, and job creation goals?

JALA:
By the year 2020, we would like to have become a high-income economy that fulfills the GNI targets of $15,000 per capita. That is our long-term goal. To do that will require a lot of investment; something like $444bn is needed to propel the Malaysian economy to grow. We also need to create 3.3m jobs; you have to create a lot more high-paying jobs so that the citizens can benefit. So those are the three true-North targets: gross national income per capita, private investments that will drive it, and jobs that are created. The good news today is that, from when we first began, in four years, we have been able to grow our total GNI per capita by 50%. We are at the halfway mark today. So we are very pleased with the progress made on the GNI target. With regard to job creation, we are supposed to create 3.3m jobs, and we have created 1.3m jobs in the four-year period. So that is really very good.

We have met more than 60% of the investment targets, signifying we are well on the way to achieving this as well. My view today is that we would like this coming year to continue in the same way as we have experienced over the last three years. That means that everything is on the right trajectory. If things continue the way that they are, we will fulfill our targets before 2020.

 

Q: In terms of time frame and the trajectory you are on today, when do you anticipate these goals will be achieved?

JALA:
I think we should reach our targets by the year 2018. But, as you know, the world is not linear. If you look back over the last four years, it has been a good run for us, but we are subject to what happens in the global economy. We have to build in a lot more resilience within the Malaysian economy to face any global crisis or any global slowdown to ensure we can weather storms that happen between now and the year 2020. It has been a very good run for the last four years.
Q: In a world of constantly changing economic realities, how can Malaysia’s Economic Transformation Programme (ETP) and National Key Economic Areas (NKEAs) adapt?
JALA:

Adaptation is a very important requirement moving forward for Malaysia. So what we want to do in Malaysia moving forward is to ensure we build enough resilience in our economy.Let me begin by saying we must implement proper fiscal reforms. Public debt in our case should not exceed 55% of our GDP. Now there are many countries that have gone to 80%, 90%, 100%, and even 190% public debt to GDP. So if you make sure that you grow the economy and make sure the government debt is below the 55% threshold, we believe that is the way to go. You cannot and should not over leverage, so we are really focusing on that.The second thing about being resilient as an economy and being able to face any un-foretold difficulties with the global economy is to make sure we do not have a fiscal deficit that exceeds 6%. We have been steadily reducing our fiscal deficit. When we first started, our fiscal deficit was 6.6%. We have since cut that down to 5.8%, and then to 4.8%, and last year we reached 3.9%.

The other aspect of making sure we can adapt is obviously to make sure we have the right competent talent. A competent talent pool means that whatever structural changes take place in the economy, people are able to be mobile and will do what is needed to produce products and services that can compete in the world outside.

The other is that we made changes in the way the civil service operates. We have become a lot more efficient and the good news today is that we have been able to improve the ease of doing business. It is very easy to do business in Malaysia. The World Bank assessed Malaysia in 2009 at number 23. We then moved to number 18, and then to 12, and last year, for the first time, we moved to number 6 overall in the world in terms of the ease of doing business. So if it is easy for investors to put money and investment in Malaysia, and at the same time the government is fiscally prudent and we bring in all the fiscal reforms, and we have a talent pool in the country, then we can adapt very quickly to changes that are happening.

Q: How does this philosophy play into the ideology that Malaysia should move away from being a primary resource based economy and into a higher value added service based economy?

JALA:
If you look at the history of Malaysia, we were an agrarian economy during independence in 1957 and then we moved into a more commodities play. So what we are now doing is making sure that our manufacturing arm grows a lot bigger and we have started doing that. In fact, when it gets down to palm oil, we are now telling the industry it is fine and good for us to do a lot more primary products and selling that as crude, but it is much more important for us to start producing downstream products such as oleo chemicals and we gave a lot of incentives to allow this to happen as evidenced by the establishment of more refineries. That is happening as we speak today, the downstream component has to come in. At the same time, between now and 2020, we wanted to see that we increase the services sector of the GDP to become more than 60% and we have been growing that rapidly. You can see today that tourism is big for us, financial services are big, the health sector as a part of the economy is also growing, and the education sector. So all of these all together, they will become, by the year 2020, at least 60% of our GDP. So I think for the first time doing this, we will have to diversify the economy so that we do not rely entirely on the commodities play, but we get into the downstream part of the same sectors and at the same time we grow the services sector. I think if you add the two together, the Malaysian economy becomes more resilient.

Paying Tribute to Integrity


June 14, 2014

Paying Tribute to Integrity

by Ahmad Zakie Shariff (received by e-mail)

Like many others of his generation, my late father rejoiced when the Union Jack was lowered, that fateful night in August 1957. We were finally independent and free to set our nation’s future course. He was a simple man of integrity and he admired the great qualities of our Founding Fathers and he passed on that admiration to me.

hj-ahmad-zakieAs I write I am paying tribute to the founding spirit of this nation; a spirit of collective optimism and idealism. True, we may not feature in this year’s World Cup in Brazil (we can still dream, 2030 anyone?), but Malaysia is still a place where people can dream and achieve lofty goals together. United we stand, divided we fall.

But for too long, the economics discipline has understated the critical role of cooperation in economic activity. Emphasis on the individual has risen above all else and overshadowed the profound ways we depend on each other. You may have recently heard a prominent business person say “I did it all myself. I had no help from other quarters.” I want to interrupt that point.

Every successful business venture requires the cooperative effort of many people – the policymaker who believes in the benefits of the project, the banker who believes in the business plan, the customer who believes in the product, the employee who devotes precious time to the business and its owners.

A relationship exists when trust and integrity exists, and when they do, remarkable efficiencies result. Partners are spared a multitude of worries – whether they’ll get paid, whether they’ll get what they think they’re paying for. They are freed to act quickly and with confidence, again and again.

Pervasive integrity is fundamental to our society and the growth of its economy. Integrity, therefore, is not something that’s nice to have. It’s something we have to have.

The dictionary defines integrity as adherence to moral and ethical principles, rectitude, honour, and honesty. These are certainly admirable qualities. But we need to understand integrity as not simply a virtue, but a shared asset that brings social and economic rewards. Sometimes we take integrity for granted. We learn from infancy to count on other people to tell the truth, to keep their promises, and respect the rights of others.

This trusting attitude is ingrained in our culture, learnt from the cradle and accumulated over the years. However in this era, where so much seems to be going wrong, many have lost trust in their fellow citizens. Some of us have lost faith in integrity.

The path forward can’t be to stop trusting. We need to build the trust that will power our nation for decades to come.If mistakes are learning experiences, the painful lesson of recent events that pervaded our nation is that integrity really does matter. Not just to our moral wellbeing but to our economic wellbeing too.

Conventionally, integrity is considered a “behind closed doors” topic: a personal issue, entirely up to the individual. If you are upright, good for you; if not it’s no one else’s affair. We should turn conventional wisdom on its head. The real value of integrity is not personal; it’s collective. It is the underpinning for all our social relationships. We are heirs to a huge stock of integrity, built up over the years by our predecessors and visible in every aspect of our society.

It is a shared asset that has made us quite wealthy.Without integrity, our nation cannot function. There would be no trust, no mega projects, no trading, no credit, no buying and selling. Our oft-praised economy would quickly degenerate into a primitive system, and our nation’s wealth would disappear long with it.

