G7 Summit @Shima, Japan: No common workable solutions offered


May 30, 2016

G7 Summit @Shima, Japan: No common workable solutions offered.

by Bunn Nagara

http://www.thestar.com.my

ANOTHER G7 Summit has come and gone, with the only certainty being next year’s Summit amid more daunting challenges.

Leaders of the United States, Canada, Britain, France, Germany, Italy and Japan plus the EU gathered for two days during the week in the Japanese coastal resort of Shima to ponder on the world’s problems.

These mostly Western countries have come a long way in trying to tackle global challenges with declining capacity. The modalities of this year’s gathering were predictable, its tenor pessimistic.

The chief issues raised were terrorism, refugees and not least, declining growth. These are problems of the world which G7 countries have taken upon themselves to address.

The result has been a loosening grip on these already intractable problems. Typically, no common workable solutions were offered by the end of the Summit.

Terrorism has long been a scourge throughout the world. With neither “terrorism” nor its root causes identified, acknowledged and defined, it will long remain a scourge.

Much of that applies to mass refugee flows. To the West, which the G7 implicitly represents, the problem is how to handle, reduce or stop these influxes.

To the source countries of refugees however, the problem is a home nation made uninhabitable through devastation and war.

According to the UN High Commissioner for Refugees, the three main source countries are Syria, Afghanistan and Iraq. These are countries that the West has bombed, attacked and invaded in recent years.

An obvious solution for the future would be to end Western militarist ventures abroad. But there was no indication the Summit acknowledged this any more than it could identify a solution for declining growth.

The most that it could achieve this year was to produce a declaration thick with phrases like the need for “inclusive growth” that is “sustainable” because of “weak demand” and “structural problems”.

There was also the customary denunciation of protectionism and all trade barriers. The International Monetary Fund, a key G7 participant, staunchly displayed its Bretton Woods DNA in the face of multiple global challenges.

As host, Prime Minister Shinzo Abe was keen to impress and to leave an imprint, perhaps even to establish a legacy.

So he tried to sell his “Abenomics” formula as a solution to the world’s economic problems. This comprised a fiscal stimulus, monetary easing and structural reforms.

Unfortunately for Abe, by the first quarter of 2016 Abenomics was discredited widely as a failure in Japan and abroad. Among other things, it began by ignoring Japan’s debt problem and then enlarged it.

Abe tried to spook his guests into believing that the beginnings of another 2008 crisis were already at hand. But they should know a thing or two about that crisis since they started it, and said current problems were only its tail end – albeit almost a full decade later.

At the Summit Abe could not even get his first stage, fiscal stimulus, to be accepted by his G7 guests. They politely countered that each country would have to find its own solution.

Britain, Germany and the IMF in particular were dead set against a fiscal stimulus or monetary easing, let alone both. Any structural reforms deemed necessary would then be very different from those of Abenomics.

The final joint declaration agreed only to depressed growth being a problem, not to a solution for it. This did not stop Abe from claiming in his closing address that the G7 had agreed to apply Abenomics for the world.

Another issue the G7 tried to grapple with was the global steel glut with the focal point on China. But China, which produces half the world’s steel, was not mentioned.

China had already cut production by 90 million tonnes, with plans to cut up to another 150 million tonnes in the coming years. But its industrial momentum is such that, as Japan acknowledged, it is a challenge simply to slam on the brakes.

One result has been the United States slapping a 522% tax on Chinese steel for property construction and automotive manufacture, while still complaining of protectionism and trade barriers. US steel producers blame Chinese state subsidies and China blames unfair Western practices. The rest of the world sees an unrepresentative G7 posing as the world’s saviour.

This year’s Summit also expressed concern over developments in the South China Sea without mentioning China, but still incurred Beijing’s displeasure. That could conceivably have been avoided if China was a member.

The G7 began in 1974 as an informal meeting of finance officials from the United States, Britain, France, West Germany and Japan in Washington. They were supposed to be the economic movers and shakers of the world.

