Economic Pragmatism and Regional Economic Integration: The Case of Cambodia


July 12, 2018

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Economic Pragmatism and Regional Economic Integration: The Case of Cambodia

by Chheang Vannarith

Chheang Vannarith, Visiting Fellow, ISEAS-Yusof Ishak Institute, explains that “International economic cooperation and regional integration are key principles of Cambodia’s foreign policy.”

Asia Pacific Bulletin, No. 429

Cambodia’s foreign policy strategy has been chiefly shaped and driven by “economic pragmatism,” meaning the alignment of foreign policy with economic development interests. The Cambodian government’s two main approaches to regional economic integration are (1) transforming the international environment into a source of national development and (2) diversifying strategic partnerships based on the calculation of economic interests. International economic cooperation and regional integration are key principles of Cambodia’s foreign policy, which emphasizes shared development and win-win cooperation.

As a less developed country in the region, Cambodia has a strong interest in promoting and realizing a more inclusive, fair, and just process of regional community-building that narrows the development gap and implements people-centered regional cooperation. Linking regional integration with national economic policies is critical to sustaining dynamic economic development.  Key tasks include improving regulatory harmonization and harnessing and synergizing various regional integration initiatives.  It is particularly important to link ASEAN community blueprints with sub-regional cooperation mechanisms such as the Greater Mekong Subregion (GMS) program and Mekong-Lancang Mekong Cooperation (MLC).

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Samdech Prime Minister Hun Sen–Father of Cambodia’s Socio-Economic Development

The Cambodian government perceives regional integration as a means to further advance its national development interests. ASEAN, GMS and MLC are the main gateways for Cambodia to reach out to the region and beyond. The ASEAN Economic Community Blueprint 2025 aims to achieve five goals: (1) an integrated and cohesive economy; (2) a competitive, innovative and dynamic ASEAN; (3) enhanced connectivity and sectoral cooperation; (4) a resilient, people-oriented, and people-centered ASEAN; and (5) a global ASEAN. GMS operates under the principles of non-interference, consultation and consensus, mutual interest and equality, win-win cooperation, shared development, and common destiny. GMS gives emphasis to practical or functional cooperation, aiming at achieving concrete results in poverty reduction. MLC promotes regional connectivity, production capacity, cross-border economic cooperation, trade and investment facilitation, customs and quality inspection, financial cooperation, water resource management, agriculture, forestry, environmental protection, and poverty reduction.

In the Rectangular Strategy Phase III, issued in 2013, a five-year strategic development plan, the Cambodian government set out a vision that states, “by the end of the first half of the 21st century, Cambodia is to reclaim full ownership of its own destiny, while becoming a real partner in regional and global affairs.” It further states that Cambodia is now “actively integrating itself into the regional and global architecture, and playing a dynamic role in all regional and global affairs on equal footing and with equal rights as other nations.”

The Cambodian government stresses several key benefits of regional integration, including regional peace and stability, the development of both hard and soft infrastructure, energy and digital connectivity, free and effective movement of trade and investment, human capital development, the expansion of regional production bases and networks, and stronger regional cooperation and coordination in agricultural development. Strengthening regional cooperation — especially in the Mekong region in rice production and trade facilitation — would contribute to improving farmers’ standard of living. Creating an association of rice-exporting countries will strengthen the global position of the Mekong countries.

Although there have been remarkable achievements over the last two decades in forging regional cooperation, integration, and connectivity, there are several challenges that Cambodia needs to overcome. Those challenges include socio-economic inequality within the country and the region, weak institutions and governance, and the lack of national capacity in implementing regional projects. Income disparity within the regions and localities contributes to political instability, trans-boundary crimes, illegal labor migration, and human trafficking.

Institution-building based on good governance remains a key challenge to the effective implementation of regional policies. The national capacity of each member country of the GMS in transforming and integrating its regional development agenda into a national development action plan is limited. The lack of resources in realizing regional development projects requires more investment and participation from the private sector.

Local government plays a significant role in regional cooperation and integration. Recognizing the role of local government in socio-economic development, in 2008 the government adopted two Organic Laws and established a National Committee for the Democratic Development of Subnational Administrations. These measures are aimed at decentralizing power and creating a sub-national governance system. Delegating power and resources to local governments at the commune, district and provincial levels not only contributes to national development but also connects governments with neighboring countries, especially in the border areas.  For instance, the Cambodia-Laos-Vietnam Development Triangle was formed in 2002 to link 13 border provinces of the three countries.

