Irate Expat takes on Penang’s Chief Minister Guan Eng over Traffic and Development


June 3, 2016

Irate Expat takes on Penang’s Chief Minister Guan Eng over Traffic and Development

by Predeep Nambiar

http://www.freemalaysiatoday.com

 Lim-Guan-Eng

Businesswoman from China raises concerns about development, saying ‘Why must Penang be like Singapore or Hong Kong? Penang must remain calm, beautiful’

Penang Chief Minister Lim Guan Eng spent five minutes calming down a frustrated expatriate who had complained about worsening traffic and uncontrolled development in the state.

Chinese national Sophia Zhou, vented her frustration at Lim as he was leaving the Golden Screen Cinemas in Gurney Plaza last night. Zhou, who has businesses in Europe, raised concerns about the need for an undersea tunnel and uncontrolled development in Penang.

Penang–Still Pearl of the Orient

Lim had just opened the Penang Le French Festival, accompanied by French Ambassador to Malaysia Christophe Penot. Lim, who appeared unfazed with her comments, calmly explained to her that with progress came development and the need for proper transport infrastructure.

“Do you know that The Aga Khan Trust has an agreement with the Penang government to develop our heritage city?The fact that they want to come here means they are confident that Penang can promise a sustainable development,” he said.

Zhou then related her experience when she first moved to Penang under the Second Home programme. “When we arrived five to 10 years ago, there were hardly any tall buildings around. Right now, everywhere there are buildings. Now you want to build a third bridge,” Zhou said.

To this, Lim said the government was keen on building a tunnel, and the third bridge remained an option if the Federal Government allowed it. Lim then told Zhou that the undersea tunnel would only be ready 12 years from now in 2027.

Zhou also queried why the contract and land was given to a Chinese company. Lim then explained to her that a Malaysian company won an open tender to build the tunnel.

It had been reported previously that the entire Penang Tunnel project was awarded to joint venture company Consortium Zenith-BUCG Sdn Bhd, which comprises Zenith Construction from Malaysia and Beijing Urban Construction Group (BUCG) from China.

Later, Zhou commented that the Penang Government should focus on building reliable public transport instead of roads. She suggested to Lim perhaps a subway (underground train system) could be built.

“I think public transport needs to be improved. I waited 40 minutes for a bus. Why don’t you build a subway? There are too many cars on the roads and we are often stuck in traffic.

Lim then said: “That is why we are building an LRT system. Subways are expensive.” The Chief Minister was then led off by Penot.

Zhou then addressed the media present, asking: “Why must Penang be like Singapore or Hong Kong? Why can’t it be what Penang is supposed to be? Calm and beautiful.”

 

WEF ASEAN 2016–Opening Plenary Shaping the ASEAN Agenda for Inclusion and Growth


June 1, 2016

WEF ASEAN 2016–Opening Plenary Shaping the ASEAN Agenda for Inclusion and Growth

Listen to Prime Minister of Malaysia. Don’t you think he should start with Malaysia first and get on with good governance? Right now, Malaysia is credibility is low. We want good and competent leaders. Otherwise, it is all empty talk. Prime Minister Najib Razak,just do not play with words.–Din Merican

Psychology matters a great deal


May 1, 2016

Psychology matters a great deal in determining shifts in the economy.

by Robert J. Shiller
“We don’t know whether any specific event — say, an unexpected spike in oil prices or a decline in the stock market — will help transform any of the current social stories into a truly virulent economic disruption. We don’t know what is coming or when. But history does tell us that human imagination can spontaneously transform discrete events into world-shaking narratives of unexpected colour and force.”– Robert Shiller –Nobel Prize Laureate in Economics 2013

Economists are good at measuring the past but inconsistent at forecasting future events, particularly recessions. That’s because recessions aren’t caused merely by concrete changes in the markets. Beliefs and stories passed on by thousands of individuals are important factors, maybe even the main ones, in determining big shifts in the economy.

That is likely to be the case again, whenever we next endure a global recession. Worries that a big downturn might be imminent seem to have abated, but they still abound. In April, for example, the International Monetary Fund reported in its World Economic Outlook that while very modest growth is likely this year, the world economy was in a “fragile conjuncture.”

It is therefore worth asking what actually sets off a real global recession. Most discussions focus on leading indicators — statistics about economic variables that have preceded recessions. While these kinds of correlations can sometimes be useful in forecasting, they provide little understanding of why major changes are taking place. Leading indicators don’t usually address ultimate causes, nor do econometric models that try to predict events.

In fact, it’s instructive to remember that global recessions have usually begun suddenly and been a real surprise to most people. As I have argued in this column and with George A. Akerlof in Animal Spirits (Princeton 2009), such events can largely be ascribed ultimately to contagious stories of wide significance. Basically, global recessions tend to begin when newly popular narratives reduce individuals’ motivation to spend money. Psychology matters a great deal.

