Trust, Sharing Economy and Behavioral Economics


August 22, 2016

Trust, the Sharing Economy and Behavioral Economics

By D’Arcy Coolican & Lucas Coffman

Trust. It’s a complex, tricky, hard to explain, harder to define concept, but it’s crucial for so many things.

As Adam Smith pointed out, a base level of trust in society is necessary for specialization and the economic growth that accompanies it. If we didn’t trust the butcher to give us quality meat without having to inspect the cow every time — or worse yet, if we needed to litigate after every grocery run — the whole system would come to a screeching halt.

This concept is even more critical in the sharing economy — which is often, quite appropriately, referred to as the trust economy.

The sharing economy requires an incredibly high degree of trust, often based off little more than a profile picture and rudimentary reputation system. One needs only a few examples to realize how much trust is actually involved.

  •  Think about the faith required to get into the backseat of a random person’s car late at night? Seemed like a leap, until Uber made it ubiquitous.
  • Or consider letting a complete stranger staying your guest bedroom? Even visionary investors thought it was a dangerous idea … until AirBnB proved that it wasn’t.

Maybe it’s a trust in the platform (i.e., I trust Uber to screen and monitor drivers) or just trust in people (i.e., that AirBnB host looks legit), but either way it requires a tremendous amount of trust.

These successes in the sharing economy startled more than a few cynics who assumed that this reliance on trust, reputation and goodwill would quickly become a giant scam or worse.

The Subsequent Fall of the Sharing Economy

But a concept that began with such promise is already going through some tough growing pains.In many ways, the sharing economy seems to be coming apart at the seams. Whether it’s Uber drivers attacking their passengers, or Lending Club defrauding users, these recent problems — and big problems they are — have re-emboldened the original pessimists who doubted the idea of a trust economy in the first place.

Given that trust that is so crucial to the sharing economy — and that many Silicon Valley darlings seem to be getting it wrong — we thought it was time to go through the important lessons from behavioral economics on how trust (and trustworthiness) actually works, and the important consequences for the sharing economy companies.

Lessons from Behavioral Economics for the Sharing Economy

Lesson 1: Trust begets trustworthiness

One of our favorite concepts in behavioral economics is the idea that signaling that you trust someone, is a strong way to get that person to act in a more trustworthy manner towards you.

Armin Falk and Michael Kosfeld provided the first evidence of this hypothesis in their seminal paper: “The Hidden Costs of Control”. We give details on the experiment here, but the takeaway was that when Person A chooses to control or limit Person B’s options, Person B acts in a less trustworthy way towards Person A.

Put another way: If you show you trust the person, they’ll act more trustworthy towards you. Trust is self-fulfilling.

In many ways this explanation can help us understand the initial success of the trust economy.

  • The stranger that is welcomed into someone’s AirBnB might be a little more conscientious of a guest knowing that the owner has trusted them to act appropriately. After all, trust does beget trustworthiness.

This positive — and counter-intuitive — outcome helps show that people are more trusting than skeptics usually assume, especially when someone else goes out on that limb first.

This idea — and the resulting spike in trust-based activity — helped fuel much of the early optimism of a utopian trust economy where we could all operate on a system of goodwill toward mankind.

Lesson 2: Trust and reciprocity are limited in time

The TED talk types are often inclined to focus on these surprisingly positive elements of trust, but they often ignore the limitations that are just as important. While trust and reciprocity are very real phenomena, they also have very real limitations.

Most importantly, trust and reciprocity decline quickly with the passage of time.

As Uri Gneezy and John List show in their wonderful paper on gift exchange, the warm glow and good feeling of a generous and trustworthy act begins to disappear very quickly and after a few hours there is no difference in outcomes.

As one gets farther from the moment when trust was shown, the less likely one is to act in a trustworthy way.

How does this concept affect the sharing economy?

  • Maybe that AirBnB guest will be conscientious on the first night, but after 10 days in your apartment, they might spilling things on the couch and leaving a mess in the bathroom.
  • Or that 36 month loan on Lending Club or Vouch will look very different in month 32 than it does in month 2.

Many of the challenges the sharing economy has seen recently can be traced back to the evidence documenting this very real limitation on trust and collaboration: timing matters.