A major challenge is that both the central government and local governments in Cambodia lack sufficient institutional capacity and resources to effectively implement the country’s regional cooperation and integration agenda which includes the budget infrastructure connectivity projects. It is therefore necessary to forge a closer partnership between the public and private sectors, especially in infrastructure development and connectivity.  Decentralization, delegating more authority to local governments, can facilitate public-private partnerships and stimulate national public administrative reform. Cambodia’s Ministry of Economy and Finance crafted a policy paper on public-private partnership for public investment project management, 2016-2020, which aims to “create an enabling environment for promoting the participation of the private sector and financial institutions in public investments.”

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Phnom Penh, Cambodia

To enhance Cambodia’s competitiveness, and thereby to improve the depth and quality of its participation in regional economic integration, Prime Minister Hun Sen said at the GMS Business Summit in Hanoi in March 2018 that it was necessary to strengthen efforts in regional economic integration and connectivity through prioritized areas of finance, economy, e-commerce and cross-border trade.

The seize the opportunities arising from fourth industrial revolution and digital integration in ASEAN the Cambodian government is focusing on four pillars.  According to a speech by Prime Minister Hun Sen at the 2018 Cambodia Outlook Conference in Phnom Penh, these are:

(1) Developing a skilled workforce by emphasizing education in science, technology, engineering, and mathematics (STEM) and technical and vocational training, supporting linkages between education and enterprises, and creating a national accreditation system.

(2) Promoting a research and development network, a high-quality physical infrastructure, and a public-private partnership mechanism to support the establishment of research and development, the facilitation of information sharing and technology transfer, and the penetration of foreign markets.

(3) Further strengthening institutional, policy and regulatory frameworks by bolstering the implementation of intellectual property law, related regulations, and other regulatory frameworks in order to encourage and support entrepreneurs and scientists to innovate and sell their technology products and services.

(4) Inspiring public participation in the science and technology sector, promoting public awareness of the importance of STEM, and nurturing the talents of its population.

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Young and Better Educated Cambodians

As a small and open economy, Cambodia has taken a proactive approach in promoting regional integration based on the principle of win-win cooperation.  The government has taken measures to diversify the sources of growth by investing in knowledge-based economy and strengthen public-private partnerships. However, the lack of institutional capacity at both national and local levels remains a key constraint.

