America’s extraordinary economic gamble –The Economist


February 13, 2018

The Economist

Souped up growth

America’s extraordinary economic gamble

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The mood of fiscal insouciance in Washington, DC, is troubling. Add the extra spending to rising pension and health-care costs, and America is set to run deficits above 5% of GDP for the foreseeable future. Excluding the deep recessions of the early 1980s and 2008, the United States is being more profligate than at any time since 1945.–The Economist

Fiscal policy is adding to demand even as the economy is running hot

Print edition | Leaders

Feb 8th 2018

Image result for VOLATILITY is back.on Wall Street

VOLATILITY is back. A long spell of calm, in which America’s stockmarket rose steadily without a big sell-off, ended abruptly this week. The catalyst was a report released on February 2nd showing that wage growth in America had accelerated. The S&P 500 fell by a bit that day, and by a lot on the next trading day. The Vix, an index that reflects how changeable investors expect equity markets to be, spiked from a sleepy 14 at the start of the month to an alarmed 37. In other parts of the world nerves frayed.

Markets later regained some of their composure (see article). But more adrenalin-fuelled sessions lie ahead. That is because a transition is under way in which buoyant global growth causes inflation to replace stagnation as investors’ biggest fear. And that long-awaited shift is being complicated by an extraordinary gamble in the world’s biggest economy. Thanks to the recently enacted tax cuts, America is adding a hefty fiscal boost to juice up an expansion that is already mature. Public borrowing is set to double to $1 trillion, or 5% of GDP, in the next fiscal year. What is more, the team that is steering this experiment, both in the White House and the Federal Reserve, is the most inexperienced in recent memory. Whether the outcome is boom or bust, it is going to be a wild ride.

Fire your engines

The recent equity-market gyrations by themselves give little cause for concern. The world economy remains in fine fettle, buoyed by a synchronised acceleration in America, Europe and Asia. The violence of the repricing was because of newfangled vehicles that had been caught out betting on low volatility. However, even as they scrambled to react to its re-emergence, the collateral damage to other markets, such as corporate bonds and foreign exchange, was limited. Despite the plunge, American stock prices have fallen back only to where they were at the beginning of the year.

Yet this episode does signal just what may lie ahead. After years in which investors could rely on central banks for support, the safety net of extraordinarily loose monetary policy is slowly being dismantled. America’s Federal Reserve has raised interest rates five times already since late 2015 and is set to do so again next month. Ten-year Treasury-bond yields have risen from below 2.1% in September to 2.8%. Stock markets are in a tug-of-war between stronger profits, which warrant higher share prices, and higher bond yields, which depress the present value of those earnings and make eye-watering valuations harder to justify.

This tension is an inevitable part of the return of monetary policy to more normal conditions. What is not inevitable is the scale of America’s impending fiscal bet. Economists reckon that Mr Trump’s tax reform, which lowers bills for firms and wealthy Americans—and to a lesser extent for ordinary workers—will jolt consumption and investment to boost growth by around 0.3% this year. And Congress is about to boost government spending, if a budget deal announced this week holds up. Democrats are to get more funds for child care and other goodies; hawks in both parties have won more money for the defence budget. Mr Trump, meanwhile, still wants his border wall and an infrastructure plan. The mood of fiscal insouciance in Washington, DC, is troubling. Add the extra spending to rising pension and health-care costs, and America is set to run deficits above 5% of GDP for the foreseeable future. Excluding the deep recessions of the early 1980s and 2008, the United States is being more profligate than at any time since 1945.

A cocktail of expensive stock markets, a maturing business cycle and fiscal largesse would test the mettle of the most experienced policymakers. Instead, American fiscal policy is being run by people who have bought into the mantra that deficits don’t matter. And the central bank has a brand new boss, Jerome Powell, who, unlike his recent predecessors, has no formal expertise in monetary policy.

Does Powell like fast cars?

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Jerome “Jay” Powell succeeds Janet Yellen as head of the Federal Reserve: To tighten or not to tighten, that is the question for Mr. Powell

What will determine how this gamble turns out? In the medium term, America will have to get to grips with its fiscal deficit. Otherwise interest rates will eventually soar, much as they did in the 1980s. But in the short term most hangs on Mr Powell, who must steer between two opposite dangers. One is that he is too doveish, backing away from the gradual (and fairly modest) tightening in the Fed’s current plans as a salve to jittery financial markets. In effect, he would be creating a “Powell put” which would in time lead to financial bubbles. The other danger is that the Fed tightens too much too fast because it fears the economy is overheating.

