The enigma of Malaysia’s high household income growth


November 6, 2017

The enigma of Malaysia’s high household income growth

 

Image result for Enigma of Income Growth in Malaysia
 Who is fudging the household income figures, if not this Prime Minister cum Finance Minister? Malaysians are a whiney lot.

 

Why does the official report of rising household income seem incredible and implausible? Is Income really stagnating, or is it flourishing but Malaysians are a whiney lot?

 

By Dr. Lee Hwok Aun@www.freemalaysiatoday.com

Statistics are meant to inform, but sometimes they confuse. Take Malaysia’s household income figures. We keep hearing complaints of stagnant incomes and difficulties coping with the rising cost of living. But since the release of the Household Income and Basic Amenities Survey Report 2016 last month, an official success story is making the rounds – all the way to the 2018 Federal Budget speech.

The speech celebrates the rise in median household income, calculated from the Household Income Survey (HIS), from RM4,585 in 2014 to RM5,288 in 2016. Simultaneously, average household income rose from RM6,141to RM6,958, or at an annual growth rate of 6.4%. In real terms – that is, accounting for inflation – income grew 4.3% per year. The rest of this article refers to growth rates in real terms, which more accurately reflect purchasing power.

By the government’s account, household incomes have been growing quite substantially. Yet the budget is stacked with lavish handouts and financial relief, as though income growth has been sluggish, insufficient. Granted, this is an election budget, but a clearly the proliferation of social assistance is also addressing areal groundswell of economic discontent.

Statistics should be validated by the reality they intend to measure. If the government reports that the Malaysian economy has grown by 10% this year, most of us would disbelieve that outright. It can’t be that high; the economy is not ballooning like the early- to mid-1990s! But looking at Malaysia’s steady international trade, investment and domestic consumption, visible construction projects, low unemployment, and economic conditions as a whole, the actual figure of about 5% GDP growth seems credible and plausible.

So why does the official report of rising household income seem incredible and implausible? Is Income really stagnating, or is it flourishing but Malaysians are a whiney lot?

An examination of empirical evidence exposes three enigmas in the official household income statistics, raising questions about the reliability of the government’s high growth report.

First, income gains of the past half-decade are driven by inexplicably rapid growth in the 2012-2014 period, during which real household incomes expanded8.2% per year – faster than in the booming 1990s (Figure 1). Furthermore, households in the bottom 40% (B40)enjoyed stupefying 14.6% income growth per year. Suchhyperrates are usually the exception but were supposedly the norm – during a time of modest 5.4% economic growth.

Image result for Hwok-Aun Lee Enigma of Income Growth

Two years ago, when the 2014 Household Income Survey Report documented a spectacular fall in inequality from 2012 to 2014, I raised concerns that those results departed too far from reality (http://www.themalaymailonline.com/what-you-think/article/malaysias-spectacular-drop-in-inequality…-for-real-lee-hwok-aun, https://m.malaysiakini.com/news/315933). This phenomenal success bypassed attention. It was not mentioned in the 2016 Budget speech; the government was apparently not taking its own statistics seriously.

In releasing the 2016 income statistics, the government reaffirms the questionable 2014 calculations – without explanation. Of course, we might point to two outstanding policy shifts as income boosters: minimum wage, which came into full effect in 2014, and BR1M, introduced in 2012. Their possible effects cannot be ignored.

But upon examination, these turn out to be the second and third enigmas in the income statistics.Minimum wage and BR1M fail to explain the rise in household income.

The official household income statistics aggregate various income components (the proper term is gross household income):

  1.  Income from wages and salaries, also including allowances, bonuses
  2.  Self-employment: income through selling goods and services
  3. Property and investment income: land and property rent (including imputed rent of owner-occupied homes), interest, dividends
  4. Transfers received from public sources (BR1M, etc) or family members

A breakdown of these sources shows that the share of wages and salaries in gross household income has declined, while the share of property and investment income and transfers have increased (Figure 2). Therefore, it is most unlikely that minimum wage contributed to high overall income growth.

Image result for Hwok-Aun Lee Enigma of Income Growth

 

Furthermore, when we compute growth rates household wages and salaries, we find modest numbers for 2012-2014 and 2014-2016 (Figure 3). Happily, we can compare this particular finding with calculations from another data source. The growth of individual wages and salaries, based on the Wages and Salaries Survey data, registered similar rates. Minimum wage surely boosted wage growth to some extent, as indicated by the higher rate in 2014 when it took effect. But it fails to account for rapid household income expansion.

Image result for Hwok-Aun Lee Enigma of Income Growth

BR1Mis the last big factor standing. The share of transfers in household income increased – so far so good.

Figure 3

Image result for Hwok-Aun Lee Enigma of Income Growth

 

But the case for BR1M as an explanation for income growth soon crumbles. First, the BR1M payments are popularly known by the annual amounts paid, whereas household income is handled on a monthly basis. When investigating BR1M’s impact on household income, we must convert into their monthly amount. The problem with the BR1M explanation is that the quantum per month is so minuscule relative to household income per month. In 2012 and 2016, B40 household’s income averaged RM1,847 and RM2,848, while BR1M payments for households earning below RM3,000 per month, were RM42 and RM83 (RM500 and RM1000 divided by 12). BR1M accounted for only 2.3% and 2.9% of the household income of the B40, its principal recipients.

The second pertains to timing. BR1M was introduced in 2012 at RM500 per year, increased to RM650 in 2014, then RM1,000 in 2016. The big differences took place in 2012 and 2016, not in 2014. However, the huge leap in household income occurred between 2012 and 2014!

In light of these enigmas, discrepancies and gaps, the government’s household income calculations for 2014 and 2016 remain implausible and demand a fuller accounting, particularly to provide reasons for the unfathomably high growth in property and investment income and transfers received.