Then this Group of Five in 1975 grew into the G6 with the inclusion of Italy, with meetings of the finance ministers and central bank governors of the five Western countries and Japan.

Later Canada and then Russia joined to make it the G8. It became the G7 again after Russia was excluded, following strategic differences with the West over Ukraine.

Today the G7 plus EU remains very much a Western entity, comprising six Western countries and Japan, a US ally. More than half the members are already in the EU, with effective EU representation again amounting to additional Western membership.

The G7 still holds itself up as the arbiters of global economics, but how credible is this claim today?

The world’s highest scorers in (nominal) GDP per capita are Luxembourg, Switzerland and Qatar, and in PPP (purchasing power parity) terms are Qatar, Luxembourg and Singapore.

Granted, these countries may lack the global heft of major powers, but what are the economic standings of the G7 countries themselves today?

In nominal GDP per capita, the United States, Britain, Canada, France, Germany, Italy and Japan come in 5th, 13th, 16th, 22nd, 20th, 27th and 25th places respectively.

In PPP terms of GDP per capita, they are 11th, 21st, 27th, 25th, 20th, 32nd and 29th.

Several private Western sources list the world’s 10 most influential national economies (alphabetically) as Brazil, Britain, Canada, China, France, Germany, India, Italy, Russia and the United States, albeit in different orders.

Britain’s Telegraph newspaper group, which adjusts influence based on certain criteria, lists Indonesia in place of Italy.

Russia is now excluded from the G7 because of political differences, while China and India are excluded because they are still developing countries. But these distinctions are ultimately subjective.

What matters more, particularly for the G7’s own credibility, is how relevant its membership still is for the issues it seeks to tackle. The lack of “fit” has only produced a common frustration.

It is a frustration seen on both sides of the “Brexit” issue. A lack of fit has made one side want to pull Britain out of Europe, while the other sees a solution in redefining its presence there.

It is also a frustration seen in last year’s G7 Summit protests despite its remote location in the Bavarian mountains. Protesters saw a lack of fit between the G7 and real world problems.

G7-Summit–Obama’s Last

In the United States, a sense of frustration from a lack of fit in current institutions and practices has led to the Trump and Sanders candidacies in the presidential election. Adjustments or upheavals then naturally result.

Bunn Nagara is a Senior Fellow at the Institute of Strategic and International Studies (ISIS) Malaysia.

Seizing the moment in Asian economic diplomacy


May 2, 2016

Economics, Politics and Public Policy in East Asia and the Pacific

Seizing the moment in Asian economic diplomacy

by  Editors, East Asia Forumhttp://www.eastasiaforum.org/2016/05/02/seizing-the-moment-in-asian-economic-diplomacy

Asia is looking to complete a major economic agreement by early 2017 that offers the chance to lift its growth closer to potential by locking in domestic reform and liberalisation through regional cooperation. The Regional Comprehensive Economic Partnership (RCEP) agreement is Asia’s response to the Trans-Pacific Partnership (TPP) and heralds the next phase in Asian economic cooperation. But RCEP is qualitatively different from past cooperation in Asia — more comprehensive in scope than any of its antecedents — and its delivery will require enormous political will.

Economic cooperation and the growth of economic interdependence in East Asia occurred without preferential regional agreements, unlike in Europe through the EU or in North America with NAFTA. Yet economic integration in East Asia by most measures is on par with that of these other regions. The main drivers have been trade liberalisation (with successful commitments by the major East Asian players to the GATT/WTO) and competitive liberalisation of investment regimes. The WTO International Technology Agreement (ITA), for instance, gave a huge boost to the development of regional value chain production in the electronics sector.

Understanding that opening up to trade and investment is necessary for growth, development and prosperity gained momentum in East Asia over the years. South Asian countries have yet to settle on that consensus. The growing weight of the East Asian economies in the international economy, combined with their proximity and the complementarity of their economies, is why intra-East Asian economic relationships have grown so large. The Japan–China trade relationship, for example, is the third largest in the world. India is gradually joining the pack.