On balance, hasty tightening is the greater risk. New to his role, Mr Powell may be tempted to establish his inflation-fighting chops—and his independence from the White House—by pushing for higher rates faster. That would be a mistake, for three reasons.

First, it is far from clear that the economy is at full employment. Policymakers tend to consider those who have dropped out of the jobs market as lost to the economy for good. Yet many have been returning to work, and plenty more may yet follow (see article). Second, the risk of a sudden burst of inflation is limited. Wage growth has picked up only gradually in America. There is little evidence of it in Germany and Japan, which also have low unemployment. The wage-bargaining arrangements behind the explosive wage-price spiral of the early 1970s are long gone. Third, there are sizeable benefits from letting the labour market tighten further. Wages are growing fastest at the bottom of the earnings scale. That not only helps the blue-collar workers who have been hit disproportionately hard by technological change and globalisation. It also prompts firms to invest more in capital equipment, giving a boost to productivity growth.

To be clear, this newspaper would not advise a fiscal stimulus of the scale that America is undertaking. It is poorly designed and recklessly large. It will add to financial-market volatility. But now that this experiment is under way, it is even more important that the Fed does not lose its head.

This article appeared in the Leaders section of the print edition under the headline “Running hot”

A sweetheart tax deal — for the Trumps


December 22, 2017

A sweetheart tax deal — for the Trumps

by Eugene Robinson Opinion writer

https://www.washingtonpost.com/opinions/a-sweetheart-tax-deal–for-the-trumps

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President Donald Trump with his fawning Republican legislators celebrating the historic Tax Deal

 

One of the biggest beneficiaries of the massive, slapdash tax bill that President Trump and Republican lawmakers celebrated at the White House on Wednesday will be, wait for it . . . President Trump. What a coincidence!

The rest of Trump’s wealthy family will benefit lavishly as well, including his son-in-law and all-purpose adviser, Jared Kushner. And, of course, it’s not a coincidence at all. The chance that this President would preside over a revision of the tax code without lining his own pockets was zero. Anyone who believed Trump’s claim that the tax bill would “cost me a fortune” hasn’t been paying attention.

It is not possible to calculate precisely how much money the President will save, because he — unlike all other recent presidents — refuses to release his tax returns. But the figure is surely in the millions, assuming Trump is anywhere near as wealthy as he claims. His extended clan will have plenty of liquidity for Donald Jr. and Eric to jet off to Africa and kill more leopards and water buffaloes; for Jared and Ivanka to disappear on ski trips whenever they need to claim deniability regarding the latest administration outrage; and for the president himself to consume as many Big Macs, Filet-o-Fishes and chocolate shakes as his constitution can bear.

Trump says he is worth $10 billion; Forbes estimates his wealth at $3 billion, and some analysts think the true figure is lower. Any way you look at it, however, he’s a wealthy man — and the tax bill, which awaits only Trump’s signature to become law, is designed to make the very rich even richer.

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Republicans celebrate tax wins as Trump fumes over FBI Russia probe

Like all 1-percenters, Trump will benefit from the lowering of the top tax rate from 39.6 percent to 37 percent. But that’s just for starters. As is always the case with the tax code, the devil is in the details.

Trump conducts his business affairs through hundreds of “pass-through” companies whose income is taxed at the personal rate, not the corporate rate. The House wanted to dramatically slash the pass-through rate across the board, but the Senate initially balked. At the last minute, however, the Senate wrote into the final bill a 20 percent deduction for pass-through income. If a taxpayer had, say, $100 million in pass-through earnings, he or she would be taxed on only $80 million; the rest would be tax-free.

t first, senators sought to limit this sweetheart deal to companies with large numbers of employees or high payrolls — unlike Trump’s pass-through businesses, which are mostly paper entities. But the final legislation gives the full deduction, regardless of the number of employees, to pass-through companies that own a lot of depreciable property, such as commercial real estate. Which just so happens to be the president’s livelihood.

