The enigma of Malaysia’s high household income growth


November 6, 2017

The enigma of Malaysia’s high household income growth

 

Image result for Enigma of Income Growth in Malaysia
 Who is fudging the household income figures, if not this Prime Minister cum Finance Minister? Malaysians are a whiney lot.

 

Why does the official report of rising household income seem incredible and implausible? Is Income really stagnating, or is it flourishing but Malaysians are a whiney lot?

 

By Dr. Lee Hwok Aun@www.freemalaysiatoday.com

Statistics are meant to inform, but sometimes they confuse. Take Malaysia’s household income figures. We keep hearing complaints of stagnant incomes and difficulties coping with the rising cost of living. But since the release of the Household Income and Basic Amenities Survey Report 2016 last month, an official success story is making the rounds – all the way to the 2018 Federal Budget speech.

The speech celebrates the rise in median household income, calculated from the Household Income Survey (HIS), from RM4,585 in 2014 to RM5,288 in 2016. Simultaneously, average household income rose from RM6,141to RM6,958, or at an annual growth rate of 6.4%. In real terms – that is, accounting for inflation – income grew 4.3% per year. The rest of this article refers to growth rates in real terms, which more accurately reflect purchasing power.

By the government’s account, household incomes have been growing quite substantially. Yet the budget is stacked with lavish handouts and financial relief, as though income growth has been sluggish, insufficient. Granted, this is an election budget, but a clearly the proliferation of social assistance is also addressing areal groundswell of economic discontent.

Statistics should be validated by the reality they intend to measure. If the government reports that the Malaysian economy has grown by 10% this year, most of us would disbelieve that outright. It can’t be that high; the economy is not ballooning like the early- to mid-1990s! But looking at Malaysia’s steady international trade, investment and domestic consumption, visible construction projects, low unemployment, and economic conditions as a whole, the actual figure of about 5% GDP growth seems credible and plausible.

So why does the official report of rising household income seem incredible and implausible? Is Income really stagnating, or is it flourishing but Malaysians are a whiney lot?

An examination of empirical evidence exposes three enigmas in the official household income statistics, raising questions about the reliability of the government’s high growth report.

First, income gains of the past half-decade are driven by inexplicably rapid growth in the 2012-2014 period, during which real household incomes expanded8.2% per year – faster than in the booming 1990s (Figure 1). Furthermore, households in the bottom 40% (B40)enjoyed stupefying 14.6% income growth per year. Suchhyperrates are usually the exception but were supposedly the norm – during a time of modest 5.4% economic growth.

Image result for Hwok-Aun Lee Enigma of Income Growth

Two years ago, when the 2014 Household Income Survey Report documented a spectacular fall in inequality from 2012 to 2014, I raised concerns that those results departed too far from reality (http://www.themalaymailonline.com/what-you-think/article/malaysias-spectacular-drop-in-inequality…-for-real-lee-hwok-aun, https://m.malaysiakini.com/news/315933). This phenomenal success bypassed attention. It was not mentioned in the 2016 Budget speech; the government was apparently not taking its own statistics seriously.

In releasing the 2016 income statistics, the government reaffirms the questionable 2014 calculations – without explanation. Of course, we might point to two outstanding policy shifts as income boosters: minimum wage, which came into full effect in 2014, and BR1M, introduced in 2012. Their possible effects cannot be ignored.

But upon examination, these turn out to be the second and third enigmas in the income statistics.Minimum wage and BR1M fail to explain the rise in household income.

The official household income statistics aggregate various income components (the proper term is gross household income):

  1.  Income from wages and salaries, also including allowances, bonuses
  2.  Self-employment: income through selling goods and services
  3. Property and investment income: land and property rent (including imputed rent of owner-occupied homes), interest, dividends
  4. Transfers received from public sources (BR1M, etc) or family members

A breakdown of these sources shows that the share of wages and salaries in gross household income has declined, while the share of property and investment income and transfers have increased (Figure 2). Therefore, it is most unlikely that minimum wage contributed to high overall income growth.

Image result for Hwok-Aun Lee Enigma of Income Growth

 

Furthermore, when we compute growth rates household wages and salaries, we find modest numbers for 2012-2014 and 2014-2016 (Figure 3). Happily, we can compare this particular finding with calculations from another data source. The growth of individual wages and salaries, based on the Wages and Salaries Survey data, registered similar rates. Minimum wage surely boosted wage growth to some extent, as indicated by the higher rate in 2014 when it took effect. But it fails to account for rapid household income expansion.