As the East Asian economies have climbed the income ladder — Japan, South Korea, Hong Kong and Singapore are already high income economies — their international economic policy interests have shifted from trade in goods and direct investment to trade in services, investment in production networks and financial market integration through capital account liberalisation. The economic cooperation agenda in East Asia now encompasses all these issues — not just border trade liberalisation but the economic and institutional reform behind the border that is essential to attaining the region’s future economic growth potential.

The diversity of the regional economies and polities, and difficulties stemming from historical and political baggage among them, has shaped the nature of economic cooperation in Asia. Building a framework of shared priorities and trust has allowed rapid catch up through the gains from trade and commerce for growth and development. Most of the action has been through concerted unilateral reform reinforced by global commitments (spectacularly, for example, through China’s accession to the WTO).

With multilateral trade liberalisation stalled and the Doha Round going nowhere, Asia has turned to imitating negotiating preferential bilateral agreements. Free trade agreements have proliferated but have brought neither the large gains proponents claimed nor the damage critics argued they might. Excluding sensitive sectors, already low barriers to trade at the border and the lack of reform behind borders has meant they have brought little benefit nor imposed large costs.

Enter the mega-regional arrangements, TPP and RCEP. They have the potential to exclude or include and carry greater significance for the global system.The TPP includes the eastern Pacific members of APEC — the United States, its NAFTA partners Mexico and Canada plus Chile and Peru — as well as RCEP members Australia, Japan, Brunei, Malaysia, Singapore and Vietnam. But China, Indonesia, South Korea, India and the other ASEAN states, leave a big hole in the TPP donut. RCEP is in part a response to the TPP, driven by Indonesia

As Peter Drysdale explains in this week’s lead essay, ‘the RCEP group is where the global economic dynamism is, and [presents] a massive opportunity for the region’. READ: http://www.eastasiaforum.org/2016/05/01/asias-next-growth-frontier/

Much ink has been spilled about what a large chunk of the world economy TPP represents. The group of countries that comprise RCEP were already larger than the TPP group in real terms by 2007. Given the rise of the Indian economy and China’s continued growth, even at a 5 per cent a year, the RCEP grouping could be double the size of the TPP group in ten or at most 12 years.

RCEP includes less-developed countries in Southeast Asia and others like India that are further behind both economically and in trade and economic reform. The gains from opening up these economies and buttressing national domestic reform through regional reinforcement is huge.

China and India will not be able to join the TPP any time soon and, as Drysdale argues, ‘an ambitious and high-quality RCEP can offset trade and investment diversion from TPP and work to integrate the entire Asia Pacific region.’ Exclusion from the TPP is not just a Chinese and Indian problem. ASEAN members not party to the TPP will also struggle to join in the near future, creating serious fault-lines in progress towards East Asian economic integration. Already some manufacturers are moving from China to Vietnam to take advantage of better access to the US market — a costly exercise that is diverting investment and trade away from non-TPP members.

The TPP is thought by many to be a higher quality agreement because of the new issues it introduced such as stronger intellectual property protections, data flow liberalisation and new dispute settlement provisions. Some of those aspects will help open economies up and provide impetus for reform, but not all.

Distinctively, RCEP will include an ongoing economic cooperation agenda providing regional peer support for domestic institutional reform. As Drysdale says, the ‘economic cooperation agenda sets up RCEP as an important vehicle for building economic and political confidence in effecting the next big structural transformation across Asia, between China, India, Northeast Asia and Southeast Asia’.

The cooperation agenda also means the agreement is not a one-shot game. This is an opportunity for Asia to bring in harder cooperation with binding targets and commitments, combined with its cooperation agenda to help countries define their own paths to prosperity.