Lesson 3: Trust and reciprocity are limited in scope

Just as time can work to diminish trust and goodwill, so too can it diminish with decreased social proximity.

As Arun Chandrasekar from Stanford, Cynthia Kinnan from Northwestern, and Horacio Larreguy from Harvard show in their paper on Social Networks as Contract Enforcement, people are much more likely to act appropriately (even without a contract) when they share many close social connections with the person on the other side of the table. As these common social ties decrease, the degree of cooperation declines significantly.

So what does this mean for the sharing economy?

  • One might be more conscientious of refilling the gas for the car sharing service they use by their apartment that they know their friends also use, but maybe not the car they use when they’re visiting a different city.
  • Or (more controversially) an AirBnB user might be more likely to rent a room to someone that looks and sounds like they do.

Again, this evidence doesn’t mean the sharing economy doesn’t work, but we need to be aware of what the behavioral evidence says we should expect to ensure the systems that are built are fair and durable.

Lesson 4: Don’t lose trust, because it’s really hard to get back

One of the most under-appreciated concepts in the world of sharing economy start-ups is the idea that once trust is lost, it can be extremely hard to get back. “Move fast and break things” might work for a social media company like Facebook, but it can destroy an industry that relies on sharing, trust and cooperation.

For an example of this we need to look no farther than the heartbreaking history of the Tuskegee Study.

The Tuskegee Study was an experiment that started in the 1930’s that aimed to study certain diseases in poor black sharecroppers. The horrifying part was that after a cure for the disease was discovered, doctors withheld treatment in order to continue studying the effects on their patients. Revealed to the public in 1972, it goes down as one of the darkest moments in US history.

In a new paper, Marcela Alsan from Stanford and Marianne Wanamaker from the University of Tennessee, showed that this helped create a post-1972 distrust between black males and the medical community that has persisted. Over the last 50 years this distrust has led to black males underutilizing doctors and dying almost 1.4 years younger.

As the post-2009 finance community can attest, re-gaining the public’s trust after it has been lost can be an extraordinarily difficult task.

So for every sharing economy start-up that fails to foster or reward the trust of their users, the entire industry suffers. One does wonder how the sharing economy as a whole suffers for every one of these Uber driver issues or bad Lending Club loans.

The behavioral research would suggest that the price will be high.

What does it all mean?

The sharing economy was born with an incredible amount of promise. It was going to leverage trust to help create a more cooperative and efficient world. But if it’s going to actually fulfill this promise, its leaders need to begin to acknowledge and design around the limits on trust and cooperation that behavioral economists have already been helping us understand.

It doesn’t mean we should declare the entire industry dead and move on to the “next big thing”. It just means we need to be more thoughtful about where it will work and what design mechanisms can give it the best chance for success.

  • Not every exchange is ripe for the sharing economy. For example, a platform that relies on a reciprocal action years after the initial action might be too disconnected to actually work. This is probably just a no-go.
  • Some platforms might not be as big as Uber. For some, the limitation on scope means the actual circle of trust is necessarily small. I might be willing to lend my lawnmower to 100 people around me but my car to only 25 people around me. This might be smaller that venture capitalists ideally want, but at the end of the day I’m sure they’d prefer a platform that works to one that doesn’t.
  • Commitment mechanisms are critical where time is a factor. For example Frank is a P2P lending platform that allows people to borrow money from friends and family in a safe way. In Frank the reciprocal action usually happens months after the initial action, but because the platform asks borrowers to set up the repayment schedule immediately it captures that sense of trust and reciprocity at its peak. (Full disclosure: the authors of this article helped design and create Frank.)
  • Repetition is important where trust can dissipate. Every interaction can help build and re-enforce trust. Taking an Uber everyday can help me trust the system. Or getting an email from Frank with every successful payment can help restore the feeling of trust and reciprocity.
  • Technology can make the world feel smaller. Online communities — whether a Reddit board, an AirBnb reviewer, or a Facebook group — can make people who were previously distant feel “proximate” and increase that trust factor.
  • Start-up failure rates are unacceptable for the social economy. The majority of start-ups end up failing, it’s just how that system works. And it’s fine if the platforms fail, but for every user that feels a breakdown of trust, the rest of the industry suffers. Everyone needs to be cognizant of that.