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BR1Mis the last big factor standing. The share of transfers in household income increased – so far so good.

Figure 3

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But the case for BR1M as an explanation for income growth soon crumbles. First, the BR1M payments are popularly known by the annual amounts paid, whereas household income is handled on a monthly basis. When investigating BR1M’s impact on household income, we must convert into their monthly amount. The problem with the BR1M explanation is that the quantum per month is so minuscule relative to household income per month. In 2012 and 2016, B40 household’s income averaged RM1,847 and RM2,848, while BR1M payments for households earning below RM3,000 per month, were RM42 and RM83 (RM500 and RM1000 divided by 12). BR1M accounted for only 2.3% and 2.9% of the household income of the B40, its principal recipients.

The second pertains to timing. BR1M was introduced in 2012 at RM500 per year, increased to RM650 in 2014, then RM1,000 in 2016. The big differences took place in 2012 and 2016, not in 2014. However, the huge leap in household income occurred between 2012 and 2014!

In light of these enigmas, discrepancies and gaps, the government’s household income calculations for 2014 and 2016 remain implausible and demand a fuller accounting, particularly to provide reasons for the unfathomably high growth in property and investment income and transfers received.

There are empirical grounds, not just anecdote or intuition, to question the veracity of the official statistics, and to restrain celebration of Malaysia’s purported achievements in raising household income.One can speculate some possibilities. Perhaps transfers have been over-counted, or imputed rent over-estimated. For those living in houses they own, the gross household income numbers include an imputed amount of rent – that is, an amount they would receive if they rented out the house. Imputed rent, although it is not actual income received, is a useful piece of information. But it is misleading to include imputed rent in household income and report the sum as an indication of purchasing power and material well-being.

The Department of Statistics must be commended for publishing increasingly detailed reports on the 2014 and 2016 Household Income and Basic Amenities Surveys, but the disclosures are still inadequate. In line with the government’s commitment to Open Data, the natural next step should be to make the raw datasets accessible, to facilitate collaborative and constructive work and arrive at a fuller comprehension and credible measure of this vital issue of household income.

Dr. Lee Hwok Aun, Senior Fellow,  Yusof Ishak Institute– ISEAS, Singapore

Janet Yellen Was a Master of Thinking in Public. What About Jay Powell?


November 5, 2017

Janet Yellen Was a Master of Thinking in Public. What About Jay Powell?

by Adam Davidson

https://www.newyorker.com/business/currency/janet-yellen-was-a-master-of-thinking-in-public-what-about-jay-powell?mbid=nl_TNY%20Template%20-%20With%20Photo%20(55)&CNDID=49438257&spMailingID=12287533&spUserID=MTg4MDU2MzU5MDA5S0&spJobID=1280352236&spReportId=MTI4MDM1MjIzNgS2

Jay Powell, Trump’s nominee for Federal Reserve chair, is praised as a safe, consensus choice, but no one can be entirely sure what he is thinking. Photograph by T.J. Kirkpatrick / Bloomberg via Getty

Much of the time, the Federal Reserve operates a bit like a commercial pilot on a long, routine flight over the Pacific. The plane’s navigational system is taking care of nearly all the decisions, and the pilot is just there in case things go haywire. The central role of the Fed’s chair, governors, and regional presidents is to meet roughly every six weeks to decide on the Fed funds rate. Technically, that rate is the amount banks charge one another for overnight loans; metaphorically, however, it’s the central drumbeat of the economy. (Or should it be “the thrust of the airplane’s engines”? Too many metaphors.) The Fed funds rate ripples throughout our financial system and, in ways that are still not fully understood, helps determine inflation, unemployment, and, from time to time, the very structural soundness of the global economy.

On Thursday, President Trump nominated Jerome (Jay) Powell as the next chair of the Federal Reserve. By near-universal agreement, he’s a safe choice. For five years, he has been one of the little-known gray men at those regular meetings, always voting with the usually unanimous majority, never expressing dissent or an independent view. Journalists and Fed watchers have scoured his background and found virtually nothing to suggest a monetary Powell doctrine—some take on the world that would tell us how he might handle, say, a financial crisis or a sudden recession with a President screaming for the Fed to act. Bloomberg carefully studies each member of the Fed’s Open Market Committee (the body that determines that crucial rate), and has rated Powell as precisely “neutral,” meaning he is neither a “dove” (someone generally supportive of lower rates to increase employment) or a “hawk” (someone who is more worried about inflation and wants to use faster-rising rates to slow the economy down). The assumption is that he will continue the policies of the recent past, which is to say that he will encourage the Fed to very slowly, very carefully increase the Fed funds rate.