The momentum is building among the negotiating corps, though there is a way to go. Failure doesn’t mean that Asia will stumble. But it would mean that we’d be in for a period of distinctly below potential growth from a group of economies more likely to get stuck in the middle income trap. The opportunity is within grasp. All delivery on the RCEP agreement needs is something in short supply: some leadership.

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

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.

 

Quality Healthcare in Singapore


March 9, 2016

How can we compete with Singapore and Bangkok in the provision of quality healthcare? I am pessimistic about our ability to match their medical and patient service quality. We spend loads on scarce tax ringgits on promoting medical tourism.Billions have been spent by the private sector to build modern hospitals and equip them with state of the art of facilities. Yet, we have found private healthcare wanting. Why? I will attribute this to the way we do things.It is our attitude and culture of mediocrity. We are brilliant at talking, but fall short on action.

I welcome your comments. Big talking Nazri Aziz, Minister of Tourism is also welcome to respond. His time and talent would be better used to deal with this issue than to defend our Prime Minister.–Din Merican

Quality Healthcare in Singapore

One of Farrer Park Hospital’s rooms. Photo: Farrer Park Hospital

The lobby reception at Mount Elizabeth Novena. Photo: Mount Elizabeth Novena

A concierge service, beautifully-plated meals, a personalised tablet with Wi-Fi access and ensuite bathroom complete with premium toiletries were some perks 47-year-old business owner Ms Wong Li Ping enjoyed during her five-night hospital “staycation” at Farrer Park Hospital (FPH) last December.

“The staff even went the extra mile to provide me with cranberry juice every day although it was not on the menu as a natural adjuvant to my therapy. I felt pampered, as if I was staying in a five-star hotel,” said Ms Wong, who was admitted for a renal condition that required intravenous treatment.

These five-star healthcare hospitality and frills are no longer reserved only for the uber-rich. Private hospitals that look and feel like upscale hotels are growing in numbers here, catering to a mix of local patients and medical tourists.

In 2012, Parkway Pantai Group launched Mount Elizabeth Novena Hospital (MNH) comprising only single-bedded rooms. Each room comes with standard hotel-styled features such as floor-to-ceiling windows, marble bathrooms, mini bar, coffee machines and luxury linen. Also available upon request – at no additional charges – are limousine transfer services and complimentary massages for maternity patients.

Slated to officially open its doors this month, FPH is the newest private hospital in town. The 220-bedded facility is part of Singapore’s first fully integrated healthcare-hospitality complex which links the hospital to a five-star One Farrer Hotel and Spa, restaurants and educational facilities.

Besides its upscale offerings, arrangements can be made for relatives of patients to have direct access into the hospital’s deluxe suites from the hotel, a boon for international patients travelling with family members.

Higher Expectations and Overseas Rivals

Single rooms significantly reduce the risk of hospital-acquired infections while the added privacy allow patients to recover in peaceful environment, said Mr Stephens Lo, Chief Executive Officer of MNH.

There are also higher patient expectations. “Even many of our hawker centres are now air-conditioned. What you would consider frills in the past is now the today’s norm,” said FPH’s spokesperson.

Recognising this, facilities providing maternity healthcare services have also jumped on the bandwagon, wooing patients with complimentary perks at no additional charges. Beyond clinical services, patients now look for value-added offerings, said Ms Mega Shuen, General Manager at Thomson Medical Centre.

For instance, TMC provides maternity patients with a complimentary massage service as well as post-discharge phone call services to ensure that mother and baby are coping well. Mothers who deliver there this year will also enjoy a specially commissioned luggage comprising a range of premium maternity and baby items.

Stiff overseas competition is also keeping the private healthcare sector here on their toes.

International patients form about 30 and 50 per cent of total patients seen at MNH and FPH respectively. MNH’s Mr Lo noted that regional competitors are catching up with Singapore on clinical competencies for standard medical procedures, often at a lower cost.