The biggest recession of all, the Great Depression, began suddenly with the stock market crash of October 1929, as Christina Romer, former chairwoman of President Barack Obama’s Council of Economic Advisers, pointed out in a famous paper. Even before 1929 was over, she found, department store sales and automobile registrations had declined, indicating that consumer spending had already dropped sharply. But why?

Economists were alarmed by the crash, she found, and their warnings helped make consumers wary. But let’s not overestimate the importance of these economic forecasts: Most people never actually read them. They received their information from other channels.

Back then, immediately after the market crash, church sermons were a powerful influence. Congregations were told that many business people had behaved like gamblers and hucksters. Through these sermons and other word-of-mouth sources, moralising about the stock market crash spread, affecting mass psychology. Frederick Lewis Allen, in the epilogue to his 1931 best-seller Only Yesterday: An Informal History of the 1920s, wrote that cultural values changed after the crash: People began to dress more modestly, adopting a new formality and religiosity, reviving Victorian sexual taboos. It is reasonable to assume that many of these changes had an economic impact, mainly by discouraging spending.

Similarly in more recent downturns, broad cultural and social changes had big effects, too. Since World War II, there have been four global recessions, according to the International Monetary Fund, which defines such an event very specifically as negative global per capita economic growth over at least one year. In each case, these recessions lasted only one year, although relatively slow economic growth rates were also an issue in periods surrounding them. The recessions ended in 1975, 1982, 1991 and 2009.

As they had with the Great Depression, economists have cited concrete causes for these events. Oil has been named as a fundamental factor in each case, with price spikes blamed on the Yom Kippur war of 1973, the Iran-Iraq War beginning in 1980, the 1990-91 Persian Gulf war and rising energy demand in China and other emerging countries in 2008.

Broader social narratives are sometimes ignored, but they matter, too. Consider the recession of 1975. Along with oil prices, common ways of understanding and describing daily life also changed. The oil crisis was widely said to signal the end of an era of abundance. Lower highway speed limits were imposed to conserve fuel, and cars grew smaller. Americans were told to lower their home thermostats to 68 degrees. In large numbers, people began wearing sweatsuits, flannel leg warmers, thermal underwear and long johns. Among all this austerity, economist E.F. Schumacher’s 1973 best-seller Small Is Beautiful became a global morality lesson.

Let’s jump to the most recent global recession, the one of 2009. Oil prices, subprime mortgages and the freezing up of the financial system after the collapse of Lehman Brothers were all important factors. But why did we have a global recession? The transformation of distinct events into a broad global slowdown occurred through a variety of mechanisms. Reports about financial misdoings, the possible collapse of venerable institutions, rising unemployment caused by advanced technology — all of these affected the psychology of spending.

Where does this leave us now? No single narrative seems to have enough compelling force at the moment to engender a downturn as big as the last one. Many people have been borrowing from older narratives of risk and vulnerability while trying to understand the current economy. Oil prices have been slumping, not soaring, but there are significant worries about outsourcing, downsizing and globalisation, along with deep concerns about rising inequality, refugee and immigrant flows, and what has been called secular stagnation of the economy. Political candidates on both the left and the right have been spinning charged and sometimes disruptive narratives about these issues.

We don’t know whether any specific event — say, an unexpected spike in oil prices or a decline in the stock market — will help transform any of the current social stories into a truly virulent economic disruption. We don’t know what is coming or when. But history does tell us that human imagination can spontaneously transform discrete events into world-shaking narratives of unexpected colour and force.

 

Indonesia launches ‘big bang’ liberalisation


February 12, 2016

Indonesia launches ‘big bang’ liberalisation

by Avantika Chilkoti in Jakarta

Indonesia has announced plans to liberalise rules on foreign investment in a number of industries, as President Joko Widodo strives to jump-start growth and draw investors to Southeast Asia’s largest economy.

Facing criticism over creeping protectionism and regulatory flip-flops, the government has announced a big overhaul of the so-called “negative investment list” — a highly sensitive catalogue of sectors in which foreign investment is limited.

A total of 35 industries were removed from the list on Thursday, including film, tourism and restaurants, in what economists are referring to as a “big bang” move that could drive efficiency and competitiveness in local industry.

“This policy is not about liberalisation, it is to encourage economic modernisation,” Pramono Anung, cabinet secretary, told reporters.

 In certain sectors foreign groups will still be unable to wholly own businesses but they will be able to invest alongside local partners. Investments in the e-commerce industry above Rp100bn ($7.3m) will also be free from restrictions, in a move that has been closely watched in recent months as Jakarta’s start-up scene has blossomed.