Integrity is collective action.To actually practice integrity, to deal honestly, there has to be someone on the other side of the transaction. That means that to really understand integrity, we have to appreciate it as a relationship of trust.

An example: The Asian financial crisis of 1998 was in my mind, first and foremost, a crisis of integrity. It was by far the biggest economic disruption of my lifetime, more so than the subprime crisis of 2008.  In both crises, the seeds were sown when a number of people sought their own short-term advantage, knowing that they were putting others at risk. There was no thought spared for the collective good.

The things that will destroy us are: politics without principle; pleasure without conscience; wealth without work; knowledge without character; business without morality; science without humanity; and worship without sacrifice.–Mohandas K. Gandhi

In that climate, greed great and small multiplied and spread like potent germs in a warm petri dish. The result of all that integrity and trust unravelling was an economic contraction so profound that it impacted vast populations and diminished wealth around the globe.

It was a wake-up call. Ignoring or, worse, abusing integrity isn’t just unpleasant forGandhi a few bad apples and their unlucky victims. It had profound economic consequences. At stake were the entire regional economic system and our way of life.

There is another way to think about integrity. What if we invested in integrity? What if we took a different approach and focused on “increasing the good stuff that people do” instead of highlighting the scandals, the frauds and the cheatings? What if?

The ultimate point is that if we invest in our collective integrity, we invest in our collective wealth. We can create wealth together in ways that are not possible alone. Despite all the dishonesty, the falsehoods, the cheating and even the outright fraud we’ve seen exposed, there’s actually a lot of integrity left in this world. Without it, financial activity and the vast majority of commerce would stop completely.

Mohandas K. Gandhi once said that there are seven things that will destroy a society – wealth without work; pleasure without conscience; knowledge without character; religion without sacrifice; politics without principles; science without humanity and business without ethics.I agree with the Mahatma. He was cautioning us against the loss of integrity.

Get back on the right track,Mr. Jala


June 11, 2014

Published: Wednesday June 11, 2014 MYT 12:00:00 AM
Updated: Wednesday June 11, 2014 MYT 8:07:57 AM

http://www.thestar.com.my/Opinion/Letters/2014/06/11/Get-back-on-the-right-track/

Get back on the right track,Mr Jala

by Tan Sri (Dr) Ramon Navaratnam, Chairman,Asli Centre of Public Policy Studies

Ramon14I REFER to the article “Tackling income inequality” (The Star, June 9) by Minister in the Prime Minister’s Department and CEO of PEMANDU, Datuk Seri Idris Jala.

Jala shows compassion for the poor, having come up dramatically from a very poor village background himself.He explains the many achievements of the Government’s plans and programmes to fight poverty and states that Malaysia is on the right track to win the big war on poverty.

I would agree only generally with his assessment. It is true that we have come a long way to eradicating poverty. However, I would think that we are not necessarily on the “right track”. To put it aptly, we need to “get back on the right track!”

Why is this so? It is because we are still using the old strategies of fighting poverty through aiding small-time businesses and giving out grants to farmers, fishermen and giving out minor construction contracts to the poor.

All these uplift them in a very limited manner. That is why the Government often proclaims the individual aid given to Low-Income Households (LIH) and Amanah Ikhtiar Malaysia (AIM). But how effective are we in substantially solving the structural causes of poverty?

There are a limited number of poor individuals who gain from these small aid programmes in the short term. But what about the vast majority of the poor whose mean household income is only RM2,000 per month or lower for a family of four or about RM500 per person per month?

How do they survive and what are their prospects from getting out of poverty permanently?The public also needs to be told what proportion of the poor benefit from the schemes to uplift themselves permanently.

It is also good if Jala (pic-playing guitar) could provide the racial and geographical idris guitarbreakdown of these recipients.Unfortunately, there is this nagging perception that the very poor orang asli, the poor Sabahans and Sarawakians, and the very poor Chinese, Indians and others, are not given sufficient and equal attention by the Government.

If all the poor are treated fairly, then the Government should highlight it and be proud of this noble act. But is this being done? Although the Gini Coefficient that measures poverty is said to be improving, it’s a very slight improvement. Moreover, it is well-known that Malaysia’s Gini Coefficient is one of the worst in Asean, despite our considerable wealth in oil and gas and other natural resources and our relatively high income. They need to explain why this is happenning. Thus, in fighting poverty we need to review our old policies and “get back on track”.

While we need to carry on with short-term measures and perhaps the BR1M programmes for some time, we need to do much more to transform the structural causes of poverty.

Since Jala has rightly asked for “fair and reasonable comments”, I hope my recommendations will be considered, if not implemented.

First, increase the budget to fight poverty through long-term sustainable measures, like better infrastructure for the poor.Second, improve the quality of education. Our educational standards are rated poorly by international agencies.

Third, teach more and better English to help our dropouts, school leavers and even graduates to get higher income jobs to break out of the poverty cycle. Fourth, introduce more technical education so that the majority of our children who cannot benefit or are not interested in an academic education, can become independent and be gainfully employed as technicians. Then, they need not depend on government handouts or government jobs for the sake of employing them at taxpayers’ expense.

Lastly, instill the time-tested values of good conduct, strong discipline, racial and religious harmony and a sense of independence and competition. Tackling income inequality is a vital goal for social stability, progress and especially for national unity.

Therefore, we have to constantly review and revise our policies and practices to ensure we “keep on the right track” in fighting poverty, lest we lose our way in this tough struggle.

My message to Idris Jala, who may have forgotten his KPI on Corruption, comes from Ayn Rand, Author of Atlas Shrugged below. Minister Paul Low, what are doing in the Prime Minister’s Department, apart from earning a fat salary? –Din Merican

ayn-rand-“When you see that trading is done, not by consent, but by compulsion – when you see that in order to produce, you need to obtain permission from men who produce nothing – when you see that money is flowing to those who deal, not in goods, but in favors – when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you – when you see corruption being rewarded and honesty becoming a self-sacrifice – you may know that your society is doomed.”–Atlas Shrugged

 

Malaysia must tackle its high public and rising external debts


June 9, 2014

Malaysia must tackle its high public and rising external debts

http://www.themalaysianinsider.com

Malaysia risks seeing its economy contract and losing its global market share in key export sectors if it fails to tackle its high levels of public and rising external debts, a United Kingdom-based economist has warned.

 ????????????????????????????????????Sarah Fowler from Oxford Economics said while the nation’s shrinking current account surplus was not a major concern as it was expected to stay in excess in the next few years, there are worries over Malaysia’s capital account due to rising external debt, which has shot up close to 40% of its gross domestic product (GDP) in recent years.

The country’s public debt-to-GDP ratio has been hovering at an all-time high of more than 50% since 2010 because of large fiscal deficits incurred when an aggressive stimulus package was launched to bolster the country’s economy during the global financial crisis.

“Addressing the concerns would enable Malaysia to achieve a higher growth path, reaching a higher per capita income sooner. We expect the economy to grow by just more than 4% over the next five years but if the concerns were addressed growth could exceed 4.5%,” she told The Malaysian Insider in an email.