 

“In order to compete effectively, we have to move up the value chain, place greater focus on developing our capabilities, complex procedures and provide an overall superior patient experience through high service standards. At MNH, we seek to provide our patients with high quality of care at affordable prices,” he said. In 2013, MNH introduced Class A single rooms in 2013, priced at S$418, about 35 per cent less than rates for standard single rooms.

A 2015 BMI Research report has warned that Singapore will lose medical tourists as patients explore cheaper options to competing hubs in neighbouring cities. In 2013, medical expenditure generated from travellers was S$832 million, a decline of 25 per cent from 2012’s S$1.11 billion, according to figures from Singapore Tourism Board.

FPH’s spokesperson said significantly higher pricing premiums are “no longer sustainable for the private hospital sector given the changing economy and overseas competition”.

“Singapore continues to attract international patients who come to us for more complex medical procedures, such as heart surgery, due to our reputation for high quality of clinical care. Even so, we still hope to make high standard of care affordable for our target audience,” she added.

Competitively-Priced

A check revealed competitive inpatient room rates between some restructured and private hospitals here.

For private patients, a Class A single bedded room in National University Hospital’s (NUH) general ward is around S$527 a night, with deluxe rooms in the same ward at around S$762. For private patients, a Class A single bedded room in National University Hospital’s (NUH) general ward is around S$527 a night, with deluxe rooms in the same ward at around S$762.

A Class A1 single bedded room at Khoo Teck Puat Hospital and Tan Tock Seng Hospital’s (TTSH) acute ward starts from $420 a night, while a deluxe room at TTSH’s acute ward starts from S$550 a night, according to the hospitals’ websites.

MNH’s Class A room is priced from S$418 per night while its single signature room, which comes with personalised nursing service, starts from S$710 per night. FPH, which offers four-bedded, single bedded and deluxe suites, charges S$562 per night for a single-bedded suite.

But while rooms charges are competitively priced, they are not indicative of overall hospital bill size, which vary with different medical procedures and doctors’ fees. For instance, the estimated 90th percentile bill size for cataract day surgery for private patients is S$9,073 and S$8,867 at FPH and MNH respectively; at NUH and Singapore National Eye Centre, it is S$6,598 and S$5,464 respectively, according to figures by Ministry of Health.

According to Mr Lo, a private integrated shield plan with riders often allows patients to enjoy full coverage during their private hospital stay. Some prenatal insurance plans in the market also offer health and financial protection for expectant mothers and their babies, added Ms Shuen.

For 34-year-old interior designer Ray Chua Chia Howe, a private integrated shield plan with a rider took care of a S$5,600 hospital bill incurred during a serious bout of salmonella poisoning last year. His three-day MNH stay included procedures such as a CT scan done at the Accident and Emergency department, blood and stool tests and injections.

“I knew that my shield plan allows me to be treated at a private hospital and I appreciate the comfort in knowing I don’t have to wait as long, or risked having very limited room options at the restructured hospitals,” he said.

Return of Keynesian Economic Theory


Return of Keynesian Economic Theory

by Shrey Srivastaya

In the tumultuous global macroeconomic climate, which we find ourselves in today, people are increasingly looking back in time at the ideas of one revolutionary economist: John Maynard Keynes. The cogitation of the most influential economist of the 20th century has been thrown somewhat under the water in recent decades, in wake of the 1973 oil shock and the recession that shook much of the developing world from then until 1975. However, contemporaneously with the great recession of 2008, Keynesianism has seen a resurgence, often cited by many scholars nowadays in economic debate. Regardless, even given this, the question remains: is Keynesian economic theory still relevant in today’s day and age?

To answer this, we first need to gain a basic grounding in what Keynesianism actually entails. Simply, Keynesianism dictates that increased government spending, combined with lower levels of taxation, can pull a country out of an economic depression. In other words, Keynes proclaimed that a country’s economic output, in real terms, is largely a result of the levels of aggregate demand (the total demand for final goods and services in an economy at a given time). The laissez-faire free market will not automatically lead to full employment, and needs some stimulus, in the form of government intervention through public policy.