“The extent of creative destruction created by e-commerce is unprecedented,” Sofyan Djalil, Minister for National Development Planning, told the Financial Times in an interview last month. “On one hand we have to protect family shops but on the other hand we have to enter this new reality — I think smart policymakers have to find a mixed policy.”

The announcement is the latest in a series of reform packages from Jakarta since September, including changes to the national minimum wage and new streamlined licensing processes for large infrastructure projects.

“It’s definitely a step-up compared to the policy packages you saw before — these were relatively small-scale,” said Euben Paracuelles, an analyst at Nomura. “From the signalling standpoint I think this could cement what has been changing slowly from protectionist sentiment to a little more market friendly [sentiment].”

 Elected on a promise of reviving growth and pushing through pro-business reforms, President Widodo has so far developed a reputation for inward-looking policy and growing protectionism. Last year, for example, foreign businesses expressed alarm over suggestions that expatriate workers would be required to pass a language test to work in Indonesia, while import duties were raised sharply on a range of consumer goods.

Yet the president is now looking to foreign investment to boost growth as commodity prices remain weak and economic growth in the resource-rich market slowed to a six-year low in 2015.

Since shaking up his cabinet in August, in particular, Mr Widodo has launched a big reform push. Trade minister Thomas Lembong has led a marked pivot in economic policy. Following his appointment in August, the Harvard-educated former private equity executive has moved away from protectionist rhetoric and Indonesia has expressed interest in joining the Trans- Pacific Partnership.

 Foreign direct investment was up 19 per cent year on year in 2015 to Rp365.9tn ($27.3bn), according to official data, with a spike in the last quarter when sentiment improved markedly.

This week’s announcement comes amid rising concern for foreign investors in the country, which has a population of 250m and is an important market for many multinational groups.

 In the past week Swedish furniture group Ikea lost a legal battle against a small local furniture business claiming the Ikea trademark. Harley-Davidson, meanwhile, has pulled out of the country following the introduction of new import tariffs and luxury goods taxes that have squeezed business.

 Additional reporting by Taufan Hidayat in Jakarta

 

 

The Nexus Of Corruption And Higher Income


September 9, 2015

The Nexus Of Corruption And Higher Income

by Hishamh

http://econsmalaysia.blogspot.com/2012/03/nexus-of-corruption-and-higher-income.html

Part I

INTRODUCTION

This post isn’t a defense of corruption. It’s not an April Fool’s joke either. There’s no doubt that corruption weighs on an economy and on society through many different channels – through higher costs of doing business, to redistribution of income, through reducing the rewards of entrepreneurship, through social and economic inequality, through reducing the level of trust in society (indirectly contributing to all the problems listed above, and more).

But…

There’s this meme I’ve been hearing and reading that if we can just handle corruption, Malaysia would easily become a high income nation.

The basis for this view is this seemingly convincing correlation between corruption and per capita income (this is the full dataset; the charts I’ve seen elsewhere are more simplistic):01_cpiThe data is taken from Transparency International’s Corruption Perception Index (CPI) from it’s inception in 1995 to the latest numbers published a few months back (with a scale ranging from zero being totally corrupt, to ten meaning completely corruption free).

The horizontal axis is GDP per capita in current international dollars adjusted for purchasing power parity, from the IMF World Economic Outlook database (September 2011 edition – 2011 data and some past years data for some countries are based on estimates).

The chart above tabulates values of the CPI against per capita income for every country which has a score under the CPI (except for Kosovo, which has no GDP numbers).

The scatter plot of the data suggests that countries with lower levels of corruption have higher levels of per capita income. Therefore, the reasoning goes, the route to becoming a higher income economy can be trodden by simply reducing the level of corruption. If corruption represents costs to economic growth and development, reducing it would ipso facto improve the income level; Quod Erat Demonstrandum (QED).

I wish it were so easy. You could just as easily say that as income levels increase, the incentive for indulging in corruption falls. Countries have low levels of corruption because they have high income. QED. And if you have a background in statistics or econometrics, you could also point out that the causal relationship might be two-way (corruption drives changes in income, AND income drives changes in corruption) or that income and corruption levels might be driven by a separate independent process, in which case the inverse causal relationship between corruption and income might be completely spurious i.e. there’s no real relationship at all, they just happen to move together.

In summary, corruption might cause income; OR income might cause corruption; OR both; OR neither. Correlation on its own does not really prove anything.

Now the ideal way to solve this conundrum is to figure out all the factors that contribute to income and corruption levels, throw them into a coherent model, and test the significance of the coefficient estimates.

That’s a little beyond the scope of a blog post. But there are ways to determine whether there is any causal relationship between corruption and income, without bringing in other variables.The analysis of the data will be very wonkish, so if you’re allergic to statistical analysis, I’d advise jumping straight to the end.

