Malaysia–the best predictors of electoral outcomes


July 14, 2014

Malaysia–the best predictors of electoral outcomes

Gotta’ keep on learning


July 13, 2014

Schumpeternomics: Gotta’ keep on learning

by (Tan Sri) Dr. Lin See-Yan@www.thestar.com.my (07-12-14)

Lin See-YanI JUST returned from the summer meeting of the board of governors (on which I am a long-standing member) and the board of trustees of the Asian Institute of Management (AIM) in Makati, Manila. It celebrated its 45th anniversary…

To mark the occasion, AIM held its second Asian Business Conference against the backdrop of an emerging ASEAN Economic Community (AEC) by 2015. It was well attended by a wide cross-section of Asian businesses, research institutes and universities, under the banner: “2015 Approaching: Priming for ASEAN Integration.”

I spoke at the strategic session on banking and finance with particular focus on the need for Asia (and indeed ASEAN) to keep on innovating to create a truly learning society, in order to maintain its competitive edge and remain relevant in an increasingly hostile and uncertain world. To survive, we just gotta’ keep on learning!

Technological progress

I learned early as a Harvard graduate student in the 1970s from no less than Nobel laureate Robert Solow at the Massachusetts Institute of Technology (MIT) down the Charles, that rising output and incomes can only come about in a sustained way from technological progress (TP), not from mere capital accumulation. Put simply, Solow repeatedly emphasised that TP comes from learning how to do things better; indeed, there’s always a better way.

As a practising banker and economist at Bank Negara after my PhD, I quickly undertstood that much of the productivity increases we see come from small incremental changes – they all add-up, other than the lumpy gains arising from dramatic discoveries or from unpredictable phenomena. It all starts with nurturing our education system and the process of its development to ensure youths are properly educated, not just in terms of literary, quantitative and scientific skills, but also with the right moral values and civic outlook.

Broadly, along what Nobel laureate Joseph Stiglitz (pic) has been advocating – it always makes goodJ Stiglitz sense “to focus attention on how societies learn, and what can be done to promote learning, including learning how to learn.”

Innovation and creative destruction

The seeds of the critical role of innovation in economic growth were first planted about a century ago by Harvard economist and political and social scientist Joseph Schumpeter, a contemporary of John M. Keynes. His economics (hence, Schumpeternomics) is based on the ability and capability of the market economy to innovate on its own.

I recall reading his 1939 book Business Cycle: A Theoretical, Historical and Statistical analysis of the Capitalist Process, where he wrote “Without innovations, no entrepreneurs; without entrepreneurial achievement, no capitalist returns and no capitalist propulsion. The atmosphere of industrial revolutions – of “progress” – is the only one in which capitalism can survive.”

So, Schumpeter went about challenging conventional wisdom in three areas: (i) misplaced focus on competitive markets. He contended that what matters was “competition for the markets, not competition in the markets,” as rightly pointed out by Stiglitz. It is competition for the markets that drives innovation. Sure, this can (and do) result in the rise of monopolies; still this would lead to improved living standards over the long haul (eg. Microsoft, Nokia – acquired in 2013 by Microsoft). (ii) undue focus on short-run efficiency which can be detrimental to innovation over the long-term – classic example is helping “infant industries” learn.

But governments should not be in the game of picking winners; the market can do this better (witness Obama’s failed “clean energy” projects or Malaysia’s wasteful car-maker Proton). Sure, there are exceptions where government invests in research that has since led to development of the Internet and discovery of DNA with enormous social benefits.

Schumpeter

(iii) Innovation leads to creative destruction – it can (and do) wipe out inefficient industries and jobs. The Internet has turned businesses from newspapers to music to book retailing upside down. In their place, more efficient businesses have popped up. In his biography of Schumpeter – Prophet of Innovation, Thomas McCraw wrote: “Schumpeter’s signature legacy is his insight that innovation in the form of creative destruction is the driving force not only of capitalism but of material progress in general. Almost all businesses, no matter how strong they seem to be at a given moment, ultimately fail – and almost always because they failed to innovate. Competitors are relentlessly striving to overtake the leader, no matter how big the lead. Responsible business people know that they ignore this lesson at their peril.”

In 1983, the 100th anniversary of the birth of Schumpeter and Keynes, Peter F. Drucker proclaimed at Forbes that it was Schumpeter, not Keynes, who provided the best guide to the rapid economic changes engulfing the world, according to McCraw.

Higher education

The business of higher education has changed little since Plato and Aristotle taught at the Athenian Lyceum. With government patronage and support, close to 4 million Americans and 5 million Europeans will graduate this summer. Emerging nations’ universities are expanding even faster. I was told in Shanghai last month that China has added 30 million university places in the past 20 years.

Indeed, I do see a revolution coming for three main disruptive reasons:

  •  Rising costs – Baumol’s disease has set in, i.e. soaring costs reflecting high labour intensity with stagnant productivity; for the past two decades, costs have risen 1.6 percentage points above inflation annually.
  •  Changing demand – a recent Oxford study contended that 47% of occupations are now at risk of being automated and as innovation wipes out jobs and drastically change others, vast numbers will be needing continuing education.
  • Fast moving TP will change the way education is packaged, taught and delivered. MOOC (Massive Open Online Course) today offers university students a chance to learn from the world’s best and get a degree for a fraction of today’s cost. Harvard Business School will soon offer an online “pre-MBA” for US$1,500 (RM4,778)! The reinvention of universities will certainly benefit many more than it hurts. Elites like Harvard, MIT and Stanford will gain from this creative destruction process. Education is now a global digital market.

What then, are we to do

Corporate giants come and go in a competitive economy. Microsoft and Nokia used to rule the digital world. Now they don’t. No monopoly is permanent, unless enforced by government, which as everyone knows hardly changes, even as the rest of the world passes it by. In the United States, it is reported that the administration wants to prevent Apple’s iTunes and AppStore from abusing the network “lock-in” created by Apple’s tech ecosystem. But the judge has since ruled that “I want Apple to have the flexibility to innovate.” That’s something, isn’t it?

economics-poster-smallMy professor at Harvard, Nobel laureate Kenneth Arrow, used to extol about the importance of learning by doing. So, those who want to innovate, let them just do it – hopefully with no government intervention even though there is a compelling “infant” argument for industrial protection, which can be a double-edged sword when it comes to learning and innovating.

Most of the time, the infant seldom grows up. But reinventing the ancient institution of higher learning will not be easy. EdX, a non-profit MOOC founded (and funded) in May 2012 by Harvard and MIT, is now a consortium of 28 institutions worldwide. No one knows how big the online market will eventually be. It’s more akin to online airline-booking services – expanding the market by improving the customer experience.

Still, innovation at MOOC will definitely reduce the cost of higher education, grow market size but with widespread creative destruction collateral damage, and turn inefficient universities on their heads. MOOC estimates that university employment can fall by as much as 30% and 700-800 institutions can shut-down. The rest have to reinvent themselves to survive. Our learning society will change forever, whether we like it or not.

Former banker, Dr. Lin See-Yan is a Harvard educated economist and a British chartered scientist who writes on economic and financial issues. Feedback is most welcome; email: starbizweek@thestar.com.my. The views expressed are entirely the writer’s own.

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

 

Malaysia is in Ostrich Mode over University Rankings


June 20 2014

Taipei, Taiwan

Malaysia in Ostrich mode over University Rankings

http://www.freemalaysiatoday.com

By KT Maran

The Times Higher Education Asia University Rankings 2014 has shown that for the second consecutive year, Malaysia’s public universities have failed to make it to the top    100.

image

Malaysia’s PM Najib and his Deputy take Education Lightly

However our Education Minister is making good progress on thinking up a perfect excuse for it. In his response to the failure of local public universities to make the list, Education Minister II Idris Jusoh said the decline did not reflect the local tertiary education levels in the country.

He said emphasis should be placed on the entire learning process rather than rankings alone. “Rankings don’t mean everything, although we can improve (our performance). We must be realistic when aiming for a position,” he said.

The nation’s continuous failure to feature in any university ranking despite a huge education budget every year has not gone down well with the public. The Education Ministry received RM38.7 billion in 2013 and has been allocated RM54 billion this year, the biggest allocation yet. However we keep making excuses for the deplorable academic performance of our Malaysian Universities. Our neighbour Singapore is ranked second.

First class infrastructure alone is not enough to pull us out of this rut. What about the mentality of our students? What has happened to striving hard and putting in the effort to achieve academic excellence?

It does seem we are good in giving excuses year in and year out for our dismal academic performance. The world is laughing at us and our ministers are doing us no favours with their rationale either.

The Muslim World’s Challenges–Part 1


May 28, 2014

The Muslim World’s Challenges

By Dr Farhan Ahmad Nizami

ISLAMIC PAST: Legacy was built on Muslims’ confidence in Islam, sustained by material prosperity, combined with political and legal stability

Dr Farhan Ahmad NizamiFOR about a thousand years, roughly from the 7th century onwards, the people under Islamic rule made striking advances in their material and intellectual culture.

The contribution of those advances to modern Western philosophy, sciences and technology has been extensively studied. But I want to speak about their distinctively Islamic qualities.

The area under Islamic influence stretched overland from the Atlantic in the west to the borders of China, and across the Indian Ocean to the islands of the Malay archipelago.

This vast area was commercially interconnected with much continuous and profitable exchange of goods. It was also culturally interconnected, with prodigious traffic in books and ideas, scholars and travellers.

Its people busied themselves in seeking knowledge and writing it down. So much so was this that, to this day, there remain huge quantities of manuscripts, from different ends of the Islamic world, yet to be catalogued and studied.