There are empirical grounds, not just anecdote or intuition, to question the veracity of the official statistics, and to restrain celebration of Malaysia’s purported achievements in raising household income.One can speculate some possibilities. Perhaps transfers have been over-counted, or imputed rent over-estimated. For those living in houses they own, the gross household income numbers include an imputed amount of rent – that is, an amount they would receive if they rented out the house. Imputed rent, although it is not actual income received, is a useful piece of information. But it is misleading to include imputed rent in household income and report the sum as an indication of purchasing power and material well-being.

The Department of Statistics must be commended for publishing increasingly detailed reports on the 2014 and 2016 Household Income and Basic Amenities Surveys, but the disclosures are still inadequate. In line with the government’s commitment to Open Data, the natural next step should be to make the raw datasets accessible, to facilitate collaborative and constructive work and arrive at a fuller comprehension and credible measure of this vital issue of household income.

Dr. Lee Hwok Aun, Senior Fellow,  Yusof Ishak Institute– ISEAS, Singapore

Lim Kit Siang’s Take on Najib Razak’s So-Called Mother of All Budgets 2018


November 2, 2017

Lim Kit Siang’s Take on Najib Razak’s 2018 BudgetThe So-Called Mother of All Budgets

The Budget is a tool or instrument for presenting a statement about the state of the economy, its prospects, and policy announcements for improving governance. A well-crafted budget statement should be an objective and honest presentation meeting the goal of accountability.

Sadly, the budget he (Najib Razak) presented fails these basic tests. His speech of almost 12,000 words was more akin to a laundry list of giveaways, expenditure allocations both real and imagined, and vague statements about the economic consequences that would result.–Lim Kit Siang

http://www.malaysiakini.com

MP SPEAKS | Prime Minister Najib Razak described Budget 2018 being about “gifts, rewards and incentives.” It is a most mistaken view.

The Budget is a tool or instrument for presenting a statement about the state of the economy, its prospects, and policy announcements for improving governance. A well-crafted budget statement should be an objective and honest presentation meeting the goal of accountability.

Sadly, the budget he presented fails these basic tests. His speech of almost 12,000 words was more akin to a laundry list of giveaways, expenditure allocations both real and imagined, and vague statements about the economic consequences that would result.

The speech omitted any reference to urgently needed policy changes to restore the competitiveness of the economy that would enable the nation to escape the middle-income trap it finds itself in. The speech was silent about measures to correct the stagnation in real income, and address the looming danger associated with the mountain of debt – public, corporate and household.

The budget has been turned into an unabashed and irresponsible first salvo in the campaign for the 14th General Election. Page after page of the speech detailed expenditures and proposed allocations; no group was ignored in the largesse being extended.

Najib’s laundry list of giveaways, expenditure allocations both real and imagined, and vague statements.-2018 BUDGET

Little was said about how the proposed expenditures were designed to advance the overarching economic goals; no reference was made to how the addiction to deficit spending was to be overcome.

The projected deficit was itself a meaningless figure as the profligate spending in some measure would be financed outside of the budget, and nor did the PM in his speech or in the economic report provide details about the level of contingent liabilities or the new liabilities being assumed.

Electioneering

The PM chose to describe the budget as the “mother of all budgets”. Ironically, he was on target as this budget was an exercise in deception and was an unvarnished sales pitch seeking votes in the upcoming election.

Najib’s claim about “good news” needs to be taken with a large pinch of salt. The reality is that the news as reported in the budget statement is more in the nature of “fake news”. The budget framework is built upon dubious interpretation of statistical data in a highly selective manner.

The PM gloated over the growth numbers but was being selective. He failed to make any reference to issues of a structural nature raised by the World Bank and the International Monetary Fund (IMF) in particular in the latter’s Annual Article IV Consultations and reported on its website.

Economic growth rates

Najib also made much about the revised growth rates issued by the International Financial Institutions and attempted to claim credit. He omitted to indicate that the revisions pertained to almost all countries – Malaysia being one in the group.

The revised growth rates should not therefore be interpreted as an approval of the competence of the government in managing the economy. Growth rates are revised to be higher because of global economic developments, primarily resulting from changes in monetary policies by the US Federal Reserve Bank and its counterpart the European Central Bank, and the partial recovery in prices for oil and gas.

The PM has been selective in the use of data. This is best illustrated by his use of the year 2009 as the base for measuring change. There is no rational reason for this choice other than an attempt to glorify his own tenure of office. It is also pertinent to note that 2009 marked a global recession. The choice of this low base amplifies the recovery in the years since.

Najib, however, chooses to remain silent about the negative developments, for instance, in the losses in the country’s external reserves (from a peak of US$ 140.0 billion in 2012 to US$101.2 billion in Sept 2017; total reserves as a percentage of external debt fell from a high of 121.1 percent in 2007 to 47.2 percent in 2016 or the decline in the value of the ringgit from US$1 = RM 3.34 in 2007 to US$1= RM4.20 in September 2017. These are not indicative of “efficient governance and prudent discipline” as he claimed.

Putrajaya’s fiscal situation

For two decades the government has operated with a deficit; the reported federal government debt now approximates 55 percent. Additionally, the Putrajaya has concealed its borrowings and the true size of its debt by making government-linked companies and other quasi-government entities undertake borrowings to finance public sector projects under the guise of so-called public-private projects.

The government has, at the same time, accumulated large hidden contingent liabilities by extending guarantees for borrowings by GLCs and other entities.

The fiscal situation has been worsened by corruption, mismanagement and other abuses including non-competitive acquisition of goods and services. The absence of competitive bidding results in price distorted costs. Tax revenues have been eroded by way of so-called “incentives” extended to government cronies without resulting in any discernable rise in private investment.

NEM goals

The reference in the speech to the New Economic Model (NEM) is more in the nature of a throwaway remark.

Certain clear-cut goals and policies adopted at the launch of the NEM have fallen by the way side. It should be recalled that there was a commitment to pursue further privatisation of the government’s non-financial public enterprises and reduce the government’s holdings in the GLCs which in reality function as state-owned enterprises.

