Understanding the Productivity Puzzle


January 21, 2017

Understanding the Productivity Puzzle

by Howard Davies

https://www.project-syndicate.org/columnist/howard-davies

Howard Davies, the first chairman of the United Kingdom’s Financial Services Authority (1997-2003), is Chairman of the Royal Bank of Scotland. He was Director of the London School of Economics (2003-11) and served as Deputy Governor of the Bank of England and Director-General of the Confederation of British Industry.

 

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In all major economies, the so-called productivity puzzle continues to perplex economists and policymakers: output per hour is significantly lower than it would have been had the pre-2008 growth trend continued. The figures are stark, particularly so in the United Kingdom, but also across the OECD. And while it goes without saying that economists have many ingenious explanations to offer, none has yet proved persuasive enough to create a consensus.

According to the UK’s Office for National Statistics, output per hour in France was 14% lower in 2015 than it would have been had the previously normal trend growth rate been matched. Output was 9% lower in the United States and 8% lower in Germany, which has remained the top performer among developed economies, albeit only in relative terms. If this new, lower growth rate persists, by 2021 average incomes in the US will be 16% lower than they would have been had the US maintained the roughly 2% annual productivity gain experienced since 1945.

The UK exhibits a particularly chronic case of the syndrome. British productivity was 9% below the OECD average in 2007; by 2015, the gap had widened to 18%. Strikingly, UK productivity per hour is fully 35% below the German level, and 30% below that of the US. Even the French could produce the average British worker’s output in a week, and still take Friday off. It would seem that, in addition to the factors affecting all developed economies, the UK has particularly weak management.

Some contributing factors are generally acknowledged. During the crisis and its immediate aftermath, when banks’ efforts to rebuild capital constrained new lending, ultra-low interest rates kept some firms’ heads above water, and their managers retained employees, despite making a relatively low return.

On the other hand, new, more productive, and innovative firms found it hard to raise the capital they needed to grow, so they either did not expand, or did so by substituting labor for capital. In other words, low interest rates held productivity down by allowing heavily indebted zombie companies to survive for longer than they otherwise would have done.

The Bank of England has acknowledged that trade-off, estimating that productivity would have been 1-3% higher in the UK had it raised interest rates to pre-crisis levels in the recovery phase. But they believe the consequences – slower income growth and higher unemployment – would have been unacceptable.

This argument has now been extended beyond the banking system, to the capital markets themselves. Critics of central banks have claimed that a sustained policy of exceptionally low interest rates, reinforced by huge doses of quantitative easing, have caused asset prices to rise indiscriminately. That has not only had adverse consequences for the distribution of wealth; it has also muted the ability of capital markets to distinguish between productive, high-potential firms and others that deserve to fail. According to this view, a rising tide lifts even fundamentally unseaworthy boats.

This argument has some explanatory power, though it says little about the value added by highly paid asset managers and whether they really are prepared to put their money to work simply on the basis of a monetary-policy effect on relative prices, paying no attention to individual companies’ strategies and performance. But the key question the argument raises is what to do about it.

Would it really have been preferable to tighten policy far earlier, to kill off weaker companies in the interests of improving productivity? The BoE has given an explicit answer, and the other major central banks implicit answers, to that question. They do not think so.

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http://www.institutionalinvestor.com/Article/3315202/The-Great-Divide-over-Market-Efficiency.html#.WUpY4elRPIU

A preferable approach to resolving the problem might be more vigorous use of the tools available to market regulators. These authorities tend to focus more on investor protection than on the allocational efficiency of the markets they oversee. Investor protection is important, of course, but as the Nobel laureate Eugene Fama put it, “the primary role of the capital market is allocation of ownership of the economy’s capital stock.”

A regulator focused on that objective would be especially rigorous in overseeing the transparent disclosure of information, and would seek to promote vigorous competition among companies and also, crucially for this objective, among investors. It should not be acceptable for asset managers to earn extravagant returns for following a market benchmark.

There are, no doubt, other dimensions to the productivity puzzle. Maybe we are not measuring output well. As developed economies become more service-based, our measures of output become less objective. In many service industries, outputs are effectively measured by inputs. Maybe we are not measuring enhancements in quality, which may mean that output increases are understated. Maybe we have reached a point at which the productivity boost from Internet-based technology has been cashed, and we need another technological leap to move forward again.