The regional diversity and assimilative embrace of Islam as a civilisation is manifest in the names by which great figures in Islamic scholarship are best known: al-Qurtubi, al-Fasi, al-Iskandari, al-Dimashaqi, al-Baghdadi, al-Isfahani, al-Bukhari, al-Dihlawi and al-Jawi.

The language of communication among scholars was mostly Arabic, with Persian and Turkish becoming important later in the east. This dominance of Arabic was not the result of any policy to diminish local languages. It was simply a gradual extension of the authority of the language of the Quran and its teachings.

Muslims believed that the way of life defined by the Quran summed up the best of the teachings of the past. They expected that non-Muslims, too, would have knowledge, skills and virtues. They expected to learn from them and to fit that learning with Islam.

Islamic civilisation thus self-consciously set out to co-exist with and absorb the cultures of others. It did so from a position of political strength.

The House of Wisdom (Bayt al-Hikma) in Baghdad, funded by the Caliph, is the best-known example of this attitude. Translations were commissioned of works in every branch of learning, from metaphysics to the science of making poisons. Once translated, these works were studied critically, then improved and extended.

The dominant streams in this flood of knowledge were Hellenic, Persian and Indian. The Chinese script proved too severe an obstacle to the absorption of Chinese philosophy and science. However, Chinese influences are found everywhere in the material culture of the Islamic world, in decorative motifs, and in the skills of making paper, ceramics, glass, metal-ware, textiles, dyes and drugs.

The Quran presented the teaching of all God’s messengers as a unified legacy. Muslims set out to harmonise older traditions of learning with that legacy. This effort was not universally admired.

In particular, the presentation of Islamic teachings in the style of Greek philosophy remained controversial for centuries. In the end, it had a more enduring influence on the medieval Christian world than on Islam.

Such controversies did not dampen Muslims’ self-confidence. In general, Islamic norms continued to encourage intellectual adventure and achievement. Muslims were aware of living in prosperous, stable societies, and comfortable with non-Muslim communities among them. They considered themselves forward-looking, inventive and multi-cultured.

Their best scholars made innovations of lasting importance in mathematics and experimental science, and applied them in technical instruments, manufacture, and engineering. And the wealthiest royal courts competed to own and display the results.

Al-Jazari’s famous water-clock illustrates this well. Its water-raising technology is Greek; the elephant, inside which the great vat of water is hidden, represents India, the rugs on its back are Persian; on top of the howdah sits an Egyptian phoenix; on its sides are conspicuously Chinese red dragons. This deliberately multicultural device was constructed shortly after the Crusades.

All that said, while Muslim societies were stable, their governments were often not: regime change was usually violent and disruptive. Politically, the Muslims became ever weaker and more divided.

Little now survives of their cultural self-confidence; even less remains of the personal and political skills they had developed to manage life alongside different communities and confessions.

Their ways of organising long-distance commerce and regulating free markets have vanished completely. The material remains of the rest — all the thinking in all the books, colleges, libraries and hospitals — interest only medievalists, museums, and tourists.

The past still has presence in the public spaces; you still hear the call to prayer, even in secularised city centres. There is still a feel of Islam in private homes and personal manners.

We can objectively map the movements of books, ideas and scholars from one end of the Islamic world to the other in every century until the modern period.

The recovery following the Crusades and Mongol conquests included the building of madrasa and colleges that taught a rich, varied curriculum.

There is little evidence of that during European colonial rule. The madrasa of that era were not well funded. They could afford to focus only on Islamic sciences narrowly defined.

For the rest of their education, Muslims had to leave the cultural space of Islam. A division became established between religious and secular education, between old and modern, with Islam on the side of the old. That division is at the heart of the present challenges facing Muslims in every part of the world.

When we memorialise the legacy of the Islamic past — when naming public institutions, or presenting past glories in books and museums — we should remember that this legacy was built on Muslims’ confidence in Islam.

This confidence was sustained by material prosperity, combined with a sufficient degree of political and legal stability. Without prosperity and stability, the constraints on political and economic decisions are too strong for people to make their own choices for their future.

We need only look at the difficulties in post-recession Europe to know that feeling powerless to shape the future is not special to Muslim societies. It is not related to their being Muslim but to the material conditions in which they are Muslim.

The end-goal is hardly a matter of dispute among the vast majority of Muslims. It is to re-establish connections between Islamic upbringing and education and modern secular, technical education.

The latter provides the means for individuals to make their way in the world, to have things to do in it and to enjoy doing them successfully. The former provides them with their religious orientation and identity.

Religious orientation is not itself the goal. The aim is not to have people identify as Muslims; the vast majority already do that. Rather, the aim is to enable them to prosper in the world in ways that express and test, inform and improve, their identity as Muslims.

As the Chinese saying puts it, the journey of a thousand miles begins from where your feet are. We in the Muslim world can only set out from where we stand in reality. That reality needs to be stated bluntly.

Today, Muslim identity is not sufficiently relevant to how things are done in the world, especially in the collective spheres of life.

Muslim identity is not the engine of prosperity, of either the production or the distribution of wealth. Muslim identity is not the engine of knowledge, of collecting it, or adding to it, or disseminating it. (This is true, rather unexpectedly, even of knowledge about the past legacy of Islam.)

Muslim identity is not the engine of political and legal order. Or rather, it is not so in a positive way. Instead, we see mainly negative expressions of it. We see it in a despairing withdrawal from the evils of power: in the attitude that the status quo, however bad, is still better than chaos.

We see it also in despairing violence intended to erase the status quo, without any labour of understanding and analysis about what will follow.

The end-goal is to make being Muslim relevant and effective in the quest for knowledge, in the quest for prosperity and in the quest for political order. Except in the sphere of personal courtesies and private concerns, being Muslim is no longer the currency of exchange neither among Muslims themselves, nor between them and non-Muslims.

To make it so again is a task of huge scale and complexity. Our first priority must be to establish institutions and forums so that the present challenges are properly identified, and then try to guide expectations towards realistic, achievable goals.

The hurdles in the way are real and substantial.First, there is the hurdle, as I said, of determining what is do-able and specifying it intelligently, in the light of local realities; in the way that sustains momentum towards the next objective; and without losing sight of the end-goal.

Second, there is the hurdle of co-ordinating effort with other societies and states. Priorities can vary sharply with local conditions. Therefore, there will be a need for trust among policymakers, with tolerance for variable levels of competence and energy.

Thirdly, there is the hurdle of rejection by those who oppose any attempt to bring religious concerns into the public sphere. The response will sometimes be concession, compromise and conciliation. At other times, it will take the form of steadfastly holding one’s ground. In either case, alert flexibility — the readiness to adjust to different circumstances — is essential.

Among general objectives, the most inclusive is to build up the commercial, financial, trade and cultural ties between Muslim societies.One measure of the need is the low values and volumes of bilateral trade between Muslim-majority countries, compared with their trade with non-Muslim countries.

Another measure is the low values and volumes of trade outside the dollar-dominated banking system.

Another is the low numbers of Muslims travelling for higher education from one Muslim country to another; the general preference, for those who can afford it, remains Europe or America.

Yet another measure is the massive inflow of cultural product from the non-Muslim into the Muslim world — the information and imagery people get from their televisions and computers; the advertising that influences the things they want to own; the time they give to sports and other entertainments.

All of this shapes people’s horizons, and their understanding of what is important and what is possible.

For the states that make up the Islamic world, the need to work together is clear. Modern technologies make it much easier to do that than it used to be. The sacrifices needed for cooperation to succeed are widely understood. But we should also highlight the benefits of a strengthened economic base in Muslim states, through increase in trade and long-term investments in human development.

The distribution of resources favours Muslim nations, but they lack the will and confidence to manage them to best advantage. If only because they are Muslim nations, their leaders have a special responsibility to nurture that will and confidence.

Their aspirations and policies should be consciously linked to the history, culture and faith that Muslims share. If enough far-sighted individuals have the courage of their Islamic convictions, what seems desirable but unrealistic can become a realistic and achievable goal.

Muslims are commanded to “bid to the good and forbid from the evil” (amr bi-l-ma`ruf wa-nahy `ani l-munkar). This entails commitment to the direction and quality of the whole social ethos. Not just traditional forms of family life and neighbourliness but also religiously valid ways of earning a living, co-operatively with others and with the natural environment.

As I mentioned, in the past, Muslims traded globally. The expansion of Islam’s influence followed the trade routes out of its Arabian heartland. For Muslims, economic effort is an integral part of responsible living.

We have a reliable record of how the Prophet and his companions went about discharging that responsibility. Muslims may not engage in practices that deliberately and systematically deprive others of their livelihood, and then, in response to a separate impulse, give charitably to relieve the distress their economic practice has generated.

Rather, the effort to do good works and the effort to create wealth must be sustained as a single endeavour. Both means and ends must be halal.

More Muslims need to join, with each other and with non-Muslims, in the urgent need to balance the creation and distribution of wealth so that a good life is available to all, including future generations.

Muslims’ efforts to develop techniques of financing and investment that are free of usury and uncertainty (speculation) are pertinent to the wider concerns about ethical investment, fair and genuinely free trade, and abolishing the export, through debt-slavery, of poverty, instability and pollution to the poorest and weakest on this earth.

We have seen over the last forty years massive growth in the stocks of Islamic financial capital. But these stocks are not being deployed to develop the economic capacity of Muslim countries. It seems that the wealthiest Muslims, individually or as sovereign powers, prefer the safe, quick returns from investment in the non-Muslim world.