Since the macroeconomic revolution that Keynes himself was at the forefront, the 1970s stagflation (a combination of high inflation and slow economic growth) led to a decline in popularity for Keynes’ proposed policies. However, it is indubitable, especially in the wake of the most recent severe economic downturn, that Keynesianism still has a place in modern economic thought, and may in fact be one of the only solutions to the impending economic depression that the world is heading for. Before Keynes, the widespread belief held was that if consumer demand fell, then prices would fall in turn, therefore leading again to an increase in aggregate demand. However, Keynes disproved this baseless faith in the powers of the free market to rebalance the economy.

If governments of countries in the developed world chose to do nothing, in the hope that their economy would have somehow “fixed itself”, they might have ended up in economic quicksand synonymous with that of Japan’s since their economic boom ended in 1990. After the great 2008 recession, Great Britain’s chancellor, Alistair Darling, announced a massive fiscal stimulus package for the country, which was then, in turn, announced by China to the tune of around $586 billion, among others. The famous quote from Milton Friedman in 1965, namely that “we’re all Keynesians now”, could never be truer than in 2008. Ed Balls later described this stimulus package as “a classic Keynesian response”, indicative of how far support for Keynesian economic policies had come.

The Keynesian thought that many policymakers had incorporated is not the only mark that the famous economist’s thoughts have left in recent years. One of the major causes of the 2008 recession being so brutal was Keynes’ own “paradox of thrift”. In a nutshell, this states that people will try to save more money during a recession, thereby leading to a decline in consumer spending, ergo a decline in aggregate demand and also economic growth. In September 2009, the US’ value for consumer spending was at 85, which was 5% lower than the trend since December 2007 would have indicated, according to the New York Times. When businesses see demand reducing for their goods and services, they may also think twice about reinvesting their money in alternative ventures, thereby completing the negative cycle. Consumer demand plummeted during some months of 2008, which led to a gargantuan decline in some integral sectors to the economy, for example manufacturing. The paradox of thrift was a major reason why 2008 was the worst recession since the recession that Keynes actually modeled his ideas for. Therefore, it is only logical to assume that in future, utilising Keynesian thought, we can anticipate the impending paradox of thrift and take policy measures to act against it.

Keynes also used the term “liquidity trap”, which essentially means that consumer demand for liquid assets (assets that can be converted into cash in a short time, with little or no loss in value) is greater than inflation (a general increase in prices and fall in the purchasing value of money). Therefore, as the average Joe prefers cash to liquid assets, governmental attempts to persuade people to buy illiquid assets would fail, as people prefer cash to those assets. Therefore, the effect of increasing the supply of money (i.e. lowering interest rates) would be minimal. Several decades after Keynes’ own death, his ideas again became reality in the UK in the years following 2008. In March of 2009, interest rates were cut to 0.5% in an attempt to revitalize a battered and bruised economy. However, following a feeble recovery in 2010, the economy began to sink again in 2011 and 2012, with it shrinking by 0.3% in the last quarter of 2012. This is one of the greatest examples of a liquidity trap in recent years, with the aforementioned trap meaning that the UK economy remained on its knees in the years following 2008. Again, in times of economic downturn, Keynes’ ideas became more relevant than ever.

“Marginal propensity to consume” is also one of the ideas that Keynes is most famous for. Simply, marginal propensity to consume is the concept that with an increase in disposable income, people will have more money with which to consume goods and services. According to the formula that the multiplier effect equals 1/(1-mpc), where “mpc” is the marginal propensity to consume, an incremental increase in consumption will lead to a large multiplier effect in the economy. Now, this idea can be applied to one of the banes of society: income inequality. As people of lower income levels have a higher marginal propensity to consume (i.e. they can buy more goods as opposed to the rich, who do not have many goods to buy as they already possess them), it is only logical that an increase in their income will lead to a higher total marginal propensity to consume, and therefore a far larger multiplier effect.