Part II

ANALYSIS

We should start off first by formalising the correlation into a regression. Using an unbalanced panel estimation with fixed effects on the sample data above (translation: we do a regression that covers all countries simultaneously over time), we get the following results (standard errors in parenthesis):Ln(GDP) = 8.49 (0.06) + 0.26*Ln(CPI) (0.04)

What this says is that a 1% increase in the CPI score is associated with a 0.26% increase in the level of income.

So if you go from a CPI score of 5, and manage to increase it to 6 (an increase of 20%), your associated income level should be on average 5% higher (the 95% confidence range would be between 7% and 3%). If you’re going from a score of 2 (e.g. Cambodia, Laos) to 7 (US, France), your income level would be between 45% to 85% higher (average: 65%).Would that kind of increase be sufficient to qualify as a high income nation? I’m not sure but I don’t think so, certainly not based on the examples I quoted. What about if we look at levels alone?

GDP = 8803 (894) + 965*CPI (205)

Since we’re dealing with current GDP numbers, we can evaluate this against the World Bank’s current threshold for high income, which happens to be USD12,195.

What this means is that all you need is a CPI score of about 3.5 (Thailand; El Salvador) to cross over into becoming a high income nation. Ahem.

That’s obviously not true, so we need to look into this a little deeper – the correlation, such as it is, isn’t really helpful at all, and can’t be relied upon to give a true picture of the relationship between corruption and income.

What about a non-linear relationship (log GDP against actual CPI score)? I tried it, and it’s not much different from the first attempt above (an increase of 1 point in the CPI score raises GDP per capita by 6%-8%; again not terribly convincing).

So back to first principles – what is the the CPI? It’s a continuous (not discrete) scale that ranges from zero to ten. Looking at the individual country scores and testing for unit roots suggest the CPI scores are mainly – though not all – I(0) variables i.e. the CPI scores are stationary variables. On the other hand, GDP per capita numbers are very obviously I(1) variables i.e. non-stationary variables.

If you want to know the difference, here’s a sample of the data for Australia:

03_cpi_au_thumb

04_gdp_au_thumb

In the first graph, the CPI numbers mainly fluctuate between 8.6 to 8.8, with the exception of a couple of years. That’s what a stationary variable looks like – it fluctuates around a central point through time. The GDP data however is continuously rising across time i.e. it’s non-stationary.

There are exceptions; for a subset of countries, the CPI is generally rising with GDP per capita, and for another subset, we have the opposite – the CPI score is falling but GDP per capita is rising. But on the whole, the general case is of a fairly stable CPI score with a continuously rising GDP per capita.

And this gives a partial solution to the problem – the CPI score, as constructed, cannot have a long term causal relationship with GDP per capita. You need an absolute, not relative, equivalent measure to properly define the relationship between corruption and income. Changes in stationary I(0) variables cannot “explain” long term changes in I(1) variables, you need to have variables of the same order of integration.

But all hope is not lost – if you can’t make the CPI data non-stationary, it’s fairly trivial to transform GDP per capita data into stationary data by taking the difference in values between each period. In other words, it’s theoretically valid to examine the relationship between the CPI score and real GDP growth.

So, starting all over again, here’s the same dataset but tabulating the CPI score on the vertical axis, and real GDP per capita growth on the horizontal axis:

02_cap_thumb

And one look is all you need – there is no strong relationship between corruption and economic growth. Changes in the level of corruption don’t appear to be associated with changes in the rate of growth. There might be a relationship between corruption and the variance of growth (wider scatter at low CPI scores), but not the level of growth itself.

More formally (standard errors in parenthesis):

GDP growth = 0.045 (0.01) + 0.001*CPI (0.002)

The intercept (0.45) is statistically significant, but the coefficient for the CPI (0.001) is not statistically significant from zero – rather strongly so (p-value=0.6275).

[BTW, we’ve just discovered the trend estimate for world real GDP per capita growth over the last 15 years (0.045 = 4.5%).]

Does GDP growth affect corruption? Not hardly:

CPI = 4.33 (0.15) + 0.11*GDP growth (0.23)

Same story as above – the intercept is statistically significant, but the coefficient for GDP growth is not (p-value again at 0.6275).

The obvious conclusion is that the correlation between the CPI score and real GDP per capita is spurious – they’re both being driven by (an)other unidentified process(es). I’ll admit that finding surprised me – I expected to find a relationship, even if a very weak one. What could be the possible reasons behind this?

Part III

CONCLUSION

The idea that corruption has a dampening effect on income levels and/or growth is intuitively appealing, yet the data doesn’t appear to support any causal relationship of any kind. In fact, the conclusion appears to be that the relationship is technically spurious – corruption affects neither the level or growth of income, nor does income affect the level or rate of corruption (or should I say, the perception of corruption).