Our ignorance about Powell is partly because he is not an economist, so there is no trail of academic papers in which he has carefully laid out his views. Powell, who is sixty-four, is a lawyer. Early in his legal career, he represented banks; in the mid-eighties, he was hired by one, eventually becoming a vice-president of the investment bank Dillon, Read. Aside from a short stint in George H. W. Bush’s Treasury Department, he spent most of his career at huge global investment firms, including the Carlyle Group and a firm that he founded, Severn Capital Partners. He has made few public statements; those he has made are obscure even by Fed standards. This summer, for example, he said that he would have expected more inflation right now, given that the economy has been growing healthily and unemployment has fallen. He said that the lack of inflation is “kind of a mystery,” and offered no additional insight. The interplay between Federal Reserve policy and inflation is a central question of macroeconomics, and so it is crucial to understand how a Fed chair thinks through this question. By comparison, Janet Yellen, the outgoing chair, has recently also expressed surprise at the unusually low level of inflation, but she hardly left it there. She walked through several possible reasons for it, including global technological change (she pointed to online shopping, which encourages price cuts, as one potential cause), and lower-than-expected increases in medical prices. She additionally explained how continued surprises might influence her decisions about Fed policy. Yellen was candid and clear, so that anyone—or at least anyone who understands central bankers—could grasp what she is thinking, and how her thinking might change if the facts change.

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Dr. Janet Yellen is a master at thinking in public—continually sharing what she is doing, why she is doing it, and what she might do in the future. This was essential to the Fed’s role in stabilizing the global economy during its greatest modern crisis.–Adam Davidson

Like her predecessor, Ben Bernanke, Yellen is a master at thinking in public—continually sharing what she is doing, why she is doing it, and what she might do in the future. This was essential to the Fed’s role in stabilizing the global economy during its greatest modern crisis. It’s an odd feature of our modern economy that it requires the entire financial world to trust in a handful of monetary-policy wizards who meet in secret every six weeks or so. But it is true. The Fed funds rate is the platform upon which the global economy is built, and was tested so profoundly that Bernanke and Yellen (who served as vice-chair before her promotion) had to invent new suites of macroeconomic tools. If they hadn’t built such trust through decades of rigorous academic work and open communication while at the Fed, their experiments would surely not have been so successful.

If the economy continues as it has for the past three years or so—slowly, steadily growing, with minimal inflation or turmoil—there should be little reason to worry about Powell. A middle-of-the-road man of consensus will be able to guide the Fed well. Powell is a relief for those worried that Trump—who has made it quite clear how little he knows or cares about monetary policy—might put in place a fringe ideologue or a man like Arthur Burns, who, as the Fed chair, succumbed to President Nixon’s desire to goose the economy through lower rates right before the 1972 election, even if it increased the likelihood of long-term inflation.

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If, however, there is severe economic turbulence—a rougher-than-usual recession or a financial crisis that erupts, suddenly, somewhere else on the globe—the fact that few people know how Powell thinks will be a real problem. Hopefully, he will take after his predecessors and begin to tell us about himself. We need to know who you are, Mr. Powell—it’s possible our economy will depend on it.

  • Adam Davidson is a staff writer at The New Yorker

 

Another Nobel Surprise for Economics


October 18, 2017

Another Nobel Surprise for Economics

by Robert J.Shiller

https://www.project-syndicate.org/commentary/richard-thaler-nobel-behavioral-economics-by-robert-j–shiller-2017-10

Image result for Economist Richard Thaler

University of Chicago Economist Richard Thaler wins 2017 Nobel Prize in Economics

Richard Thaler (pic above) has shown in his research how to focus economic inquiry more decisively on real and important problems. His research program has been both compassionate and grounded, and he has established a research trajectory for young scholars and social engineers that marks the beginning of a real and enduring scientific revolution.

 

NEW HAVEN – The winner of this year’s Nobel Memorial Prize in Economic Sciences, Richard Thaler of the University of Chicago, is a controversial choice. Thaler is known for his lifelong pursuit of behavioral economics (and its subfield, behavioral finance), which is the study of economics (and finance) from a psychological perspective. For some in the profession, the idea that psychological research should even be part of economics has generated hostility for years.