It would be hard to craft a measure more tailor-made to enrich Trump and his family. If he wanted to avoid even the appearance of corruption, of course, Trump could decline to take this tax break or donate an equivalent amount to the treasury. Somehow I doubt either of those things will happen.

Trump also gets to continue using a frequently abused tax loophole called a “like-kind exchange.” Usually, if you sell a piece of property at a profit, that profit is considered income and is taxed. Creative accountants and tax lawyers came up with ways to structure sales so that they technically qualified as trades, meaning that as far as the IRS was concerned, there was no income to tax. This practice is now ending for all types of property — except real estate. Another coincidence, I’m sure.

Oh, and most businesses will be negatively affected by a measure capping the amount of interest expenses they can deduct — except real estate investors and hotel operators, which are explicitly exempted. If this were a movie, lobbyists and lawmakers would have hammered out this last provision in a back room at the Trump International Hotel.

On the flip side, Trump’s ability to deduct the state and local taxes he pays in New York would be drastically limited. But that is nothing compared to the likely upside.

Join me in a thought experiment. Imagine that the legislature of some other country — Brazil, say, or Mozambique, or Thailand — decided to rewrite the tax code, with no public hearings or expert testimony, in a way that benefited the rich overall, with maximum financial gain for businesses like that of the sitting head of gov ernment.

What would you say?I’m pretty sure you’d use the word corruption. And you would be right.

 

Complacency Will Be Tested in 2018


December 15, 2015

Complacency Will Be Tested in 2018

by Stephen S. Roach@ http://www.project-syndicate.org

Despite seemingly robust indicators, the world economy may not be nearly as resilient to shocks and systemic challenges as the consensus view seems to believe. In particular, the absence of a classic vigorous rebound from the Great Recession means that the global economy never recouped the growth lost in the worst downturn of modern times.

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“World GDP growth is viewed as increasingly strong, synchronous, and inflation-free. Exuberant financial markets could hardly ask for more.I suspect that today’s consensus of complacency will be seriously tested in 2018”.–Stephen S. Roach

NEW HAVEN – After years of post-crisis despair, the broad consensus of forecasters is now quite upbeat about prospects for the global economy in 2018. World GDP growth is viewed as increasingly strong, synchronous, and inflation-free. Exuberant financial markets could hardly ask for more.

While I have great respect for the forecasting community and the collective wisdom of financial markets, I suspect that today’s consensus of complacency will be seriously tested in 2018. The test might come from a shock – especially in view of the rising risk of a hot war (with North Korea) or a trade war (between the US and China) or a collapsing asset bubble (think Bitcoin). But I have a hunch it will turn out to be something far more systemic.

The world is set up for the unwinding of three mega-trends: unconventional monetary policy, the real economy’s dependence on assets, and a potentially destabilizing global saving arbitrage. At risk are the very fundamentals that underpin current optimism. One or more of these pillars of complacency will, I suspect, crumble in 2018.

Unfortunately, the die has long been cast for this moment of reckoning. Afflicted by a profound sense of amnesia, central banks have repeated the same mistake they made in the pre-crisis froth of 2003-2007 – over staying excessively accommodative monetary policies. Misguided by inflation targeting in an inflationless world, monetary authorities have deferred policy normalization for far too long.

That now appears to be changing, but only grudgingly. If anything, central bankers are signaling that the coming normalization may even be more glacial than that of the mid-2000s. After all, with inflation still undershooting, goes the argument, what’s the rush?

Alas, there is an important twist today that wasn’t in play back then –central banks’ swollen balance sheets. From 2008 to 2017, the combined asset holdings of central banks in the major advanced economies (the United States, the eurozone, and Japan) expanded by $8.3 trillion, according to the Bank for International Settlements. With nominal GDP in these same economies increasing by just $2.1 trillion over the same period, the remaining $6.2 trillion of excess liquidity has distorted asset prices around the world.

Therein lies the crux of the problem. Real economies have been artificially propped up by these distorted asset prices, and glacial normalization will only prolong this dependency. Yet when central banks’ balance sheets finally start to shrink, asset-dependent economies will once again be in peril. And the risks are likely to be far more serious today than a decade ago, owing not only to the overhang of swollen central bank balance sheets, but also to the overvaluation of assets.