But one key challenge for central banks, as we edge toward the normalization of interest rates, will be to develop a framework for thinking about the impact of monetary policy on the allocation of capital. The task is urgent, as the social and political implications of a prolonged period of no productivity or real wage growth may be very serious. Indeed, arguably they have been factors behind the political upheavals in the US and the UK already.

FGV Falls from Grace but Isa Samad Stays: Governance Malaysian Style


June 16, 2017

FGV Falls from Grace but Isa Samad Stays: Governance Malaysian Style

by P.Gunasegarm@www.malaysiakini.com

A QUESTION OF BUSINESS | The latest fallout at Federal Land Development Authority (Felda) controlled Felda Global Ventures Ventures Holdings Bhd (FGV), is just a continuation of the wrong and highly questionable actions of the company since listing in 2012.

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The solution is to simply go back to basics which means that FGV should stick to the business it knows well – oil palm plantations and related processing. It should pay fair prices for related acquisitions, not astronomical sums. And be run by competent professional managers who understand the business and are straight.

But too much damage has already been done by these actions and it will be some time before it recovers completely.

In the latest controversy, FGV board chairperson Isa Abdul Samad announced on June 6 that FGV CEO Zakaria Arshad was to take an immediate leave of absence. He added that it was a board decision.

Apart from Zakaria, FGV chief finance officer Ahmad Tifli Mohd Talha, FGV Trading chief executive officer Ahmad Salman Omar and Delima Oil Products Sdn Bhd senior general manager Kamarzaman Abd Karim were also suspended.

Zakaria hit back saying he had tried to stop hundreds of millions in investments by the company’s board which he described as “ridiculous”.

Amongst the investments, he said, were plans for a 100 million pound sterling (approximately RM551 million) expansion of Felda Cambridge Nanosystems Ltd, a nanocarbon company, which had already lost RM117 million in the last three to four years.

“Now they (the FGV board) want to expand, they need another 100 million pounds. To me this is ridiculous, we’re a plantation company,” he was quoted as saying by The Star.

To understand what is going on, it is necessary to go back into FGV’s short history. While it was listed in mid-2012 with high hopes that it will provide great returns for Felda settlers who hold a direct stake, Felda which holds about a 34% stake and various government institutions including the Employees Provident Fund (EPF), the share performance has been atrocious.

When it was first listed on June 28, 2012 confidence was so high that it opened higher than expected over its initial public offer (IPO) price of RM4.55. Reuters reported: “Malaysian palm oil firm Felda Global surged 20 percent in its trading debut on Thursday (June 28, 2012) as investors cheered on the world’s second largest IPO after Facebook’s botched float and the company pledged stronger profits in the coming months.

“The firm raised US$3.1 billion (about RM10 billion then) in Asia’s biggest initial public offering of this year, running against the global gloom in IPO markets and giving the government a political dividend ahead of what is likely to be a closely fought election (the 2013 general election).”

FGV closed that day at RM5.30, some 16% higher than its IPO price but it has been downhill all the way after that, reflecting poor results and an extreme lack of market confidence in the share following a string of poor purchases over the years, squandering some RM4.46 billion net that came directly to FGV from the issue of new shares from the IPO.

Between June 28, 2012 and its last trading day on Friday, FGV’s share price went from RM5.30 to RM1.66, wiping out nearly seven-tenths of its market value. Even comparing with the IPO price of RM4.55, the drop was over 63% – more than six-tenths of value was lost. The EPF itself lost RM203 million when it sold off some of its investments in FGV.

If one thought that this decline in value is because of a general decline in plantation stocks generally, they are wrong. Bursa Malaysia’s plantation index, which aggregates the performance of major plantation companies, declined just 6% over the same period, or about a twentieth of its value against FGV’s seven-tenths, a rate of decline which was 20 times higher.

Acquisition spree

FGV’s acquisition spree under previous CEO Mohd Emir Mavani Abdullah included the takeover of Pontian United Plantations Bhd for RM1.2 billion, Asia Plantation Ltd for RM628 million and RM2.2 billion for Felda Holdings Bhd, and 836 ha of oil palm land from Golden Land Bhd for RM655 million cash.