Not from me. I find it wonderful that the Nobel Foundation chose Thaler. The economics Nobel has already been awarded to a number of people who can be classified as behavioral economists, including George Akerlof, Robert Fogel, Daniel Kahneman, Elinor Ostrom, and me. With the addition of Thaler, we now account for approximately 6% of all Nobel economics prizes ever awarded.

But many in economics and finance still believe that the best way to describe human behavior is to eschew psychology and instead model human behavior as mathematical optimization by separate and relentlessly selfish individuals, subject to budget constraints. Of course, not all economists, or even a majority, are wedded to this view, as evidenced by the fact that both Thaler and I have been elected president, in successive years, of the American Economic Association, the main professional body for economists in the United States. But many of our colleagues unquestionably are.

I first met Thaler in 1982, when he was a professor at Cornell University. I was visiting Cornell briefly, and he and I took a long walk across the campus together, discovering along the way that we had similar ideas and research goals. For 25 years, starting in 1991, he and I co-organized a series of academic conferences on behavioral economics, under the auspices of the US National Bureau of Economic Research.

Image result for Economist Merton MillerMerton H. Miller–The Nobel Laureate in Economics, 1990

Over all those years, however, there has been antagonism – and even what appeared to be real animus – toward our research agenda. Thaler once told me that Merton Miller, who won the economics Nobel in 1990 (he died in 2000), would not even make eye contact when passing him in the hallway at the University of Chicago.

Miller explained his reasoning (if not his behavior) in a widely cited 1986 article called “Behavioral Rationality in Finance.” Miller conceded that sometimes people are victims of psychology, but he insisted that stories about such mistakes are “almost totally irrelevant” to finance. The concluding sentence of his review is widely quoted by his admirers: “That we abstract from all these stories in building our models is not because the stories are uninteresting but because they may be too interesting and thereby distract us from the pervasive market forces that should be our principal concern.”

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MIT Economist Stephen A. Ross

 

Stephen A. Ross of MIT, another finance theorist who was a likely future Nobel laureate until he died unexpectedly in March, argued along similar lines. In his 2005 book Neoclassical Finance, he, too, eschewed psychology, preferring to build a “methodology of finance as the implication of the absence of arbitrage.” In other words, we can learn a lot about people’s behavior just from the observation that there are no ten-dollar bills lying around on public sidewalks. However psychologically bent some people are, one can bet that they will pick up the money as soon as they spot it.

Both Miller and Ross made wonderful contributions to financial theory. But their results are not the only descriptions of economic and financial forces that should interest us, and Thaler has been a major contributor to a behavioral research program that has demonstrated this.

For example, in 1981, Thaler and Santa Clara University’s Hersh Shefrin advanced an “economic theory of self-control” that describes economic phenomena in terms of people’s inability to control their impulses. Sure, people have no trouble motivating themselves to pick up a ten-dollar bill that they might find on a sidewalk. There is no self-control issue there. But they will have trouble resisting the impulse to spend it. As a result, most people save too little for their retirement years.

Economists need to know about such mistakes that people repeatedly make. During a long subsequent career, involving work with UCLA’s Shlomo Benartzi and others, Thaler has proposed mechanisms that will, as he and Harvard Law School’s Cass Sunstein put it in their book Nudge, change the “choice architecture” of these decisions. The same people, with the same self-control problems, could be enabled to make better decisions.

Improving people’s saving behavior is not a small or insignificant matter. To some extent, it is a matter of life or death, and, more pervasively, it determines whether we achieve fulfillment and satisfaction in life.

Thaler has shown in his research how to focus economic inquiry more decisively on real and important problems. His research program has been both compassionate and grounded, and he has established a research trajectory for young scholars and social engineers that marks the beginning of a real and enduring scientific revolution. I couldn’t be more pleased for him – or for the profession.

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

‘Minister of Finance Inc’ – A Political Economist’s Study of Minister of Finance Incorporated and GLICs in Malaysia–Terence Gomez


September 30, 2017

‘Minister of Finance Inc’ A Political Economist’s Study of Minister of Finance Incorporated and GLICs in Malaysia–Terence Gomez

by M Krishnamoorthy @www.malaysiakini.com

 

Dr. Terence Gomez, in his latest book, “Minister of Finance Incorporated: Ownership and Control of Corporate Malaysia”, traces the government’s role in the corporate sector. He provides an assessment of Malaysia’s new political economy, with a focus on ownership and control of the corporate sector.

Gomez, who is a Professor of Political Economy at Universiti Malaya, is also the author of “Politics in Business: UMNO’s Corporate Investments”, a pioneering publication in 1990, which traced how UMNO secured a huge equity interest in Malaysia’s corporate sector.