Fowler, who produced a report on “Why Malaysia is now a more risky prospect than Indonesia” which was highlighted by global financial news site Bloomberg’s columnist William Pasek last week, used 17 indicators to develop a scorecard to assess emerging market vulnerability to external economic and financial shocks.

Among the indicators are capital inflows, external financing, the current account and budget balances, credit markets and the economy. “Our scorecard assesses Malaysia as a more vulnerable economy than Indonesia, Thailand or India,” she wrote in her report.

Touching on external debt, Fowler had reported that non-foreign direct investment capital inflows averaged 6.6% of GDP a year between 2009 and 2012, the highest in their sample of 13 emerging markets and more than Indonesia’s average of 2.2%.

“More than half of all portfolio investment in Malaysia went into debt securities between 2010 and 2012, up from close to a third between 2005 and 2009.”

She had also noted in her report that the short-term component of external debt was also increasing, which is risky as it requires repaying or rolling over earlier. Short-term debt as a share of GDP reached 15.2% by the end of last year, up from 10% in 2007. In contrast, India’s and Indonesia’s short-term debt accounted for less than 5% of their GDP.

Overall, external indebtedness in Malaysia is low relative to exports, however, which means that funding the debt may not be a problem.But Malaysia has an unusually open economy; exports are equivalent to more than 80% of GDP, lower only than in Singapore and Hong Kong.

On public debt, Fowler said although Putrajaya has reduced its fiscal deficit as aPM Najib share of GDP from 6.5% in 2009 to 3% last year, there was a need to continue to manage the public finances carefully to trim the deficit further.This, she said, could be done by broadening the tax revenue base in order to try to raise revenues.

“Public debt has risen in recent years and reducing this would be good because money that currently has to be spent paying the interest on the debt could be spent in more productive areas.”

However, Fowler expects the public debt to GDP ratio to remain above 50% for the next five years, saying Indonesia’s, Thailand’s and Korea’s public debts amount to no more than a third of their respective GDP.

Fowler is not the first person to sound the alarm bells on Malaysia’s economy.In October last year, financial analyst Jesse Colombo warned that Malaysia’s economic bubble will burst after China’s economy takes a tumble and global and local interest rates continue to rise.

Writing in Forbes online magazine, Colombo said: “Malaysia’s bubble will most likely pop when China’s economic bubble pops and/or as global and local interest rates continue to rise, which are what caused the country’s credit and asset bubble in the first place.

“The resumption of the US Federal Reserve’s QE taper plans may put pressure on Malaysia’s financial markets in the near future. Malaysia’s rapidly deteriorating current account surplus due to weaker exports is another worrisome development.” –June 9, 2014.

Malaysia–A Paradise Lost


June 7, 2014

Malaysia–A Paradise Lost

by Cogito Ergo Sum@http://www.malaysiakini.com

COMMENT: Superficially, Malaysia, for all and sundry, is a nation that is not onlyhype_najib1 doing well, but even thriving in all its endeavours. Foreigners and locals are told that we are a model of tolerance and harmony in a plural society and that others must emulate our ways if they want to succeed.

Unfortunately, even a cursory look at the state of things will give away this lie, so lyrically waxed in the mainstream media. And unless one has access to news portals like Malaysiakini, we would be blissfully ignorant under the onslaught and media blitz of the government controlled media machinery.

For one, we seem to be on a runaway train towards an Islamic state, when the Federal Constitution has overtly stated that we are secular nation.

So-called defenders of the faith and race like ISMA and PDRKASA have become not only very vocal, but also dangerously influential. They promote laws and legal systems that are in opposition to a multi-ethnic and plural society, and is deemed inappropriate for a modern economic system that can compete on an equal footing with our neighbours.

These so-called NGOs, considered to be on the fringes, seem to be getting theirIsma President funding and encore from a benign government that that is even seen as fanning these inciting and seditious pronouncement by its very silence and inaction.

And yet, we have an official propaganda that is portraying our ‘moderation’ and moderate ways to foreigners and foreign investors. But walking the talk is futile as the antics of such official ‘guardians of the faith’ like JAIS, are a stumbling block to this false mirage we are trying to project in a desert of what used to be an oasis of goodwill.

And as if to prepare us for the inevitable, the government has even set up a ‘hudud implementation committee’ for the day when the shariah system becomes law of the land. And if this carries on, we are well on track to go the way of Brunei, Sudan and several other failed states which have adopted hudud laws. And we are a ‘moderate’ nation with moderate policies and people?

Intruders beware

But we are indeed a nation of tolerance. Pushed to the limits of accommodating preferential treatment and affirmative action, Chinese and Indians are declared ‘intruders’ who have no business to have any business or rights as equal human beings.

And despite these provocative and obviously false, seditious accusations by radicals and self-proclaimed ‘fundamentalists’, we have either a mute BN which distinguishes itself  as a multi-racial coalition, or one that is too stupefied to respond decisively.

Newspapers that are unofficial mouthpieces of the authorities like Utusan Malaysia have a penchant of publishing rubbish and peddling it as sacrosanct news. Racial and religious slurs are printed and sold as if it is bread butter of the nation. Yet, the authorities are impotent or choose to be, against such slurs and often given official sanction by remaining dumb and unresponsive to such blatant lies. The tolerance and moderation, unfortunately is from the victims of such hate-filled messages.

Our Education system sucks

Bakri Musa's BookA serious flaw in the fundamentals of this nation is the education system. Our school system and education promotes learning by rote and regurgitating facts for examinations. No attempt is made to foster critical thinking and questioning of subject matter. Facts of history, and now even geography, are being manipulated to fit a distinct political agenda.Well accepted historical facts have been altered and even changed to leave out pertinent points of history that made this nation once great.

The roles of our forefathers like the late Tan Cheng Lock and VT Sambanthan are either missing or dealt with in passing. These men (and many women) played an integral part in getting the British to give us independence.And it was the Malay, Chinese and Indian Police officers whot beat the communists in a urban and guerrilla warfare.

No one race could have achieved this as Malaysia became the only nation to beat the BRAIN DRAINmovement in open combat. No other country has achieved this in the history of warfare.By the time students reach universities, their language skills in English can only be described as atrocious. Research papers and standard texts are written in the English language.

An erstwhile student in at a university is required to not only know the current trends in whatever fields he or she is pursing, but also critically evaluate such studies. That ability to valuate studies by others is a critical component in the pursuit of higher learning. Learning by rote and spewing out wrong facts at public exams are of no use in evaluating research papers because it does not require thinking. And the vicious cycle goes on when these graduates become teachers themselves. Results have shown that our students performance in science and mathematics is among the poorest in Asia.

We need a revolutionary education system to set thing right. A system that will ‘uneducate’ our children from the current ‘copy and paste’ mentality so prevalent that the word plagiarism is as alien as the concept of unity in diversity.

Economic descent

From a house of plenty, we have now become a nation of borrowers. Our household debt is at its peak at 80 percent. Families in urban areas find it impossible to meet ends and unless you are a favoured despot, you will find yourself drowning in a sea of personal debt.

Poverty cuts across racial and religious barriers. Despite government efforts to prop up the rural population, the urban Malays are finding it hard to meet the expenses of daily city life.

The sheer weight of managing and balancing a domestic budget is actually a microcosm of the national economy.Our current account (money received from imports minus the money that goes out for exports) has fallen.