Snatch The Match From That Monkey Najib Before He Burns Down The Village


April 19, 2018

Snatch The Match From That Monkey Najib Before He Burns Down The Village

M. Bakri Musa
www.bakrimusa.com
It would take more than just a monkey with a match to burn down a village, despite the dwellings being made of wood and having flammable thatched roofs. Those homes have withstood generations of indoor wood-burning stoves and nightly mosquito-repelling ambers underneath their floors. There would have to be more, as with a long spell of dry hot weather and mountains of ignitable garbage strewn around.
      Yet when the kampung does get burned down, everyone would be shocked. The immediate reaction would be to blame the idiot with the match, and the fury heaped upon that poor soul would then be merciless.
      Consumed with vengeance and with little inclination or intelligence for reflection, the necessary probing questions would never get raised. As with who gave the idiot the match or why was he not supervised. Few would notice much less ponder why the strewn garbage was allowed to accumulate and thus pose a fire as well as health and other hazards.
      The kampung that is Malaysia has not burnt down, at least not yet. Malaysians are still smug and remain blissfully unaware of the long dry spell and the tinder dried debris that has been stacking up. Nor do they realize the danger posed by the idiot running around with a match in his hand and threatening more mischief. God knows he has wrecked enough damage already.
Being in the tropics, Malaysians are used to hot weather but the current hot political climate is very recent. The 1969 “incident” excepted, political riots and turmoils are not yet the norm. Malaysia has been thankfully spared such scourges as the assassinations of leaders and politicians, the staple of Third World politics.
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The BERUKs of Malusia
If Najib and his Barisan coalition were to prevail in the upcoming general election on May 9, 2018, however slim their victory, that would be akin to giving the village idiot a match, and then encouraging him to continue playing with it amidst the flammable debris and the high-voltage political atmosphere.
     The flammable debris are our failing institutions. Malaysias are also now deeply polarized, lending to the current highly-charged political climate. The last time Malaysians were stridently divided was during the 1969 election. Then the ruling coalition’s defeat in a few states and its loss of a supra majority at the federal level triggered a horrific race riot that killed thousands and maimed many more. Parliament had to be suspended and the nation ruled by decree. The scar of that national tragedy has now thankfully been sealed with a thick scab. It is unlikely that it would be rubbed open again despite the mischievous attempts by many.
     The polarization then was interracial, between Malays and Chinese to be specific, and the outbreak of violence was localized only to Kuala Lumpur. Today the schisms and polarizations are widespread but not interracial despite crude attempts by many to make it so, rather intra-racial, among Malays. Only East Malaysia is spared. As such Malaysians, in particular Malays, do not or refuse to recognize or even acknowledge this new threat to the nation. Therein lies the danger.
     Yet the evidence is glaring. I have never seen more ugly or blatant displays of vicious and visceral hatred directed at Najib and Mahathir. The two leaders themselves have set the pace and tone. Others too like their HRHS The Sultans and ulamas have taken sides. Their revulsion, as well as that of their followers, is so open. Such gross and uncouth displays are so un-Malay. I fear that should something untoward were to happen to Najib or Mahathir, that would trigger a vicious civil war among their fanatic followers, meaning, Malays.
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     Throughout history the most savage conflicts are intra rather than interracial. Witness the ongoing carnage in the Middle East. I am referring not to the Arab-Israeli dispute but the continuing savageries among the Arabs. The Korean Peninsula is still a tinderbox, ready to explode and taking the world with it. Then there was the earlier Chinese civil war. It would be a futile exercise to venture whether the Chinese suffered more under the Japanese or during their own civil war. It would not be an exaggeration to assert that the Japanese Occupation at least interrupted the brutalities the Chinese inflicted upon each other.
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They are partial to UMNO Malays, thanks to Najib’s “cash is king” lure.
What is so volatile about the current threat facing Malaysia is the absence of any restraining element to buffer or dampen this intra-Malay schism. Our institutions–from the sultans and the Election Commission to the Armed Services and the police–have failed us. The Sultans and Agung are not the “protectors” of Islam and Malay customs as they claim, or as tradition and the constitution would have it. They are partial to UMNO Malays, thanks to Najib’s “cash is king” lure.
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     The Chief of the Armed Forces had to retract his earlier statement proclaiming his troops’ and officers’ loyalty to Najib. That General forgot his oath of office, to serve King and country. Likewise the Registrar of Societies; she did her “job” in a single blow (pardon the pornographic pun) by denying the registration of Mahathir’s new party, a powerful opposition force. Meanwhile that clown Prince and Sultan wannabe in the southern tip of the Peninsula thinks he can titah (command) his fantasized “Bangsa Johor” as to which party to vote for! His father the sultan had gone even further.I would have expected Malaysian minorities to buffer or dampen this dangerous intra-Malay rift if nothing else for their (non-Malay) own self-interest. Instead they are sucked in by their own miscalculations into this perilous undertow.
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A sliver of hope is Sabah and Sarawak. Perhaps because everyone there is a minority, Malaysians there are inclusive and tolerant. They have gone beyond; they have not let their ethnic and cultural identities define or limit them. It is sad that their exemplary collective stance is lost on their fellow Malaysians in the peninsula.
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 Sarawakians must honour Tan Adenan Satem
The fact that UMNO, a national party otherwise, does not have a beachhead in Sarawak, explains why the particularly virulent racist virus that has infected UMNO’s body and mind in the Peninsula has not spread east across the South China Sea. I hope East Malaysians will keep it that way.

Malaysians have a crucial task in this upcoming May 9 General Election. They must snatch that dangerous match away from that idiot Najib and his band of mischievous UMNO monkeys. He and they have done enough damage to Malaysia. Stop them before they burn the whole country down.

 

The sharp power of development diplomacy and China’s edge


April 12, 2018

 

https://www.orfonline.org/expert-speaks/sharp-power-development-diplomacy-china-edge/

Chinese development diplomacy not only offers alternative sources of finance, but also presents a model that seems to overcome the major criticisms of traditional aid. However, such power relations are rarely horizontal, and often come attached with significant geopolitical implications.

Development Diplomacy,The China Chronicles

This is the fifty third part in the series The China Chronicles.

Read all the articles here.


Military might and economic coercion have traditionally been the preferred tools for the pursuit of geopolitical ambitions with soft power playing a supporting role. For the first time in contemporary geopolitics, we witness this accepted norm turn on its head. The experience of China being a classic example — where, in several cases, we see development diplomacy assume a central role in reinforcing Beijing’s hegemonic ambitions. Beijing’s conduct calls into question not only established understanding of geopolitics, but also that of global development.

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The sphere of global development will increasingly be the arena where geo-strategic tensions play out. As such, perhaps it is time to give development cooperation some serious consideration in the larger study of geopolitics.

The soft power of attractiveness and persuasion has often been treated as the stepsibling of coercive hard power. As Joseph Nye Jr. argues, diplomacy and economic assistance programmes are generally underfunded as they rarely show immediate visible results. Take the case of the United States — with arguably the largest strategic influence across geographical clusters, foreign aid makes up less than 1 percent of the American federal budget. In addition, when budget cuts take place aid faces the axe first, creating the perception that development aid is dispensable, particularly when compared to military spending. Yet, it is development diplomacy that has come to China’s advantage in securing its interests abroad.