 

In “Minister of Finance Incorporated”, Gomez (photo above) and his team of researchers offer another pioneering assessment of Malaysia’s corporate sector, though their focus is now government-linked investment companies (GLICs), a type of state enterprise that has long prevailed in the economy but has not been analysed.

Gomez argues that corporate power is now concentrated in these GLICs that are ultimately controlled by the Minister of Finance. Interestingly, Gomez admits that these GLICs are well-managed by highly qualified professionals, though these people can be subservient to the dictates of the Minister of Finance.

By focusing on the GLICs, “Minister of Finance Incorporated” ignites interesting debates about the role of the government in the economy, an issue that requires thoughtful consideration given their dominant presence in the corporate sector. Through in-depth research, novel insights are provided into this question of government ownership and control of corporate Malaysia.

This review is presented as a question-and-answer dialogue with the author, to draw attention to this study’s major findings. Much of what is outlined below is from this book.

The Interview

Professor Gomez, in your latest book, “Minister of Finance Incorporated”, what are your major findings?

Malaysia’s political economy has undergone a major transition since the 1990s that has escaped public attention.

Corporate power has shifted from UMNO and well-connected businessmen to the government. Huge business groups controlled by the government have emerged, seen in the dominance that a mere seven GLICs have over the corporate sector.

During this transition, one extraordinary outcome was the removal of UMNO, its members and the business associates of party leaders as owners of publicly-listed government-linked companies (GLCs).

 

UMNO now has direct equity ownership of only one quoted company, the media-based Utusan Melayu, while no UMNO member figures as a major corporate player.

UMNO’s absence from the corporate sector has major implications. The power nexus involving politics and business has fundamentally shifted at the federal level.

If this political-business nexus once involved numerous powerful UMNO politicians who had enormous influence over the corporate sector, economic power is now concentrated in the Office of the Minister of Finance.

Who are the GLICs?

Seven institutions have been classified by the government as GLICs. These are the Minister of Finance Incorporated (MoF Inc), the government’s holding company, which participates actively in corporate manoeuvres and owns a diverse range of firms known as government-linked companies (GLCs).

The sovereign wealth fund, Khazanah Nasional Berhad, is policy-based and implements major plans, including venturing abroad to support the government’s business internationalisation effort.

 

 

The investment trust fund, Permodalan Nasional (PNB, or National Equity Corporation), is portfolio-oriented, though with a policy agenda to redistribute wealth more equitably between the nation’s ethnic groups.

Two savings-cum-pension-based funds, the Employees’ Provident Fund (EPF) and the Kumpulan Wang Persaraan Diperbadankan (KWAP, or Retirement Fund Incorporated), are portfolio-based with an equity interest in a vast number of companies.

Lembaga Tabung Angkatan Tentera (LTAT, or Armed Forces Fund Board) is also a savings-cum-pension-based fund but is active in the management and development of large businesses in various sectors.

 

 

Lembaga Tabung Haji (LTH, or Pilgrims Fund Board), though portfolio-based, has an organic form of enterprise development, active in the development of Islamic-based products and services.

How are these GLICs owned and controlled?

The Ministry of Finance sits at the apex of a complex business group structure comprising its holding company, MoF Inc, as well as other GLICs, quoted GLCs and a huge number of unquoted private firms.

MoF Inc is the “super-entity”, given its enormous influence over the corporate sector through its substantial ownership and control of the other GLICs and the financial sector, comprising Malaysia’s leading commercial banks. Through its ownership of these commercial banks, the government can control the economy indirectly by acting as a lender to private firms.

However, MoF Inc’s vast network of business interactions constitutes only one part of the government’s complex system of control over the corporate sector. State governments have a similarly sizeable interest in the corporate sector.

In this system, the Board of Directors are important. Directorships function as a primary avenue through which the government can dictate decision-making within GLICs and GLCs.

Our comparison of ownership and directorate patterns in 1996 (prior to the 1997 currency crisis) and 2013 revealed a new phenomenon.

 

Only a small number of UMNO members remain as directors of these government-owned enterprises. These findings are particularly astonishing as Umno remains a party riddled with money politics, patronage and rent-seeking.

How did Malaysia get to this point?

Three major events have contributed to these transitions where the Prime Minister and GLICs have emerged as economic powerhouses. The first was the implementation of the New Economic Policy (NEP) in 1971, which allowed these enterprises to gradually acquire a major presence in the corporate sector.