Here’s some of the reasons why I think the results came out the way they do:

  1. Accuracy of the dataset – The CPI scores are composites of surveys of business people on their experience with corruption in their respective countries. Taking the CPI scores as given means accepting that the CPI number accurately reflects actual corruption. That may not be true for a number of reasons, such as differences between opinion and actuality, or instances of corruption that might not impinge on the business community (NFC is a good example, since it allegedly involves CBT, rather than bribery). I also suspect the CPI score says more about the level of trust in public institutions as much as actual experience of corruption.
  2. Lags in the data – Because the CPI score is a reflection of business community perception of corruption rather than its incidence, there might be a lag structure to the data. For example, if a corruption case is exposed today, it might raise the perception of corruption now (a lower CPI score) even though the actual corruption might have occurred years before. That suggests increasing transparency might have a short term perverse effect on the CPI score, before returning perception returns to its “true” level.
  3. Variance in the dataset – While TI puts in considerable effort at arriving at a definitive CPI score (and kudos to them for trying), the variance of the scores in the individual surveys can be pretty wide – as much as 1 point or more. That means the data can be a bit “fuzzy”, especially for those countries with lower scores – the variance is noticeably smaller for countries with high CPI scores. In which case OLS regression analysis (which works towards minimising errors) might not be capturing the true relationship, simply because the distribution of the actual level of corruption might be too wide.
  4. Non-linear relationship between corruption and income – There’s the possibility that corruption only affects national income and growth at certain ranges of corruption. That may be true especially at the bottom of the income scale, as the relative costs of corruption on society might be larger. Past a certain income level, the costs of corruption might rapid diminish. Applying the same analysis to subsets of the data might reveal a causal relationship. I’d tend to discount this explanation though, as looking at the individual country scatterplots tends to show a relatively stable value of the CPI against higher and higher income levels.
  5. The fallacy of composition – Corruption is often seen to be a dead loss to the economy, but that’s only true at the level of the individual economic agent. It largely isn’t true for the economy as a whole. Money spent on bribery for instance transfers wealth and income from the briber to the bribed – one loses and one gains. But from the perspective of GDP, the difference in terms of growth and spending will only be seen in terms of the differences in marginal consumption and saving between the two parties. If the bribed spends as much as the briber, then total expenditure within the economy doesn’t change. Only if the briber has a smaller propensity to consume will income levels and growth be negatively affected (incidentally, that suggests that venal corruption should be more tolerated than large scale corruption), or if the expenditure takes place elsewhere, e.g. buying condos in Australia instead of in Malaysia. What this means is that the impact of corruption should primarily be seen through rising income and wealth inequality (the distribution of income), and/or through capital flight,  but not in GDP or GDP growth.

Any or all of the factors above could be in play, or just as likely, that the analysis I’ve done is correct and there’s some other factor driving both variables – income inequality for instance, or the integrity of social and political institutions, for example.

But the bottom line here is that the available evidence that I’ve been able to come up with just doesn’t support a causal link between income and corruption, or vice versa.

I’ll conclude with the actual data for Malaysia; it’s illustrative of problem (CPI score against GDP per capita; red line is the estimated regression):

05_my_gdpMalaysia shows a negative relationship between the CPI score and GDP per capita – so if you believe that there is a causal relationship, the way to increase our income level is to increase the perceived level of corruption. That obviously can’t be right. A more plausible explanation? The CPI score is actually pretty stable from 1995 to 2008 – I wonder what happened then (*cough*).

Moving on (CPI score against GDP per capita growth; red line is estimated regression):

06_my_capHere the estimated relationship is slightly positive (higher CPI leads to higher growth), but the sample coefficient is statistically indistinguishable from zero; in other words, there’s no detectable relationship.

The most appealing explanation I can come up with for the data is that increased transparency post-2008 and the proliferation of online news channels and social media activism, has seen evidence of past corruption increasingly surfacing and that’s been reflected in a higher perceived level of corruption (lower CPI score).

It isn’t that corruption is increasing, it’s that we’re more aware of it and increasingly intolerant of it. Which is a good thing, and signals in a way our increasing development as a society. But I don’t expect that reducing corruption will, on its own, help Malaysia become a high income nation.

Technical Notes:

  1. Corruption data is from Transparency International’s Corruption Perception Index, from 1995 to 2011
  2. GDP per capita data is taken from the IMF World Economic Outlook database (September 2011) – series code PPPPC.

Here are some comments:

Anonymous:

There is just too many variables to correlate GDP growth with a gamut of factors..for all I know, we can’t even correlate the cleanliness of our public toilets with economic growth but first..data please.