In many Muslim states, economic infrastructure and activity remain linked to servicing the economies of former colonial powers. Those linkages are not sustained only by fear, but by individual and institutional inertia — by lack of will and imagination on the part of officials to take the necessary steps to put in place the needed skills and systems.

One reason that Muslims do not invest their wealth and talents in Muslim countries is that those countries are unstable, unsafe and unproductive to work in.

This vicious circle is not a function of those countries being Muslim: similar socio-economic conditions elsewhere have similar effects — an exodus of energy, talent and money.

Many Muslim states inherited their political boundaries from the colonial era. Those boundaries increased dependence on the colonial power to keep order. The anti-colonial struggle provided a shared history for communities separated by ethnic and religious differences. In the post-colonial era they have not been able to find common ground. Solidarity is not a precondition, but an outcome, of the effort to identify common purposes. It is something that has to be, and can be, constructed.

To make Muslim identity effective in the world, a major policy commitment must be to make justice and fairness the decisive value for all modes and levels of governance.

This means allowing independent centres of authority to emerge and recognising their concerns and aspirations. It means a redistribution of opportunities to acquire wealth and influence, so that decision-making is not concentrated in the same few hands.

This must be a process, not a gesture. It must be given the time it needs, according to local conditions, to happen gradually.

In this way all parties learn to trust and work with each other to mutual benefit. If government is seen to be in the service of the people as a whole, its security is guaranteed by them.

Tomorrow: Part II

Dr Farhan Ahmad Nizami presenting the Perdana Putrajaya Lecture at the Putrajaya International Convention Centre yesterday. Bernama pic

Taking on Adam Smith (and Karl Marx)


April 21,2014

Taking on Adam Smith (and Karl Marx)

PARIS — Thomas Piketty turned 18 in 1989, when the Berlin Wall fell, so he was spared the tortured, decades-long French intellectual debate about the virtues and vices of communism. Even more telling, he remembers, was a trip he took with a close friend to Romania in early 1990, after the collapse of the Soviet empire.

piketty-“This sort of vaccinated me for life against lazy, anticapitalist rhetoric, because when you see these empty shops, you see these people queuing for nothing in the street,” he said, “it became clear to me that we need private property and market institutions, not just for economic efficiency but for personal freedom.”

But his disenchantment with communism doesn’t mean that Mr. Piketty (left) has turned his back on the intellectual heritage of Karl Marx, who sought to explain the “iron laws” of capitalism. Like Marx, he is fiercely critical of the economic and social inequalities that untrammeled capitalism produces — and, he concludes, will continue to worsen. “I belong to a generation that never had any temptation with the Communist Party; I was too young for that,” Mr. Piketty said, in a long interview in his small, airless office here at the Paris School of Economics. “So it’s easier in a way to reopen these big issues about capitalism and inequality with a fresh eye, lbecause I was too young for that fight. I don’t have to justify myself as being pro-communist or pro-capitalist.”

In his new book “Capital in the Twenty-First Century” (Harvard University Press), Mr. Piketty, 42, has written a blockbuster, at least in the world of economics. His book punctures earlier assumptions about the benevolence of advanced capitalism and forecasts sharply increasing inequality of wealth in industrialized countries, with deep and deleterious impact on democratic values of justice and fairness.

Branko Milanovic, a former economist at the World Bank, called it “one of the watershed books in economic thinking.” Paul Krugman, winner of the Nobel in economic science and a columnist for The New York Times, wrote that it “will be the most important economics book of the year — and maybe of the decade.” Remarkably for a book on such a weighty topic, it has already entered The New York Times’s best-seller list.

“Capital in the Twenty-First Century,” with its title echoing Marx’s “Das Kapital,” is meant to be a return to the kind of economic history, of political economy, written by predecessors like Marx and Adam Smith. It is nothing less than a broad effort to understand Western societies and the economic rules that underpin them. And in the process, by debunking the idea that “wealth raises all boats,” Mr. Piketty has thrown down a challenge to democratic governments to deal with an increasing gap between the rich and the poor — the very theme of inequality that recently moved both Pope Francis and President Obama to warn of its consequences.

Mr. Piketty — pronounced pee-ket-ee — grew up in a political home, with left-wing parents who were part of the 1968 demonstrations that turned traditional France upside down. Later, they went off to the Aude, deep in southern France, to raise goats. His parents are not a topic he wants to discuss. More relevant and important, he said, are his generation’s “founding experiences”: the collapse of Communism, the economic degradation of Eastern Europe and the first Gulf War, in 1991.

Those events motivated him to try to understand a world where economic ideas had such bad consequences. As for the Gulf War, it showed him that “governments can do a lot in terms of redistribution of wealth when they want.” The rapid intervention to force Saddam Hussein to unhand Kuwait and its oil was a remarkable show of concerted political will, Mr. Piketty said. “If we are able to send one million troops to Kuwait in a few months to return the oil, presumably we can do something about tax havens.”

Would he want to send troops to Guernsey, the lightly populated tax haven in the English Channel? Mr. Piketty, soft-spoken, barely laughed. “We don’t even have to do that — just simple basic trade policy, trade sanctions, would do the trick right away,” he said.

A top student, Mr. Piketty took a conventional path toward the French elite, being admitted to the rarefied École Normale Supérieure at 18. His doctoral dissertation on the theory of redistribution of wealth, completed at 22, won prizes. He then decamped to teach economics at the Massachusetts Institute of Technology before returning two years later to France, disappointed with the study of economics in America.

“My Ph.D. is mostly about pure economic theory because that was the easiest thing to do, and I was hired at M.I.T. as a young assistant professor doing economic theory,” he said. “I was young and successful at doing this, so it was an easy way. But very quickly I realized that there was little serious effort at collecting historical data on income and wealth, so that’s what I started doing.”

Academic economics is so focused on getting the econometrics and the statistical interpolation technique correct, he said, “you don’t really think, you don’t dare to ask the big questions.” American economists too often narrow the questions they examine to those they can answer, “but sometimes the questions are not that interesting,” he said. “Trying to write a real book that could speak to everyone meant I could not choose my questions. I had to take the important issues in a frontal manner — I could not escape.”

He hated the insularity of the economics department. So he decided to write large, a book he considers as much history as economics, and one that is constructed to lead the general reader by the hand.

He is also not afraid of literature, finding inspiration in the descriptions of society in the realist novels of Jane Austen and Balzac. Wealth was best achieved in these stories through a clever marriage; everyone knew that inherited land and capital was the only way to live well, since labor alone would not produce sufficient income. He wondered how that assumption had changed.

As he extended his work on France to the United States in collaboration with Emmanuel Saez, a professor of economics at the University of California, Berkeley, he saw that the patterns of the early 20th century — “the top 10 percent of the distribution was full of rental income, dividend income, interest income” — seemed less prevalent from the 1970s through the early 1990s.

“It took me a long time to realize that in effect we were returning slowly in the direction of the previous equilibrium, and that we were part of a long transitory process,” he said. When he started working on the issue in the late 1990s, “there was no way this could be understood so clearly — having 20 additional years of data makes a big difference to understanding the postwar period.”

His findings, aided by the power of modern computers, are based on centuries of statistics on wealth accumulation and economic growth in advanced industrial countries. They are also rather simply stated: The rate of growth of income from capital is several times larger than the rate of economic growth, meaning a comparatively shrinking share going to income earned from wages, which rarely increase faster than overall economic activity. Inequality surges when population and the economy grow slowly.

The reason that postwar economies looked different — that inequality fell — was historical catastrophe. World War I, the Depression and World War II destroyed huge accumulations of private capital, especially in Europe. What the French call “les trentes glorieuses” — the roughly 30 postwar years of rapid economic growth and shrinking inequality — were a rebound. The American curve, of course, is less sharp, given that the fighting was elsewhere.

A higher than normal rate of population and economic growth helped reduce inequality, along with higher taxes on the wealthy. But the professional and political assumption of the 1950s and 1960s, that inequality would stabilize and diminish on its own, proved to be an illusion. We are now back to a traditional pattern of returns on capital of 4 percent to 5 percent a year and rates of economic growth of around 1.5 percent a year.

So inequality has been quickly gathering pace, aided to some degree by the Reagan and Thatcher doctrines of tax cuts for the wealthy. “Trickle-down economics could have been true,” Mr. Piketty said simply. “It just happened to be wrong.”

His work is a challenge both to Marxism and laissez-faire economics, which “both count on pure economic forces for harmony or justice to prevail,” he said. While Marx presumed that the rate of return on capital, because of the system’s contradictions, would fall close to zero, bringing collapse and revolution, Mr. Piketty is saying the opposite. “The rate of return to capital can be bigger than the growth rate forever — this is actually what we’ve had for most of human history, and there are good reasons to believe we will have it in the future.”

n 2012 the top 1 percent of American households collected 22.5 percent of the nation’s income, the highest total since 1928. The richest 10 percent of Americans now take a larger slice of the pie than in 1913, at the close of the Gilded Age, owning more than 70 percent of the nation’s wealth. And half of that is owned by the top 1 percent.

Mr. Piketty, father of three daughters — 11, 13 and 16 — is no revolutionary. He is a member of no political party, and says he never served as an economic adviser to any politician. He calls himself a pragmatist, who simply follows the data.

But he accepts that his work is essentially political, and he is highly critical of the huge management salaries now in vogue, saying that “the idea that you need people making 10 million in compensation to work is pure ideology.”

Inequality by itself is acceptable, he says, to the extent it spurs individual initiative and wealth-generation that, with the aid of progressive taxation and other measures, helps makes everyone in society better off. “I have no problem with inequality as long as it is in the common interest,” he said.