It is significant that the speech contained no reference to the pursuit of these stated goals.

The findings from a recent highly professional study led by Terence Gomez has highlighted the dominant role played by GLCs in almost all sectors of the Malaysian economy, from aviation, banking, manufacturing, plantations to various modes of transportation.

In 2013, a total of 455 companies (including subsidiaries) were classified as government-linked investment companies (GLICs). There were 35 publicly listed companies which were among the top 100 companies listed on the Bursa Malaysia. The latter account for an overwhelming percentage of the capitalisation of the exchange.

Without a doubt, the government’s footprint is large in the business and commercial sectors. The entities in question act as monopolies or privileged entities, thus stifling private enterprise. This has led to flagging private investment despite tax and other incentives.

Of late several entities (e.g., Mara, Felda, Tabung Haji) have become mired in financial scandals. There is little or no accountability by such entities.

Furthermore, it is strange indeed that while Malaysia as a upper middle income country seeks to attract FDI flows, yet government linked agencies are currently exporting capital. These endeavors taken represent contradictions. But, more troubling is the fact that they give rise to abuses and corrupt practices.

The claims of successes in employment creation merit comment. While indeed some 2.3 million jobs have been created in the past eight years, most of these have been low paying jobs with many filled by migrant workers.

Serious shortages of skilled workers exist; paradoxically the brain drain continues unabated. These labor market developments along with the stagnation in wages are indicative of a failed set of policies that are contributing to the loss of competitiveness and entrapment as a middle-income country.

The self-congratulatory remarks about export growth are yet another example of delusion. While the current level of exports are expressed in ringgit terms, the PM has chosen to ignore the fact that he is comparing values based on different exchange rates.

The comparison of international reserve levels is rather devious – this is the only comparison linked to 1997!

The reporting of an increase in income per capita from RM27,819 in 2010 to RM49,713 in 2017. This trend is contradicted by the World Bank as the following numbers show:

The significance of these numbers points the extent to which Malaysia is lagging in terms of achieving “high income” status which in 2016 was set as income levels in excess of US$12,235.

Indeed, taking account of the current level of GNI per capita, projected exchange and growth rates, it is patently clear that the much-touted goal of achieving “high income” status by 2020 is a fading dream.

Budget allocations

The budget allocations for 2018 are projected at RM280.25 billion, an increase of RM20 billion, with RM234.25 billion for operating expenditure and some RM46 billion for development.

While further details are highlighted, Najib chose to be silent about a large item, namely debt service which amounts to 11 percent of the operating expenditure. The increased allocations are largely to restore cuts that were imposed earlier in the year.

Revenue collection in 2018 is projected at RM240 billion, an increase of approximately nine percent from RM220 billion in 2017.

No details are given either about the sources of revenue, or the amounts reduced by way of tax cuts and exemptions. The projected growth lacks credibility given GDP growth rate, reductions in revenue attributable to the exemptions from GST granted for big ticket items alongside the reductions in income tax rates.

In brief, the rosy estimates of modest growth in expenditure coupled with unrealistic levels of revenue receipts follow a pattern. Revenue projections are pitched high whilst expenditures are restrained in the budget.

Thus, there are inevitable supplementary expenditure requests later in the year. These approaches in budgeting enable the government to put out massaged numbers for the deficit. These practices appear to be sharpened in the preparation of the 2018 Budget.

Lip service was paid about fiscal consolidation without mention of how the PM proposes to reduce debt levels. While he was upbeat about all manner of “progress”, no mention was made about the record concerning deficits. It is noteworthy that it is now more than 20 years since Malaysia enjoyed a budget in surplus.

Once again total debt along with contingent liabilities will rise in the year ahead. These will represent burdens passed on to future generations. With an ageing population, the burden will be all the greater. The nation’s long-term interests are being sacrificed for short term political gains.

The claim that this budget will chart the course for building the nation for the next 30 years is a farfetched assertion. This is all the more questionable considering the fact that the Budget hardly lays out any long- term policies and goals but is only concerned with the “here and now” issues assumed to be of interest to a highly jaded electorate.

Rewriting history

Most remarkable, however, is the PM’s assertion: “Since we declared Independence, we have been fortunate as our forefathers have governed and administered this country embedded with shariah requirements”. Najib appears to be rewriting history by ignoring the fact that the country adopted a secular constitution and up until recently shariah played no major role in administration.

To claim that for six decades a shariah framework has operated with the federal constitution playing a secondary role is an outright distortion of the facts. The formulation used by the PM ought to raise a red flag about his coalition’s intentions regarding the status of the Constitution.

While acknowledging that “the framework has not been written in any government documents, but its practices are reflected in all inter-related national philosophies and policies” Najib appears to be outlining a position that the government will adopt in the event it is returned to power. It is thus a signal of how the secular federal constitution will be further sidelined.

Trends in investment

The PM set out several targets dealing with investment and trade. The statistics about trends in investment were selective.

Once again by choosing a low bench mark year (2009), a year that recorded a global recession, and inflated targets for 2018, he attempted to project progress.

These statistics appear impressive in attributing performance of private investment. A closer review, however, paints a different picture.

Given that the GLCs dominate the private sector, and that they largely operate as SOEs, much of the “improvement” can be attributed to government initiatives handled by these entities.

The process permits the government to by-pass concerns about the debt ceiling and at the same time permit nefarious projects as evidenced by the 1MDB saga.

The trends in private investment are erratic as inappropriate policies and political uncertainties have impacted on private investment, both domestic and foreign. The failure to announce corrective policy measures will result in sluggish investment patterns along with continuing outward capital flows

Passing reference is made in the 2018 Budget to accelerating exports. However, no indication is given as to what policies will be introduced to develop capacities in new products and promoting industries involving new technologies for instance the use of artificial intelligence.

No mention is made about how the government proposes to deal with the withdrawal of the US government from the TPPA; the PM was silent about what posture it intends to take viz. other trading arrangements within ASEAN or with the EU and the China-led proposals for a regional trade arrangement.