 

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The soft power of attractiveness and persuasion has often been treated as the step sibling of coercive hard power.


China’s development assistance model — much like those of other emerging powers — are based on two fundamental pillars articulated in the two White Papers on foreign aid. First, it stresses non-interference and respect for the sovereign rights of partner countries. Articulated as a direct contradiction to the controversial conditionalities prescribed by traditional aid donors — most particularly the International Monetary Fund and the World Bank — the Chinese development approach provides recipient countries with the agency to choose their independent growth and development trajectories based on individual requirements.

Second, Chinese development finance follows the win-win principle. Identifying itself as a country still struggling with its own domestic development challenges, China’s economic assistance must bring benefits for the Chinese state — in addition to development gains recipient countries reap. The mutual-benefit principle also brings with it another aspect — the perception of a horizontal partnership and equal power dynamic. Thus, Chinese development diplomacy not only offers alternative sources of finance, but also presents a model that seems to overcome the major criticisms of traditional aid. The issue, however, is that such power relations are rarely horizontal, and they often come attached with significant geopolitical implications.

While it would be impossible to decipher the motivations behind China’s development diplomacy programme — other than those stated in the White Papers — development assistance has allowed China to secure a range of strategic gains. Beijing’s engagement with the African continent showcases many such instances. Beijing — through the People’s Bank of China, the China Development, the Export-Import Bank of China and the China-Africa Development — has provided Africa with a considerable volume of aid in the form of investments and loans. As per calculations by SAIS-CARI, Chinese loans to Africa amount to USD 86 billion in the 2000-2014 period. A major portion of these going to resource-rich countries such as Angola, the Democratic Republic of Congo and Sudan. Today, Africa is the second largest source of crude oil to China. More important, however is the increasing Chinese military presence in Africa. China’s contribution of military personnel to peacekeeping missions in Africa has seen a sharp rise — with more than 2,500 troops and experts committed to six such UN missions, according to the Council on Foreign Relations. Further, in 2015 Beijing promised the African Union military aid worth USD 100 million; and China’s first overseas naval base has recently been constructed in Djibouti.


Beijing — through the People’s Bank of China, the China Development, the Export-Import Bank of China and the China-Africa Development — has provided Africa with a considerable volume of aid in the form of investments and loans.


Asia too offers several such examples. The latest and most controversial one being Sri Lanka’s Hambantota port. In 2010, Beijing provided a loan of USD 1.5 billion for the construction of the Hambantota port — a project that many deemed economically unviable from the start. This loan, in addition to many other Chinese loans for various other infrastructure projects, has meant a monumental debt. The turn of events has been well covered — Sri Lanka signing a 99-year lease with Chinese state-owned firms for the Hambantota port. This also raises alarm bells for the rest of the infrastructure projects financed by Beijing — for instance, the many segments of the Belt and Road Initiative, which are unlikely to provide any significant commercial returns. Further, Beijing has invested in the construction of the strategically located Gwadar port in Pakistan; it has pledged USD 7.2 billion to develop a deep-sea port in the Straits of Malacca; and has entered into an agreement to develop the international airport of Maldives.

A country’s development policy and economic assistance programme can, thus, lead to more than the mere creation of global goodwill. In fact, such diplomacy figures as a useful instrument for a revisionist power to further its geopolitical ambitions. Consequently, the conventional categorisation of development diplomacy within soft power no longer holds. Considering this, then, does the study of soft power in international relations require a revision that reflects current geopolitical realities? Secondly, is there an added urgency in reconciling the existing ideological differences between traditional and emerging providers of development assistance — in order to develop an internationally accepted normative framework that is conducive to development and geopolitical stability? Lastly, will the threat of becoming a global outlaw be enough to bring an increasingly confident Beijing within the boundaries of such a normative framework?

The views expressed above belong to the author(s).

Future Prosperity of Greater Mekong Subregion (GMS) through Cooperation


April 9, 2018

Future Prosperity of Greater Mekong Subregion (GMS) through Cooperation

by Takehiko Nakao

https://moderndiplomacy.eu/2018/04/08/securing-the-future-prosperity-of-the-greater-mekong-subregion/

The Greater Mekong Subregion (GMS) countries have made stunning progress over the past quarter century. Once plagued by poverty, they are now economic success stories.

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Phnom Penh–The Hub of Greater Mekong Subregion, Cambodia

 

The GMS Economic Cooperation Program has contributed significantly to this transformation. Since it was established in 1992 as a means to enhance economic relations and promote regional cooperation, its six member countries—Cambodia, the People’s Republic of China, Lao People’s Democratic Republic, Myanmar, Thailand, and Viet Nam—have built a platform for economic cooperation that has mobilized almost $21 billion for high-priority infrastructure projects. Foreign direct investment into the subregion has surged ten-fold and trade between its countries has climbed from $5 billion to over $414 billion.