Malaysia's Current Acc to GDP RatioAnd the figure has been steadily falling according to numbers released by the Department of Statistics, Malaysia since the year 2004 (see chart above).

John Milton’s ‘Paradise Lost’, is an epic poem of the fall of man. Like the Garden of Eden, Malaysia was once an advanced and prosperous nation in not just Southeast Asia, but Asia. But sin crept into Paradise and it all was lost. And like Eden, we have allowed corruption, decay and prejudice to destroy the once paradisiacal state we were in.

In his poem, Milton painted the devil in such colourful language, that some haveMilton's epic poems even argued that Satan was the hero in ‘Paradise Lost’! And, much like Milton’s Eden, we seem to have fallen to the devilish ways of religious and racial bigotry that is transforming us, from the proverbial paradise, to a living hell on earth … for the average person.

One is left to contemplate if there is a way out of this runaway train that we have seemingly boarded. Will sanity, in the end prevail and will there be economic, social and political salvation? Milton pointed to a new future with his second epic poem entitled ‘Paradise Regained’.

As Malaysians, we have a duty to regain that lost paradise. We owe it to the next generation and the generations to come so that the story of Malaysia will be remembered as one of victory over darkness, of good over evil, of sanity over insanity and of one of moderation over extremism.

Let us not end up as an epic tragedy.

Malaysia truly Asia’s weakest link


June 7, 2014

Malaysia truly Asia’s weakest link thanks to Putrajaya, says Bloomberg

Published: 5 June 2014 | Updated: 5 June 2014 10:33  PM

http://www.themalaysianinsider.com

kuala-lumpur-skylineKuala Lumpur: Beautiful  outside but Rotten Inside

Putrajaya’s one-party policy and its 40-year-old pro-Malay affirmative action programme will spell trouble for the country’s economy, effectively turning Malaysia into the weakest link in Asia, a Bloomberg columnist said today.

http://www.bloombergview.com/articles/2014-06-05/is-malaysia-asia-s-weakest-link

William P2William Pesek is a Bloomberg View columnist based in Tokyo and writes on economics, markets and politics throughout the Asia-Pacific region. His journalism awards include the 2010 Society of American Business Editors and Writers prize for commentary. Since joining Bloomberg in 2000, Pesek’s columns have appeared in the International Herald Tribune, the Sydney Morning Herald, the New York Post, the Straits Times, the Japan Times and many other publications around the world. Pesek began his journalism career writing for the American Banker and Bond Buyer newspapers.

He also worked for Dow Jones Newswires, where he wrote the daily credit markets column for the Wall Street Journal. Pesek earned a bachelor’s degree in business journalism from Bernard M. Baruch College-City University of New York

Citing Putrajaya’s poor handling of opposition politicians and the search for MH370, William Pesek said Malaysia will continue to hog headlines for all the wrong reasons if Putrajaya continues to be complacent in economic matters.

“Its 40-year-old, pro-Malay affirmative-action program chips away at the country’s competitiveness more and more each passing year. The scheme, which disenfranchises Malaysia’s Chinese and Indian minorities, is a productivity and innovation killer. It also has a corrupting influence on the political and business culture,” Pesek said.

Pesek based his observations on a new report from Sarah Fowler of UK-based Oxford Economics, which ranks Malaysia the “riskiest country in Asia of those we consider,” more so than India, Indonesia and even coup-ridden Thailand.

In the report, Fowler said: “Prompted by its high levels of public debt, rising external debt and shrinking current account surplus, there has been a shift in the perception of risks towards Malaysia and away from Indonesia”

Pesek added that current-account surplus is dwindling, from 16% of GDP in 2008 to 3.7% last year, while household debt, according to Fowler, is “worryingly high” at more than 80% of GDP compared to less than 60% in 2008.

Fowler also wrote that Putrajaya’s “climate of entitlement amongst the Malay community limits entrepreneurialism and vested interests within UMNO still resist change.”

Pesek said that the only thing holding Malaysia back is its insular political culture.“The government’s handling of Malaysia Airlines flight 370 said it all. Its deer-in-the-headlights response to the plane’s disappearance was the product of an insular political culture.

“The trouble is, that insularity is holding back a resource-rich economy that should be among Asia’s superstars, not its weakest links.” – June 5, 2014.

 

YTL’s Francis Yeoh apologizes


June 6, 2014

Francis Yeoh apologizes for Speaking Out against Crony Capitalism in Malaysia

Under heavy fire for daring to speak out against crony capitalism in Malaysia, YTL Corporation Managing Director Francis Yeoh has apologised for his remarks. Yeoh, the eldest son of Malaysian billionaire Yeoh Tiong Lay, said he regrets saying things that caused the furore.
YTL-apologises-in-UTUSAN-picture-01-360x216“I am truly saddened that my words have been misrepresented. Nevertheless, I humbly apologise if offence has been caused as a consequence. “I very much regret it,” Yeoh said in a letter to Utusan Malaysia, which was also carried on the front page report of the New Straits Times today.

“We are genuinely thankful to the Malaysian government and the people of Malaysia for allowing us to continue to thrive in this beloved country of ours.”–Malaysiakini (June 6, 2014)

Of Cronies, Sweetheart deals, IPPs and Francis Yeoh

TigerTalk  |  JUNE 5, 2014 5:17 PM
by P. Gunasegaram –guna@kinibiz.com

YTL group’s Francis Yeoh has got himself into quite a bit of a pickle over some statement on cronyism he made at a talk on going global. He denies he is a crony and that the crony way is not how business is done in Malaysia. But is that the truth? Let Tiger dig to unearth the bare truth with his claws.

Who is a crony really? Tiger, without any reference to a dictionary, thinks it’s a cosy relationship with the powers that be so as to obtain an advantage over others and get what is commonly known as a sweetheart deal, that is an uncommonly good deal which no government in its right mind will give you.

And crony capitalism defines a situation where this is rampant – that is a cosy relationship between the state and businessmen for the benefit of the businessmen primarily and often the state leaders too.

Just to be sure Tiger looked it up. Merriam-Webster defined a crony as “a friend of someone powerful (such as a politician) who is unfairly given special treatment or favours.” And Investopedia (Tiger’s favourite site for business terms) defined crony capitalism as a capitalist society based on the close relationships between businessmen and the state.

In Tiger’s books his definition is not significantly different from the dictionary definitions – just a matter of phraseology and an emphasis here and an emphasis there – nothing anyone will tear their hair out over discussing differences

Now that we are clear on what we mean by crony and crony capitalism. Let’s dig in. This is going to be a long dig so be prepared to stay with it – it will show things up quite clearly as we unearth the truth.

YTL Corporation Bhd group managing director Francis YeohThere are two parts to it. Is there crony capitalism in Malaysia? And the second part is this: Is Francis Yeoh a crony? If you have not already, read how he became caught up in the crony controversy here. And read here how he got whacked by Utusan Malaysia for it.

Let’s try and answer the second part first and it will be easier to answer the first part after that. And let Tiger take you back in time to the early nineties and a major blackout in Malaysia when there was power outage across the land.

We Tigers never noticed it of course because it’s always dark in the jungle at night except for the moon now and then and the question of whether the jungle was close enough to be affected by haze through which starlight seldom penetrates.