I do work with statistics but in the manufacturing sector using minitab..seems there is no correlation of CPI with GDP growth primarily because CPI is not measurable but a perception and we know we have citizens who put down the perception of our country…getting a positive perception on corruption in Malaysia would be impossible.

Shihong

Hi Hishamh,

First of all, thanks for the awesome study. It has really given us a lot of insight on corruption and economic growth.

I think you may have said this, but not exactly in these words. Also, it wasn’t exactly clear from your 2nd part. May I know how you had defined GDP growth or GDP per capita growth. If my assumption is correct, and that you had used year-on-year growth, then I think it would not be too surprising to encounter almost no correlation. My take on this is that, from year to year, I would think that any number of factors would affect GDP growth (global economic conditions, commodity prices, bad weather, etc). Corruption would be a pretty insignificant factor for short-run growth. Perhaps you may have tried this, but I think there should be a much stronger link between corruption and long-term growth. It’s hard to say how long term is long term though. Plus, I think you may have been handicapped by the short CPI data.

Also, another small issue that I am not entirely sure is that, perhaps, developed countries (which I assume tend to be less corrupt), will tend to have smaller growth rates, courtesy of the fact that their GDP is already at a high base. So, if your data does not go far back enough to reflect the transformation from a low income economy to a high income economy, it will create sort of a distortion in the sense “low corruption may be correlated with low growth”.

I am not trying to poke holes into your study here. I really think that it has definitely given us a lot of things to think about. Really appreciate it.

 

Malaysia: The Making of a Kleptocracy


September 6, 2015

COMMENT: This is well written piece by Murray Hunter. Real economic reforms have yet to takedato-din-merican place in our country. Hopefully the high powered committee appointed by our desperate Prime Minister recently can start the process. We lost the opportunity to restructure our economy in 1997-1998. Maybe the priority was different then.

For starters, this Committee must not be imprisoned by the NEP mindset and be humble enough to learn from South Korea which used the Asian Financial Crisis to restructure its economy including the highly leveraged chaebols like Samsung, Hyundai, and Lucky Goldstar (LG), which have become global players today. The Koreans moved away from kleptocracy to democracy and free market economics. I congratulate them for their vision, determination and courage. That is what we need in Malaysia–a merit based and market driven economy with democracy in tow.

The new economic policy for our country should be based on empowerment and meritocracy, not dependency on an interventionist nanny state ruled by corrupt kleptocrats and plutocrats. For that to happen Prime Minister Najib must be removed from power, the sooner the better. In addition, we must disband the expensive Pemandu and let the once effective Economic Planning Unit in the Prime Minister’s Department take over. More importantly, we need to be bold and innovative if we are to rescue our economy and compete globally.

I disagree. however, with Murray’s statement that “[S]uccessive post independence governments all dominated by the United Malays National Organization (UMNO) had always promoted a primarily market based economy, managed through fiscal and monetary policy.” The New Economic Policy was very much state driven.–Din Merican

Malaysia: The Making of a Kleptocracy

by Murray Hunter

http://nsnbc.me/2015/07/15/malaysia-the-making-of-a-kleptocracy/

The post independence Malaysian economy grew out of a mixture of an agro-mercantile and Chinese business domination to what it is today. Successive post independence governments all dominated by the United Malays National Organization (UMNO) had always promoted a primarily market based economy, managed through fiscal and monetary policy. In addition, growth had always been promoted and guided through a series of five-year plans, and specific sector development plans like agriculture, multimedia, biotechnology, and regional development corridors.

Najib and RosieThe Looters of Malaysia’s Wealth

However, the Malaysian Government has always felt there has been a need for economic intervention through various methods to achieve certain economic and political goals. The first round of economic intervention was about the ‘Malaysianization’ of the economy after independence. The second round of intervention came after ‘race’ riots on May 13th 1969, where the New Economic Policy (NEP) was conceptualized and implemented to bring more Bumiputera equity into the economy. A third round of intervention started in the 1980s under then Prime Minister Dr. Mahathir to bring Malaysia into developed nation status.

During the last 50 years, Malaysia has slipped from being an economic role model for developing countries to a lackluster one, with many structural inefficiencies that have made the economy extremely uncompetitive.

This has occurred to the point where commercial opportunity for new entrants in many parts of the Malaysian economy is now negligible. The Malaysian economy is distorted, starved of innovation, diversity, fair access to markets, market competitiveness, and entrepreneurial opportunities.

As a consequence, Malaysia today is a net exporter of investment capital, which according to an Asian Development Bank series paper is a case of capital flight, and an indicator of underlying structural weaknesses within the economy.