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Will the Republican Tax Plan work?

That is particularly true in the United States. According to Nobel laureate economist Robert J. Shiller, the cyclically adjusted price-earnings (CAPE) ratio of 31.3 is currently about 15% higher than it was in mid-2007, on the brink of the subprime crisis. In fact, the CAPE ratio has been higher than it is today only twice in its 135-plus year history – in 1929 and in 2000. Those are not comforting precedents.

As was evident in both 2000 and 2008, it doesn’t take much for overvalued asset markets to fall sharply. That’s where the third mega-trend could come into play – a wrenching adjustment in the global saving mix. In this case, it’s all about China and the US – the polar extremes of the world’s saving distribution.

China is now in a mode of saving absorption; its domestic saving rate has declined from a peak of 52% in 2010 to 46% in 2016, and appears headed to 42%, or lower, over the next five years. Chinese surplus saving is increasingly being directed inward to support emerging middle-class consumers – making less available to fund needy deficit savers elsewhere in the world.

By contrast, the US, the world’s neediest deficit country, with a domestic saving rate of just 17%, is opting for a fiscal stimulus. That will push total national saving even lower – notwithstanding the vacuous self-funding assurances of supply-siders. As shock absorbers, overvalued financial markets are likely to be squeezed by the arbitrage between the world’s largest surplus and deficit savers. And asset-dependent real economies won’t be too far behind.

In this context, it’s important to stress that the world economy may not be nearly as resilient as the consensus seems to believe – raising questions about whether it can withstand the challenges coming in 2018. IMF forecasts are typically a good proxy for the global consensus. The latest IMF projection looks encouraging on the surface – anticipating 3.7% global GDP growth over the 2017-18 period, an acceleration of 0.4 percentage points from the anemic 3.3% pace of the past two years.

However, it is a stretch to call this a vigorous global growth outcome. Not only is it little different from the post-1965 trend of 3.8% growth, but the expected gains over 2017-2018 follow an exceptionally weak recovery in the aftermath of the Great Recession. This takes on added significance for a global economy that slowed to just 1.4% average growth in 2008-2009 – an unprecedented shortfall from its longer-term trend.

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Trumpian Economics

The absence of a classic vigorous rebound means the global economy never recouped the growth lost in the worst downturn of modern times. Historically, such V-shaped recoveries have served the useful purpose of absorbing excess slack and providing a cushion to withstand the inevitable shocks that always seem to buffet the global economy. The absence of such a cushion highlights lingering vulnerability, rather than signaling newfound resilience – not exactly the rosy scenario embraced by today’s smug consensus.

A quote often attributed to the Nobel laureate physicist Niels Bohr says it best: “Prediction is very difficult, especially if it’s about the future.” The outlook for 2018 is far from certain. But with tectonic shifts looming in the global macroeconomic landscape, this is no time for complacency.

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

 

Coping with Foreign Direct Investment


December 6, 2017

Coping with Foreign Direct Investment

by Jomo Kwame Sundaram and Anis Chowdhury

http://www.networkideas.org/news-analysis/2017/11/coping-with-foreign-direct-investment/

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Malaysia has been named by Forbes as one of the top recipients of foreign direct investment, followed by Singapore, Vietnam, Indonesia and India.

Foreign direct investment (FDI) is increasingly touted as the elixir for economic growth. While not against FDI, the mid-2015 Addis Ababa Action Agenda (AAAA) for financing development also cautioned that it “is concentrated in a few sectors in many developing countries and often bypasses countries most in need, and international capital flows are often short-term oriented”.

FDI flows

UNCTAD’s 2017 World Investment Report (WIR) shows that FDI flows have remained the largest and has provided less volatile of all external financial flows to developing economies, despite declining by 14% in 2016. FDI flows to the least developed countries and ‘structurally weak’ economies remain low and volatile.

FDI inflows add to funds for investment, while providing foreign exchange for importing machinery and other needed inputs. FDI can enhance growth and structural transformation through various channels, notably via technological spill-overs, linkages and competition. Transnational corporations (TNCs) may also provide access to export markets and specialized expertise.