I believe in the sharing economy. I believe it has the power to create economic opportunities for a part of country that is often left behind. I believe it can make the world more efficient and reduce the power of middle-men.

But until that industry begins to understand the well documented behavioral and psychology constraints of it, it will fail to meet the lofty expectations that it sparked.

 

 

ASEAN Community: Economic Integration and Development of SMEs


August 21, 2016

S. Rajaratnam School of International Studies

ASEAN Community: Economic Integration and Development of SMEs

By Ong Keng Yong and Phidel Marion G. Vineles

Synopsis

The ASEAN Community is in business notwithstanding various challenges. The huge potential of ASEAN Small and Medium Enterprises must be tapped to strengthen the backbone of the regional economy.

Commentary

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Ambassador and former ASEAN Secretary-General  Ong Keng Yong with friends from The University of Cambodia, Phnom Penh

AS ASEAN celebrated its 49th anniversary on 8 August 2016, regional public opinion is sceptical that the ASEAN Community exists. The fact is each ASEAN Member State does not count for much in the global economy even though Indonesia, as the biggest economy in Southeast Asia, is seen as quite significant with a GDP of nearly US$900 billion. But that is only the size of the economy of Tokyo, the capital area of Japan. The combined GDP of ASEAN Member States is about US$2.6 trillion. This makes ASEAN the seventh largest economy in the world. In ten years’ time, ASEAN can overtake the United Kingdom and France to be No.5 – after the US, China, Japan and Germany!

ASEAN Community: New Operating Environment

ASEAN is very diverse – 10 different cultures, economic systems, history and political order. The ego of each nation in the grouping is typically self-centred. That creates troubles for the organisation from time to time. Yet, looking at the global picture, forming the ASEAN Community is a strategic imperative and economic necessity.

Collectively, the Southeast Asian countries as ASEAN will be competitive vis-a-vis other regions of the world and an attractive destination for investors. ASEAN needs foreign direct investment and jobs for its peoples. ASEAN will do well if the member states work together and navigate through the interests of powerful neighbours and the bewildering technological developments affecting the marketplace and society.

The ASEAN Community is now the operating environment for all of us. The ASEAN Community has three pillars – political/security, economic and socio-cultural. The ASEAN Economic Community or the AEC has achieved positive results even though there are persistent complaints that ASEAN businesses are still not fully aware of the benefits accruing from the AEC. Tariff reduction and removal of obstacles to facilitate trade and open markets are ongoing. ASEAN is amalgamating its five Free Trade Agreements (FTAs) with China, Korea, Japan, Australia/New Zealand and India into the Regional Comprehensive Economic Partnership (RCEP). Infrastructural development and connectivity are being improved. Overall, growth prospects for the AEC are good: more than 5% annually for the next five years.

ASEAN SMEs: Significant Growth Engine

To be sure, ASEAN could do better and it has prioritised the development of small and medium enterprises (SMEs) to achieve equitable, inclusive and sustainable growth, as they represent more than 95% of all enterprises in the region. This could also contribute to poverty reduction as well as improve the status of women in the region as almost half of the enterprises are women-owned.

ASEAN SMEs are the backbone of the ASEAN economies. According to the ASEAN Secretariat, they employ between 52% and 97% of all workers. In addition, their contribution to each ASEAN Member State’s GDP varies between 30% and 53%. However, their share of total exports remains small, between 10% and 30%. This means much remain to be done to strengthen the role of SMEs to help ASEAN economic integration.

The ASEAN Strategic Action Plan for SME Development laid out five key strategies: (1) promote productivity, technology and innovation; (2) increase access to finance; (3) enhance market access and “internationalisation”; (4) enhance policy and regulatory environment; and (5) promote entrepreneurship and human capital development.

SMEs Not Equipped for AEC and RCEP?

Several analysts claimed that most SMEs in the region are not fully equipped to deal with new business realities of the AEC and the RCEP. The AEC is an integrated market and production base of over 620 million people, which could expand to more than three billion through the RCEP. Both the AEC and the RCEP could bring many opportunities for the SMEs, realise economies of scale for them and increase their participation in the global value chains.