But the subregion faces challenges to its prosperity. Further reducing poverty, climate change adaptation and mitigation, energy efficiency, food security, and sustainable urbanization remain priorities of the GMS Program. Countries also face new challenges, including growing inequalities, rising levels of cross-border migration, and the potential impact on jobs of the fourth industrial revolution.

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Tsubasa Bridge ( Neak Loeung ),Cambodia

Moreover, GMS countries have agreed to significant commitments under the Sustainable Development Goals and the Paris Agreement on climate change.

There are also emerging opportunities for the region, including incorporating new technologies in various sectors such as education, agriculture, health, and finance. GMS countries are situated at the crossroads of South and Southeast Asia, and hence they can benefit from the increased momentum for growth in South Asia.

As GMS leaders gather this week in Hanoi to chart the future of the program, it’s a good time to consider how a new generation of initiatives can ensure the GMS Program remains relevant and responsive to the subregion’s needs.

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The Hanoi Action Plan and the GMS Regional Investment Framework 2022, both proposed for adoption at the Summit, provide a platform for countries to strengthen their cooperation through continuous innovation. These two documents will have a sharpened focus on the GMS Program’s strategic goals of enhancing connectivity, competitiveness, and community in the subregion.

Connectivity, the first objective, has been dramatically improved. More than 10,000 kilometers of new or upgraded roads and 3,000 kilometers of transmission and distribution lines have been added under the program. These transport networks have been transformed into an interconnected network of transnational economic corridors, building on 25 years of work to extend the benefits of growth to remote areas. The Ha Noi Action Plan calls for the continued expansion of these economic corridors to boost connectivity both between and within countries.

The subregion’s competitiveness is improving through ongoing efforts to facilitate transport and trade flows, enhance agriculture exports, and promote the GMS as a single tourism destination after receiving a record 60 million visitors in 2016. Looking ahead, it will be important to continue cutting red tape and to remove remaining barriers to transport and trade.

Finally, communities are being strengthened through cross-border initiatives to control the spread of communicable diseases, expand educational opportunities, protect the subregion’s rich biodiversity, and mitigate the impacts of climate change.

GMS countries have identified a new pipeline of 227 projects worth about $66 billion under the GMS Regional Investment Framework 2018–2022. These projects will expand economic prosperity by developing cross-border transport and energy infrastructure.

ADB, which has been the program’s secretariat since its inception, expects to provide $7 billion over the next 5 years for a range of projects supporting transport, tourism, energy, climate change mitigation and adaptation, agribusiness value chains, and urban development. This builds on more than $8 billion in financing provided by ADB so far under the program.

To deliver these projects and make headway on other priorities such as infectious disease control and environmental preservation, strong partnerships are vital. The GMS Program depends on the collaboration of many stakeholders, including local administrations and communities, development partners, academia, and the media.

The GMS will benefit from strengthened partnerships with other regional and global cooperation platforms, leading to new opportunities for future development.

Partnerships with the private sector will also be increasingly important, and it is gratifying to see them deepening through the GMS Business Council, the Mekong Business Initiative, the e-Commerce Platform, GMS tourism and agriculture forums, and the recent Finance Sector and Trade Finance Conference.

I am optimistic that the subregion will meet its challenges and capitalize on emerging opportunities. By working together, GMS countries can deliver rapid, sustainable, and inclusive growth for another 25 years and beyond. ADB will continue to be an important and trusted partner in that endeavor.

Voodoonomics: How successive governments impoverished Malaysians


March 15, 2018

Voodoonomics: How successive governments impoverished Malaysians

by P. Gunasegaran@www.malaysiakini.com

A QUESTION OF BUSINESS | At least two ways – both very wrong in the longer term – were used to support the export sector in Malaysia in believing that growth through exports was the right thing for a developing country like Malaysia.

Even though there was economic growth, which means more wealth was created, there was impoverishment too. But how could that be? Basically, those who were rich got richer and those who were poor got poorer.

How did the government achieve export competitiveness over the years? Through two measures. First, they reduced the number of things Malaysians generally could buy by opting for a policy which weakened the ringgit. And two, they imported poverty by allowing the uncontrolled import of cheap labour.

Both improved Malaysia’s competitiveness not by raising productivity, although there was some of that, but by cutting down the cost of labour through the import of cheap labour (imported poverty) and lowering the relative value of the currency or currency depreciation, effectively lowering costs in US dollars.