The involvement of the GLICs in the corporate sector diminished with the active promotion of privatisation from the mid-1980s. With this spate of privatisations, major enterprises fell under the ownership and control of UMNO and well-connected businesspeople.

The second defining event was the 1997 currency crisis and the momentous intra-elite political feuding that ensued the following year. The GLICs’ bailout of ailing well-connected companies and their takeover of firms associated with ousted Umno leaders led to their re-emergence as major actors in the corporate sector.

 

The third defining moment was when reform of the GLICs and GLCs was initiated by Dr. Mahathir Mohamad in the late 1990s, though actively implemented by Abdullah Ahmad Badawi (photo) from 2003. Najib Abdul Razak continued these reforms when he took office in 2009 as Prime Minister.

The current concentration of economic power in the office of the Prime Minister is particularly salient because when Najib took office in 2009 he voiced his intention to transfer GLCs to the private sector, arguing that the private sector should function as the primary engine of growth.

Unlike Mahathir, Najib appeared personally uninterested in business as a government tool for economic and corporate development when he came to power. Najib, however, soon came to realise the significant economic influence that the GLICs have over the corporate sector.

Why was this type of corporate control structure created?

This complex system of ownership and control of the corporate sector is not one that was designed or envisioned by ruling elites.

In fact, since the 1980s, all Prime Ministers – Mahathir, Abdullah and Najib – have persistently advocated privatisation of the GLCs on the assumption that these enterprises would function far more effectively and productively if under private ownership.

Even when the NEP was conceived, the plan was to transfer corporate equity acquired by the GLICs to bumiputeras, in order to redistribute wealth more equitably among the ethnic groups.

When Mahathir’s vision of creating business groups led by corporate captains was dismantled by the 1997 currency crisis, the GLICs and GLCs were deployed to bail out well-connected ailing, debt-ridden enterprises.

 

When a bitter feud ensued between Mahathir and his Minister of Finance, Anwar Ibrahim, over these bailouts, Anwar was ousted from public office and his business allies lost control of their corporate assets.

When a similar feud ensued between Mahathir and Daim Zainuddin, Anwar’s replacement as minister of finance, companies controlled by his allies and UMNO were channelled to the GLICs. Having had persistent feuds with his trusted allies who he had appointed as Minister of Finance, prime minister Mahathir then took charge of this ministry.

The new structure of Malaysia’s political economy has also arisen out of the need for the UMNO President to reduce the influence of party warlords.

UMNO’s major businesses now under the GLICs include media companies that own the major newspapers, The New Straits Times and Berita Harian, as well as TV3, the party’s cooperative KUB, the huge construction-based UEM Group, the hotel-based Faber Group (now UEM Adgenta) and the Bank of Commerce, now a part of Malaysia’s third largest banking enterprise, CIMB Group. Control of these companies ultimately falls under MoF Inc.

If UMNO members once had many sources of patronage, what is the situation now?

UMNO members now have only one source if they wish to obtain access to federal government-generated economic concessions. This is profoundly problematic in terms of public governance as the minister of finance concurrently holds the position of prime minister, a situation that does not prevail in democracies.

In this governance structure, there is the possibility of checks and balances being deeply undermined, opening space for abuse of power that can have serious implications on the economy and the corporate sector.

Who is accountable for the running of the companies?

The board of directors of these companies are accountable. While most of these directors are professionals who manage the GLCs in a productive manner, since they are appointed by the minister of finance, they can be compelled to follow his dictates.

There are also serious concerns in some GLICs. In LTH, a number of its directors, including its chairperson, are UMNO members who are elected representatives but hold no position in government. LTAT is led by Lodin Kamaruddin (photo), a longstanding close business associate of Prime Minister Najib.

 

There is sufficient evidence that these GLICs could be vulnerable to political interference unless sufficient oversight measures and institutional reforms are introduced to ensure they are well-insulated from such abuse.

In the boards of directors of the GLICs and GLCs, what has also increased is the number of former bureaucrats. These ex-civil servants, like the professional elite, have no political influence. However, they also appear to function as mere figureheads.

The most influential decision-makers are the chairpersons of these boards and the managing directors who, when necessary, take the cue from the Minister of Finance, further indicating his overwhelming influence over the corporate sector.

There is evidence of “inner circles” among the GLICs. One inner circle revolves around Nor Mohamad Yakcop, until recently the deputy chairperson of Khazanah. Professional managers groomed by him lead the GLICs and GLCs.

An inner circle is also evident in the media sector. An obscure private firm, Gabungan Kesturi, controls the leading media enterprise, Media Prima, along with PNB.