Former Prime Minister Dr Mahathir MohamadBack to the story, this prompted then Prime Minister (Tun) Dr. Mahathir Mohamad to launch perhaps his most expensive (to the Malaysian that is) privatisation plan – to privatise the generation of electricity, alleging that our electricity utility Tenaga Nasional Bhd or TNB was inefficient, hence the blackout.

TNB had by then been producing electricity without problems for many decades and was able to raise funding for its power stations without government support. It was considered to be quite efficient.

There were allegations that the blackout happened because TNB was not allowed to plant up, hence reducing the reserve production margin it was supposed to maintain for eventualities.

In fact, in an interview with The Star in 2006, former TNB Executive Chairman Ani Arope (pic below) alleged that TNB had been ready to plant up following the 1992 blackout, but that it was prevented from doing so by none other than the Economic Planning Unit (EPU) under the prime minister’s department. TNB was ordered to surrender the land it had acquired to the government, and not long after the government announced plans to privatise power plants.

Ani Arope

Former TNB Chairman Tan Sri Ani Arope

Ani also alleged in the interview that it had no negotiations with the IPPs. TNB had to deal with the EPU, who gave TNB the terms and asked management to agree. Ani refused to agree. In the interview, Ani also said that the pricing and terms of the PPAs “was all fixed up”. “They said you just take it and I refused to sign the contracts. And then I was put out to pasture,” he was quoted as saying.

Later, the government did put in the checks and balances to ensure that IPPs do not continue earning ludicrous profits from their PPAs, but the damage had already been done. The IPPs created overnight billionaires and many of them continue to profit at TNB’s expense even today.

Recall that among the first-generation of IPPs was YTL Power International, often said to be the richest IPP. It was a lucrative deal for YTL Power, with the pricing of power based on at least an internal rate of return (IRR – the correct way of calculating returns on investments) of a high 16% at least.

If the project is structured such that equity is 20% and the rest 80% financed by debt and if we assume an interest rate of say 7.5% (it’s much lower now), then calculations show that the return on equity is at least 50%. In two years, you recover your equity investment!

And the risk is minimal – the person who supplies the power plant will guarantee the performance and TNB will guarantee take up of the power or pay a capacity charge. What a wonderful sweetheart deal and this is confirmed by no less than the TNB executive chairman at the time!

YTL Power International Bhd 050614 edited

If there is still doubt, here is more evidence. The table (above) shows YTL Power’s power businesses. The TNB contract has a profit margin of 14.1% while other power businesses are less than half that at 6.2%. Yes, Francis Yeoh now takes pride in the fact that most of YTL Power’s business is overseas but it was Malaysia that provided him the base and Malaysia where his business it still most profitable.

Did Francis Yeoh know Mahathir? Yes and by most accounts very well. Then, we can assume that he was indeed a crony – certainly not the only crony, because every IPP owner subsequently was also one and many more besides but a very major one nevertheless. This bit of crony capitalism catapulted his family into billionaire status.

It was recently reported that the same YTL Power has won the Project 4A award for a new power plant as part of a consortium linked to the Sultan of Johor with Tenaga Nasional taking a 20% stake via direct negotiations. And so cronyism marches forward and onward.

The model that YTL Power pioneered with the connivance of the EPU under Mahathir was copied by those following him, the other cronies, if you will but no one else got as good a deal as he did.

Even now, the IPP project is  a sure and easy path to massive riches, selectively handed out to connected businessmen who carefully cultivate the politicians who dish them out. One can safely say that anyone who gets an IPP contract is a crony – that makes for a fair number of cronies in this sector alone.

And if the entire IPP sector is owned by cronies would it not be fair to say that crony capitalism is not only alive in Malaysia but well and thriving? That answers the first the question this article was examining.

To summarise: Yes, cronyism is part of doing business in Malaysia and Francis Yeoh is a crony. But to be fair to him he is just one of many and it is not easy to do business in Malaysia unless you are a crony.

Although he denies having said that, he is right when he said that in developed countries he does not need to toady up to prime ministers and other leaders before and after he gets a project. Which implies that he has to here.

tenaga-nasional-genericThis Tiger has always maintained that IPPs are actually unnecessary and merely add another layer of costs to the ultimate consumers of electricity. The best way is for Tenaga Nasional to own and run the plants – its been doing it for many decades before privatisation.

So long as the staff of Tenaga Nasional are kept clean, honest and efficient and paid a good salary for their work, this will provide the lowest cost of electricity to consumers. Why? Simply because you don’t need to provide an IRR of 12-16% for meddling middlemen cronies who become multi-millionaires and billionaires on the back of these needless contracts.

http://www.kinibiz.com/story/tigertalk/89444/of-cronies-sweetheart-deals-ipps-and-francis-yeoh.htm/%5D

Examining ISMA’s Nam Tien Ideology


June 6, 2014

Examining ISMA’s Nam Tien Ideology

UMNO protest

Nation and national soul-searching, despite the romantic connotations behind the term, is always a painful and unsettling process.

A free nation, especially one with a colonial past, will always need to recalibrate its moral position to provide an existential standing. Therefore, a liberation story that is buttressed by a ‘good triumphs evil’ narrative is needed: a new nation sprung from the buds of history, cleansed and desanitised from its past, ready to take on a new course without any entanglements of the past; a ‘New Contract’, but not a renewed contract, so to speak.

This is until it realised, the ‘New Contract’ could not be sustained without hinging on the past, albeit a resented one. A void in history is too borderless for a nation-state with stoic and constitutional borders; be it geographical and psychological, and hence the national discourse is prone to relapse into ‘us-versus-them’ hostility expected of a liberating nation.

The familiarity of achieving a benchmark point of defeating evil (independence) was sought after to achieve cohesion and coherence for a dominating and identifying factor, and therein lies the highly emotive but not necessarily patriotic force of ultra-nationalism. Its digression from patriotism is because those who capitalised on such forces to place imaginative captivity on the masses are usually not patriots themselves. The civil wars and genocides in former African colonies are testaments to that.

Malaysia proves to be an interesting case-study of this “relapse” condition because of its relatively peaceful transition to Independence. The shouts of Tunku’s Merdeka, although invigorating in spirit, did not provide a clean slate for the national conscience to be built upon.

The peaceful transition also meant that there was no post-traumatic stress disorder that originated from a brother-in-arms resistance against invaders for the citizens of diverse origins to direct a common recuperation effort at. Instead, the infantile nation was torn between the political majority rural Malay psyche that the country will “return” to a not-explicitly defined pre-colonial order Malay feudalism and a ‘New Order’ that in practice by the nascent government made little effort in differentiation from the colonial structures.

In other words, there was, and is an expectation for “wrongs” – no matter what they were or are – to be corrected to return the country to a perfect equilibrium before any new projection to the future could be made. The little participation its citizens had in Malaysia’s Independence had left a void being created within the colonial shackles of mind and economics, and it is within this void, contestation of nationhood and identities occurred, as can be seen from the politics of race, language and subsequently, religion that arises.

Ironically, almost every imagination being thrown into the void during that time was retrospective in nature. The Malays longed for a revived domination of the nation’s politics untampered by British intervention, while the Chinese expected a return to the autonomy and free-handedness they enjoyed in commerce and education during colonial governance.