Let’s look at these measures in turn.

1. Currency Depreciation

The ringgit fell in value from around as strong as around RM2.2 to the US dollar in 1980 to around RM4.0 now. The US dollar appreciated by over 80% during the period and the ringgit lost over four-tenths of its value relative to the US dollar.

Consider what that does: if an imported food item cost US$1, it was RM2.2 in 1980. But it rises to RM4 now, an increase of some 82%. But consider it now from the exporter’s perspective: If he sells something for US$1 overseas now, he gets RM4 versus RM2.2 then, again 82% more.

Unless he shares this benefit equitably with the worker – and in practice, he does not – a depreciated currency is a subsidy to exporters and a tax on workers because everyone depends on imported goods and even services for a good part of what they consume. Think in terms of food, clothing and buying from foreign chains.

While a depreciated currency improves the appearance of export figures in ringgit terms, it is still not a long-term solution for the betterment of people because it directly impoverishes a major part of the public by reducing their purchasing power – the amount they can buy with the ringgit.

2. Importing poverty through cheap foreign labour

The next major stupid move successive governments did was to import cheap labour from overseas. Until today, this is largely from Indonesia, Philippines, Bangladesh and India.

In the 1980s, this happened in the plantations affecting mainly Indian Malaysians who were displaced from the estates due to cheap Indonesian legal and illegal labour. Soon, this imported cheap labour spread into all areas, heavily depressing labour wages, affecting all Malaysian labour including Malays.

Was wealth ever created?

How terribly short-sighted! While developed countries were importing skilled and white-collar workers from developing countries, Malaysia, still very much a developing country then (and still is despite what others say), was importing cheap labour from other countries, depressing wages of a large section – probably as much as 50% – of its own workforce.

What kind of a madness was this that at the same time inhibited improved productivity by opening the tap to cheap labour and delayed the invention and adoption of new processes to reduce labour input while improving productivity per person through training and automation?

Till this day, when employers complain of labour shortage, it irritates one to see imported labour at car parks, for instance, being used to hand out parking tickets even after the process has been automated at the entry points.

Drive further in and you see others directing traffic and blowing loudly on whistles. The price of labour is so cheap that imported labour is used for such menial tasks. Are Malaysians so illiterate that they can’t read and follow signs?

As if the whole situation is not ridiculous enough, government officials and ministers regularly regurgitate garbage by saying that labour imports are necessary because Malaysians do not want to do these jobs. Pay them enough and Malaysians will do the job. Perhaps the ministers should send their daughters and sons to do this kind of work for a pittance.

And as many millions of workers are imported, a thriving business sanctioned by the government sprouts up living off the blood and sweat of workers and exploiting employers by making both parties pay ridiculous amounts for legal import, driving them towards employing illegal workers.

One may ask, what then is the alternative? If you want a broad section of the public to get richer and more affluent, the only way is to create wealth for everyone.

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That means improving the overall productivity or output per person so that he or she deserves a higher wage. Not by creating wealth for some and impoverishing most via currency depreciation and depressing wages.

Ah, yes but how do you do that? There is only the hard way. First, improve the quality of education for all and focus on the right kind of education which will make people employable.

Next promote the kind of industries which will increase the dollar value of output per person and ensure that productivity gains drive wealth creation, not cost-cutting.

Third, ensure that as much as possible of the resources go towards improving educational opportunities and building the necessary infrastructure for continuing productivity improvements with as little leakage as possible.

How much of this has been done since independence? Little.

The frightening part

According to Khazanah Research Institute’s (KRI) ‘State of Household Report’ dated November 2014 and Employees Provident Fund (EPF) data on individual incomes which includes salary or wages, overtime payments and bonus in 2013:

  • 96 percent of active EPF members earned less than RM6,000 a month
  • 85 percent less than RM4,000
  • 62 percent less than RM2,000

That’s a telling figure – 62 percent of workers earn less than RM2,000 a month. How can many of them live comfortably with such an income, especially when they have children to support?

Meantime, the median monthly salaries and wages per month for individuals was RM1,700 in 2013 (see chart below). That means half of all workers get this much or less, KRI explains.

And what does an illegal Indonesian worker earn in a month these days? In March, there are 27 working days including Saturdays on which they typically work as well. Industry employers say Indonesian illegal workers cost RM70 a day, casual, that means not contracted. Multiply that figure by 27, we get RM1,890 for the month of March.

Now, the frightening part is that this is more than the RM1,700 median salary for Malaysia which means that 50% of Malaysians earn less than casual Indonesian workers!

Clearly, the majority of the country lives in poverty. Income gains for the wage-earner have not gone up enough. And for a country like Malaysia with abundant resources and which once had the highest income in Asia after Japan, that reflects a failure of government.