It culminated in a deal with the Rajawali Group announced in June 2015 for FGV to acquire a 37% stake in PT Eagle High Plantations (EHP) and 93% to 95% stakes in Rajawali Group’s sugar project, in all worth about US$680 million (about RM2.9 billion) in cash and FGV stock.

Emir was strangely involved in a corruption case earlier this month when an employee of The Star newspaper was charged in the Kuala Lumpur Sessions Court with receiving RM20,000 in bribes. M Youganesparan was accused of receiving the money from Emir at The Intermark Hotel, Jalan Tun Razak about 9.15pm on May 30 this year.

By the time the Eagle High acquisition was announced, FGV needed to borrow money to do the deal as it had exhausted the RM4.46 billion from IPO proceeds. The deal was heavily criticised as being way too expensive, even by the EPF, at an estimated 70% premium to market. Also Peter Sondakh, the founder and owner of the Rajawali group was said to be part of Prime Minister Najib Razak’s inner circle and served as his adviser on Indonesian affairs.

Fortunately CEO Zakaria Arshad, appointed on April 1, 2016 and the same one who is now on a leave of absence, nixed the deal, which was officially aborted in July 2016 after FGV started negotiations to restructure the deal in December 2015. Eventually in December 2016, the Eagle High deal was done with Felda which paid US$505 million (about RM2.2 billion) a quarter less, for the same deal.

Zakaria also cut other merger and acquisition deals saying that FGV should concentrate on the plantation business instead, in all saving FGV at least RM4 billion in spending.

Isa was chairman of both FGV and Felda at this time but was replaced as Felda chairman in January this year by another politician Shahrir Samad, although it was not clear why he was replaced. Isa, during Abdullah Ahmad Badawi’s time as Umno president, was found guilty of money politics in 2005 and suspended from the party for six years. He had to give up his post as UMNO Vice-President and Federal Territories Minister.

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Idris Jala–The Financial Whiz appointed to fix GFV

Now former cabinet minister Idris Jala is supposed to look into this whole mess and make his recommendations. But at the end of the day, the solution is very straight forward. First, appoint people with impeccable credentials to the board and ensure that there is board diversity, independence and honesty.

Don’t just cram them chock full with politicians, often of dubious quality even then, and civil servants who know little or nothing about the corporate world and how it operates. Directors collectively should have expertise which covers all aspects of running a business.

Then pick a CEO with proven credentials and give him a free hand to run the company within the broad guidelines and mandate set out by the shareholders and the board. Make him accountable for set targets.

The needless failure of FGV is that of basic corporate governance. At the heart of this is the hijacking of what could have been a good, solid plantation company by the politicians for their own purpose, in the process screwing Felda settlers, investors and other stakeholders.


P GUNASEGARAM says too much is discussed but too little is done about corporate governance in Malaysia, even for listed companies. What happens with unlisted government companies, he wonders. E-mail: t.p.guna@gmail.com.

 

Saving the Global Trading System


May 22, 2017

Saving the Global Trading System

By Editors,  Eastasiaforum.com

International trade and investment lift living standards. The evidence for this is irrefutable. And modern economic development is not possible without opening up to international markets, competition and capital.

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But the world is re-learning the hard way, through Brexit and the rise of Donald Trump, that institutions and policies that protect the immediate losers from trade are needed to realise and sustain the benefits of open markets. Having a healthy and a well-functioning macroeconomic environment — one that delivers what economists call full employment — and a flexible labour market are crucial. So is having an effective social protection system.

When economic growth slows it is harder for the winners from globalisation to compensate the losers. The United States’ slow recovery from the global financial crisis, which hit close to 10 years ago, has brought these underlying structural problems into sharp focus. The social safety net is in tatters with the healthcare system, education system and redistributive policies exacerbating inequality — inequality in both opportunity and outcome — and bringing into question the American dream.

Australia, Japan, and many other countries have been able to avoid the retreat from globalisation thanks to well-functioning social protection systems. There may have been an inclination in many countries to adopt US institutions since it is the richest, most advanced and powerful economy in the world, but the lesson from Trump’s rise is a clear warning that now is the time to double down on the social safety net when embracing free and open markets.