Unsurprisingly, the clash of such nostalgia produced an outcome of retributory nature; the New Economic Policy (NEP) in focus of “correcting” racial imbalances was born. It was a relapse towards the discourse of Malay special position and supremacy, a privilege that was guaranteed by colonial governance to placate Malay fears in the face of a changing nation, demographically, economically and culturally.

Understanding this, Islamist group Ikatan Muslimin Malaysia (ISMA)’s classification of the Chinese as being an invading force, the Nam Tien or “southbound invasion” in challenge of Malay or Islam’s indigenous position can be seen as just another episode of the relapse syndrome.

UMNO-ISMA-PERKASASoutheast Asia’s indigenous religion is not Islam to begin with since it is pre-dated by Hinduism. ISMA, however, had made significant efforts in revising of this fact. The fact is that, the invasion from China in usurping the physical or religious status of the locals, simply did not happened. Therefore, the claim that the Chinese are “wrongs that should be corrected” is merely a throwback in a sense. As the vitality of the NEP wears off following the decline of Mahathir’s developmental state, a substituting agenda was needed for “retributory justice” to continue in maintenance of the capitalist elite power structure, and it was in this light a militaristic revisionist account of the Chinese influx into Malaysia was created.

Although not entirely original, the conceived idea of the Chinese as being an “invading” force did have some salient features. Using an invasion analogy, the need to stress constitutional justifications of Malay and Islamic supremacy (a common strategy employed by right-wing ethnocratic organisations such as UMNO and PERKASA) was diminished.

The approach taken to externalise Chinese citizens of Malaysia had shifted the psychology of the siege mentality to one that is even more rudimentary, one that hardly sees co-existence as an amenable outcome. This is because as the logic goes, the threat is foreign and expansionist in nature and had to be repealed to preserve sovereignty.

Placing Islam in the centre of it, in full cognisance of the religious conservatism of the Malays as well as the outright secularist orientation of the Chinese was only a natural move. A frontier that is both distinctive and violent was enforced between the two communal groups.

The demonisation process, not unlike the “history textbook” treatment that was subjected to most colonial powers, was undertaken. A new struggle against foreign evil, the others, is to be embarked; a theme that has mythical origins, also made relatable for the Malaysian context by Islamic concepts like the jihad (although not in the Salafist jihadist sense).

As iterated above, soul-searching is a painful process, especially when history was kept like a gaping hole, filled in by State-controlled narratives that were insufficient in richness, complexity and inclusiveness. Dominated by retro-looking agendas (Mahathir’s Vision 2020 was a breath of fresh air but it collapsed in the face of growing inequality, communal integration and most importantly, the competence expected of a capitalistic developed nation).

ibrahim-ali-perkasaMalaysia’s perpetual search for divergent collective motives were vulnerable to be seized by the romanticism associated with puritanism and evil banishment, for it is these sentiments that fuelled a citizen’s anger against immigrant workers, free trade agreements and foreign cultures.

The inability of authoritative figures to put a stop to all of this, or the civil societies to provide an effective diversion, will only spell trouble for the already economically struggling nation. Despite years of official forward planning, and government mantras of a brighter future, the forward looking narratives have been undermined by the lack of credibility and authenticity of its proponents and implementers. It also makes its present proponents appear hypocritical.

It is dangerous for Malaysia to not have a credible and authentic forward looking narrative. But it is even more dangerous for the ‘Muslim Malay’ (however that is defined) – without this credible and authentic forward looking narrative – to ask the question “Dari mana datangnya saya?” (“Where do I come from?”), and to look to the pendatangs (immigrants) for an answer.

Nicholas Chan is a King’s College London graduate in Forensic Science. He is currently a socio-political analyst with the Penang Institute. He can be reached at: nicholaschan2003@penanginstitute.org

 

Dissonance in Malaysia-Japan Relations


June 4, 2014

Dissonance in Malaysia-Japan Relations

Abe-NajibBamboo Diplomacy–Look East Again?

Malaysia’s Prime Minister Najib Razak recently met with Japanese Premier Shinzo Abe in Tokyo in conjunction with the annual symposium organised by the Nikkei, one of Japan’s leading newspaper. The summit meeting covered various topics including Japanese security policy, coastal protection, the missing MH370, the South China Sea (SCS) dispute, and Malaysia’s goal to be a high-income nation by 2020. Enhancing the cooperation for a ‘Second Wave of Look East Policy’ (LEP) was also agreed as a framework to deepen bilateral relations. The meeting nevertheless appeared lacklustre with the two Premiers appearing in the same press conference but talking about totally different agendas: Japan underscoring the importance of security while Malaysia stressed on the economic cooperation.

Wither “Second Wave of LEP”?

Malaysia-Japan relations have always been depicted as special by academics and diplomats who frequently refer to the LEP as a symbol of cultural, economic and ethical ties. When talking about the LEP, it is important to remember that this policy was the product of a congruence of strategic thought among the key players in the two countries more than three decades ago. In 1982, the LEP was launched by Mahathir Mohamad in response to a proposal by the Japan Malaysia Economic Association and Malaysia Japan Economic Association. The LEP would mean many things: the emulation of the Japanese model; a way to attract Japanese capital; to put Malaysia on the track to heavy industrialisation; but would also uplift the economic status of Bumiputeras.

Japan in the 1980s, on the other hand, was in the process of expanding its identity from just a member of the West to that of the growing Asia Pacific region as developed countries faced economic stagnation after the second Oil Shock, and as Japan confronted a protracted trade conflict with the US. Thus, the LEP was formulated between a developed country looking for new investment opportunity to decrease its trade surplus with the US and reduce production cost on one hand, and a developing country trying to court much-needed foreign investment. Bolstered by an appreciated Yen – following the Plaza Accord – the LEP eased the inflow of Japanese capital, with the amount of direct investment from Japan to Malaysia increasing by more than seven times for the next decade.

Three decades later, Najib calls for upgrading the LEP. The intent was clearly stated when he asserted that the LEP can address new priority industries such as energy-saving and green technology, healthcare and education— key areas of development included in Najib’s Economic Transformation Program (ETP). However, it is unclear if the ‘Second Wave of LEP’ gives a new thrust to the bilateral relations. In the 1980s to 1990s, “Look East Policy”, “Mahathir” and/or “developmental state” were catch-phrases attached to Malaysia among the Japanese business class and policy-makers. Today, neither “Second Wave of LEP” nor “Najib” are buzz words among the same circle in Tokyo. Rather, it is “middle-income trap”, “weak government” or “dragging its feet in the negotiation of the Trans-Pacific Partnership Agreement (TPP)” that the Japanese audience is talking about.

Dominant party systems in decay: experience of LDP and BN

The notion of a “weak Malaysian government” is depicted by the declining power of the Barisan Nasional (BN). For some Japanese commentators, the developments surrounding the 13th Malaysian General Election was reminiscent of Japan in the late 1980s to early 1990s when Japan’s own dominant party, the Liberal Democratic Party (LDP), saw its control over government diminishing and eventually lost.