The claim that “…for the first time in the history of the nation’s budget…” a large allocation “is provided to assist farmers, fishermen smallholders and rubber tappers” appears to be a most strange claim. Every Five-Year Plan, every budget over the past six decades has contained allocations for these groups; it is disingenuous indeed to make claims that are short on a factual base.

 

The mega rail transportation projects that have been announced raise multiple concerns. For a start, cost benefit and feasibility studies have not been disclosed, assuming these have been done.

It is worthy of note that the projects will be financed by loans from China; the terms of these loans have yet to be announced. Reports in the media appear to suggest that major parts of these projects will be assigned to China’s enterprises who will invite some Malaysian entities to collaborate.

Najib evaded the entire issue of port expansion using loan funds in the face of overcapacity in the nation’s major port, Port Klang, following the departure of a major user. Many of the other transportation projects highlighted in the speech will not be financed from the Federal budget.

The following quote from his speech is most remarkable – it projects self-glorification and is somewhat insulting of past holders of the office of Finance Minister:

“This Budget that has never been crafted so well, even during the last 22 years or the past 60 years of our own nation, and marked in history, making this Budget the Mother of All Budgets.”

Ironically, this Budget may indeed qualify as the “mother of all budgets” for reasons other than those offered by the PM. The speech represents an open attempt to create fake news in pursuit of gaining credibility with an electorate that is largely disenchanted by the workings of a government tarred by endless scandals, led by someone viewed as a kleptomaniac.

The current budget also qualifies as such for its extensive giveaways, without a realistic vision or any demand for sacrifices. It provides no coherent strategies to permit the nation to escape the middle-income trap.

Malaysia urgently needs a course correction if it is to regain dynamism to enable it to move forward on the road to greater prosperity.


LIM KIT SIANG is DAP Parliamentary Leader and MP for Gelang Patah.

 

Malaysia’s Finance Minister’s free spending ways and the national debt


October 24, 2017

Malaysia’s Finance Minister’s free spending ways and the national debt

by Jomo Kwame Sundaram and Raisa Muhtar

http://www.malaysiakini.com

Image result for Malaysia's Free Spending Finance Minister

COMMENT | Malaysia has a problem with debt. Government debt is about 53 percent of GDP, just below the already increased 55 percent debt-to-GDP ratio threshold. The big jump in such government debt from 41 percent in 2008 to 53 percent in 2009 followed the last change of Prime Ministers.

Recently, the government has been borrowing from abroad at an unprecedented pace. The latest level has been attributed to the increased domestic debt of RM15.8 billion and additional foreign debt of RM2.2 billion last year.

Also, by encouraging Malaysian investors, both private and public, to invest abroad, and by sharply increasing borrowings and portfolio investments from abroad, the country has unnecessarily become much more vulnerable to international financial volatility and instability.

Contingent liabilities

Contingent liabilities refer to debt commitments related to government guaranteed loans. With contingent liabilities growing rapidly, the overall consolidated public sector debt-to-GDP ratio has risen to 68 percent of GDP.

These have risen sharply, with government-guaranteed liabilities rising to RM195.7 billion, or 15.2 percent of GDP in 2016, from 12.8 percent in 2011, an increase by almost a fifth. Observers are concerned that pre-election ‘projects’ are causing a new debt spike in 2017.

An unexpected shock to growth, an increased interest rate in the West (e.g., with the end of ‘quantitative easing’ [QE]) or the sudden exit of foreign portfolio investments would all threaten the Malaysian economy due to its greater self-induced vulnerability.

Most current contingent liabilities abroad have been accrued after the last prime minister’s tenure. Abdullah’s reduction of the budget deficit bolstered the country’s debt ratings, making it cheaper for the federal government and government-linked companies (GLCs) to borrow overseas at a time of QE-induced low-interest rates in the OECD economies.

Such debt has more than doubled since Prime Minister Najib Abdul Razak took office in 2009, as government-related entities borrow abroad to fund infrastructure projects and ventures such as 1MDB. This is quite unprecedented as most new foreign borrowings have not been invested in ways likely to generate foreign exchange earnings.

Such government spending is needed to sustain growth, but all too often, has been abused to fund large-scale projects for crony companies (‘jobs for the boys’) with ‘kickbacks’ for key decision makers. The growing burden of such debt is inevitably borne by taxpayers.

PPPs: Public risk, private gain

Malaysia’s relatively high contingent liabilities include those due to public-private partnerships (PPP) where the government or GLCs bear the bulk of the risk, while the lion’s share of profits typically goes to the crony private partner.

DanaInfra Nasional Bhd (MRT), the company created to fund infrastructure projects, recently recorded a 43 percent spike in such liabilities!

Meanwhile, contingent liabilities associated with 1MDB’s default in August have been estimated at 2.5 percent of gross domestic product (GDP). According to Moody’s Ratings Services Vice-President Christian de Guzman, 1MDB, which defaulted after missing a bond repayment deadline, raised the risk for contingent liabilities the government is exposed to, increasing the cost of government debt from abroad.

Recently, Malaysian authorities established the Fiscal Risk and Contingent Liability Technical Committee to evaluate the government’s fiscal risks and to propose appropriate measures to address them. After failing to meet previous targets, the authorities have promised, yet again, to achieve ‘near-balance’ for the federal budget by 2020.

But such promises may not have renewed confidence, especially as the deployment of borrowed funds by 1MDB and some other GLCs has not convinced the market that public finance management in Malaysia is improving irreversibly.

JOMO KS and RAISA MUHTAR are Malaysian economic researchers.