But like the Columbia University economist Joseph E. Stiglitz (right), he argues that J Stiglitzextreme inequality “threatens our democratic institutions.” Democracy is not just one citizen, one vote, but a promise of equal opportunity.

“It’s very difficult to make a democratic system work when you have such extreme inequality” in income, he said, “and such extreme inequality in terms of political influence and the production of knowledge and information. One of the big lessons of the 20th century is that we don’t need 19th-century inequality to grow.” But that’s just where the capitalist world is heading again, he concludes.

Mr. Saez, his collaborator, said that “Thomas combines great perfectionism with great impatience — he both wants to do things well and do things fast.” He added that Mr. Piketty has “incredible intuition for economics.”

The last part of the book presents Mr. Piketty’s policy ideas. He favors a progressive global tax on real wealth (minus debt), with the proceeds not handed to inefficient governments but redistributed to those with less capital. “We just want a way to share the tax burden that is fair and practical,” he said.

Net wealth is a better indicator of ability to pay than income alone, he said. “All I’m proposing is to reduce the property tax on half or three-quarters of the population who have very little wealth,” he said.

Published a year ago in French, the book is not without critics, especially of Mr. Piketty’s policy prescriptions, which have been called politically naïve. Others point out that some of the increase in capital is because of aging populations and postwar pension plans, which are not necessarily inherited.

More criticism is sure to come, and Mr. Piketty says he welcomes it. “I’m certainly looking forward to the debate.”

READ onhttp://www.nytimes.com/2014/04/20/business/international/taking-on-adam-smith-and-karl-marx.html?ref=books

Dani Rodrik: Has sustained growth decoupled from industrialization?


April 9, 2014

The George Washington University, Washington DC–Growth Dialogue

http://www.growthdialogue.org/shared-views/dani-rodrikhas-sustained-growth-decoupled-industrialization

Dani Rodrik: Has sustained growth decoupled from industrialization?

Watch Prof. Dani Rodrik’s full presentation at the Symposium on Frontier Issues in Economic Growth.

Attracting Malaysian Talent Home is tough for Johan Merican


April 9, 2014

Malaysia struggles to woo Malaysian experts home due to ‘better life’ abroad–A Tough Job for Johan Merican

 by MD Izwan (04-08-14) @www.themalaysianinsider.com

TalentCorp CEO Johan Mahmood Merican says the agency has several incentives to make it easier for overseas Malaysians to come home, including tax exemptions on their cars. – The Malaysian Insider pic by Najjua Zulkefli, April 8, 2014.

TalentCorp CEO Johan Mahmood Merican says the agency has several incentives to make it easier for overseas Malaysians to come home, including tax exemptions on their cars.–  pic by Najjua Zulkefli, April 8, 2014.

Higher salaries, better professional opportunities and a comfortable life – these are the main reasons Malaysian professionals living abroad are reluctant to return to Malaysia, TalentCorp said.

According to its statistics, TalentCorp managed to bring back 2,500 Malaysians working abroad, but the figure is small when compared with a 2011 World Bank estimate that almost a million Malaysians are working outside the country.

TalentCorp has received almost 4,000 applications in the three years since it was established in 2011 to address the brain drain in the country.

“It is a combination of several factors. First, the quality of life is related to salaries, second, professional opportunities and third, a comfortable life, ” TalentCorp Chief Executive Officer Johan Mahmood Merican told The Malaysian Insider recently. However, the gap in quality of life is not too big when Malaysia is compared with other countries, he said.

“For example, the salaries in London are definitely high but we must increase their awareness about the quality of life after living costs are taken into account. Sometimes, the gap is not that big,” he added.

In terms of professional opportunities, Johan said Malaysia was still capable of offering the best opportunities as the country’s economic position was still good.

“In many other developing countries in the world, their economies are relatively slow but Malaysia’s is steadily progressing,” he said.

“The third factor, there are a lot of reasons for that. It’s true that there are some Malaysians who are worried about education, crime and the political scenario in the country,” he added.

The country which has the highest number of Malaysians wanting to come home is Singapore, followed by the United Kingdom, China, Australia and the Middle East.

According to a World Bank report, Malaysia’s Gross Domestic Product (GDP) was US$303.53 billion (RM995.43 billion) in 2012. Malaysia’s GDP represents 0.49% of the world’s economy.

“When they have been out of the country for too long, it will be hard for them to come home. At least, we appreciate their efforts by giving them incentives.”

The administration of Prime Minister Datuk Seri Najib Razak has targetted Malaysia to become a high-income nation by 2020 through Vision 2020, which was introduced by former Prime Minister Tun Dr Mahathir Mohamad.

As part of efforts to achieve the goal, Najib also introduced fiscal steps to reduce the country’s deficit, but that have affected the inflation rate.

Up till 2013, TalentCorp was allocated RM65 million, but it has received criticism over the huge allocation as it did not reflect in the number of talents brought home.

“TalentCorp is not only about bringing workers from overseas, we also have other programmes such as graduate employability and helping foreign talents,” Johan said.

The area in which most talents have decided to come back to is the business service sector, followed by oil and gas, finance, electronics, information technology and health.

“We support the Economic Transformational Programme (ETP) and not just overseas programmes. We help drive the ETP,” he said, adding that TalentCorp was in line with the government’s goal of achieving a high-income nation by 2020.

Johan also said that TalentCorp does not take on the role of a “recruitment agency” for the talents brought home.

“We do not operate like a recruitment agency because we are a government agency. We do not look for jobs for them; it is up to them to find jobs.However, we realise that Malaysians who have worked overseas for too long will not necessarily be used to the local professional culture so we are prepared to help them to get in touch with recruitment agencies or executives,” he said.

Realising that the move to bring back talent is not easy, Johan said TalentCorp has prepared several incentives to make it easier for them to return to Malaysia.

“When they have been out of the country for too long, it will be hard for them to come home. At least, we appreciate their efforts by giving them incentives.”

Among the incentives are tax exemptions on cars the applicants would like to bring back to Malaysia under the Return Expertise Programme (REP).Johan said it was not fair for others to judge TalentCorp’s work just based on allocations to the agency, as there were other activities that they take on.

“You cannot take a whole amount of allocation and divide it by one activity… we have other different activities.Maybe our activities hardly get any coverage, but we are managing talents in a different aspect,” he said.

In 2011, a World Bank Report revealed that Malaysia was experiencing a huge brain drain to other countries, with almost a million of the country’s professional workforce reported to be working overseas.

According to the report, the migration is caused by the imbalances of the New Economic Policy (NEP), with Indians and Chinese making the highest numbers.

The World Bank warned that if the situation was not addressed as soon as possible, it would slow down the economy and halt the country’s development.

Following the report, Putrajaya set up TalentCorp and introduced programmes to lure Malaysian talents from overseas. – April 8, 2014.

Controversial Muslim Thinker and Politics


February 23, 2014

Controversial Muslim Thinker sets the cat among the canaries, again

by Terence Netto@http://www.malaysiakini.com

COMMENT They say politics makes for strange bedfellows. It looks like religion also does the same. Consider thinker Kassim Ahmad’s ties to former Prime Minister Dr Mahathir Mohamad – on Islamic exegesis, the two are birds of a feather.

kassim thinkerThe Controversial Muslim Thinker

This is best understood in the context of Voltaire’s famous criticism of Christian belief and practice at the onset of the Enlightenment in the 18th century – that incantations can kill a flock of sheep if administered with a certain quantity of arsenic.

In other words, faith should not be blind and unexamined beliefs are for bovines, not homo-sapiens.

In 1986, Kassim published a book – ‘Hadis: Satu Penilaian Semula (Hadith: A Reappraisal)’ – that espoused a subversive idea.This was that certain bases of Islamic practice and belief cannot sustain critical scrutiny. The book proposed the Quran as sole basis for sound Muslim belief and best practices.

That view Kassim reiterated to a conference which reviewed his thought held last Sunday at the Perdana Leadership Foundation, a think-tank associated with Mahathir (right).

The former Premier officiated at the conference’s opening and days later, after controversy flared over what Kassim had said, allowed that Kassim was a thinker whose opinions are easily misunderstood.

Like the publication of his book 28 years ago, Kassim’s latest musings have caused a furore. Its magnitude can be gauged in the days to come as Islamic authorities mull action against him.

It’s a safe bet, though, that none of them will take him on in a debate because they know that Kassim is a formidable foe to joust with; he will not easily recant his views.

Kassim blames Anwar Ibrahim – the Education Minister in the mid-1980s – for squelching the debate that ‘Hadis’ was obviously intended to provoke.Till today, Kassim nurses an enduring antipathy towards Anwar for the turn of events following publication of Kassim’s book in early 1986.

The ironies in history

Although all this occurred 28 years ago, the passage of decades has not had a becalming effect on the visceral feelings the controversy evoked at that time.

As recently as the middle of 2012, Kassim remained choleric at the mention of Anwar’s name, denouncing the Pakatan Rakyat leader with a vituperation that was ugly to behold.

It is not clear that Anwar had anything to do with the banning of Kassim’s book or with foreclosure of the debate.What’s less incontestable is that had the book not been banned, matters to do with Islamic thought and understanding in Malaysia would plausibly have transcended the present moment where some peninsula Muslim Malaysians insist that the term ‘Allah’ is exclusive to them.

In one of those ironies in which history abounds, in the debate over the ‘Allah’ issue, Anwar (left) is not opposed to non-Muslim use of the term – provided it is not abused – whereas Mahathir is for prohibition of the term to non-Muslims.