If one needs an example of successful economic development, you just need to look across the Causeway which started pretty much from where Malaysia did and look where it is now with the adoption of the right policy mix coupled with an incorruptible government.

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The currency–the Singapore Dollar– is now valued at three times Malaysia’s against about parity in 1980 and its per capita income is among the highest in the world.

We are not saying that Singapore is the perfect state but in terms of economic development, they have beaten us by far and continue to do so.


P GUNASEGARAM still hopes that sometime in the future (perhaps soon?) there will be a government not only of the people but for the people. E-mail him at t.p.guna@gmail.com

The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.

Economic Policy making under Trump Presidency


January 28, 2018

Economic Policy making under Trump Presidency

Commentary from Project Syndicate

by Edmund H Phelps

http://globalgeopolitics.net/2018/01/26/economic-policymaking-in-the-age-of-trump/

We are living in worrisome economic times. One year ago, I observed that US President Donald Trump’s bullying of companies and individuals who get in his way is reminiscent of Benito Mussolini in the 1920s. Like Mussolini, Trump poses a clear danger to the rule of law.–Edmund

 

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For decades, America has suffered from a long-run productivity slowdown that has sapped the economy of its former dynamism, and left median wages stagnant. Will the tax legislation recently enacted by congressional republicans and the Trump administration finally reverse this trend, or will it make a bad situation worse?

PHILADELPHIA – We are living in worrisome economic times. One year ago, I observed that US President Donald Trump’s bullying of companies and individuals who get in his way is reminiscent of Benito Mussolini in the 1920s. Like Mussolini, Trump poses a clear danger to the rule of law.

My subject here, however, is the tax legislation that Trump signed into law in December, on the promise that reducing the rate at which corporate profits are taxed will help an ailing US economy.

Political Responses to  the Malaise

For several decades, the US economy has exhibited various symptoms of economic malaise. Now, we have a political upheaval on our hands. While real (inflation-adjusted) median wages have been nearly stagnant for decades, private saving from profits and enormous capital gains have continued apace. As asset prices – to say nothing of the wealth-wage ratio – have climbed to vertiginous levels, established wealth has grown more powerful, and wealth managers have done well.

Worse still, in industries hit hard by foreign trade or automation, many jobs have been eliminated, and real wages have actually declined. As these new developments continued over the past few decades, they placed increasing pressure on society as a whole. Ultimately, there was an electoral realignment, marked by a shift in voting patterns among key economic constituencies.

Remarkably, neither Democrats nor Republicans seemed to register these economic and social ailments, or the consequences they could have. When Hillary Clinton launched her 2016 presidential campaign with a speech on Roosevelt Island, she focused heavily on achieving social justice for marginalized groups. She did not address the fact that, some six decades ago, the US economy lost the sustained growth it had been generating since the 1820s, despite depressions and inflationary cycles.

While Democrats became increasingly fixated on notions of “fairness” and what academics call the “just economy,” they apparently didn’t notice that the country had been operating for decades without a good economy. Countless people have had little or no chance of feeling fully included in economic life. They have been deprived of jobs that are actually engaging, and of opportunities to feel that they have succeeded at something.

As the renowned Columbia University philosopher David Sidorsky recently pointed out to me, ancient philosophers spoke of “the good and the just” (boni et aequi), not “the just and the good.” Clearly, the Democrats put the cart before the horse. First, we need a good economy. Only then can we devise a just way to reward participants for contributions that the economy empowers them to make.

An Attempt at a Cure

After securing the presidency – in addition to both houses of Congress – in 2016, Republicans have tried to run the ball through the opening left by the Democrats. Throughout 2017, they pursued a range of reforms to address weak investment and stagnant wages, and ended the year with the newly enacted tax legislation, which cuts the tax rate on corporate profits from 35% to 21%.

Economists who support the Republicans’ tax legislation have relied on a textbook growth model to claim that it will boost investment activity. According to their model, investment will drive up the capital stock until it reaches the steady-state level where the after-tax rate of return falls to the level of the real interest rate. The real interest rate is exogenous, and reflects investors’ time preferences, world interest rates, and other factors. The point where the rate of return intersects with the real interest rate is shown in Figure 1. (A more classical case, in which the rate of return is pulled down by capital accumulation, is shown in Figure 2.)

Supporters of the tax legislation reason that if the tax cut pushes up the after-tax rate of return, investment activity will increase, and the capital stock will expand, boosting productivity until the capital stock reaches a new steady state, which they calculate will happen in around ten years.

But, as is always the case with supply-side economics and more radical forms of Keynesianism, this approach is profoundly short-sighted. After ten years, there is no reason to think the faster growth will continue.