‘Minister of Finance Inc’ – A Political Economist’s Study of Minister of Finance Incorporated and GLICs in Malaysia–Terence Gomez


September 30, 2017

‘Minister of Finance Inc’ A Political Economist’s Study of Minister of Finance Incorporated and GLICs in Malaysia–Terence Gomez

by M Krishnamoorthy @www.malaysiakini.com

 

Dr. Terence Gomez, in his latest book, “Minister of Finance Incorporated: Ownership and Control of Corporate Malaysia”, traces the government’s role in the corporate sector. He provides an assessment of Malaysia’s new political economy, with a focus on ownership and control of the corporate sector.

Gomez, who is a Professor of Political Economy at Universiti Malaya, is also the author of “Politics in Business: UMNO’s Corporate Investments”, a pioneering publication in 1990, which traced how UMNO secured a huge equity interest in Malaysia’s corporate sector.

 

In “Minister of Finance Incorporated”, Gomez (photo above) and his team of researchers offer another pioneering assessment of Malaysia’s corporate sector, though their focus is now government-linked investment companies (GLICs), a type of state enterprise that has long prevailed in the economy but has not been analysed.

Gomez argues that corporate power is now concentrated in these GLICs that are ultimately controlled by the Minister of Finance. Interestingly, Gomez admits that these GLICs are well-managed by highly qualified professionals, though these people can be subservient to the dictates of the Minister of Finance.

By focusing on the GLICs, “Minister of Finance Incorporated” ignites interesting debates about the role of the government in the economy, an issue that requires thoughtful consideration given their dominant presence in the corporate sector. Through in-depth research, novel insights are provided into this question of government ownership and control of corporate Malaysia.

This review is presented as a question-and-answer dialogue with the author, to draw attention to this study’s major findings. Much of what is outlined below is from this book.

The Interview

Professor Gomez, in your latest book, “Minister of Finance Incorporated”, what are your major findings?

Malaysia’s political economy has undergone a major transition since the 1990s that has escaped public attention.

Corporate power has shifted from UMNO and well-connected businessmen to the government. Huge business groups controlled by the government have emerged, seen in the dominance that a mere seven GLICs have over the corporate sector.

During this transition, one extraordinary outcome was the removal of UMNO, its members and the business associates of party leaders as owners of publicly-listed government-linked companies (GLCs).

 

UMNO now has direct equity ownership of only one quoted company, the media-based Utusan Melayu, while no UMNO member figures as a major corporate player.

UMNO’s absence from the corporate sector has major implications. The power nexus involving politics and business has fundamentally shifted at the federal level.

If this political-business nexus once involved numerous powerful UMNO politicians who had enormous influence over the corporate sector, economic power is now concentrated in the Office of the Minister of Finance.

Who are the GLICs?

Seven institutions have been classified by the government as GLICs. These are the Minister of Finance Incorporated (MoF Inc), the government’s holding company, which participates actively in corporate manoeuvres and owns a diverse range of firms known as government-linked companies (GLCs).

The sovereign wealth fund, Khazanah Nasional Berhad, is policy-based and implements major plans, including venturing abroad to support the government’s business internationalisation effort.

 

 

The investment trust fund, Permodalan Nasional (PNB, or National Equity Corporation), is portfolio-oriented, though with a policy agenda to redistribute wealth more equitably between the nation’s ethnic groups.

Two savings-cum-pension-based funds, the Employees’ Provident Fund (EPF) and the Kumpulan Wang Persaraan Diperbadankan (KWAP, or Retirement Fund Incorporated), are portfolio-based with an equity interest in a vast number of companies.

Lembaga Tabung Angkatan Tentera (LTAT, or Armed Forces Fund Board) is also a savings-cum-pension-based fund but is active in the management and development of large businesses in various sectors.

 

 

Lembaga Tabung Haji (LTH, or Pilgrims Fund Board), though portfolio-based, has an organic form of enterprise development, active in the development of Islamic-based products and services.

How are these GLICs owned and controlled?

The Ministry of Finance sits at the apex of a complex business group structure comprising its holding company, MoF Inc, as well as other GLICs, quoted GLCs and a huge number of unquoted private firms.

MoF Inc is the “super-entity”, given its enormous influence over the corporate sector through its substantial ownership and control of the other GLICs and the financial sector, comprising Malaysia’s leading commercial banks. Through its ownership of these commercial banks, the government can control the economy indirectly by acting as a lender to private firms.

However, MoF Inc’s vast network of business interactions constitutes only one part of the government’s complex system of control over the corporate sector. State governments have a similarly sizeable interest in the corporate sector.

In this system, the Board of Directors are important. Directorships function as a primary avenue through which the government can dictate decision-making within GLICs and GLCs.

Our comparison of ownership and directorate patterns in 1996 (prior to the 1997 currency crisis) and 2013 revealed a new phenomenon.

 

Only a small number of UMNO members remain as directors of these government-owned enterprises. These findings are particularly astonishing as Umno remains a party riddled with money politics, patronage and rent-seeking.

How did Malaysia get to this point?

Three major events have contributed to these transitions where the Prime Minister and GLICs have emerged as economic powerhouses. The first was the implementation of the New Economic Policy (NEP) in 1971, which allowed these enterprises to gradually acquire a major presence in the corporate sector.

The involvement of the GLICs in the corporate sector diminished with the active promotion of privatisation from the mid-1980s. With this spate of privatisations, major enterprises fell under the ownership and control of UMNO and well-connected businesspeople.

The second defining event was the 1997 currency crisis and the momentous intra-elite political feuding that ensued the following year. The GLICs’ bailout of ailing well-connected companies and their takeover of firms associated with ousted Umno leaders led to their re-emergence as major actors in the corporate sector.

 

The third defining moment was when reform of the GLICs and GLCs was initiated by Dr. Mahathir Mohamad in the late 1990s, though actively implemented by Abdullah Ahmad Badawi (photo) from 2003. Najib Abdul Razak continued these reforms when he took office in 2009 as Prime Minister.

The current concentration of economic power in the office of the Prime Minister is particularly salient because when Najib took office in 2009 he voiced his intention to transfer GLCs to the private sector, arguing that the private sector should function as the primary engine of growth.