However, it is projected that SMEs will face intense competition from the entry of multinational corporations (MNCs) and cheap imports. Hence, ASEAN Member States should fine-tune their concrete action lines in relation to the specific needs and circumstances of their SMEs.

Productivity and technology improvements are key drivers of SMEs to integrate with the production networks of MNCs. These drivers could be further enhanced if SMEs are allied with other SMEs or with large enterprises. However, there are some challenges to boost productivity of ASEAN SMEs.

According to various studies, average labour productivity (GDP per person employed) in ASEAN was equivalent to only 31% of US labour productivity in 2015. There are notable variations on labour productivity among ASEAN Member States: Singapore’s average labour productivity equivalent to US’ labour productivity is 112%, Thailand (25%), Myanmar (8%), and Cambodia (5%).

There should be more training within ASEAN SMEs to help boost their labour productivity to levels needed to become qualified suppliers in global value chains. SMEs should also invest in specialised technical training for their workers.

Overcoming Impediments to SME Development

According to the Economic Research Institute for ASEAN and East Asia (ERIA), the lack of strategic approach to innovation policy for SMEs is one of the impediments of SME development in ASEAN. It is therefore necessary to find ways to promote technology and technology transfer for developing SMEs’ innovation capabilities. Protection and promotion of intellectual property rights, development of broadband infrastructure and industrial parks, and sufficient financial incentives in research and technology development are some policy measures which have to be instituted to boost the SMEs.

Access to finance is a key concern for ASEAN SMEs. According to ERIA, there is a big gap in the access to finance of the less developed ASEAN Member States when compared with Singapore, Malaysia, Thailand, Indonesia, and the Philippines. There are also cumbersome requirements. According to the World Bank, an average of 47 days is required for 13 procedures to start a business in Indonesia, while it requires 73 days for six procedures in Lao PDR. It would only take three days to complete three procedures in Singapore and online electronic applications are made to a single authority. The business registration process should be simplified.

Promoting human resource development and entrepreneurship is essential for SMEs to succeed. Entrepreneurship learning programmes help equip SMEs with improved management and business methods. Presently, the ASEAN Common Curriculum in Entrepreneurship, which is one of the initiatives of ASEAN Strategic Action Plan for SME Development, aims to establish a common curriculum for entrepreneurship in the region with the use of an entrepreneurship educational programme that is currently implemented in ASEAN universities.

In conclusion, it is essential to implement an effective SME development policy that will propel regional cooperation among ASEAN Member States. This will assist SMEs to expand internationally and integrate them into global supply chains.

About the Authors

Ambassador and Former ASEAN Secretary-General Ong Keng Yong is Executive Deputy Chairman of the S. Rajaratnam School of International Studies (RSIS) at NTU Singapore and former Secretary-General of ASEAN. Phidel Gonzales Vineles is a Senior Analyst at RSIS.

This Commentary is adapted from a speech on ASEAN SMEs delivered on 4 August 2016.

 

Malaysia’s Najib Razak demands Respect


August 4, 2016

Malaysia’s Najib Razak, Beset by Growing Scandal, Demands Respect

by Sara Schonhardt in Jakarta and  Yantoultra Ngui in Kuala Lumpur

http://www.wsj.com

The  Malaysian Prime Minister addresses World Islamic Economic Forum in Jakarta

JAKARTA, Indonesia—Malaysian Prime Minister Najib Razak, facing a loss of international standing as he wrestles with global investigations into alleged domestic corruption, on Tuesdayurged countries not to meddle in the affairs of his Southeast Asian nation.

“I have always been a proponent of openness to the world and collaboration, but we must insist on respect for our own sovereignty, our own laws, and our own democratically elected governments,” Mr. Najib said at the opening of a summit on Islamic finance held in neighboring Indonesia.

Mr. Najib has struggled for more than a year in a scandal centered on the state investment fund 1Malaysia Development Bhd. He used a keynote address to the World Islamic Economic Forum to restate his country’s importance in Asian trade and security arrangements and as a counterbalance to Islamic extremism.