Without the same level of indigenous innovation that was achieved during the golden era of high growth rates, from the 1820s to around 1970, the Republican tax law will amount to nothing more than a stop-gap measure. And even over the next decade, it will not deliver truly rapid growth.

The Problem with Models

More fundamentally, we ought to ask whether it is right to expect tax cuts to translate into higher productivity growth. I would argue that, because the tax package will add to the annual fiscal deficit and the public debt, it might actually block investment, and thus derail a productivity pickup.

When I was a young economist working on my 1965 monograph, Fiscal Neutrality Toward Economic Growth, I would have looked at today’s favorable short-term conditions and actually called for a tax increase across the board, in order to stanch the federal government’s fiscal hemorrhaging. A tax hike might push down bond yields, and thus bring about higher share prices and a considerable drop in interest rates over the entire yield curve, provided the US Federal Reserve didn’t offset the move by unwinding its bond holdings.

Thinking back even further, to when I was a young student, I can remember congressional Republicans voicing their opposition to fiscal deficits, and President Harry Truman, a Democrat, enacting a run of fiscal surpluses aimed at mopping up the federal debt. These policies, helped by inflation (which lowered the real value of the debt), did not lead to a depression. There was only the 1949-1950 recession.

Nowadays, a crude form of Keynesianism is so deeply ingrained in voters’ minds that any program aimed at achieving a fiscal surplus, or even balance, has become unthinkable. Yet one wonders if the new tax law will arouse worries about the sustainability of the growing federal debt, which is already high after the presidencies of George W. Bush, a supply-sider, and Barack Obama, a Keynesian. If so, such concerns would push up interest-rate risk premia in anticipation of a depreciating dollar. Yes, the Republican plan does include some provisions to raise revenue or cut spending, but that is not entirely reassuring.

Of course, those who support the law would argue that the supposed increase in investment activity will immediately push up the dollar’s exchange rate, and that the dollar’s real value would then depreciate gradually to where it had been. Otherwise, no one would want to continue holding foreign capital. This points to a paradox in the law. Trump ran on the promise of boosting American exports, but in standard models, an appreciating dollar will depress export demand.

On the other hand, a stronger dollar will prompt domestic firms in import-competing industries to cut their markups so that potential foreign rivals will be less inclined to invade the US market. As a result, wage rates might be pulled up along with the amount of labor supplied. These particular industries, then, would experience an expansion of output and employment.

An Uncertain Prognosis

But for those who do not share the perspective of the law’s supporters, this scenario is hardly a sure thing. After all, who’s to say if the tax package will drive up business investment until the marginal productivity of capital has fallen enough to raise substantially the marginal productivity of labor? That scenario might be possible; but it is in no way assured. As New York University’s Roman Frydman and I argued in a commentary last month, the real-life US economy is not a “mechanical system in which changes in tax parameters and other inputs explain exactly why and how investment occurs and the economy grows.”

Unfortunately, the economics profession has ignored the potential implications of human agency. If far more people were to start conceiving and creating innovations, investment and wage rates might rise well beyond what the textbook model would have predicted. By the same token, if fewer people engage in innovation, investment and wages rates may rise less than expected, or even fall.

In other words, the innovation factor could very well dwarf the effect of the cut in the corporate-tax rate over the next ten years. By that point, we might not have enough evidence to determine if the tax cut was effective, or merely an inconsequential drop in the bucket.

And the uncertainty goes deeper than that. The problem is not just that the traditional model’s disturbance terms may be so large that they overshadow the effects of the tax cut, but also that the coefficients for measuring the tax law’s effect on investment or wages might not even be knowable. The innovators driving (or failing to drive) gains in productivity cannot be certain ahead of time what form their new products or methods will take, or whether they will be adopted at all. How, then, could economists ever foretell precise changes in investment patterns as a result of a tax cut, or what effects new investments will have on the marginal productivity of labor?

As I suggested in November, what we call the “natural” unemployment rate can be affected by insecurity and fear. Similarly, if an unfunded tax cut conjures visions of insolvency, corporate executives might be wary of making new investments. Or they might decide to invest predominantly in labor-saving technologies, which could actually reduce wages and eliminate jobs in some industries. Given that possibility, one cannot be sure whether the tax law will have a positive or negative effect on wages, employment, or productivity.

None of this is to say that we should avoid new departures. Certainly, we must keep trying in the hopes of making progress. Or, as Candide (in the musical) tells Cunégonde after they have both endured many difficulties, “We’ll do the best we know.”

About the Author:

Edmund S. Phelps, the 2006 Nobel laureate in Economics, is Director of the Center on Capitalism and Society at Columbia University and the author of Mass Flourishing.

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