Unlike Mahathir, Najib appeared personally uninterested in business as a government tool for economic and corporate development when he came to power. Najib, however, soon came to realise the significant economic influence that the GLICs have over the corporate sector.

Why was this type of corporate control structure created?

This complex system of ownership and control of the corporate sector is not one that was designed or envisioned by ruling elites.

In fact, since the 1980s, all Prime Ministers – Mahathir, Abdullah and Najib – have persistently advocated privatisation of the GLCs on the assumption that these enterprises would function far more effectively and productively if under private ownership.

Even when the NEP was conceived, the plan was to transfer corporate equity acquired by the GLICs to bumiputeras, in order to redistribute wealth more equitably among the ethnic groups.

When Mahathir’s vision of creating business groups led by corporate captains was dismantled by the 1997 currency crisis, the GLICs and GLCs were deployed to bail out well-connected ailing, debt-ridden enterprises.

 

When a bitter feud ensued between Mahathir and his Minister of Finance, Anwar Ibrahim, over these bailouts, Anwar was ousted from public office and his business allies lost control of their corporate assets.

When a similar feud ensued between Mahathir and Daim Zainuddin, Anwar’s replacement as minister of finance, companies controlled by his allies and UMNO were channelled to the GLICs. Having had persistent feuds with his trusted allies who he had appointed as Minister of Finance, prime minister Mahathir then took charge of this ministry.

The new structure of Malaysia’s political economy has also arisen out of the need for the UMNO President to reduce the influence of party warlords.

UMNO’s major businesses now under the GLICs include media companies that own the major newspapers, The New Straits Times and Berita Harian, as well as TV3, the party’s cooperative KUB, the huge construction-based UEM Group, the hotel-based Faber Group (now UEM Adgenta) and the Bank of Commerce, now a part of Malaysia’s third largest banking enterprise, CIMB Group. Control of these companies ultimately falls under MoF Inc.

If UMNO members once had many sources of patronage, what is the situation now?

UMNO members now have only one source if they wish to obtain access to federal government-generated economic concessions. This is profoundly problematic in terms of public governance as the minister of finance concurrently holds the position of prime minister, a situation that does not prevail in democracies.

In this governance structure, there is the possibility of checks and balances being deeply undermined, opening space for abuse of power that can have serious implications on the economy and the corporate sector.

Who is accountable for the running of the companies?

The board of directors of these companies are accountable. While most of these directors are professionals who manage the GLCs in a productive manner, since they are appointed by the minister of finance, they can be compelled to follow his dictates.

There are also serious concerns in some GLICs. In LTH, a number of its directors, including its chairperson, are UMNO members who are elected representatives but hold no position in government. LTAT is led by Lodin Kamaruddin (photo), a longstanding close business associate of Prime Minister Najib.

 

There is sufficient evidence that these GLICs could be vulnerable to political interference unless sufficient oversight measures and institutional reforms are introduced to ensure they are well-insulated from such abuse.

In the boards of directors of the GLICs and GLCs, what has also increased is the number of former bureaucrats. These ex-civil servants, like the professional elite, have no political influence. However, they also appear to function as mere figureheads.

The most influential decision-makers are the chairpersons of these boards and the managing directors who, when necessary, take the cue from the Minister of Finance, further indicating his overwhelming influence over the corporate sector.

There is evidence of “inner circles” among the GLICs. One inner circle revolves around Nor Mohamad Yakcop, until recently the deputy chairperson of Khazanah. Professional managers groomed by him lead the GLICs and GLCs.

An inner circle is also evident in the media sector. An obscure private firm, Gabungan Kesturi, controls the leading media enterprise, Media Prima, along with PNB.

The directors and shareholders of Gabungan Kesturi are Shahril Ridza Ridzuan and Abdul Rahman Ahmad, both groomed by Nor Mohamad. Shahril is the CEO of EPF, which also owns a huge interest in Media Prima. Rahman was appointed the CEO of PNB in 2016.

The use of private companies like Gabungan Kesturi obscures the identity of the ultimate shareholder, the Minister of Finance, as well as the extent of the state’s control over major media companies.

Did our leaders groom and place executives in GLICs for their vested interests?

Daim Zainuddin (photo) groomed and placed professionals he had trained as executives and owners of companies associated with UMNO.

 

A similar practice of grooming young professionals as executives and CEOs emerged in the late 1990s after well-connected firms came under the control of the GLICs. Professionals trained by Nor Mohamed took over the management of these enterprises.

However, while Nor Mohamad and Daim groomed and placed professionals in control of major quoted enterprises, their reasons for doing so differed.

As Minister of Finance, Daim, also UMNO’s Treasurer and a longstanding businessperson, appeared intent on securing enormous control over the corporate sector to serve his vested business interests. The professional-managerial team groomed by Nor Mohamed was not necessarily trained to manage the GLICs and GLCs.

What are the possible repercussions of this ownership and control mechanism?

Through this pyramiding system, with the Minister of Finance at the apex, the GLICs and GLCs can be subjected to considerable abuse. This pyramiding system allows the minister to secure numerous political and business benefits from the GLICs and GLCs, as well as abuse them.

It is noteworthy that MoF Inc has ownership and control of controversial companies such as 1MDB and the National Feedlot Corporation (NFC).

The GLIC-based business groups have control over companies through majority equity ownership, which accords them significant voting rights. This has serious implications for minority shareholders, and the economy, in the event of abuse of the companies.

Our study noted that the EPF appears to have been forced to take control of RHB Capital from a firm linked with the former Chief Minister (and now Governor) of Sarawak, Abdul Taib Mahmud (photo above ). This financial institution has long been an enterprise that has come under the control of a number of well-connected people and GLCs.

Politics evidently matters, influencing how these enterprises are run. Policies also matter as they shape the different ways in which these institutions are managed.

There can be a link to between politics and policies, especially redistributive policies and enterprise development strategies when determining how these enterprises are employed.