The directors and shareholders of Gabungan Kesturi are Shahril Ridza Ridzuan and Abdul Rahman Ahmad, both groomed by Nor Mohamad. Shahril is the CEO of EPF, which also owns a huge interest in Media Prima. Rahman was appointed the CEO of PNB in 2016.

The use of private companies like Gabungan Kesturi obscures the identity of the ultimate shareholder, the Minister of Finance, as well as the extent of the state’s control over major media companies.

Did our leaders groom and place executives in GLICs for their vested interests?

Daim Zainuddin (photo) groomed and placed professionals he had trained as executives and owners of companies associated with UMNO.

 

A similar practice of grooming young professionals as executives and CEOs emerged in the late 1990s after well-connected firms came under the control of the GLICs. Professionals trained by Nor Mohamed took over the management of these enterprises.

However, while Nor Mohamad and Daim groomed and placed professionals in control of major quoted enterprises, their reasons for doing so differed.

As Minister of Finance, Daim, also UMNO’s Treasurer and a longstanding businessperson, appeared intent on securing enormous control over the corporate sector to serve his vested business interests. The professional-managerial team groomed by Nor Mohamed was not necessarily trained to manage the GLICs and GLCs.

What are the possible repercussions of this ownership and control mechanism?

Through this pyramiding system, with the Minister of Finance at the apex, the GLICs and GLCs can be subjected to considerable abuse. This pyramiding system allows the minister to secure numerous political and business benefits from the GLICs and GLCs, as well as abuse them.

It is noteworthy that MoF Inc has ownership and control of controversial companies such as 1MDB and the National Feedlot Corporation (NFC).

The GLIC-based business groups have control over companies through majority equity ownership, which accords them significant voting rights. This has serious implications for minority shareholders, and the economy, in the event of abuse of the companies.

Our study noted that the EPF appears to have been forced to take control of RHB Capital from a firm linked with the former Chief Minister (and now Governor) of Sarawak, Abdul Taib Mahmud (photo above ). This financial institution has long been an enterprise that has come under the control of a number of well-connected people and GLCs.

Politics evidently matters, influencing how these enterprises are run. Policies also matter as they shape the different ways in which these institutions are managed.

There can be a link to between politics and policies, especially redistributive policies and enterprise development strategies when determining how these enterprises are employed.

After his party fared badly in the 2013 General Election, Najib announced that contracts and other concessions would be channeled through GLICs and GLCs to bumiputeras, justified by his new ethnically-based affirmative action policy that targeted this ethnic group. This was evidently to consolidate the political support of this ethnic community. 

What reforms are required to deal with this issue?

These powerful GLICs are a clear manifestation of high concentration of corporate ownership in the state. This concentration of corporate wealth is justifiable only if GLICs are managed in an accountable and transparent manner.

Inevitably, to inspire confidence among private investors, political reforms are imperative to enforce stringent institutional checks and balances by independent oversight institutions.

 

The technocratic professional elite at the epicentre of this GLIC-GLC network can remain, but must be subjected to close scrutiny by parliamentary action committees led by the Opposition. And the Prime Minister cannot also serve as the Finance Minister since it is an obvious case of conflict of interest.

Rethinking Southeast Asian Economic Diplomacy


September 18,2017

Rethinking Southeast Asian Economic Diplomacy

by Henry Wai-chung Yeung, NUS

http://www.eastasiaforum.org
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In today’s global economy of cross-border production networks, the need to understand the changing ways in which the state and firms work together has become even more pressing. While the state plays an important role in supporting these production networks, it is firms and other private organisations — industry associations and standards organisations, for example — which coordinate and organise these networks.

UNCTAD’s World Investment Report 2013 estimated that some 80 per cent of today’s world trade is conducted through firms in these production networks — they are the backbone and central nervous system of the global economy.

 

In Southeast Asia, many economies are heavily involved in production networks, some of which are highly regional in nature. The ASEAN Investment Report 2016 suggests that regional production networks will be critical in realising the ASEAN Economic Community’s goals, which include building a single market of over US$2.5 trillion and a single production base of over 620 million people. As Escaith et al argue in East Asia Forum Quarterly ‘Strategic Diplomacy in Asia‘, ‘understanding the nature and dynamics of these production networks will be more important to securing stable and fair growth throughout the region’.