At that time, financial deficit had become normalcy and government debt kept on soaring as LDP expanded expenditure for public works and social spending for the elderly to consolidate its support. One of the decisive moments of LDP losing its dominance was the introduction of 3% of Consumption Tax in 1989 as a means to broaden revenue base, after years of hesitation in fear of losing voters. Indeed, this decision – to introduce the consumption tax – was derided by voters who were already angered by the LDP-led government’s profligate public spending. Another and bigger cause of LDP’s decay was the corruption scandals involving top party leaders including then Prime Minister Noboru Takeshita. These scandals revealed the pervasiveness of money politics within the party and the government. The recurring scandals prompted voters, especially those who resided in urban areas, to discard the LDP. Not surprisingly, the party lost the majority of the Upper House in 1989. In 1993 the LDP lost power for the first time since 1955 to a coalition of small parties that consisted of former LDP members and socialists in the Lower House elections of that year. The “1955 system” ended.

Like the LDP dominated Japanese government, the dominant party government in Malaysia has behaved in the similar way for decades, and especially since the 1997 Asian Financial Crisis. BN has tried to boost or maintain support for the party, especially under the Najib administration, through expansionary fiscal policies. To draw support from the business sector, the government has increased expenditure for infrastructure projects. To gather support from lower income groups, BN has disbursed cash benefits under the 1Malaysia People’s Aid (BR1M). Moreover, an increase in the Goods and Services Tax (GST) was put on hold in the run-up for the last general election.

The similarity between the LDP and BN does not end there. Prolonged control of government by the BN has blurred the boundary between public and private interest, resulting in the series of high profile corruption allegations involving top party leaders. Even the result of GE13 – in which BN managed to secure a simple majority of the Dewan Rakyat (Lower House) through heavily-weighted rural votes – reminded many Japanese of the strategy of the LDP in Japan to maintain its dominance in equally testy times in the past.

Though the BN managed to retain majority control of the Dewan Rakyat despite losing the popular vote against the opposition Pakatan Rakyat, not a few Japanese observers have reflected on whether a change in the federal government in the near future will ensure better or a more effective government. This question is relevant in the Japanese context given the fact that post-1993 governments have been short-lived, unable to push forward their reform agenda, and in the case of the Democratic Party of Japan that was in power from 2009 to 2012, bungled on key concerns that include Japan-US relations and the management of the 3.11 disaster (referring to the triple earthquake, tsunami and Fukushima disaster).

Stalled structural reform

While the effectiveness of the future Malaysian government is yet to be known, what is clearly understood by the Malaysia-attentive Japanese audience is that the BN government is weak and can barely maintain its autonomy given heightened social pressure. This is made evident most clearly in the TPP negotiations.

While the TPP draws controversy in Japan, especially with its impact on the agricultural sector, Malaysia’s demands on the TPP is also often highlighted in the Japanese media. For example, Malaysia is known to oppose the institution of investor-state dispute settlement and intellectual property rights that affects access to generic medicines. But much more highlighted in the Japanese media is Malaysia’s demand to exempt Government-Linked Companies (GLCs) and government procurement from TPP coverage. For those who are familiar with Malaysian domestic affairs, this is understandable.

GLCs play too big a-role in the Malaysian economy, and also as the major investor in Najib’s flagship Economic Transformation Programme (ETP). Further, government procurement is an essential means to distribute resources to GLCs and eventually to Bumiputera SMEs. Given the result of GE13 where Bumiputera votes somewhat enabled BN-UMNO to remain in power, the already limited room for the Government to make concessions to external negotiating parties in these areas has narrowed even further.

Malaysia’s rather defensive posture in the TPP negotiation is seen, especially by the Japanese business sector, as a reflection of the weak power of the government vis-à-vis pressure groups and a stalled reform agenda. For this group, liberalisation under the TPP is one of the primary means to further advance structural reform and increase the competitiveness of Japanese economy. This same group knows that Malaysia remains – now for almost two-decades – caught in a “middle-income trap”. Many also argue that a failed conclusion of TPP, with the creation of ASEAN Economic Community just around the corner, would negatively affect Malaysia’s path to become a high-income nation.

The misgivings of the Japanese business sector is also anchored on the belief that the BN cannot be expected to exercise strong leadership given its increasing dependence on the Bumiputera constituency and the relative increase in the power of UMNO within the governing coalition. They somehow expect that it will take an even bigger electoral jolt, similar to what the LDP experienced in 1993, before the Malaysian government takes a more serious effort in pushing required reforms through. Looking back, it was only after LDP lost its power that Japan embarked on a series of important reforms. For instance, administrative and fiscal reform was pursued since the mid-1990s, and more seriously since 1996 when the LDP came back to power as a major coalitional partner.

Based on the lessons learned, LDP-led governments shifted to a more liberal orientation where the government drastically decreased government spending, rationalised government financial institutions, and embarked upon series of privatisation including Japan Post, Highway Public Corporation and other financial institutions. In light of these Japanese experiences, a number of Japanese naturally expect that a reform that pushes Malaysia out of the trap would come only after change in the federal government.

Japan’s security agenda and Malaysia’s ambiguity

While Japanese business players have not been impressed with scenes from the Malaysian political economy, the current Japanese government puts much value on Malaysia. This is demonstrated by the frequent official visits of Ministers between the two countries. In particular, Prime Minister Abe’s renewed interest in Malaysia, as well as ASEAN, comes with a clear agenda: regional security.

Abe grabbed a landslide victory and brought the LDP back to power again in the 2012 Lower House election touting a “Take Back Japan” that focused on “intrusion into Japanese territory by foreign forces” as one of his main campaign slogan. Since then, Abe has had official visits to ASEAN countries and even hosted the Japan-ASEAN Commemorative Summit in 2013. All this in the hope of cementing Japan’s relationship with Southeast Asian countries in various areas including regional security given China’s growing naval power and its increasing assertiveness over territorial disputes in the East and South China Seas. In the summit meetings with Malaysian counterpart, Abe highlighted the issues such as maritime security and the newly introduced Air Defense Identification Zone declared by Chinese government in November 2013 as common concerns between the two countries.

The Japanese Premier’s effort is also directed toward securing support from ASEAN countries for his long-cherished goal of a “departure from the post-war regime,” enabling Japan to play a bigger role in regional security among others. His security policy self-labelled as “proactive pacifism” includes changing the interpretation of Article 9 of the Japanese Constitution to allow the country to exercise the right to collective self-defense. This agenda has always been included in the summit meetings with ASEAN countries including Malaysia.

TDM--21 MarchHowever, the timing and context do not seem right. In the mid-1990s, it was Malaysia’s Prime Minister Mahathir that often urged Japan to loosen the legal constraints on the use of force to play a significant role in regional and global security. The Socialist Party dominated coalition government, however, did not positively receive this prodding. Now, as the Abe government pushes for a reinterpretation of Article 9, the conditions that will generate support for such change from countries like Malaysia has changed. China has grown powerful, economically and militarily, and disputes over territories have become more intense with increasing competition over natural resources and nationalistic sentiments among the general public in the conflicting countries. In this new regional context, Malaysia has shown a somewhat reserved reaction to Abe’s agenda.

Although Malaysia has expressed concern over the overlapping territorial claims in the SCS and the absence of an effective regional Code of Conduct, the fact that China is its largest trading partner has led Malaysia to stick to its traditional position: not to regard China as a threat. This explains Najib’s rather indifferent attitude towards Abe’s expressed concern on China’s aggressive actions in disputed territories. In one meeting, Najib was reported to have indicated that the SCS issue should be dealt by ASEAN through a multilateral approach, indicating his weariness to link disputes in SCS and East China Sea.