Kassim’s position on the issue is not known, but judging from what can be deduced of the man’s intellect, it would be a huge surprise if he agreed with Mahathir’s stance.

There is a strong strain of the iconoclast in Kassim, evident from half a century ago when he suggested that Malay folklore was wrong to view Hang Tuah as a hero because the real hero was Tuah’s friend, Hang Jebat, whom Tuah had killed.

Because of his tendency to examine the received wisdom on a subject, it wasn’t surprising that Kassim, who tuned 80 last September, gave vent at last Sunday’s conference to views that were even more controversial than the ones he aired in his 1986 work.

In what was purported to be his final testament – rendered at the conference themed ‘Thoughts of Kassim Ahmad: A Review’ – the man who started his intellectual journey as a cultural iconoclast and doctrinaire socialist, invited Muslims to return to the teachings of the Islamic faith as revealed in the Quran.

He said that believers would find Quranic teachings to be cognate with natural law (undang-undang alamiah).Kassim also espoused the view that Muslims do not need, like he claimed Christians did, a “priestly caste” to know what God commands of them and to perceive those commands’ consonance with what natural law tells them.

He argued that the female practice of wearing a headscarf (tudung) was a wrong interpretation of the Quranic stricture against bodily exposure, claiming that hair on a woman’s head is not included in the ‘aurat’ that is required by the Quran to be covered. He said that head hair must be aired for health (natural law) reasons.

An interesting tack to take

Thus, he took an example from nature to elucidate a Quranic teaching, demonstrating in the process the supposed truth of his argument that sound interpretation of Quranic revelation would necessarily be found to be compatible with what natural law teaches.

This is an interesting tack to take and is at variance to the asharite (God is power/God is will) school of Islamic thought. The asharite has been the dominant school since the 12th century when it gained the upper hand over the mutazilite (God is also reason) school of Islamic interpretation.

Since the victory of the asharite school, Islam’s answer to what is called “the Socratic puzzle” has been emphatic.But, pray, what is the Socratic puzzle?

It is a question that is so abstruse, it gives philosophy a bad name: Is a good action good because it is approved by God? Or is it approved by God because it is good?

In other words, do the categories of good and evil, right and wrong, have an existence independent of the divine will?

To this, the answer of the Asharite school is: An action is good because it is approved by Allah.

The asharites hold that there is no independent criterion of morality outside the will of Allah. And since the Quran is an absolutely literal and accurate account of that will – indeed in a deep sense, the Quran itself actually incarnates that will – there is no independent criterion of morality outside the text of the Quran.

In other words, if the Quran says something that seems morally offensive, it is morality that is mistaken, not the Quran.

The Mutazilites are inclined to find an interpretation of the Quran that accords with what natural law teaches. This is because they believe that there is an objective moral order to the universe and that this is discoverable through reason. That is why the Mutazilities are called rationalists.

Because these are febrile questions of religious interpretation and philosophy, and apt to foment divisive and emotional effects on believers – Voltaire advised that discussion of complex religious questions be held behind closed doors and out of the hearing of servants – Muslim thinkers approach them with circumspection.

Now and then, one or the other of them saunters on to the turf and inevitable detonations ensue.

Last Sunday, Kassim Ahmad walked into a blast-prone area and set off subversive ripples of resonance. He is likely to enjoy immunity because he did it at the Perdana Leadership Foundation

Last year about this time, Ibrahim Ali (right) escaped a sedition rap for threatening to burn bibles after Mahathir offered extenuations on the Perkasa chief’s behalf, following former attorney-general Abu Talib Othman’s admonishing incumbent AG Abdul Gani Patail against dilly-dallying on pressing charges.

This time round, Mahathir’s extenuations on behalf of Kassim are likely to have intellectually more beneficent uses.

The irony is that Kassim – like the man he detests, Anwar Ibrahim – is not likely to think much of the argument that the term ‘Allah’ ought to be the exclusive preserve of Peninsula Muslims; more certainly, he will laugh Mahathir’s reservation of the term for Peninsula Malays, to scorn.Not just politics, religion, too, makes for strange bedfellows.

The Malaysian Consumer and the Fight against Inflation


January 21, 2014

The Malaysian Consumer and the Fight against Inflation

by Tan Sri Dr. Mahboob Sulaiman@www.nst.com.my

As a society, we too have a role to play in ensuring that inflation is controlled. Let us exercise our power, as consumers, to control unreasonable price increases by judicious spending and economising on our energy use as well as changing our consumption spending pattern.–Dr. Mahboob Sulaiman

THE interest on inflation is reactivated now with the Consumer Price Index (CPI) approaching  three per cent.

Dr Mahboob SulaimanMalaysians are used to price stability for a long time, except for a few years, such as in 1973/1974, 1998, and in 2008. The inflation in 1973/74 and in 2008 was caused by an increase in oil and rice prices at the same time.

Some agitators recently conducted a demonstration on the eve of this new year, using the rising prices as an issue to air their grievances.I wonder what would they do if the country was experiencing an inflation rate of eight to 12 per cent annually as is being experienced for many years in China and India, given the countries’ rapid economic growth.

Blaming the authorities alone for the price pressure reflects a poor understanding of market forces. There is a market involving producers and consumers out there whose total effect determines the prices of products. This is the famous Adam Smith’s invisible hand or the market forces. The government’s policy to control prices only covers essential goods and services, enforced especially during festive seasons.

Inflation and high prices are two different things; inflation is a rate of change in general price level. One can have low inflation despite prevailing high prices of goods and services or high inflation at low price levels. It is the rate of annual price increase that is defined as inflation. Nevertheless, high price increases will invariably be translated into inflationary pressures.

High prices can be caused by high level of aggregate demand (demand-pull factor) when the economy grows beyond its sustainable levels. Our current rate of economic growth is still below our growth potential of about six to seven per cent per annum. Hence we cannot say that our current inflation is caused by excessive demand. There are also other contributing factors, such as rising cost of production including high wages, high cost of imports, and supply shortages as well as market imperfection.

One factor that may also cause increase in price level is declining rates of exchange which result in rising cost of imports. The Malaysian ringgit declined recently, with the rising value of the dollar under the impetus of the tapering policy of the Federal Reserve which led to outflows of fund from the region back to the United States, thus strengthening the US dollar vis-a-vis other currencies.

Hopefully, the decline in the ringgit will spur increases in exports thus helping our balance of payments position again. An improved external demand will help the nation to increase industrial production and a higher rate of economic growth.

The current increase in price level has not pressured our central bank to undertake monetary policy measures, such as raising interest rates and initiating open market operations. The bank is therefore still monitoring the price development.

Inflationary expectations by consumers and suppliers may result in price increases, too, as the nation is deliberating on toll increases, wage increases, increases in local government assessment rates and revision in electricity tariffs. Suppliers may have also increased the prices of certain goods now that the government has raised fuel price (RON95) and reduced sugar subsidy.

Powerful supply chain organisations can indeed raise prices much higher than the expected increase brought about by the 20 sen increase in RON95 fuel price and doing away with sugar subsidy. Analysing the supply chain using the input-output technique, tells us that supplies account for the bulk of costs of products and services. Thus, market intermediaries have a lot to explain the price increases if the resultant price adjustment after subsidy rationalisation appears unreasonable.

As usual, we as consumers are again at the disadvantage with price increases because of our weaker position as well as the lack of information on price conditions to enable us to exercise our purchasing power effectively and contribute to price stabilisation. However, this should not be the case. Consumers must exercise their power to ensure suppliers do not willy-nilly increase prices.

A detailed and comprehensive study of the causes of the current high prices needs to be donenajib-razak1 immediately so as to enable an accurate policy prescription to be implemented.

If supply is the cause of price increase then policy prescription may include import liberalisation and reducing domestic supply bottlenecks to increase domestic production and supply. In such a case, the policy response to increase KR1M (Kedai Rakyat Satu Malaysia) outlets therefore appears quite right.

Given the above explanation, one should not jump into conclusion that public policies have failed to arrest price increases. As a society, we too have a role to play in ensuring that inflation is controlled. Let us exercise our power, as consumers, to control unreasonable price increases by judicious spending and economising on our energy use as well as changing our consumption spending pattern.

Of Parliamentary “APES” and Penchant for Con-Sultants


November 17, 2013

Of Parliamentary “APES” and Penchant for Con-Sultants

A Kadir Jasinby A Kadir Jasin

On June 27, I published a posting entitled Malaysian Parliament vs Animal Planet. On November 14, judging from media reports, the Dewan Rakyat was transformed from the more respectable Animal Planet into a mere zoo.

It was the climax of yet another uncivilised behaviour of our elected representatives, when the Opposition PKR member from Padang Serai, N. Surendran was suspended for six months for allegedly insulting Speaker Tan Sri Pandikar Amin Mulia outside the House on November 12.

How I wish the government of Prime Minister Mohd Najib Abdul Razak acts equally swiftly and decisively on the plights of the rakyat, like the plan by the Kuala Lumpur City Hall to hike assessment rates by as much as 200% or the spike in deadly shootings around the country.

It is interesting that the National News Agency, Bernama should use the term “allegedly” to describe the circumstance surrounding the Surendran’s suspension. Does this mean that the charges against the PKR member were never conclusively proven?

According to Bernama, the suspension motion, which was tablednancy-shukri-menteri-bn-pbb-sarawak by Minister in the Prime Minister’s Department Nancy Shukri (left) amid protest by members of the Opposition, was passed via block voting.

The Opposition questioned the legitimacy of the motion, triggering a heated argument, which lasted almost 90 minutes.

When the division was called by Deputy Speaker, Datuk Ronald Kiandee, 92 BN parliamentarians voted for the motion while the opposition representatives abstained.