However, none of these beneficial growth-enhancing effects can be taken for granted as much depends on type of FDI. For instance, mergers and acquisitions (M&As) do not add new capacities or capabilities while typically concentrating market power, whereas green-field investments tend to be more beneficial. FDI in capital-intensive mining has limited linkage or employment effects.

Technological Capacities and Capabilities

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The National Bank of Cambodia’s decision in March, 2017 to raise the minimum capital requirements of financial institutions in order to strengthen and stabilise the financial sector has led to an increase in foreign capital flowing into the banking sector, according to industry experts. Underpinned by political stability  and business friendly policies, Cambodia is expected to register robust real economic growth in 2017 in excess of 7 per cent per annum.

Technological spill-overs occur when host country firms learn superior technology or management practices from TNCs. But intellectual property rights and other restrictions may effectively impede technology transfer.

Or the quality of human resources in the host country may be too poor to effectively use, let alone transfer technology introduced by foreign firms. Learning effects can be constrained by limited linkages or interactions between local suppliers and foreign affiliates.

Linkages between TNCs and local firms are also more likely in countries with strict local content requirements. But purely export oriented TNCs, especially in export processing zones (EPZs), are likely to have fewer and weaker linkages with local industry.

Foreign entry may reduce firm concentration in a national market, thereby increasing competition, which may force local firms to reduce organizational inefficiencies to stay competitive. But if host country firms are not yet internationally competitive, FDI may decimate local firms, giving market power and lucrative rents to foreign firms.

Contrasting Experiences

The South Korean government has long been cautious towards FDI. The share of FDI in gross capital formation was less than 2% during 1965-1984. The government did not depend on FDI for technology transfer, and preferred to ‘purchase and unbundle’ technology, encouraging ‘reverse engineering’. It favoured strict local content requirements, licensing, technical cooperation and joint ventures over wholly-owned FDI.

In contrast, post-colonial Malaysia has never been hostile to any kind of FDI. After FDI-led import-substituting industrialization petered out by the mid-1960s, export-orientation from the early 1970s generated hundreds of thousands of jobs for women. Electronics in Malaysia has been more than 80% FDI since the 1970s, with little scope for knowledge spill-overs and interactions with local firms. Although lacking many mature industries, Malaysia has been experiencing premature deindustrialization since the 1997-1998 Asian financial crises.

China and India

From the 1980s, China has been pro-active in encouraging both import-substituting and export-oriented FDI. However, it soon imposed strict requirements regarding local content, foreign exchange earnings, technology transfer as well as research and development, besides favouring joint ventures and cooperatives.

Solely foreign-owned enterprises were not permitted unless they brought advanced technology or exported most of their output. China only relaxed these restrictions in 2001 to comply with WTO entrance requirements. Nevertheless, it still prefers TNCs that bring advanced technology and boost exports, and green-field FDI over M&As.

Thus, more than 80% of FDI in China involves green-field investments, mostly in manufacturing, constituting 70% of total FDI in 2001. China has strictly controlled FDI inflows into services, only allowing FDI in real estate recently.

Although long cautious of FDI, India has recently changed its policies, seeking FDI to boost Indian manufacturing and create jobs. Thus, the current government has promised to “put more and more FDI proposals on automatic route instead of government route”.

Despite sharp rising FDI inflows, the share of FDI in manufacturing declined from 48% to 29% between October 2014 and September 2016, with few green-field investments. Newly incorporated companies’ share of inflows was 2.7% overall, and 1.6% for manufacturing, with the bulk of FDI going to M&As.

Policy Lessons

FDI policies need to be well complemented by effective industrial policies including efforts to enhance human resource development and technological capabilities through public investments in education, training and R&D.

Thus, South Korea industrialized rapidly without much FDI thanks to its well-educated workforce and efforts to enhance technological capabilities from 1966. Korean manufacturing developed with protection and other official support (e.g., subsidized credit from state-owned banks and government-guaranteed private firm borrowings from abroad) subject to strict performance criteria (e.g., export targets).

Indeed, FDI can make important contributions “to sustainable development, particularly when projects are aligned with national and regional sustainable development strategies. Government policies can strengthen positive spillovers …, such as know-how and technology, including through establishing linkages with domestic suppliers, as well as encouraging the integration of local enterprises… into regional and global value chains”.