When times are tough in any country there is immense pressure to put up barriers to foreign competition as a way to protect domestic producers. Protection may bring short-term relief to some parts of society and have short-term political appeal but is a cost to society as a whole, as well as to other countries.

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The global trading system has been stopping countries from committing self-harm for 70 years. The General Agreement on Tariffs and Trade (GATT) which later became the World Trade Organisation (WTO) was created in response to countries’ retreating to protectionism after the Great Depression. Countries voluntarily signed up to be bound by the rules and norms of that system and to have disputes with other countries settled within that system.

The 153-member WTO is far from perfect but it has underpinned successful globalisation. The large membership and diverse interests of the WTO have frustrated the completion of the Doha Round of trade negotiations. The WTO does not cover foreign direct investment and many other issues relevant to commerce in the 21st century. But its dispute settlement mechanism continues to function well and has resolved trade frictions that in an earlier time may have escalated into trade if not military conflict. High profile, geo-politically charged disputes such as the alleged Chinese rare-earth metal export embargo against Japan have been resolved peacefully in the WTO with China accepting the ruling against it.

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Three Amigos from of WTO, World Bank and IMF

In this week’s lead essay, Director General of the WTO, Roberto Azevêdo, reminds us that a ‘strong, rules-based trading system is essential for global economic stability’ and explains how that system can be re-energised.

Multilateral trade deals required all members to sign on to the entire agreement, called a single-undertaking, that made it harder to complete the latest round of negotiations, the Doha Round, as the issues became more complex and the number of countries increased. Azevêdo explains the WTO is ‘learning to be ambitious, but also to be pragmatic, realistic and flexible’, as well as ‘creative, finding innovative solutions and engaging in flexible formats’.

That is all good news for making progress on freeing up trade and reviving slumping global trade growth. But the bigger risk is that the WTO itself could be under threat from the United States, the very country that led its creation and which has underwritten the rules-based order for the past 70 years. The United States and Europe have provided a tailwind for the global economic system but have now turned to become the headwind against its forward movement.

President Trump has not carried through on many of his campaign promises and the world holds its breath in the hope that continues. While he withdrew the United States from the 12 member regional trade agreement the Trans-Pacific Partnership, he has not acted on tearing up existing trade agreements, starting a trade war with China or Mexico, or withdrawing from the WTO. But if jobs do not return in the American rust belt — perhaps as US interest rates rise and the dollar strengthens, or just because many of those jobs are gone for good — and Trump needs to demonstrate action on trade, the world will need to be ready to hold the line against following suit and to save the entire system.

Azevêdo explains that East Asia and the Pacific have a key role to play in boosting trade for jobs, growth and development. Asia will play the key role in saving the global trading system and global economy, if it is to be saved.

China is the world’s largest trader, a remarkable story only made possible with its accession to the WTO in 2001. The world, including the United States, has benefited greatly from China’s success. China’s economy is now the second largest in the world and still depends on open markets for development and its pursuit of prosperity. But China alone cannot lead the global fight against protectionism if the United States turns its back on globalisation.

South Asia and many countries in Southeast Asia need open markets to bring millions out of poverty and into the workforce. Japan and South Korea need open international markets to execute difficult reforms to manage shrinking populations. Asia is now a major growth engine in the global economy and has the interest, ability and responsibility to save the global rules-based order.

The EAF Editorial Group is comprised of Peter Drysdale, Shiro Armstrong, Ben Ascione, Amy King, Liam Gammon and Jillian Mowbray-Tsutsumi and is located in the Crawford School of Public Policy in the ANU College of Asia and the Pacific.

Japanese companies need to open up or shut down


May 21, 2017

Japanese companies need to open up or shut down

by  Alicia Ogawa, Columbia University

http://www.eastasiaforum.org/2017/05/16/japanese-companies-need-to-open-up-or-shut-down/

 

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Corporate governance has long been a hot topic for investors worldwide, but it is still a new concept in Japan. The increasing number of Japanese corporate scandals points to the need for a new approach to management. Many once-prominent companies seem to be unable to adapt to the pace of global change. The domestic market no longer offers much growth potential, so Japanese firms need to actively engage with the world or perish.