On Tuesday, Surendran was given a marching order by Pandikar Amin for challenging his decision to reject an emergency motion he proposed over the alleged demolition of the extension to Sri Maneswarar Kaliyaman Temple extension in Jalan P. Ramlee, Kuala Lumpur.

The dissatisfied Surendran told a press conference outside the chamber that Pandikar Amin was bias and likened the Dewan Rakyat to the Zimbabwean Parliament.

They deserve no honour

I have no intention of honouring the bravado of these people, be they on the government or opposition bench.These people are not fit to be elected “wakil rakyat”. Sadly, over the years, we see more and more of these characters being elected to the august house.

I miss the gentler and more decorous days of the Parliament when members were more civilised, tolerant and more gentlemanly in their verbal exchanges.

As one former members of Parliament noted, those were the “jahiliah” days when liquor was served in the Parliament and some members took time off to play a round of poker.

Has the current breed of politicians lost the ability to debate with civility, flair and candour using powerful yet inoffensive terms and expressions? Or does this mean that the standard of the Malay language and the intellect of today’s YBs are so inadequate that they have resort to uncouth language and vulgarities when making their points?

Somebody should broadcast parliamentary debate in totality for the entire period of sitting so that the rakyat can judge for themselves who are humans and who are apes among the YBs. Maybe live telecast will force them to be more civilized and thoughtful.

It is puzzling that a temple issue should lead to expulsion. I am not saying that it was not an important issue, but no less important were debates on top government leaders and important people spending RM182 million last year alone on private jet travels.

Or more shocking is the revelation by the Finance Ministry that the Federal government had spent RM7.2 billion since 2009 to hire private consultants for national projects.

dilbert-consultants

It is clear that Mohd Najib as PM and Finance Minister loves private consultants despite the government having a whopping 1.4 million staff. This is not counting his special envoys and special advisers with ministerial status.

In response to question by the DAP MP for Kelana Jaya, Wong Chen, the ministry revealed a gradual rise in the bills for private consultancy firms from RM1.3 billion in 2009 — the year Mohd Najib became PM — to RM1.63 billion in 2010, RM1.8 billion in 2011, RM1.82 billion in 2012 and RM722 million from January to October this year.

In a damning indictment of the civil servants, the Finance Ministry said: “The capabilities of government researchers are limited in terms of their competency and human resources.”

If they are not good, sack them or train them. What’s the point of having a million over civil servants and paying them better salaries if Mohd Najib has to rely on outsiders and foreigners? Actually we can get free consultancy from such multilateral organisation as the World Bank and the Asian Development Bank if we want to.

As a footnote, I congratulate a former BN MP, who now chairs a statutory body, for telling two Ministers –Mustapha Mohamed and Idris Jala – in a meeting with journalists a few days ago to stop hiring foreign consultants. I would not ask if he dares saying that if he was still an MP.– kadirjasin.blogspot.com, November 17, 2013/www.themalaysianinsider.com.

Two University of Chicago Professors share Nobel prize in economics


October 14, 2013

Two University of Chicago Professors share 2013 Nobel prize in economics

Two Professors from the University of Chicago and a third American scientist this morning won the 2013 economics Nobel prize for research that has improved the forecasting of asset prices in the long term and helped the emergence of index funds in stock markets, the award-giving body said.

“There is no way to predict the price of stocks and bonds over the next few days or weeks,” The Royal Swedish Academy of Sciences said in awarding the 8 million crown ($1.25 million) prize to Eugene Fama, Lars Peter Hansen and Robert Shiller.

“But it is quite possible to foresee the broad course of these prices over longer periods, such as the next three to five years. These findings … were made and analyzed by this year’s Laureates,” the academy said.

Fama is the Robert R. McCormick Distinguished Service Professor of Finance at University of Chicago, and Hansen is the David Rockefeller Distinguished Service Professor in Economics & Statistics at University of Chicago, a center of economics Nobel prize winners. Shiller is a professor at Yale University.

The behavior of asset prices are key to decisions such as savings, house buying and national economic policy, the academy said.

“Mispricing of assets may contribute to financial crises and, as the recent global recession illustrates, such crises can damage the overall economy,” it added.

The economics prize, officially called the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, was established in 1968. It was not part of the original group of awards set out in dynamite tycoon Nobel’s 1895 will.

The University of Chicago previously claimed 10 Nobel laureates in economics among current and former faculty members, from Milton Friedman in 1976 to Roger Myerson in 2007.

Hansen said in 1995 that he appreciated the culture at the University of Chicago.  Unlike most universities, economists at the U. of C. are generalists, not specialists, he said.

“We resist divisions and sub-areas. There’s more of a generalized atmosphere and an emphasis on how far you can push economic analysis.”

Hansen is best known as the developer of the econometric technique called the generalized method of moments, or GMM, which is used to analyze complex economic models in numerous fields. It has been widely adopted where fully specifying and solving a model of a complex economic environment makes maximum likelihood estimation unwieldy.

In 2006 Hansen won the Nemmers Prize for work that applied economic theory to the actual operations of the economy and markets and for research on how best to come up with policy in an uncertain environment. At the time, three of the six winners in economics had gone on to win the Nobel Prize.

Eugene Fama, has been called the father of modern finance. He is best-known for research with long-time partner Kenneth French, a Professor of Dartmouth College, which shows that certain groups of stocks tend to outperform over time.

Known as the Fama-French “Three-Factor Model,” company size, style and market risk are now considered essential to employ in a diversified portfolio.

Robert Shiller, perhaps best known as a namesake of the S&P/Case-Shiller housing price index, currently serves as the Arthur M. Okun Professor of Economics at Yale University and is a fellow at the Yale School of Management’s International Center for Finance.

His research relating to the dynamics of asset prices, risk sharing, financial market volatility and on bubbles and crises have received widespread attention among academics, practitioners, and policymakers.

“A lot of people had told me they hoped I would win it, but I am aware that there are so many other worthy people that I had discounted it, so I would say no, I did not expect it,” Schiller told a news conference.

Reuters contributed

Pluralism: Condition of Humility and Protection Against Excess


October 2, 2013

Pluralism: Condition of Humility and Protection Against Excess

by Prof. Tariq Ramadan

http://www.themalaysianinsider.com

Tariq RamadanPluralism is a condition of humility and a protection against potential excess and Islam confirms this transversal teaching by synthesising the two dimensions

When John Locke wrote his Letter on Tolerance in 1689, he argued for the necessity to accept religious plurality (apart from atheism seen as unacceptable and dangerous). He meant to distinguish the authority of the State and that of the Church: Temporal power, the State, drew up laws and managed the social contract and civil peace between citizens, who must be free to choose their religion and dogmas.

Locke addressed the two powers and developed arguments from the standpoint of powers: The State must manage the citizens’ diversity and protect their individual and civil freedom, and the Church must also ­ inside civil society ‘tolerate’ other religions and recognise their individual freedoms. Tolerance is thus seen as a means to distinguish and restrict powers, which are sometimes merged and exclusive, and prone to excess.

A century later, Voltaire was driven by the same intention: The Treaty on Tolerance also sets out to resist power abuses and appeal to men’s conscience. It addresses the State, the church and God, so that all those instances of power may promote accepting differences and tolerance as a principle of humanity.

Its reflections and arguments are based on a conception of man and of human relationships devised and defended on the basis of demanding rationality: Here again, power abuses must be resisted and authorities must be sent a strong, well-argued message, based on the power of reason and common sense, in order to refuse intolerance and the ensuing wars, deaths and injustices.

Autonomous critical reason speaks out against absolute authority, its imposed dogmas, its blind certainties and human claims to the absolute. It means to remind men who have the power to take themselves for God or to act in God’s name that they are but human beings and that claiming to hold the only truth leads to unacceptable horrors and miscarriages of justice contrary to the messages of goodness that they claim to defend. Like Locke, Voltaire (together with Enlightenment philosophers) assails the citadel of a political and religious authority that must — from where it decides and acts —­ make the choice of tolerance.

In the primary rational, social, religious and political sense, power must learn to tolerate the other’s existence, to literally ‘suffer his presence’, and to put up with plurality.

What used to be an act of resistance in the face of powers (who can also be represented by the majority, the elite, wealth, etc) and a brave, determined appeal calling them to tolerance, takes on a new meaning and substance when what is involved is equal relationships, free human beings, citizens in civil society or even relationships between different cultures and civilisations.

Calling powers to tolerance consisted in asking them to measure their strength and limit their capacity for harm: This implied accepting a power play, a potential authority relationship such as could exist between the state and individuals, the police and citizens, the colonisers and the colonised. Deviances, misbehaviours and a few differences can be ‘tolerated’ — they are ‘suffered’.

But when the issue is no longer resistance and limiting powers, the positive dimension of tolerance is inverted: It becomes gratuitous generosity from those who dominate and hold political, religious and/or symbolic authority, the authority of number and/or of money. Tolerance is the intellectual charity of the powerful. On an equal footing, one does not expect to be accepted or tolerated: That others should ‘suffer’ one’s presence is insufficient for oneself, and unsound for them.

In relationships between free and equal human beings, between autonomous, independent nations or between civilizations, religions and cultures, one can no longer call for tolerance of others. On equal terms, what matters is no longer to concede tolerance, but to raise and educate oneself to respect.

Then, the disposition of the heart and mind is quite different. This begins with recognising the fact and necessity of the other’s presence in my own conception of the world. The earliest African and Asian traditions as well as Hinduism, Buddhism then monotheisms, explicitly or implicitly recognise the necessity of other ways: Either because they state that there are several ways of leading to the truth or because that presence influences and shapes my own way of conceiving my own relationship to my truth.