Now, in countries such as America, where the top 0.1% have 184 times more average income than the bottom 90%, it is fair to think that, if they could somehow reduce this gap between the rich and the poor, they could see ferocious levels of economic growth. In a nutshell, Keynesian theory means that increasing levels of economic growth will be synonymous with lowered levels of income inequality. This is the reason why Scandinavian countries with low levels of income inequality, such as Sweden, are seen as some of the most prosperous on earth.

In summary, although many austerians and monetarists would love to believe that Keynesianism is dead, the reality is much the opposite. With the turbulent economic conditions that the world is facing even today, Keynesian thought will only see increased popularity, as more and more people will see that an increase in aggregate demand is a logical way to spur economic growth. Through the times of economic hardship in recent years, several Keynesian theories, including the liquidity trap and the marginal propensity to consume, among others, have become readily apparent in modern society. It’s fascinating to think that someone who died 70 years ago could have such an impact on the macroeconomic sphere of today. While these theories will still be modified and readjusted to fit the modern age, one thing is certain: Keynesian thought isn’t going anywhere anytime soon.

10 questions… with Din Merican


reeFebruary 26, 2016

10 questions… with Din Merican

 by FA Abdul

Fa asks one of Malaysia’s most famous bloggers 10 random questions about life, politics and what makes him happy.

INTERVIEW

din-merican-3

Din Merican reminds me of Don Quixote – a chivalrous gentlemen out to right wrongs, and bring justice to the world. But Din, as he prefers to be called, does it a bit differently – he blogs.

Born in Alor Setar, Kedah in 1940, Din received his early education from Penang Free School and pursued his studies in economics at the University of Malaya. Later, armed with scholarships from the Kedah State and Bank Negara Malaysia, Din graduated from The George Washington School of Business, The George Washington University in the US.

Upon his return, Din served the Malaysian government as a Foreign Service Officer and in the Central Bank (Bank Negara Malaysia) before making a move to industry and commerce.

Many may not be aware that Din was among the many unsung heroes who made Bersih back in 2007 such a success. He is still involved in the political scene today, advocating the universal values of fairness and justice, sharing his thoughts and incisive views through his blog.

Attached to the University of Cambodia, Din currently resides in Phnom Penh with his lovely wife, Dr Kamsiah Haider. At 76, he might be thousands of miles away in a foreign land, but his heart has never left home.

I thank Din Merican for taking time to entertain my ten random questions.

Question 1: What are the three things that make you instantly happy?

Reading books on Politics, Economics and Political Science

Music

Blogging

Question 2. As a child, what were your most challenging moments?

Studying for examinations; beating a tough football team; pleasing my mom.

Question 3. If you could enjoy unlimited storage for one thing, what would it be?

Books (economics, philosophy, politics and great novels).

din-merican-at-tssQuestion 4. What is your definition of a perfect day?

One where I was able to accomplish everything I set out to do for that day well.

Question 5. Do you think Malaysian Muslims are undergoing Arabisation? If yes, why?

Yes. Because we are confused about who we are as a people.

Question 6. What are your thoughts about Malaysia’s dependence on foreign labour?

I think we should stop importing labour and make sure Malaysians work hard.

Question 7. What are the three biggest problems associated with Malaysian politics?

Corruption

An incompetent civil service

Lack of quality leadership

Question 8. Personally, who do you think would make a good Prime Minister of Malaysia?

No one. We need a man of integrity and honour like Tunku Abdul Rahman. We have a leadership crisis today. Why? Because we have no one with character to lead us.

Question 9. If you were trapped in a lift with Prime Minister Najib Razak, what would you do?

I would lecture and scold him. Maybe even say to his face that he is corrupt and a liar.

Question 10. What would you do if given a chance to lead Malaysia for one month?

I will put Najib and his corrupt cronies in jail and replace all incompetent civil servants and judges.