There is strong global interest in Japanese corporate governance for two key reasons. First, from the point of view of investors, the fact that rates have been low or negative in virtually all major developed economies has encouraged a sharper focus on equity markets for real returns, and Japanese companies fall woefully behind their global competitors in terms of profitability.

Second, as the pace of global competition accelerates, management is under constant pressure to react quickly to changing opportunities, such as the development of new technologies or the consolidation of capacity in maturing industries. Dialogue with outsiders, from shareholders to independent directors, is a prerequisite to navigating this terrain safely.

Japanese companies are at a distinct disadvantage in this new world because of key features of their organisational structures that served them very well in the past, such as lifetime employment. Decision-making is slow and dominated by consensus-seeking groups of senior men who have never worked outside their own firms, who rarely have specialised expertise and whose loyalties are first and foremost to each other.

The first of the major traumas at Toshiba, which came to light in 2015, involved the 152 billion yen (US$1.33 billion) deliberate overstatement of earnings between 2008–2014. This scandal illuminated the unspoken trade-off inherent in a lifetime employment contract: staff must not question decisions made by top management.

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Japan is No Longer a Tiger Economy

An independent investigation into Toshiba’s overstatement of earnings revealed that no CEO during that period directly instructed anyone to falsify the accounts. Rather, there was a long-standing corporate culture which mandated that managers ‘couldn’t refuse’ the profit targets set by the CEOs, no matter how unrealistic. Nevertheless, after the first accounting scandal, Toshiba chose Shigenori Shiga as the new chairman after his predecessor resigned in disgrace. Not only was Shiga yet another lifetime company man, but a former head of Toshiba’s subsidiary Westinghouse — which is now in the process of Chapter 11 bankruptcy in the United States.

Many Japanese companies have raced to create better governance on paper — Toshiba was in fact a trailblazer in this respect, having chosen to replace a traditional Japanese system of governance with US-style executive committees, including independent directors on the board. But despite appearances, an inability to encourage and respect independent thinking has led to the collapse of the former world leader in high-tech products.

Failure by Japan’s corporations to embrace both the letter and the spirit of Prime Minster Abe’s new governance reforms will jeopardise Japan’s future prosperity. CEOs must encourage challenges by their subordinates and aggressive supervision by their independent directors.

Investors are the other key class of outsiders who need to be welcomed into the discussion. The traditional silence of friendly shareholders is yet another wall that insulates management from outside competition.

Much attention has been paid to the unwinding of friendly cross-shareholdings by banks. But most of these shares have been transferred from friendly banks to friendly corporations, who will likely never vote against management; to the Government Pension Investment Fund (GPIF), whose size makes it ill-equipped to exercise any positive influence; and to the Bank of Japan, who cannot be a force for better governance. The protection afforded by acquiescent shareholders does not seem to have changed very much.

A survey undertaken by GPIF indicated that 21 per cent of executives regarded investors’ increasing scrutiny of capital efficiency to be a positive development, while 32 per cent regarded this as a very negative trend. Clearly, Japanese managers are a long way away from being comfortable discussing fundamental strategies with investors who own shares in their firms, or with their junior staff. But they had better hurry up.

In the case of Toshiba, lawsuits have been brought by several foreign investors, the world’s largest public pension fund GPIF, and several of the largest domestic banks. Refusing dialogue with your outside stakeholders can carry a devastating price when mistakes are made. It’s better to choose an openness to new ideas and critiques from your independent board directors and your investors, and thereby reap the benefits of dynamism and sustainability.

Alicia Ogawa is Director of the Program on Corporate Governance and Stewardship at the Center on Japanese Economy and Business, Columbia Business School. 

 

Book Review: Dr Shankaran Nambiar –Malaysia in Troubled Times


May 11, 2017

Book Review: Dr Shankaran Nambiar –Malaysia in Troubled Times

by Tricia Teoh

“THE absence of good institutions and transparency in public undertakings, government procurement, and … the design of public policy has the potential to shake investor confidence” is how economist Shankaran Nambiar sums up the macroeconomic conditions of Malaysia.