(This article was originally published in Inter Press service (IPS) news on November 21, 2017)

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


November 2, 2017

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

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

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

http://www.malaysiakini.com

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

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

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

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

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

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

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

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

Electioneering

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

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

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

Economic growth rates

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

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

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

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

Putrajaya’s fiscal situation

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

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

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

NEM goals

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Budget allocations

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

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

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

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

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

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

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

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

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

Rewriting history

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

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

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

Trends in investment

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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


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

 

Jomo: Whither the Malaysian economy ?


October 17, 2017

Jomo: Whither the Malaysian economy under Najib Razak?

http://www.malaysiakini.com

Image result for Finance Minister Najib Razak and the National Debt
Malaysia’s Worst Finance Minister Najib Razak–Fiscal Mess, Heavily in Debt and Lowest Reserves in Asia.

This interview with economist Jomo Kwame Sundaram, former Assistant Secretary-General for Economic Development at the United Nations, was conducted in August for publication in the run-up to the country’s next Budget for 2018 due to be announced next Friday.

Developed country status

Question: Malaysia is close to achieving developed country status and is growing at a reasonable pace. Why are you concerned then?

Jomo: Becoming a developed country involves much more than achieving high-income status. But even by reducing ‘developed country’ status to becoming a ‘high-income’ country, we are not quite there unless we resort to statistical manipulation, e.g., by using 2013 exchange rates, or by ignoring about a third of the labour force who are ‘undocumented’ foreign workers.

For example, the ringgit declined from RM3.2 against the US dollar in 2014 to almost RM4.5 before recovering to the current RM4.2! But then we continue to use the old exchange rate or purchasing power parity (PPP) to pretend that we are almost there. The only people we are cheating is ourselves.

Also, if we continue to grossly underestimate the number of foreign workers in the country, then the denominator for calculating per capita income goes down. Similarly, by excluding the lowest paid foreign workers, income inequality has been declining when their inclusion may give a different picture. Thus, we can reach supposed high-income status more quickly if we pretend there are only one or two million foreign workers, when even the minister admitted last year to about 6.7 million!

Seven million, mainly undocumented foreign workers in Malaysia comes to over a third of the country’s total labour force. Many of them work and live in far worse conditions than the worst-off Malaysian workers. We are thus dependent on a huge underclass, largely foreign, whom we are in denial about.

New Economic Model

What do you think of Prime Minister Najib Razak’s New Economic Model?

Jomo: Let us be clear about this. The New Economic Model, or NEM, is really a wish-list of economic reforms desired from an essentially neo-liberal perspective. That does not mean it is all good or all bad. It contains some desirable reforms, long overdue due to the accumulation of excessive, sometimes contradictory regulations and policies.

 

Although the NEM made many promises and raised expectations, most observers would now agree that it has rung quite hollow in terms of implementation despite its promising rhetoric. As we all know, the NEM was dropped soon after it was announced for political reasons, and has never been the new policy framework it was expected to be.

Turning to actual policy initiatives, to the current administration’s credit, it accepted the minimum wage policy and BR1M (Bantuan Malaysia 1Malaysia) idea, both long demanded by civil society organisations, and supported by many, mainly opposition parties. The minimum wage policy has probably been far more important than BR1M in improving conditions for low-income earners.

Premature deindustrialisation

The contribution of manufacturing to growth and employment has been declining in this century. Yet, you seem to be nostalgic for industrialisation when the leadership wants to move to tertiary activities.

Jomo: Sadly, instead of acknowledging the problem, ‘premature deindustrialisation’ is being cited as proof of Malaysia being developed although services currently account for most job retrenchments.

Indeed, Malaysia has been deindustrialising far too early, even before developing diverse serious industrial capacities and capabilities beyond refining palm oil and so on. We have abandoned the past emphasis on industrialisation, but have not progressed sufficiently to more sophisticated, higher value-added industries.

In Japan, South Korea and China, policies to nurture industrialists and other entrepreneurs to become internationally competitive, enabled these countries to grow, industrialise and transform themselves very rapidly.