Pluralism is here a condition of humility and a protection against potential excess. Islam confirms this transversal teaching by synthesising the two dimensions. The verse Had God so willed, He would have made you a single community is echoed by others which reveal the essence and finality of this diversity: ‘Had not God checked some groups of people [nations, societies, religions] by means of others, the earth would have been corrupted and monasteries would have been pulled down as well as synagogues, churches and mosques.’

Diversity, balance of powers, indeed involve a risk of conflicts and strife. Yet, it is for all men a condition of survival and an education to measure and humility. Thus looking out to consider the world and societies as they are brings the conscience back into itself and compels it to reassess its own tendency to believe that its own truth alone is true: We are forever lured by the sirens of the dogmatic mind, with its haughty complacency, which determines that one’s relationship to others is only meaningful when one tries to convince them of one’s single truth. Holding a dialogue then consists in speaking, never listening: The other is the privileged scope of my proselytism. My truth has thus become a blind, blinding passion: It imprisons me; it was supposed to liberate me; an alienation.

An act of reason is therefore necessary, first of all, to teach us how to become reasonable. Recognising the diversity of paths and the equality of all human beings are the first two conditions of respect (through which the power play involved in the relationship of tolerance can be overcome). To this factual, objective recognition, one should also add a disposition of the mind: If I can tolerate and suffer the presence of what I do not know, I cannot respect others without trying to know them.

Respect, therefore, calls for an attitude that is not passive but active, and proactive, towards others: Being curious of their presence and their being and attempting to know them after recognising them. Recognition, active curiosity and knowledge bring our intelligence and our hearts into the universe of the other’s complexity: We can thus gain access to his principles, his hopes, his tensions, his contradictions, as well as the diversity of trends which run through his universe of reference. Tolerance can reduce the other to the simplicity of his presence; respect opens us up to the complexity of his being. As in a mirror, it means recognising the other to be as complex as oneself: He is the equal, the mirror, the question; the other in me and myself in him.

Yet, nothing is ever fully achieved. Rejection, intolerance, xenophobia, individual and institutionalized racism, missionary proselytism, colonising temptations, imposed truths and collective, passionate, if not hysterical and deaf complacencies will never stop threatening men, rich or poor, and societies, industrialised or not. Human beings will never be totally safe from that dark side of their humanity.

Spiritualities, philosophies and religions run through History to remind us of those fragilities, those vulnerabilities, those risks, they are so many reminders along the road, as their own excesses must also be. One should observe the world, and observe oneself, with the humility of those who feel and know, deep within themselves, how important it is to engage in a continuous, perpetually renewed education to humanity; ­to learn to listen and listen to oneself, everyday, always. This is a truth: Nothing is ever fully achieved, neither respect, nor love. – tariqramadan.com, October 2, 2013.

* Tariq Ramadan is Professor of Contemporary Islamic Studies at the Oxford University (Oriental Institute, St Antony’s College) and also teaches at the Oxford Faculty of Theology. He is Visiting Professor at the Faculty of Islamic Studies, (Qatar) and theUniversity of Malaysia Perlis; Senior Research Fellow at Doshisha University (Kyoto, Japan) and Director of the Research Centre of Islamic Legislation and Ethics (CILE) (Doha, Qatar).

McKinsey looks set to stay top of the heap in management consulting


September 26, 2013

Schumpeter

The future of the Firm

McKinsey looks set to stay top of the heap in management consulting

Let’s Sober Up, Malaysia (Important Posting)


September 16, 2013

malaysiaday13

Let’s Sober Up, Malaysia (Important Posting)(September 13, 2013)

http://malaysiafinance.blogspot.sg/

Finally, someone who can provide clarity to the foreign funds moving in and out Asia. It does not mean we should not be wary but need to put things in its proper perspective. I have added my take on the market capitalisation growth of the world’s top ten markets as another viewpoint that should further lend credence to the long term trend. Need to distinguish short term noise from long term concerto.

  Economics – Markets – Strategy” for Asia and the G3.    
Three steps forward…

Capital flows have always been a two-way affair.  When sentiment is strong, inflows push you up the mountain.  When it’s weak, they drag you out to sea. The fact that Western central banks put interest rates on the floor five years ago and kept them there has only amplified the action – first inward, as Asia’s V-shaped recovery took off in 2009 and 2010 and then outward, as the EU debt crisis erupted in 2011 and, more recently, as fears over Fed tapering have grown.  

We estimate that in the two quarters ending June, some US$138bn flowed out of the Asia-8.  Is that a lot?  Surprisingly, no.  Two years ago, $152bn flowed out when the European debt crisis erupted.  When Lehman collapsed five years ago, $350bn left the region, 2.5x more than the current ‘exodus’.  QE and its tapering make a sexy story but the fact is today’s outflows rank only third in the standings, and that’s just in the past five years.  

If all of this money is flowing out of the region, when does Asia run dry?  It doesn’t.  Today’s outflows underscore the fact that there have always been two types of inflow: short-run ‘hot’ money flows arbitraging differential rates and returns, and longer-term inflows seeking to profit from Asia’s strong growth.  The hot money is now going home – or at least this week it is.  The long-term money is staying put.  And the long-term money is the bigger force.  

Since the dotcom / hi-tech downturn ended in 2001, some $2.4 trillion of capital has flowed into the Asia-10.  About $500bn flowed out temporarily in 2008/09 and another $300bn has flowed out since September 2011.  Net, net, that’s $1.6trn of long-term capital that has stayed in Asia, riding out the various global crises of the past 12 years.  Three steps forward, one step back – for every dollar that comes in, 66 cents stay for the long haul.  As capital flows go, that’s a pretty good signal-to-noise ratio.  

Why is so much money coming to Asia?  That’s easy.  Asia is where the world’s growth is being generated.  And businesses want to be where the growth is. Think about it: Asia and the US are now about the same size – GDP in both regions is roughly $16 trn.  If the US grows at a 2.5% rate, it generates $400bn of new demand each year.  But Asia grows at a 6.25% pace, maybe a bit faster.  It generates $1000bn of new demand every year.  If you’re a businessman, do you want to invest where demand is growing by 4 cents per year or where it’s growing by 10 cents per year?  

Extend the thought to Europe.  Many are encouraged by the fact that Germany returned to positive growth in the second quarter.  That’s good news and a good reason to invest there.  But put it in perspective.  If Germany grew at a 1.5% rate for the next 47 years – a feat few think it will accomplish – it would double in size.  It would ‘add’ a new Germany to Europe’s economic map by 2060.  Asia, by contrast, ‘adds’ a new Germany every 4 years, right here in Asia.  Five years hence, it will take only 3.5 years for Asia to add a Germany.  By 2060, Asia will have put about 25 Germanys on the economic map.  Pretty staggering.

This is why long-term capital will continue to flow to Asia.  Businesses and investors want to be where the growth is.  Inflows will continue to flip-flop in the short-run and yes, Asia will make plenty of mistakes – the West has no monopoly on that.  But the shift in economic gravity is the biggest structural change underway in the global economy today.  Structural inflows will remain, and grow, long after today’s hot and sexy but ultimately short-term outflows have become a footnote to the bigger picture.  

David Carbon, for
DBS Group Research
September 12, 2013


10 biggest stock markets in the World by domestic market capitalization in 2005(USD bn)

1NYSE Group 13,632.3
2Tokyo Stock Exchange 4,572.9
3Nasdaq Stock Market 3,604
4London Stock Exchange 3,058.2
5Euronext 2,706.8
6Canadian TSX Group 1,482.2
7Deutsche Börse 1,221.1
8Hong Kong Exchanges 1,055
9BME Spanish Exchanges 959.9
10SWX Swiss Exchange 935.4

As of June 2013

1.  NYSE – Remember that it merged with American Stock Exchange and more critically Euronext after 2005. Hence their 2005 base should be 13,632.3 + 2,706.8 =  16,339.1. As of June 2013, its 14,000 which is 85.6%, a loss of 14.4%, largely due to European stocks devastating performance in recent years. (-14.4%)

2.  Nasdaq – June 2013 figure was 4,500 compared to 2005 figure of 3,604 … more reflective of the resilience of the US markets despite the 2008 sub prime debacle. (+24.8%)

3.  Tokyo Stock Exchange – Current 3,300 compared to 2005 figure of 4,572.9. Despite the massive surge over the last 12 months, it is still not enough to wipe out the debilitating balance sheet recession from the excesses in the 80s and early 90s. Abe still has to be more aggressive to reverse the course for Japanese stocks. (-28%)

4. London Stock Exchange – Current 3,396 compared to 2005 figure of 3,058.2. Safe to say, Thatcher’s insistence not to join the Eurozone has helped in a large way to allow them to rebuild faster than their neighbours. The government over the last 10 years have done sufficiently enough to propel London as a major and viable exchange for the world’s biggest companies, thus drawing a large number of international companies to their shores, hence the real figure for UK may be inflated but still significant to compare. (+11%)

5. HK Stock Exchange – Current figure 2,831 compared to 2005 figure of 1,055. Naturally HKSE also continued to benefit from continued listings of red chips from China, still a significant development and trend. (+168%)

6. Shanghai SE – It was not even in the top ten back in 2005 with just 295 bn. Now its at 2,547 bn. Seen in this light, it makes the HKSE figure even more credible. (+763%)

7. Toronto SE – Again, another that was nowhere back in 2005 with 1,144. Its current figure is just over 2,058 bn. Largely they have stayed strong thanks to almost none of their banks participating in the subprime mess. (+80%)

8. Deutsche Bourse – 2005 figure 1,221 and the current figure is 1,486 bn. Germany is already the most resilient among the EU countries so you can imagine how bad it was for the rest. More significantly, even Toronto has overtaken the German bourse in market cap. (+21.7%)

9. Australia SE – Current figure 1,386 bn while the 2005 was around 720. Benefited from huge China investments in commodities and mines, and they were shielded from the subprime mess. (+92%)

10. Bombay SE – 2005 figure was 380 bn and the current is 1,263 bn. Despite the massive correction for India over the last 6 months, it is still in pretty good shape overall. (+232%)

Now the REALLY INTERESTING PART, we should compare apples to apples …. since 2005 how has Bursa Malaysia fared compared to our neighbours, bring out the tissues.