The remarks amounted to a pointed statement of Malaysia’s traditional role as an investment-friendly, moderate Muslim mainstay. That role has been overshadowed in the past year by a steady stream of bad news around 1MDB, which Mr. Najib founded in 2009 to promote economic growth.

The three-day forum is the first big international event Mr. Najib has attended since the U.S. Justice Department filed a civil lawsuit July 20 seeking to seize assets that it said were bought with $3.5 billion misappropriated from 1MDB.

The lawsuit doesn’t name Mr. Najib, but there are 32 references to “Malaysian Official 1,” who allegedly received hundreds of millions of dollars in funds siphoned from 1MDB. People close to the investigation have said Malaysian official 1 is Mr. Najib.

“Without a doubt, the ongoing 1MDB investigation by half a dozen countries, including the U.S. and Singapore, is starting to take its toll on Najib’s credibility,” said Murray Hiebert, Deputy Director of the Southeast Asia program at the Center for Strategic and International Studies in Washington, D.C.

“But much of this toll is focused on Najib,” Mr. Hiebert said. “Malaysia itself is still largely viewed as one of the most economically successful Muslim majority countries.”

Mr. Hiebert was jailed briefly in the late 1990s for contempt of court after losing an appeal against a 1997 conviction for writing about a case brought by the wife of a court of appeal’s judge on behalf of her teenage son. Mr. Hiebert was working at the time as a journalist for the Far Eastern Economic Review, then owned by Dow Jones. Mr. Najib wasn’t the prime minister at the time.

On the international stage, Malaysia remains an important member of the 12-nation Trans-Pacific Partnership trade agreement the U.S. is pushing, and an increasingly important security partner for Washington amid tensions in the South China Sea, Mr. Hiebert said.

“Najib is still the Prime Minister and therefore he still must be given all the courtesies for a sitting head of government,’’ said Wan Saiful Wan Jan, Chief Executive of Kuala Lumpur-based think tank Institute for Democracy and Economic Affairs. “So in reality, it does not matter what people think. He is still in charge.”

Mr. Najib has been embroiled in scandal since The Wall Street Journal reported more than a year ago that hundreds of millions of dollars that originated with 1MDB flowed into his personal bank account. Several countries have since launched investigations.

Mr. Najib has said he did nothing wrong and is the target of political smears. The Malaysian Attorney-General has cleared him of wrongdoing, saying the funds that went into Mr. Najib’s account were a legal political donation from Saudi Arabia and that most of the money was returned. 1MDB has also denied wrongdoing.

Mr. Najib is still regarded as a moderate voice in the Muslim world and Malaysia sees itself as a model for developing countries, said Norshahril Saat, a fellow at the ISEAS Yusof Ishak Institute. His approach to terrorism has also earned him kudos among neighbors battling with Islamic extremism while earning rebuke from human-rights groups.

A special security law that took effect Monday widens Mr. Najib’s powers to fight Islamic terrorism but critics say it is broad and overly vague and could be used to silence critics. New York-based Human Rights Watch called for the law to be repealed.

Countries facing similar problems, including corruption, are less likely to pass judgment. But the allegations themselves continue to dog Mr. Najib and perceptions of Malaysia.

Political analyst Wan Saiful Wan Jan says the Sungai Besar and Kuala Kangsar by-elections will better show if Pakatan Harapan can unite as a viable pact or will continue to squabble over seat allocations. ― Picture by Yusof Mat Isa

“I think Malaysia is suffering in terms of international reputation,” said Wan Saiful Wan Jan (pic above). “Everywhere I go these days the question I have to answer is always about Najib and the allegations surrounding him. It is quite embarrassing and it is a distraction to the many good things we can talk about the country.”

The forum was founded in Malaysia in 2005, bringing together business leaders and government officials in the Islamic world to promote trade and investment opportunities. Malaysia is a global leader in the Islamic finance market and has more than tripled Islamic capital markets to $1.7 trillion over the past decade, Mr. Najib said.

An Islamic finance market is based on Islamic law. For instance, the system avoids investment in prohibited industries such as gambling and alcohol.

—Celine Fernandez contributed to this article.