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Donald Trump has abandoned TPP and opened the door to China in favour of America First. Now ASEAN must get on with RCEP. Towards a more calibrated approach to strategic economic diplomacy

We need to rethink the strategic diplomacy of economic development — it can no longer be entirely state-driven in an era of global production networks. I use the concept ‘strategic coupling’ to describe the mechanism of strategic economic diplomacy through which domestic firms couple their specific initiatives and advantages with those of global lead firms. Through this process, firms coordinate diverse production networks spanning across national and regional territories.

The Apple–Foxconn case is one example of strategic coupling at work. Taiwan’s Foxconn is instrumental not only in ‘manufacturing’ Apple’s iPhone success but also in integrating Taiwan and mainland China into the iPhone’s global production networks.

But this well told story has a critical and often missed dimension — the even more crucial role played by South Korea’s Samsung. Apple’s major competitor in the global mobile handsets market, Samsung has also supplied critical components to successive generations of iPhones assembled by Foxconn.

While serving as the iPhone’s largest supplier by value of components, Samsung has kept busy building its own production networks throughout East and Southeast Asia, including a giant industrial park in the Bac Ninh province of North Vietnam. Opened in 2009, Samsung’s smartphone production there has transformed a province of rice fields into Vietnam’s second-largest export centre after Ho Chi Minh City.

While the state and its policy initiatives in Taiwan, mainland China, South Korea and Vietnam facilitated this Foxconn–Apple–Samsung strategic coupling, they are not the only domain through which this new mechanism of economic development can be effective and successful.

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My recent work Strategic Coupling shows that equally if not more important than state policies are the organisational and technological innovations developed by national firms, such as Samsung and Hon Hai (Foxconn’s parent). These firms seize opportunities embedded in the cross-border production networks spearheaded by global lead firms from advanced industrial economies in North America, Western Europe and Japan.

The state’s capacity to steer national economic development and ‘govern the market’ has become more constrained since the 1990s. The transformation of state roles has led to the weakening of the state’s embedded autonomy in countries like South Korea and Taiwan. State institutions began to facilitate the redistribution of state power towards more horizontal and functional policy in support of domestic firms and industries that take advantage of growing global opportunities.

As Southeast Asian states move from active economic intervention to facilitating strategic coupling between firms and global production networks, developmental partnerships start to broaden from top-down state–firm relations to include inter-firm networks. This new mechanism of strategic economic diplomacy recommends a dynamic conception of state-firm relations that goes beyond the debilitating market–state dichotomy.

The integration of Vietnam into Samsung’s global production network is a good example of this rethinking of strategic economic diplomacy. Samsung’s US$15 billion investment in Vietnam represents a strategic imperative to diversify away from mainland China, where Foxconn is dominant. It allows Samsung to tap into strong existing industrial clusters in Singapore, Malaysia and Thailand.

What does the strategic coupling story suggest in terms of public policy? While it is now much harder for almost any Southeast Asian economy to develop internationally competitive vertically integrated industries, there remains significant room for a new kind of strategic economic diplomacy — one that encourages domestic firms to tap into the developmental opportunities inherent in most global industries.

The call for a more calibrated approach to strategic economic diplomacy brings with it the possibility of focusing on more niche policies that nudge strategic coupling. As industrial production becomes ever more fragmented and globalised, state planners in Southeast Asian economies will find it harder to identify which products and technologies should be developed in their domestic industries.

Today’s obstacles to economic development are less about large capital outlays and scale of investment, and more about developing specialised niches within different global industries. In most global industries characterised by vertical specialisation and modularisation (transport equipment, ICT, agro-food and so on), a niche approach to industrial policy is likely to yield stronger coupling networks than a ‘big spurt’ approach to state-led industrialisation.

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The politics of industrial and sectoral choice is confounded by the growing uncertainties of today’s global economy. Value creation and capture tends to be much greater in new innovation-based industries in the manufacturing and service sectors, such as nanotechnology, biomedicine, green tech and digital media. Here, catching up is not just a matter of capital investment led by state-controlled financial institutions and elite industrial development agencies. The sheer complexity and wide range of actors and interests with specialised knowledge in these industries makes it rather unruly for bureaucratic targeting, even for a state with well-coordinated industrial policy.

Looking forward, the post-developmental state should focus on creating broad-based capabilities in new technologies, product and process innovations, and market development, rather than choosing specific winning firms, industries or sectors.

Henry Wai-chung Yeung is Provost’s Chair and Professor of Economic Geography at the Department of Geography and Co-Director of the Global Production Networks Centre, National University of Singapore.

This article appeared in the East Asia Forum Quarterly, ‘Strategic diplomacy in Asia’.