We are suffering great illusions if we think we can leapfrog the industrial stage and go straight to services. We should not try to emulate Hong Kong because we are a different type of economy. Even Singapore has not gone the Hong Kong way and continues to try to progress up the value chain in terms of industrial technology.

We need to stop blindly following policies espoused by international institutions. GST (Goods and Services Tax) is a variant of value-added taxation, long promoted by the IMF (International Monetary Fund). To accelerate progress, we need to develop better understanding of the Malaysian economy – of its real strengths and potential, rather than assuming that the current mantra in Washington is correct, let alone relevant.

Middle-income trap

According to the World Bank and others, Malaysia is stuck in a middle-income trap. The argument is that the NEM as well as financial services development are needed to get out of it.

Jomo: The idea of a ‘middle-income trap’ is due to Latin American and other countries uncritically following Washington Consensus prescriptions promoted by the Bank and the IMF. The promise is that following their prescriptions would lead to development.

Key elements of our own ‘middle-income trap’ are actually of our own making, e.g., by giving up so quickly on industrialisation. The prescriptions imagine we can somehow leap-frog to accelerate development without making needed reforms.

 

The NEM and current official development discourse emphasise modern services, especially financial services, for future growth. But why would investors want to come here rather than, say, Singapore? If they want lower costs, there are other locations.

To offer tax breaks or loopholes, or to make Malaysia a tax haven, the question again is why come here rather than Singapore.

And how much has the national economy really benefited from the Labuan International Offshore Financial Centre? Do we need to keep making the same errors?

Looking at other international financial centres, it is not clear that it will be a net plus for the country, and provide the basis for sustainable development suitable for an economy like ours. Remember, we are no Hong Kong.

Historically, we have been heavily dependent on foreign direct investment, not for want of capital, but for access to markets, technology and expertise. To make matters worse, over the last decade, foreign investors have taken a growing share in publicly listed companies, helped by the falling ringgit in recent years.

Arguably, foreign ownership of the Malaysian economy has never been as high since the 1970s. As large corporations are increasingly dominant, they have often crowded out small and medium-sized enterprises (SMEs) and other Malaysian firms.

Macroeconomic management

In his recent book, Dr Bruce Gale (author of ‘Economic Reform In Malaysia: The Contribution Of Najibnomics’) has praised current macroeconomic management.

Jomo: Well, Gale is a political consultant and needs to ‘cari makan’. He is not a serious macroeconomist the last time I checked, but should nonetheless be taken seriously because he reminds us that well-managed ‘public relations’ influence market and public sentiment, including credit and other ratings. He heaps praise on ‘conventional wisdom’ which remains very influential, even if wrong.

Gale’s book reminds us that ‘creative accounting’, involving the transfer of debt and liabilities to state-owned enterprises or government-linked companies, has enabled the government to limit the growth of mainly ringgit-denominated federal government debt by rapidly expanding federal government-guaranteed ‘contingent liabilities’.

His defence and justification for GST ring quite hollow as his premise is that the middle class has been evading income tax, whereas it is mainly the rich who have successfully done so, whether legally or otherwise.

Although he has been writing on Malaysia for over three decades, he appears to have selective amnesia, only giving credit to the prime minister and his late father, whom no one would grudge, while ignoring other prime ministers and finance ministers, in line with the new official narrative.

Malaysians worse off?

Earlier, you acknowledged that Malaysian economic growth has continued, albeit at a lower rate, over the last two decades. Yet, you also argue that Malaysians may have become worse off in recent years. That sounds contradictory.

Jomo: Moderate economic growth has continued since the 1997-1998 financial crisis. More recently, this has been partly due to foreign financial inflows, helped by unconventional monetary policies in OECD economies.

Between 2012 and 2014, most people, especially low-income earners, became better off, thanks to the introduction of the minimum wage, continued ‘full employment’ and higher commodity prices.

Since then, commodity prices have fallen, unemployment has been rising (especially for youth), the GST was introduced, and consumer confidence has fallen lower than during the 1997-1998 or 2008-2009 financial crises.

However, consumer sentiment in Malaysia has been negative for some time according to CLSA and MIER (Malaysian Institute of Economic Research). Indeed, according to Nielsen, the international polling company, it has been poor since 2013, and is now the lowest in Southeast Asia.