Appoint brave men with entrepreneurial spirit as to captain our universities–Former UM VC Ghauth Jasmon


New York

June 21, 2016

COMMENT: When it comes to university administration, no one in Malaysia today is better qualified than Tan Sri Ghauth Jasmon, former Vice Chancellor of my alma mater, The University of Malaya (now Universiti Malaya). I welcome his appointment when it announced some years ago as great hope for the university, only to be disappointed that his insecure political masters decided to remove him.

Why? Tan Sri Jasmon had an independent and entrepreneurial streak and the guts to institute drastic changes in the way our oldest university would operate. He sought to improve academic standards, improve ranking of Universiti Malaya, and adopt a “publish or perish”culture among the academic staff. He also changed the business culture of the university Universiti Malaya to make less dependent on the government for funding. These objectives are noble ones but threatening to vested interests with a different agenda.

Bringing about change is a risky business. You need guts and vision with a strong heart. Italian  Niccolo Machiavelli was among the first political philosophers to have made this observation. In our country, men like Tan Sri Jasmon are not welcome because they upset the status quo. “Business as usual is good for those seek  to benefit, usually of personal nature, from it.

Yes, we need strong and committed  individuals, men (and women) who pursue excellence by example, to lead our universities if we are to change the standard of our institutions  of higher education. I wonder who will heed his call for moral courage, and entrepreneurship.–Din Merican

Appoint brave men with entrepreneurial spirit as to captain our universities–Former UM VC Ghauth Jasmon

by Minderjeet Kaur

This, says former Universiti Malaya Vice-Chancellor Ghauth Jasmon, is the formula to improve education standards in public universities.

Tan Sri Dr. Ghauth Jasmon, Vice-Chancellor of the University of Malaya was conferred the award of Honorary Degree of the Doctor of Science (DSc) by the University of Wales, Cardiff at a convocation ceremony at the Wales Millennium Centre, Cardiff on Friday, 4th May 2012. Tan Sri Jasmon is now Vice Chancellor, Sunway University

The way to improve standards at Malaysian universities is to employ vice-chancellors who are brave enough to make changes and think like entrepreneurs.

This is the view of former Universiti Malaya Vice-Chancellor Prof Ghauth Jasmon.

He said today that Malaysian public universities had failed to produce world class universities because they had become heavily reliant on the Government. This, he said, had made vice-chancellors complacent.

“In Malaysia, the Government gives students to varsities. Money is given. There are no challenges. The VC does not have any idea how to raise funds. They are too afraid to make any change because their neck is always on the chopping block from pressure groups and the Government,” he said.

He was speaking to about 100 people, mostly from the education sector, at a forum on expanding private higher education organised by the Jeffrey Cheah Institute on Southeast Asia.

Ghauth, who is well respected in education circles, said the Malaysian Government gave 80 per cent of the operating cost to each public university whereas the governments of Thailand and Indonesia only gave 20 per cent of the operating cost.

“The VCs in these two countries have no choice but to operate like private colleges. They offer courses relevant to the market needs. Their syllabuses are current, unlike ours. Some of our syllabuses have not changed for the past 20 years.”

He said the Thai and Indonesian university heads were entrepreneurs and go-getters. “Public universities in Thailand and Indonesia run their own businesses. Chulalongkorn University has 7 huge supermarkets, 1,400 commercial buildings. Indonesian public universities are successful too. Both countries started venturing out 30 years ago.”

The vice-chancellors in these two nations had to be on their toes to attract students without sacrificing the quality of education, as a drop in their standards or grades would not attract other students to register with them, said Ghauth.

In contrast, he said, most of the vice-chancellors in Malaysia were at a loss, especially since the Government announced budget cuts in operational costs for every public university.

The Government, in Budget 2016, had slashed university budgets by RM2.4 billion, from RM15.78 billion in 2015 to RM13.37 billion for the year 2016. Universiti Malaya had the most severe cut of 27.30 per cent, he said.

“The immediate reaction of public universities, especially the board members in UM, is to cut costs rather than expand business.”

Ghauth said some of the universities would, in such a situation, unsubscribe to online journals, charge for usage of sporting facilities and remind their staff to switch off lights, and repair leaking pipes.

Some administrators have suggested commercialising International Property rights and research papers.