Over the years since independence, the predominant mindset of politicians, policy planners and implementers has evolved from being ‘stewards’, to ‘technocrats’, to ‘crony apparatchiks’. Those responsible have turned the Malaysian economy into so something that resembles a ‘centrally planned’ economy. Malaysia has bucked the trend towards economic liberalization in the ‘top down’ sense of control over what goes on within numerous sectors of the economy.

Three major forms of state intervention have been used to drag the Malaysian economy into this position today.

1. Outright Government regulation and control of the economy,

2. Market interaction of Government owned special purpose business vehicles such as Government Linked Companies (GLCs), and State economic Development Corporations (SEDCs), and

3. Developing an environment where unfair competition exists through favoritism, cronyism, and corruption.

Market Regulation

Malaysia is one of the most regulated markets within ASEAN, if not the whole Asia-Pacific region.

Import permits (locally called APs) are required for a number of products including food items, sugar, wheat flour, milk, pharmaceuticals, photocopier machines, toner, electrical household appliances, printers, steel products, automobiles, and luxury goods. Export licenses are also needed for a host of agricultural products as well. Thus those individuals and companies which have APs for particular goods exercise a virtual monopoly over the market.

One example is Padiberas Nasional Bhd (Bernas) which is the sole importer of rice into Malaysia. There are stiff legal penalties for anybody who imports rice into Malaysia, thus protecting the Bernas monopoly. The company is owned by UMNO connected Syed Mokhtar Syed Nor and a number of UMNO politicians. This gives an individual control over Malaysia’s rice industry and national stockpiles. The paddy industry is in effect regulated by a private company, where farmers are not free to grow what they want, and rice distributors are restricted in what they can offer to the market.

In the rice industry, Malaysia is missing out on opportunities for farmers to empower themselves through forming marketing cooperatives like their counterparts in Thailand can. In addition entrepreneurial innovation is stifled because it is illegal for farmers to grow some of the more popular varieties of aromatic rice that consumers now demand.

Many markets are restricted to semi-monopoly controlled businesses that are politically connected through the issuance of import licenses and quotas. Going back to the rice example, the industry is extremely inefficient and declining under the control of a near monopoly, when new production and market paradigms are urgently needed to improve Malaysia’s competitiveness.

Other sectors of the market in Malaysia are heavily controlled. In the mid-1990s, the Domestic Trade and Consumer Affairs Ministry was given the responsibility under the Franchise Act 1998 to develop and regulate the industry. a number of bureaucratic requirements were enacted, making the procedure to become either a franchisor or franchisee cumbersome. The Franchise Development Programme (FDP) requires franchisors to undertake a number of steps and procedures before they could be registered under Section 6 of the Franchise Act. Consequently, the combination of bureaucracy, regulation, procedure and plain dishonesty among some franchisors brought misery and suffering to many unsuspecting franchisees. Many unhappy franchisors have suggested to the author that some collusion exists in this process between consultants and officials.

There are many other restrictive regulations that hinder competition in the market. Any direct marketing company must have at least RM1.5 million capitalization, which restricts many potential entrepreneurs from going into business. Licenses for television and radio licenses are very restrictive, leaving the broadcast media in the hands of only a few proprietors. Astro, the nation’s satellite TV broadcaster has a sole monopoly, where the possession of satellite receivers and dishes is illegal.

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Government ministries heavily regulate the sectors they are responsible for to the point of eliminating any potential competitiveness the sector has to offer the global market. For example, the Ministry of Education heavily regulates higher education to the point of what any university can teach, how curriculum is delivered, who can be employed as academics, and the selection of key position holders. The higher education system is producing graduates who can follow directions, rather than leaders of industry. There are also great mismatches between what industry requires in skills and what universities are currently providing. This is evidenced by very high unemployment rates of graduates within Malaysia today. There are currently more than 160,000 unemployed graduates today according to a Minister within the Prime Ministers Department Datuk Seri Abdul Wahid Omar.

The restriction of entry into universities based on race has contributed to a brain drain which is driving away valuable talent needed to drive innovation. According to the World Bank almost one million Malaysians, of which about one third are professional have left the country for good. This is about 3% of the total population. With this loss of expertise Malaysia’s ability to continue being competitive will be hampered.

GLCs and SEDCs

Ever since Malaysia’s raid on the London Stock Exchange back in September 1981 to buy the plantation company Guthrie and place it under PNB’s control, government linked companies (GLCs) are now in almost every sector of the Malaysian economy. Today GLCs employ more than 5% of the Malaysian workforce and represent approximately 35% market capitalization on the Malaysian Stock Exchange (Bursa Malaysia).

Petronas, Sime Darby, UMW, Media Prima, Maybank, CIMB, are dominant in their respective sectors. Many GLCs control over 60% of their particular markets, thus stifling competition and investment from private entities in these industries.