2005 Market Cap                        2013 June Market Cap

Malaysia  184 bn       490 bn  (+166%)
Singapore  227 bn                  752 bn  (+231%)
Indonesia 77.6 bn     477 bn  (+514%)
Taiwan  433 bn                      754 bn  (+74%)
Shenzhen  125bn                    1,190 bn  (+852%)
Philippines  32.4bn    230 bn  (+609%)
Korea  459 bn                       3,051  (+564%)
Thailand  122 bn       408 bn  (+234%)

The way its going … the 3 highlighted countries lagged Bursa substantially in 2005. Indonesia looks likely to surge past Malaysia by end 2014 despite the recent massive correction there. Thailand has come up by leaps and bounds despite numerous vicious street protests, disquiet down south of Thailand and changes in government. Thailand looks set to over take Malaysia by sometime end 2015. Now the Philippines … soon Malaysia will be sending maids to the Philippines … fcukers!!! Maybe not now but look at the trend, I predict by 2018 the Philippines will bypass Malaysia if nothing changes.

Indonesia has really surged, you cannot just argue that it was from a low base because we are not really using figures from 20 years back. its only 8 years back. We have to look at why we lagged behind, has our growth stunted, have we maxed out? I mean, not just Indonesia, look at Thailand beating us by a comfortable 68%. Singapore is Singapore, fair enough. But just watch the Philippines.

We also cannot use the argument that we are maxed out, or that the best days are behind us, look at fucking Korea, they continued to post enormous productivity gains. I mean just Samsung stock alone, its market cap is 190 bn or 38% of Bursa Malaysia all stocks.

Something went very wrong over the last 10 years. We had no sub-prime crisis to speak of, and now we are talking of maybe even being part of the emerging markets sell down? We OBVIOUSLY did not invest well, we OBVIOUSLY had too much leakages.

You can either pooh-pooh these statistics as another angry commentator going ballistic or take the reality and DO SOMETHING CONCRETE about it because if we stay roughly the same, we will have the same end result over the next 8 years. Fuck the sloganeering … the problems are so much more deep seated.

p/s  some of our problems:

Malaysia's Debt to GDP Ratio


Ratio of public servants to total country’s population

Country
(%)
Malaysia
4.68
Hong Kong
2.3
Taiwan
2.3
Thailand
2.06
Korea
1.86
Phillipines
1.81
Indonesia
1.79
Singapore
1.5
Laos
1.24
Cambodia
1.18

What Is Economics Good For?


August 27, 2013

What Is Economics Good For?

Recent debates over who is most qualified to serve as the next chairman of the Federal Reserve have focused on more than just the candidates’ theory-driven economic expertise. They have touched on matters of personality and character as well. This is as it should be. Given the nature of economies, and our ability to understand them, the task of the Fed’s next leader will be more a matter of craft and wisdom than of science.

When we put a satellite in orbit around Mars, we have the scientific knowledge that guarantees accuracy and precision in the prediction of its orbit. Achieving a comparable level of certainty about the outcomes of an economy is far dicier.

The fact that the discipline of economics hasn’t helped us improve our predictive abilities suggests it is still far from being a science, and may never be. Still, the misperceptions persist. A student who graduates with a degree in economics leaves college with a bachelor of science, but possesses nothing so firm as the student of the real world processes of chemistry or even agriculture.

Before the 1970s, the discussion of how to make economics a science was left mostly to economists. But like war, which is too important to be left to the generals, economics was too important to be left to the Nobel-winning members of the University of Chicago faculty. Over time, the question of why economics has not (yet) qualified as a science has become an obsession among theorists, including philosophers of science like us.

It’s easy to understand why economics might be mistaken for science. It uses quantitative expression in mathematics and the succinct statement of its theories in axioms and derived “theorems,” so economics looks a lot like the models of science we are familiar with from physics. Its approach to economic outcomes — determined from the choices of a large number of “atomic” individuals — recalls the way atomic theory explains chemical reactions. Economics employs partial differential equations like those in a Black-Scholes account of derivatives markets, equations that look remarkably like ones familiar from physics. The trouble with economics is that it lacks the most important of science’s characteristics — a record of improvement in predictive range and accuracy.

Tucker Nichols

This is what makes economics a subject of special interest among philosophers of science. None of our models of science really fit economics at all.

The irony is that for a long time economists announced a semiofficial allegiance to Karl Popper’s demand for falsifiability as the litmus test for science, and adopted Milton Friedman’s thesis that the only thing that mattered in science was predictive power. Mr. Friedman was reacting to a criticism made by Marxist economists and historical economists that mathematical economics was useless because it made so many idealized assumptions about economic processes: perfect rationality, infinite divisibility of commodities, constant returns to scale, complete information, no price setting.

Mr. Friedman argued that false assumptions didn’t matter any more in economics than they did in physics. Like the “ideal gas,” “frictionless plane” and “center of gravity” in physics, idealizations in economics are both harmless and necessary. They are indispensable calculating devices and approximations that enable the economist to make predictions about markets, industries and economies the way they enable physicists to predict eclipses and tides, or prevent bridge collapses and power failures.

But economics has never been able to show the record of improvement in predictive successes that physical science has shown through its use of harmless idealizations. In fact, when it comes to economic theory’s track record, there isn’t much predictive success to speak of at all.

Moreover, many economists don’t seem troubled when they make predictions that go wrong. Readers of Paul Krugman and other like-minded commentators are familiar with their repeated complaints about the refusal of economists to revise their theories in the face of recalcitrant facts. Philosophers of science are puzzled by the same question. What is economics up to if it isn’t interested enough in predictive success to adjust its theories the way a science does when its predictions go wrong?

Unlike the physical world, the domain of economics includes a wide range of social “constructions” — institutions like markets and objects like currency and stock shares — that even when idealized don’t behave uniformly. They are made up of unrecognized but artificial conventions that people persistently change and even destroy in ways that no social scientist can really anticipate. We can exploit gravity, but we can’t change it or destroy it. No one can say the same for the socially constructed causes and effects of our choices that economics deals with.

Another factor economics has never been able to tame is science itself. These are the drivers of economic growth, the “creative destruction” of capitalism. But no one can predict the direction of scientific discovery and its technological application. That was Popper’s key insight. Philosophers and historians of science like Thomas S. Kuhn have helped us see why scientific paradigm shifts seem to come almost out of nowhere. As the rate of acceleration of innovation increases, the prospects of an economic theory that tames the economy’s most powerful forces must diminish — and with it, any hope of improvements in prediction declines as well.

SO if predictive power is not in the cards for economics, what is it good for?Social and political philosophers have helped us answer this question, and so understand what economics is really all about. Since Hobbes, philosophers have been concerned about the design and management of institutions that will protect us from “the knave” within us all, those parts of our selves tempted to opportunism, free riding and generally avoiding the costs of civil life while securing its benefits. Hobbes and, later, Hume — along with modern philosophers like John Rawls and Robert Nozick — recognized that an economic approach had much to contribute to the design and creative management of such institutions. Fixing bad economic and political institutions (concentrations of power, collusions and monopolies), improving good ones (like the Fed’s open-market operations), designing new ones (like electromagnetic bandwidth auctions), in the private and public sectors, are all attainable tasks of economic theory.

Which brings us back to the Fed. An effective chair of the central bank will be one who understands that economics is not yet a science and may never be. At this point it is a craft, to be executed with wisdom, not algorithms, in the design and management of institutions. What made Ben S. Bernanke, the current chairman, successful was his willingness to use methods — like “quantitative easing,” buying bonds to lower long-term interest rates — that demanded a feeling for the economy, one that mere rational-expectations macroeconomics would have denied him.

For the foreseeable future economic theory should be understood more on the model of music theory than Newtonian theory. The Fed chairman must, like a first violinist tuning the orchestra, have the rare ear to fine-tune complexity (probably a Keynesian ability to fine-tune at that). Like musicians’, economists’ expertise is still a matter of craft. They must avoid the hubris of thinking their theory is perfectly suited to the task, while employing it wisely enough to produce some harmony amid the cacophony.


Alex Rosenberg is the R. Taylor Cole Professor of Philosophy and chair of the philosophy department at Duke University. He is the author of “Economics — Mathematical Politics or Science of Diminishing Returns,” most recently, “The Atheist’s Guide to Reality.”

Tyler Curtain is a philosopher of science and an associate professor of English and comparative literature the University of North Carolina at Chapel Hill. He was recently named the 2013 recipient of the Robert Frost Distinguished Chair of Literature at the Bread Loaf School of English, Middlebury College, Vt.

A version of this article appears in print on 08/25/2013, on page SR9 of the NewYork edition with the headline: What Is Economics Good For?.

http://opinionator.blogs.nytimes.com/2013/08/24/what-is-economics-good-for/?_r=0