“The truth is, there is not much money to be made from commercialising IP rights or selling research papers unless you are a Stanford or Harvard,” Ghauth said.

Saying the way to improve standards was to change the vice-chancellors, he pointed out that during interviews for the post of Vice-Chancellor, no one asked how the person would make money for the institution. “We need to change this,” he said.

During his time at UM, from 2008 to 2013, he had approached the University of Wales to have a joint venture with UM to open a private university – University of Malaya Wales. It started three years ago and operates out of UM. The money generated from the private university goes to UM.

“This is one way to be independent. The less we depend on money from the Government, the more UM can start standing on its feet. It can start making its own decisions to make UM world class.”

Ghauth said brave vice-chancellors were needed to make changes to Malaysian higher education. “Otherwise, it is just going to be worse from now on as the Government will continue to cut budgets due to the drop in oil prices.”

UM went up five spots to sit in 146th place in the Quacquarelli Symonds (QS) World University Rankings for 2015/ 2016. There are 20 over public universities in Malaysia.

Number of unemployed public university graduates to soar

 by Minderjeet Kuar

The number of unemployed people who graduate from local public universities is set to rise further, an academician warned today.

Not only would the unemployed figure from this group rise higher than the present 400,000, about 80 per cent of the jobless would be Bumiputera, according to Prof Ghauth Jasmon.

https://i1.wp.com/www.freemalaysiatoday.com/wp-content/uploads/2016/06/Ghauth-Jasmon_jobless_6001.jpg

He estimated the figure at 600,000 in the next few years, if nothing was done to improve university education.

The former Universiti Malaya vice-chancellor said the reality was that the private sector preferred hiring graduates from private universities and colleges.

“The private sector needs graduates who speak and write English. Many public university graduates are hired by the Government and join the civil service. But the Government cannot hire everyone,” he said.

Every year about 200,000 graduate from institutions of higher learning in the country.

He said despite the Government spending billions of ringgit on public universities, the demand for graduates from these universities remained low.

“It is a sad thing that this is happening. One way of overcoming the problem is for vice-chancellors to implement measures that will benefit the nation.Vice-chancellors need to be bold. They need to do what is good for the students and for the country so no funds are wasted.”

Ghauth, who was UM vice-chancellor from 2008 to 2013, said he had faced a lot of resistance from lecturers and students when he wanted to improve students’ soft skills, such as having extra English classes.

“The backlash to that was bad. There were demonstrations, encouraged by lecturers. They accused me of making Malay language as the second language. For the next one year, I had to continuously write to newspapers on the reasons for my move.”

Another move he made was to ask lecturers to submit their research and paperwork to International Scientific Indexing (ISI) journals. “The professors petitioned against me. They wanted to remove me. ISI journals have to be in English. They felt I was not in support of the Malay language.”

He then decided to reduce the salaries of UM professors studying PhD in Australia, United Kingdom and Canada who took three to four years longer than the deadline.

“I told them if you do not finish your courses by a certain time, the UM will cut your salary by RM200 to RM600 a month depending on the length of delay.”

Even though, there were objections, he said, the policy remained till today. He noted that almost 90 per cent of professors were now finishing their PhD on time.

He said vice-chancellors should not give in to pressure as they knew their measures were for the betterment of the country. It was not about being in the good books of everyone, he said.

Proton: An Expensive Mistake


June 9, 2016

Proton: An Expensive Mistake

by Koon Yew Yin

Malaysians deserve an explanation of why Proton, the brainchild of former Prime Minister Tun Dr. Mahathir Mohamad, remains in trouble, despite massive infusions of funds. The MITI Minister, Dato’Seri Mustapa Mohamed says that government cannot continue protecting and supporting Proton, and that the firm must learn to compete on its own after over three decades in existence. That is right. I, therefore, do not understand why the Malaysian Government must now subscribe to 1.25 billion RCCPS issued by Proton via GOVCO Holdings Bhd by way of a RM 1.25 cash payment. It is time to stop  using taxpayers’ money to underwrite a failed project.–Din Merican

All Malaysian taxpayers must have been shocked to read the article “Proton to raise capital” , car maker issuing Rm 1.25 billion convertible preference shares to Government, on page 3 of The Star on 7th June 2016.