Food prices have generally continued rising, as transport charges – for tolls, trains, etc. – have been increasing again, with floating petrol prices. Meanwhile, lower commodity prices and climate change have reduced many farm incomes.

Official unemployment has gone up from 2.9% in 2014 to 3.5% in 2016, still commendably low, although there are concerns about high youth unemployment, especially among the tertiary educated.

Retrenchments have been worst for services, casting doubt on future employment prospects as the authorities rely increasingly on services for growth and jobs. With unemployment low, but rising, wage growth has slowed after the initial introduction of the minimum wage, while real incomes have been hit by higher prices and taxes.

Wage depression

You seem to imply that Malaysian wages have been artificially lowered.

Jomo: Malaysians, in general, have higher incomes now than before. However, official numbers are misleading as we do not account for the massive presence and contribution of foreign labour, especially undocumented immigrant workers.

Their status has also served to depress wages for low-income Malaysian workers. Not surprisingly then, labour’s share of national income has gone down relatively.

This decline is not due to declining labour productivity, even if that may be the case. After all, higher labour productivity does not automatically raise workers’ incomes. Prevailing low wages retard technical change which would, in turn, raise productivity.

Thus, the unofficial low wage policy stands in the way of labour-saving innovation, such as mechanical harvesting, so necessary for development. We need a medium-term development strategy far less reliant on cheap foreign labour.

Consequently, wages and living conditions are too low, especially in agriculture. And even smallholder agriculture has been neglected by officialdom in Malaysia for some time, especially after Pak Lah’s (Abdullah Ahmad Badawi’s administration.

Fighting a jihad against middlemen was not only thinly disguised misinformed and misguided stunt intended to score ‘ethno-populist’ points, but also irrelevant to addressing contemporary challenges.

Shifting tax burden

How have recent tax reforms affected Malaysian households?

Jomo: Following the introduction of the GST in April 2015, tax revenue from households increased from RM42 billion in 2014 to RM67 billion in 2016, with GST more than doubling the contribution of indirect tax from RM17 billion to RM39 billion.

At the same time, income tax revenue has risen modestly from RM24 billion in 2014 to RM28 billion in 2016. On average, Malaysian households paid taxes of RM5,600 each, more than ever before.

Meanwhile, government subsidies and assistance have declined, falling from RM43 billion in 2013 to RM25 billion in 2016, with most food price subsidies removed between 2013 and 2016.

Inflation numbers

Official inflation numbers are low. Why does the public doubt official inflation numbers?

Jomo: There are many reasons why the public doubts official inflation numbers, but perhaps most importantly for the country’s open economy, the ringgit exchange rate dropped from RM3.2/USD to RM4.5/USD before recovering to RM4.2 recently.

People presume that a decline in the international value of the ringgit by about a quarter must surely have inflationary consequences.

The GST of 6% has been imposed since April 2015, directly affecting about half of household spending, with up to a fifth more indirectly affected. Again, this is expected to have affected the cost of living.

Price subsidies for sugar, rice, flour and cooking oil have been removed since 2013, raising prices by 14% to 31%. Meanwhile, transport – including fuel and toll – prices have risen on several fronts.

Hence, you can understand why people are sceptical.

Transformasi Nasional 2050 (TN50)

After announcing and then abandoning the New Economic Model, there is now much ado about an economic transformation agenda for 2050.

Jomo: The TN50 exercise has been broadly consultative, involving young people, which surely is a good thing. Unfortunately, as with BR1M, it has been used to mobilise political support for the regime before the forthcoming elections rather than open up a more inclusive debate about where the country is headed.

The conversation should be about where the country should go and how to get there. It is still unclear to what extent we are going beyond the usual feel-good, futuristic sounding clichés, but this should open up an important debate to give serious consideration to actually achieving the transformation.

 

The country is presently mired in a political crisis that has paralysed effective economic policymaking. Malaysia desperately needs a legitimate and consultative leadership to implement bold measures to take the country forward.

Many people in the country know what ails the economy, but we do not have the open discussion needed to really tackle the challenges the nation faces. For example, a free and independent media will not only improve the quality of public discourse, but also the legitimacy and acceptability of resulting public policy.

Yesterday: Jomo in defence of honest, constructive criticism