In his latest book, Malaysia in Troubled Times, which compiles Nambiar’s articles in newspapers between 2014 and 2016, he deftly articulates his positions on issues. He grapples mainly with the question of “where is the economy headed towards”, which he asks numerous times across his pieces, an evident sign of his deep concern over the trends taking place in the country.

Nambiar articulates what many observers of Malaysian issues have struggled with: despite our economy not hitting negative growth, not being in danger of defaulting on sovereign debt and the fact that the central bank having adequate reserves to cover shortfalls, he states clearly that yes, indeed, we should still exercise great caution with respect to the Malaysian economy.

And why so? Various pieces indicate why observers should be worried – an outflow of foreign funds, the sharp decline of oil prices, which has in turn led to a growing federal fiscal deficit, and … “doubts on the efficacy of government linked companies”.

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When Malaysia is in trouble, follow Idris Jala and play the Guitar

The challenges facing Malaysia stretch beyond our borders, and here Nambiar wades through regional waters to help readers understand the dynamics behind the now-dead Trans Pacific Partnership Agreement, the Regional Cooperation Economic Partnership, and the Free Trade Area of the Asia-Pacific, which he highlights is indicative of China flexing its muscles in the region.

Malaysia, he says, “has a special, valuable relationship with China, which places it in an excellent position to help establish a stable security landscape in the region”. Of course, the “special relationship” we have with China would now be interpreted in a very different light today, given the many bilateral deals Malaysia has now signed with China. Apart from arguing for how ASEAN can build itself up as a stronger regional pact, it is also refreshing that he brings in Asean-India economic ties and goes on to push for greater Malaysia-India improvements in trade and investment, which apparently our neighbours Singapore and South Korea have put a lot more effort in than we have.

Above all, Nambiar is a faithful believer of Keynes, whom he quotes several times in the book, saying that “positive expectations and ‘animal spirits’ spur aggregate demand and economic growth”, and that “at the moment it seems that the animal within the economy is wounded”. He cleverly works his critique of the economy through metaphors such as these, but stops short of blatantly dismissing any efforts being made by policymakers to improve the economic conditions of the country. He could also have done more in providing solutions to what he considers to be ailing our economy.

Despite the nuanced tone of his writings, it is clear that he harbours silent frustration with public policies and their implementation in Malaysia. Although the book focuses mainly on technical economic matters, Nambiar also ventures into “getting the big picture right”. He questions Malaysia’s dismal performance in the Programme for International Student Assessment (PISA) and Trends in International Mathematics and Science Study (TIMSS). He emphasises the importance of good public transport, education, human resource development and healthcare. And perhaps most importantly, he questions whether our politicians and policymakers are truly connected with the economy “as experienced by traders, technicians, taxi driver and executives”.

It is now almost two years after one of Nambiar’s pieces titled “Do we need to create scenarios for a future Malaysia?” and yet it seems even more imperative to do so today. With the elections near, this is what policymakers ought to do. And if they are not, then citizens ought to instead, and demand that their representatives pave the way for the right future to actuate.

An imagined future has to be one that, Nambiar argues, goes beyond motherhood statements like “being united in diversity and sharing a common set of values and aspirations” that he considers merely “dreamy visions of the future”. One has to concretely build scenarios based on concrete issues such as income distribution, incorporating input from a “constraint approach” (what are the stumbling blocks?) as well as a “global basis approach” (how does Malaysia fit into this matrix based on global trends?).
It is on this note that the book hits the nail hard on its head. Nambiar’s voice that constantly urges and pushes for the creation of the “spirit of this big picture” reminds us that simply, there is none of this presently that so inspires. His is a thoughtful, objective and incisive perspective of a nation that could be much more – and his desires for a better, more productive, wealthy Malaysia are evident.

Policymakers and politicians serious about addressing challenges to the Malaysian economy would benefit from a thorough reading of Nambiar’s book. They should also take heed of his advice that in thinking of the long-term, they must be “realistic about the present state of affairs”. This would be a good first starting point.

Comments: letters@thesundaily.com

When Giants Fail


May 8, 2017

When Giants Fail

What business has learned from Clayton Christensen.