While the Malaysian government carefully but steadily deepens security cooperationPM Najib with the US as a hedge against a rising China, it obviously sits on the fence with Abe’s new agenda. Such a posture by Malaysia is often taken as a reflection of the country’s “pro-China” position by some Japanese whose picture of contemporary East Asia is a region where two major countries – Japan and China – are competing for influence in the region.

The dissonance between Abe and Najib in their latest bilateral meeting is explained by the fate and current status of their long dominant parties in the context of changing regional security dynamics. Abe, the leader of Japan’s former dominant party that recently regained control of government due to the ineptness of the opposition, confidently pursued his hawkish agenda. Najib is at the helm of a dominant party whose acts are tied down by the reality that their support base has declined. Najib also has to balance his responses to regional issues as Malaysia – a middle power – is in a delicate position in the rapidly changing big power relations in the region. Thus, a significant ‘Second Wave of LEP’ underpinned by strategic congruence between the two countries will simply have to wait.

Asia’s Resilience


June 4, 2014

Asia’s Resilience

by  (Tan Sri) Dr. Zeti Akhtar Aziz, Governor, Bank Negara Malaysia

ASIA has weathered the global financial crisis and its aftermath with a resilience that it built steadily over the past decade. Today, that resilience is again being tested as a significant transition takes place in the global economic and financial landscape.

Zeti, BN GovernorAs the recovery in the major advanced economies strengthens, the end of unconventional monetary easing in these economies is inevitable. While the prospect of a return to more conventional monetary policy reflects improved economic conditions, it has been accompanied by heightened volatility, with spillovers to the emerging market economies.

Asia, with highly open economies and globally connected financial systems, is not insulated from these external developments. The region will benefit from the global recovery, and its strength and resilience will help it navigate this more volatile international financial environment.

 Managing  the  TRANSITION

Monetary policy normalisation will present a challenging transition. Following the indications of a potential US Federal Reserve scale-back in quantitative easing (its term for unconventional monetary policy) in May last year, emerging market economies experienced large reversals of capital flows.

Within eight months, about a quarter of the capital that had flowed into those economies during the preceding four years had reversed. Several economies experienced significant exchange rate depreciation and a decline in equity and bond prices.

Nonetheless, macroeconomic and financial stability in Asia was preserved. Financial intermediation — the linking of savers and borrowers — was not interrupted, and creditworthy households and businesses had continuous access to financing. Economic activity in the region remained broadly unaffected by these volatile financial conditions.

This is the result of its strong economic fundamentals and sound banking systems, reinforced by improved governance and risk-management practices, and enhanced regulatory and supervisory oversight.

Sources of financing are also more diversified following efforts to increase the size and offerings in the capital markets.

Economies in the region have generally maintained favourable external positions — with flexible exchange rates, high international reserves and less reliance on short-term external funding. Many Asian economies also have the policy space and flexibility to implement countercyclical measures.

Since 2009, several Asian economies have also introduced preemptive measures to address the buildup of financial imbalances arising from the capital inflows, which have contributed to strong credit growth, high household debt and rising property prices in the region.

Measures included limits on maximum loan duration and adjustment of loan-to-value ratios for property purchases, fiscal measures, such as higher transfer taxes and revisions to real property gains taxes.

Policymakers recognised that such measures would help address domestic vulnerabilities. Efforts have also taken to strengthen macroeconomic fundamentals, with greater focus on the current account and fiscal balances. Some economies eased export rules, such as taxes and hedging regulations, while the management of foreign exchange liquidity was improved to strengthen their external position.

Tax and subsidy reforms were also undertaken to reduce government deficits and debt, and improved governance and medium-term fiscal targets enhanced the credibility of the measures.

The policy approach in several Asian economies is gradual, sequenced and targeted. This approach promotes orderly adjustments and corrections in the affected sectors. Policymakers can also monitor the impact of these policies and preserve flexibility.

While national policies help strengthen domestic fundamentals, they are insufficient to maintain resilience in an increasingly integrated global economic and financial environment.

Regional cooperation has, therefore, been enhanced, especially in the areas of cross-border surveillance and integrated crisis management, to address risks to regional macroeconomic and financial stability preemptively.

Multilateral arrangements to support a country in a liquidity crisis, such as the Chiang Mai Initiative Multilateralisation (CMIM), as well as trade financing and settlement arrangements, will enhance the region’s ability to weather the more challenging environment. Frameworks are also in place for information sharing and collective policy response when a crisis is imminent.

Potential for GROWTH

 Since 2000, with the exception of the 2009 crisis year, Asia has grown at an annual rate of 7.5 per cent, accounting for 44 per cent of global growth. Home to 60 per cent of the world’s population, the region is a significant source of revenue for many global corporations.

In part, this was achieved through more balanced and diversified sources of growth, which essentially took place on two fronts.First, the economies increasingly grew as a result of domestic demand. Second, within that domestic demand, the growth drivers shifted from the public to the private sector.

While Asia’s trade with economies outside the region has doubled since 2000, intra-Asia trade has tripled. More than 55 percent of Asia’s exports are now to countries within the region. Similarly, intraregional investment activity has also increased significantly.

In the future, the region’s growth potential will be sustained by several fundamental factors. Asia’s demographic advantage is a key economic asset. During this decade, a young middle-class population has emerged, and it is growing in number and in affluence. The increase in consumption demand and the greater investment activity will thus anchor the growing importance of domestic demand in Asia.

In addition, Asia’s diversity will continue to support regional economic integration. The region comprises economies at different stages of development that are endowed with a range of rich natural resources. Because development needs in the region are vast, there is ample opportunity for further trade and investment linkages which will garner benefits from outside regional borders.

Importantly, financial institutions and markets will become significantly better integrated in the medium term. This will facilitate more efficient intermediation of funds within Asia through more effective recycling of surplus savings for productive investments.

With one of the highest savings rates in the world, Asia has the capacity to meet the region’s vast financing needs with the right institutional arrangements.

To further unlock the region’s growth potential, reforms to generate sustainable, quality and inclusive growth are also important. Efforts to improve social safety nets, pensions, healthcare, education and financial inclusion are being intensified. These efforts contribute to more balanced growth and maintain social cohesion.

At the same time, growing consumption will place demand pressures on limited resources. The policy agenda must, therefore, address environmental damage, pollution and climate change, for example, through sustainable financing.

Importantly, growing interdependence will present both benefits and risks. The challenge is to ensure that regional collective action, particularly the institutional arrangements for policy coordination, is evolving in line with the rapid global financial and economic integration.

 Asia’s  FUTURE

Asia’s resilience has withstood a major global financial crisis and its aftermath. As the world transitions to a new environment characterised by moderate growth, slower global trade, and greater uncertainty and volatility, Asia’s response has been preemptive, marked by increased flexibility and greater foresight.

A resilient Asia will benefit the global economy by being a vibrant growth centre and a stabilising force in the global financial system.

Equally important, Asia’s contribution can transcend economic progress and financial stability in the global policy landscape with the right representation on the global forums.