After his party fared badly in the 2013 General Election, Najib announced that contracts and other concessions would be channeled through GLICs and GLCs to bumiputeras, justified by his new ethnically-based affirmative action policy that targeted this ethnic group. This was evidently to consolidate the political support of this ethnic community. 

What reforms are required to deal with this issue?

These powerful GLICs are a clear manifestation of high concentration of corporate ownership in the state. This concentration of corporate wealth is justifiable only if GLICs are managed in an accountable and transparent manner.

Inevitably, to inspire confidence among private investors, political reforms are imperative to enforce stringent institutional checks and balances by independent oversight institutions.

 

The technocratic professional elite at the epicentre of this GLIC-GLC network can remain, but must be subjected to close scrutiny by parliamentary action committees led by the Opposition. And the Prime Minister cannot also serve as the Finance Minister since it is an obvious case of conflict of interest.

ADB Predicts Stronger 2018 for Developing Economies


September 28, 2017

ADB Predicts Stronger 2018 for Developing Economies

by  http://www.asiasentinel.com

Image result for ADB Predicts Stronger 2018 for Developing Economies

 

Asia’s developing economics have performed better than forecast earlier, according to the latest assessment by the Asian Development Bank in its mid-term review of the 2017 Asian Development Outlook. Some further slight improvement is forecast for 2018. However, much depends on external circumstances which have largely driven better-than-forecast 2017 performance.

Image result for Malaysia's Economic Outlook 2018

Among Southeast Asian countries, Malaysia’s public finances look less healthy than most of its peers.

 

Most notable has been a strong pickup in electronics exports after a weak 2016. This has been the main driver of the sharpest growth pick, Malaysia, where the forecast for GDP growth for the full year has been raised by a full percentage point to 5.4 percent, with electronics and palm oil exports as drivers plus consumption growth driven by higher wages.

Malaysia’s economy had appeared to shrug off negative effects of the sharp fall in the ringgit in 2015-16, though there was an inflation spike. Now stable, the currency seems unlikely to rebound much further unless the current account surplus surges. The ADB’s one and rather understated caveat looking ahead is the government deficit, which has surged to over 5 percent of GDP against an official target of 3 percent. Much of the government debt is foreign owned. A tax increase is necessary before long, the outlook warns.

Among Southeast Asian countries, Malaysia’s public finances look less healthy than most of its peers. Government deficits in the Philippines, Indonesia and Thailand are all around 2 percent of GDP as revenues have been rising almost fast enough to accommodate increased infrastructure spending. Progress in the Philippines in particular has brought investment up to 25 percent of GDP. This is not the result of a particularly strong 2017 but of a continuing surge since 2012. However, ambitious further spending on infrastructure will be dependent on revenues, and on progress in implementing public/private partnerships (PPPs).

Image result for Philippines Economic Outlook 2018

 

In theory, according to the development outlook, the Philippines has an advanced framework for such projects, but few have been realized. Much too will depend on the progress of proposed tax reforms and whether the reforms have a positive net impact on revenues and investment. Private sector credit growth will also have to slow down after an 18 percent leap this year.

The development outlook is silent on the costs of rebuilding Marawi City after the recent battle but will inevitably set back other spending. It also avoids mentioning foreign investor disquiet over President Rodrigo Duterte’s drug war and threats of martial law. Meanwhile a continuing rise in remittances up 8.7 percent in the first half of 2017 is underpinning consumption and feeding through to the food processing and building materials sectors of manufacturing.

While manufacturing in the Philippines is performing adequately by its own modest standards, Indonesia’s manufacturing sector is a drag on an economy continuing to jog along at 5 percent growth. The development outlook’s 2017 forecast is unchanged at 5.1 percent despite a fall in the current account deficit and increased government spending on infrastructure which could push the budget deficit close to its 3 percent of GDP ceiling. Inflation remains low by local standards at 4 percent. Foreign investment has been flowing strongly but its impact on manufacturing remains modest and investment in mining is restrained by policy uncertainties.

The ADB outlook warns of the need to maintain flexible exchange rate policy to absorb possible shocks from international markets, be they commodity prices or interest rates.

Slightly higher GDP growth is forecast for 2018 partly to a spending boost from the Asian Games to be held in Jakarta and Palembang but there is not much sign of the 6.5-7.0 percent growth which Indonesia should be able to achieve.

Image result for Thailand's Economic Outlook 2018

Thailand should in principle be able to do a lot better than its 3.5 percent growth. Tourism, agricultural prices and other exports have done well and created a massive current account surplus of 8.5 percent of GDP this year and probably over 6 percent in 2018. The surplus has underpinned a strong currency and inflation below 1 percent. But private investment remains very weak, reflecting political and other uncertainties.

Although Thailand’s own population increase is now almost static, workers from Cambodia and Myanmar continue to undergird the labor force and Bangkok’s service industries to benefit from growth in Myanmar and Vietnam. But capital is leaving for better or safer projects elsewhere. Government infrastructure spending will continue to rise. The budget deficit, now 2.8 percent of GDP, has room to rise as government debt is only 32 percent of GDP. But, though the development outlook doesn’t say so,  the traditionally conservative finance ministry is likely to keep a  rein on spending regardless of the pronouncements of the political leaders.

Image result for Singapore's Economic Outlook 2018

Fiscal conservatism can also go too far in Singapore, suggests the ADB’s outlook in one of its rare critiques of government. It states: “policy makers should consider placing a high priority on reining in persistent current account surpluses, which are primarily the product of an unusually high savings rate. Even a modest adjustment to this perennial macroeconomic imbalance would boost domestic demand and raise the economy’s potential growth rate. To this end, the government has ample resources for fiscal expansion.”

Image result for Vietnam's Economic Outlook 2018

Fiscal austerity remains a necessity in Vietnam.

Fiscal austerity however remains a necessity in Vietnam. This year the government deficit will be about 4 percent of GDP but with total debt over 65 percent there is scant room for a surge in public spending and a repeat of past cycles of inflation and devaluation.