In addition to these national GLCs, state governments through their respective State Economic Development Corporations (SEDCs) directly enter markets and attempt to exploit entrepreneurial opportunities. This makes it almost impossible for small firms to compete as SEDCs and GLCs have favored access to resources, regulation to protect them, and choice selection of land, etc, at favored rates, if not free. SEDC companies take the choice projects and weaken the ability of private enterprise to play a role in regional development.

GLCs and SEDC subsidiaries companies use their unfair advantages to compete with local entrepreneurs. This is stifling competition within the Malaysian economy.

One of the economic tragedies surrounding these companies is the waste involved. Many projects are recommended and planned by consultants without any consideration of market viability. In many cases public funds are utilized to develop ‘white elephant’ projects with little or no economic benefits, where only the contractors and consultants have benefitted.

One of the other dangers of the massive matrix of GLCs within the Malaysia economy is that aggregate economic activity is very much dependent upon GLC spending within the economy. Today with household debt at 88%, GLCs are the only potential driver of economic growth.

Unfair Competition through Corruption and Cronyism

Cronyism is a major factor in skewing free market competition in Malaysia today. Ever since the Mahathir-Anwar plan to create new Malay entrepreneurs in the 1980s by promoting people like Halim Saad and Tajudin Ramli, crony capitalism has become a major feature in the Malaysian economy.

Today, Malaysia is an economy where most politicians have businesses which compete against entrepreneurs in an unfair manner. No mechanism to check these conflicts of interest such as parliamentarian asset register currently exists.

There is a wide perception within Malaysia that the level of corruption is on the increase. Corruption and cronyism have skewed most of the tender process within Malaysia, where the level of transparency is next to nil. Toll concession agreements are considered state secrets in Malaysia.

Reports to the author from petty class F contractors supplying goods and services to government around Malaysia, are stories of payments to public office bearers for the right to supply a good or service. Some stories put these payments as high as 60% of the contract, where many contractors are unable to make a profit. With payments taking up to six months, many Bumiputera businesses are financially suffering around the country. This is hindering healthy SME competition and growth.

Failure and the Future

Planning mechanisms have become distorted over the last decade where economic studies and plans have been written by consultants in isolation to the market. Very little consultation is made with industry, consumer, or community groups in planning. This has mostly resulted in infrastructure and programs being designed and developed that nobody needs. This type of central planning has been no more successful than the old ‘Gosplan’ state planning mechanisms in the old Soviet Union decades ago.

New policy initiatives today seem to benefit one or more groups. The New Economic Policy (NEP) had noble aims which many international economists applauded in the early 1970s. However the NEP is now widely seen as an instrument that benefits a very small cadre class today.

All this has been made worse with corruption seeping down to the micro-enterprise level where small business is suffering. NEP implementation has hindered healthy business growth and the very groups it was intended to benefit are suffering. GLCs have not protected Bumiputera interests, but in fact sidelined many potential Bumiputera entrepreneurs, through crowding out markets.

Due to regulation, GLCs, and corruption and cronyism, both foreign and local investment in Malaysia has been lackluster sine the Asian financial crisis back in 1997.

Today Malaysia is in the unusual position of being a net exporter of capital. The IMDB fiasco will further weaken any chances of reversing investment trends within the country. With Malaysia being a net importer of oil, and palm oil and rubber prices being at all time lows, public sector spending must decrease.

With Malaysia’s current economic structure, there is no clear future driver of economic growth. Malaysia’s heavily regulated economy and markets are stifling the much-needed innovation needed to develop new sources of growth. Unfortunately, there are no economic reforms or initiatives signaled in the 11th Malaysia plan. It is almost silent on economic restructuring.

These reforms heralded by Prime Minister Najib when he came to power in 2009 and implemented by Idris Jala, Minister in the PMs Department heading PEMANDU, have not been forthcoming. Malaysia is now in an innovation vacuum, threatening economic buoyancy .

With fraudulent, corrupt business practices on the rise in Malaysia, and an ineffective Malaysian Anti Corruption Commission (MACC), there is a widening trough between rich and poor in Malaysia, which is beginning to attack the viability of the new middle classes.

Many Malaysian companies are becoming so frustrated with not being able to secure land and licenses for their expansion plans, they are seeking out new locations for their operations. The Thai Government is hoping to cash in on this and has just recently set up a number of Special Economic Zones across the border from Malaysia in Songkhla. Another one will be set up in Narathiwat in the not too distant future.

Ironically the strongest warning of what may happen in Malaysia in the future comes from former Prime Minister Tun Mahathir Mohamed himself, where he said in his memoirs that Malaysia’s policies have produced a ‘culture of entitlement’ where “…I fear for our coming generations. I worry that the children of those who have made it good will take the policy for granted and never learn to be intellectually and economically self reliant.”