Proton is a 100% unit of DRB-Hicom. When the redeemable convertible cumulative preference shares (RCCPS) is exercised into shares, the Government will end up with a 79% stake in Proton and DRB-Hicom’s shareholdings will be diluted from 100% to about 21%.

DRB-Hicom yesterday said the Government had agreed to subscribe to 1.25 billion RCCPS issued by Proton via GOVCO Holdings Bhd by way of a RM 1.25 cash payment.

Proton has been experiencing flagging vehicle sales in recent years and this has affected its cash flow position. Proton plays a crucial role in the national automobile industry where there are about 12,000 workers directly under it while about 50,000 are employed under various vendor companies.

The founding of Proton National Bhd. in 1983 was an expensive mistake to begin with. Billions of ringgit from taxpayers have been lost in the process. Moreover, to encourage people to buy Proton, the Government increased the import duty for other cars and car parts. As a result, consumers suffered. For over 30 years we have had to pay higher prices for all cars including Proton. Even this has not been sufficient to save Proton which has been sold five times already.

Now with the Government owning 79% of Proton, the hemorrhage will continue unless the Government, the controlling shareholder makes some drastic changes to the current system of producing cars.

  1. From the report, the Government representatives will come from the Ministries of Finance, Industry and Economic Planning Unit. I suggest some old Directors should be removed to be replaced by these Government representatives.
  2. It is also essential to remove a few of the top managers and replace them with new people with the necessary experience.
  3. The new management must see how to measure the efficiency of the 12,000 workers directly under the company. One way is to compare the labour cost of producing a similar car in Japan or compare it with Perodua which has been profitable since its inception in 1992.
  4. The new management must also see how the company buys parts from the vendors who are employing about 50,000 workers? Is the company obliged to buy parts from these vendors? Can the company call for quotations for the supply of parts from the open market?
  5. Proton should copy the way Perodua manufactures its cars. I understand that the Japanese have full management control of the car manufacturing process, although they are minority shareholders.

Malaysians are now wondering – will the burden on taxpayers and car owners be continued in other new ways?

One simplistic assumption which appears to have been made by Dr. Mahathir, the initiator of the national car project, is that an industry that is growing yearly should be profitable. It is not. In fact, industry data shows that the total profits of all the car companies over the last few decades amount to only a modest return, and that too only for the fittest in the industry. Even year on year increase in sales will not guarantee generating good returns to shareholders, even in a highly developed economy with a long tradition of successful car manufacturing such as Britain.

This is because one of the forces that limit profitability is the intensity of rivalry between car companies from around the world. This leads to oversupply and pressure on prices. This is exacerbated by a high degree of freedom for new competitors to enter the industry.

Consider the case of British Leyland, a vehicle-manufacturing company formed in the United Kingdom in 1968. It was partly nationalised in 1975 with the government creating a new holding company. The company incorporated much of the British owned motor vehicle industry, and held 40% of the UK car market.

Despite having profitable marques such as Jaguar, Rover and Land Rover, as well as the best-selling Mini, British Leyland had a troubled history. In 1986 it was renamed as the Rover Group, later to become MG Rover Group, which went into administration in 2005. This ended mass car production by British-owned manufacturers.

Today, many British car marques are now owned by foreign companies. For example MG and the Austin, Morris and Wolseley have all become part of China’s SAIC Motor Corporation Limited.

Another question to ask is why few car manufacturers, until recently, seem to go into bankruptcy? Then prices can rise relative to cost and shareholders can get a fair return.

There are two main reasons. In some countries there is always the perennial optimism of managers and shareholders. In Malaysia, the reason is different. Here, our Government has been changing rules and regulations to obstruct other cars from entering our market whilst providing special concessions including an ever ready supply of financial assistance to keep Proton afloat.

The end result is that some Malaysians have ended up with more expensive cars of other brands whilst most Malaysians have had little choice but to buy Proton – a poor substitute! This is the price we have to pay for brainless patriotism.

Koon Yew Yin is a retired chartered civil engineer and one of the founders of IJM Corporation Bhd and Gamuda Bhd.

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