There is pressure for more spending to offset what has been a slightly disappointing year so far, with GDP growth likely to be 6.3 percent against an earlier 6.5 percent projection with a small pickup in 2018. Vietnam has been hit by declining coal and oil output and prices partly offsetting strong manufacturing growth driven by foreign investment, and tourism. However both may ease off in 2018. The currency has been firm despite a small deterioration in the current account, and inflation is only around 4.5 percent.

Failure to resolve old non-performing loans remains a drag on the financial sector. There has been no consolidation in the banking sector and sale of equity by state firms has been slow despite a buoyant stock market driven in part by foreign portfolio flows.

Deciphering China’s Economic Resilience


July 26, 2017

Deciphering China’s Economic Resilience

by Stephen S. Roach*

*Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm’s chief economist, is a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management. He is the author of Unbalanced: The Codependency of America and China.

https://www.project-syndicate.org/commentary/china-economic-resilience-by-stephen-s–roach-2017-07

Once again, the Chinese economy has defied the hand wringing of the nattering nabobs of negativism. After decelerating for six consecutive years, real GDP growth appears to be inching up in 2017. The 6.9% annualized increase just reported for the second quarter exceeds the 6.7% rise in 2016 and is well above the consensus of international forecasters who, just a few months ago, expected growth to be closer to 6.5% this year, and to slow further, to 6%, in 2018.

Image result for China's Economic Resilience

I have long argued that the fixation on headline GDP overlooks deeper issues shaping the China growth debate. That is because the Chinese economy is in the midst of an extraordinary structural transformation – with a manufacturing-led producer model giving way to an increasingly powerful services-led consumer model.

To the extent that this implies a shift in the mix of GDP away from exceptionally rapid gains in investment and exports, toward relatively slower-growing internal private consumption, a slowdown in overall GDP growth is both inevitable and desirable. Perceptions of China’s vulnerability need to be considered in this context.

This debate has a long history. I first caught a whiff of it back in the late 1990s, during the Asian financial crisis. From Thailand and Indonesia to South Korea and Taiwan, China was widely thought to be next. An October 1998 cover story in The Economist, vividly illustrated by a Chinese junk getting sucked into a powerful whirlpool, said it all.

Image result for china's economic growth 2016

Yet nothing could have been further from the truth. When the dust settled on the virulent pan-regional contagion, the Chinese economy had barely skipped a beat. Real GDP growth slowed temporarily, to 7.7% in 1998-1999, before reaccelerating to 10.3% in the subsequent decade.

China’s resilience during the Great Financial Crisis was equally telling. In the midst of the worst global contraction since the 1930s, the Chinese economy still expanded at a 9.4% average annual rate in 2008-2009. While down from the blistering, unsustainable 12.7% pace recorded during the three years prior to the crisis, this represented only a modest shortfall from the 30-year post-1980 trend of 10%. Indeed, were it not for China’s resilience in the depths of the recent crisis, world GDP would not have contracted by 0.1% in 2009, but would have plunged by 1.3% – the sharpest decline in global activity of the post-World War II era.

The latest bout of pessimism over the Chinese economy has focused on the twin headwinds of deleveraging and a related tightening of the property market – in essence, a Japanese-like stagnation. Once more, the Western lens is out of focus. Like Japan, China is a high-saving economy that owes its mounting debt largely to itself. Yet, if anything, China has more of a cushion than Japan to avoid sustainability problems.

According to the International Monetary Fund, China’s national savings is likely to hit 45% of GDP in 2017, well above Japan’s 28% saving rate. Just as Japan, with its gross government debt at 239% of GDP, has been able to sidestep a sovereign debt crisis, China, with its far larger saving cushion and much smaller sovereign debt burden (49% of GDP), is in much better shape to avoid such an implosion.

To be sure, there can be no mistaking China’s mounting corporate debt problem – with non- financial debt-to-GDP ratios hitting an estimated 157% of GDP in late 2016 (versus 102% in late 2008). This makes the imperatives of state-owned enterprise reform, where the bulk of rising indebtedness has been concentrated, all the more essential in the years ahead.

Moreover, there is always good reason to worry about the Chinese property market. After all, a rising middle class needs affordable housing. With the urban share of China’s population rising from less than 20% in 1980 to more than 56% in 2016 – and most likely headed to 70% by 2030 – this is no trivial consideration.

But this means that Chinese property markets – unlike those of other fully urbanized major economies – enjoy ample support from the demand side, with the urban population likely to remain on a 1-2% annualized growth trajectory over the next 10-15 years. With Chinese home prices up nearly 50% since 2005 – nearly five times the global norm (according to the Bank for International Settlements and IMF global housing watch) – affordability is obviously a legitimate concern. The challenge for China is to manage prudently the growth in housing supply needed to satisfy the demand requirements of urbanization, without fostering excessive speculation and dangerous asset bubbles.

Meanwhile the Chinese economy is also drawing support from strong sources of cyclical resilience in early 2017. The 11.3% year-on-year gain in exports recorded in June stands in sharp contrast with earlier years, which were adversely affected by a weaker post-crisis global recovery. Similarly, 10% annualized gains in inflation-adjusted retail sales through mid-2017 – about 45% faster than the 6.9% pace of overall GDP growth – reflect impressive growth in household incomes and the increasingly powerful (and possibly under-reported) impetus of e-commerce.

Pessimists have long viewed the Chinese economy as they view their own economies – repeating a classic mistake that Yale historian Jonathan Spence’s seminal assessment warned of many years ago. The asset bubbles that broke Japan and the United States are widely presumed to pose the same threat in China. Likewise, China’s recent binge of debt-intensive economic growth is expected to have the same consequences as such episodes elsewhere.

Forecasters find it difficult to resist superimposing the outcomes in major crisis-battered developed economies on China. That has been the wrong approach in the past; it is wrong again today.