Tun Daim Zainuddin and his Colleagues get down to business


May 13, 2018

Tun Daim Zainuddin and his Colleagues get down to business

KUALA LUMPUR: The newly set up Team of Eminent Persons meant business and wasted no time as they convened their first meeting soon after the announcement of its formation by Prime Minister Tun Dr Mahathir Mohamed.

Chaired by former Finance Minister Tun Daim Zainuddin (left), the meeting, which went late into the night, was also attended by three other members of the team, namely (from right) former Bank Negara Malaysia Governor Tan Sri Zeti Akhtar Aziz, former Petronas President and Chief Executive Officer Tan Sri Mohd Hassan Marican and economist Prof Jomo Kwame Sundaram. Billionaire tycoon Tan Sri Robert Kuok was not present as he is currently overseas. Bernama Photo

No honeymoon period and prolonged post-election euphoria as the government is determined to restore the confidence of the people and investors after Pakatan Harapan’s unprecedented win in the 14th general election on May 9.

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The Prime Minister with Tun Daim Zainuddin and Tan Sri Rafidah Aziz

Chaired by former Finance Minister Tun Daim Zainuddin, the meeting, which went late into the night, was also attended by three other members of the team, namely former Bank Negara Malaysia Governor Tan Sri Zeti Akhtar Aziz, former Petronas President and Chief Executive Officer Tan Sri Mohd Hassan Marican and economist Prof Jomo Kwame Sundaram.

Billionaire tycoon Tan Sri Robert Kuok was not present as he is currently overseas.

Speaking to Bernama after the meeting, Daim said the five-member team was briefed and deliberated on current economic situation, the national debt, the ringgit, Goods and Services Tax (GST) and fuel subsidies, amongst others.

“These are the major things. We are making the recommendations to the government. At the end they will decide,” he said.

Daim said the council would be calling the Public Private Partnership Unit (under the Prime Minister’s Department), related ministries and government-linked companies (GLCs) to brief them on various mega projects and the governance of GLCs, including Lembaga Tabung Haji, Majlis Amanah Rakyat and the Federal Land Development Authority.

“As for 1MDB, there will a special task force, I have identify those who can assist the probe into 1MDB. It would be under the purview of the Team which will submit the report to the government,” Daim said.

He said another pertinent issue that needed to be addressed quickly was the oversupply of office space and housing.

“Another example is the cost of security for schools. It cost more than the assets they’re guarding,” he pointed out.

Meanwhile, Daim said the team would hold meetings daily for 100 days, and in fact on some days, it would be a few times a day.

“I want this to finish this within 100 days. After that I want to sleep,” he quipped. –Bernama

 

Looking In On The Real Paul Ryan–The Retiring Speaker of House


April 19, 2016

Looking In On The Real Paul Ryan–The Retiring Speaker of  House

he mistake about Paul Ryan, the one that both friends and foes made over the years between his Obama-era ascent and his just-announced departure from the House speakership, was to imagine him as a potential protagonist for our politics, a lead actor in the drama of conservatism, a visionary or a villain poised to put his stamp upon the era.

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Paul Ryan, Party Man

 

This Ryan-of-the-imagination existed among conservatives who portrayed his budgetary blueprints as the G.O.P.’s answer to the New Deal, among centrist deficit hawks who looked to him to hash out their pined-for grand bargain, and among liberals for whom Ryan was the most sinister of far-right operators, part fanatic and part huckster — a Lyle Lanley with “Atlas Shrugged” in his back pocket, playing everyone for suckers while he marched the country into a libertarian dystopia.

It existed among the donors who wanted him to run for President, the pundits who encouraged Mitt Romney to choose him as a running mate, the big names who pressured him into the speakership. And it existed among anti-Trump conservatives, finally, who looked to Ryan to be the Republican of principle standing athwart Trumpism yelling stop.

But the real Ryan was never suited for these roles. He was miscast as a visionary when he was fundamentally a party man — a diligent and policy-oriented champion for whatever the institutional G.O.P. appeared to want, a pilot who ultimately let the party choose the vessel’s course. And because the institutional G.O.P. during his years was like a bayou airboat with a fire in its propeller and several alligators wrestling midship, an unhappy end for his career was all-but-foreordained.

This is not to say that he lacked principles. The frequent descriptions of Ryan as a Jack Kemp acolyte — a supply-side tax cutter and entitlement reformer and free trader who imagined a more immigrant-welcoming and minority-friendly G.O.P. — were accurate enough; there was no question that the more a policy reflected Ryan’s deepest preferences, the more Kempist it would be.

But even there, he came to those principles at a time when they were ascendant within the party — in the period between the supply-side ’80s and the late-1990s window when centrist liberals seemed open to entitlement reform. And then as Republicans moved away from them, tacking now more compassionate-conservative, now more libertarian, now more Trumpist, his resistance to the drift was always gentle, eclipsed by his willingness to turn.

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Thus the Ryan of the George W. Bush era cast votes for the pillars of compassionate conservatism, No Child Left Behind and Medicare Part D. Then the Ryan of the Tea Party era championed austerity, talking about “makers and takers” and tossing out the Ayn Rand references that persuaded many liberals that he was an ideological fanatic. But that Ryan gave way to Ryan the dutiful running mate, which gave way in turn to the more moderate Ryan of Obama’s second term, who negotiated a budget deal with Democrats and moved toward so-called “reform conservatism” in his policy proposals at a time when that seemed like that might be the party’s future.

Then came the 2016 election, in which Ryan temporarily resisted Trump and then surrendered lest he break the party (which a party man could never do), and after that the Trump administration, in which Ryan has obviously steered Trump toward standard Republican policies — but has just as obviously been steered as well. Most of Ryan’s past big-picture goals (entitlement reform, free trade, minority outreach) are compromised or gone, and while he attempted Obamacare repeal and achieved a butchered version of corporate tax reform, he’s accepted spending policies that make a mockery of any sort of libertarian or limited-government goal.

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If you look at all this and see an obsessive ideologue working tirelessly for Randian ends, I think you’re being daft. But it’s equally daft to see this as the story of a great visionary brought low by Trump. The truth is that Ryan probably could have thrived as a legislator in a variety of dispensations: As a Reaganite if he’d been born early enough; as a Kempian or compassionate conservative if the late-1990s boom had continued; as a bipartisan dealmaker in a world where his base supported compromises (the blueprints he drew up with Democrats like Ron Wyden were usually interesting); as some sort of reform-conservative-inflected figure under a President Rubio or Kasich.

But in a dispensation where the G.O.P. was leaderless, rudderless, yawing between libertarian and populist extremes, he was never the kind of figure who could impose a vision on the party — nor would he would break with the party when it seemed to go insane.

Instead, he only knew how to work within the system, which because the system had turned into a madhouse meant that his career could only end where it ended this past week: in a record of failure on policy and principle that he chose for himself, believing — as party men always do — that there wasn’t any choice.

Nicholas Kristof is off today.

I invite you to follow me on Twitter (@DouthatNYT).

Follow The New York Times Opinion section on Facebook and Twitter (@NYTopinion), and sign up for the Opinion Today newsletter.

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A version of this article appears in print on , on Page SR11 of the New York edition with the headline: Paul Ryan, Party Man. Order Reprints | Today’s Paper | Subscribe

 

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

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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)