Policy uncertainty threatens trade growth, says World Bank


February 22, 2017

Policy uncertainty threatens trade growth, says World Bank

Warning on protectionism and threats to trade agreements in Trump era

https://www.ft.com/content/9d49b092-f859-11e6-9516-2d969e0d3b65

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Political uncertainty is slowing trade growth, a World Bank report has concluded, indicating that the rise of Donald Trump may already be casting a shadow over the global economy.

Major international institutions such as the IMF, the OECD and World Bank have recently upgraded their forecasts of global economic growth largely due to expectations that tax cuts, rising infrastructure spending and a wave of deregulation will boost the US economy under the new president. But the report by World Bank economists, released on Tuesday, highlights the fragile state of one historically important engine of global growth — trade.

To the extent that the policy uncertainty will remain high we should continue to expect [global] trade growth to be subdued. Michele Ruta, World Bank report co-author

The study avoids naming Mr Trump, but highlights rising protectionism and threats to unwind trade agreements — such as those made by the president. It also raises the prospect that attempts by the Trump administration to force companies to repatriate global supply chains to the US could undermine efforts to boost lagging productivity growth. To the extent that the policy uncertainty will remain high we should continue to expect [global] trade growth to be subdued Michele Ruta, World Bank report co-author International trade has been growing below historic trends for the past five years. The 1.9 per cent growth recorded in 2016, according to the team at the bank, was the slowest since the 2009 collapse in commerce that followed the global financial crisis.

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Prime Minister Justin Trudeau meets with U.S. President Donald Trump in the Oval Office at the White House–The Future of NAFTA

The team found that some of the reasons for the anaemic trade growth, which affected both developed and developing economies, were broader trends such as slow economic growth around the world and a collapse in commodity prices. But in 2016 the principal change was a surge in uncertainty about economic policy. According to the World Bank’s calculations, such uncertainty was responsible for 0.6 percentage points of the 0.8 percentage-point fall in trade growth between 2015 and 2016. The team at the bank based their figure on a study of the relationship between trade and economic policy uncertainty in 18 countries over three decades. They added they expected the impact to continue in 2017. “To the extent that the policy uncertainty will remain high we should continue to expect [global] trade growth to be subdued,” said Michele Ruta, one of the authors. The World Bank team also sought to quantify the impact of trade agreements on global trade growth. World trade grew at an annual rate of 6.53 per cent between 1995 and 2014, they calculated. Had no new members — including China — joined the World Trade Organisation or no new trade agreements been signed, international trade would have grown at just 4.76 per cent annually, they found.

One of the big consequences of the explosion in trade deals in recent decades has been the emergence of global supply chains. Such chains are widely seen by economists to have made businesses more efficient and boosted productivity. But Mr Trump and his administration have said they want to unwind those international supply chains and bring them home. “It does the American economy no long-term good to only keep the big box factories where we are now assembling ‘American’ products that are composed primarily of foreign components,” Peter Navarro, one of the president’s top trade advisers, told the Financial Times last month.

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According to the World Bank team such a move, coupled with unwinding existing trade agreements that have encouraged the establishment of international supply chains, would hurt productivity growth. “Preserving and expanding the reach of trade agreements, rather than backtracking on existing commitments, would help to sustain the growth of productivity,” the bank’s economists wrote.

Donald Trump–The Reluctant Multilateralist (?)


February 21, 2017

Donald Trump–The Reluctant Multilateralist (?)

by Barry Eichengreen

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Barry Eichengreen is Professor of Economics at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund. His latest book is Hall of Mirrors:The Great Depression, the Great Recession, and the Uses – and Misuses – of History.–www.project-syndicate.org

FLORENCE – Donald Trump did not assume the US presidency as a committed multilateralist. On that, partisans of all political persuasions can agree. Among his most controversial campaign statements were some suggesting that NATO was obsolete, a position that bodes ill for his attitude to other multilateral organizations and alliances.

Last week, however, Trump stepped back, reassuring an audience at US Central Command in Tampa, Florida (the headquarters for US forces that operate in the Middle East). “We strongly support NATO,” he declared, explaining that his “issue” with the Alliance was one of full and proper financial contributions from all members, not fundamental security arrangements.

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This more nuanced view presumably reflects a new appreciation, whether born of security briefings or the sobering fact of actually occupying the Oval Office, that the world is a dangerous place. Even a president committed to putting “America first” now seems to recognize that a framework through which countries can pursue shared goals is not a bad thing.

The question now is whether what is true for NATO is also true for the International Monetary Fund, the World Bank, the World Trade Organization, and the Basel Committee on Banking Supervision. Trump’s record on the campaign trail and Twitter is not heartening. Back in 2012, he tweeted criticism of the World Bank for “tying poverty to ‘climate change’” (his quotation marks). “And we wonder why international organizations are ineffective,” he complained.

Likewise, last July, he mooted the possibility that the United States might withdraw from the WTO if it constrained his ability to impose tariffs. And he vowed repeatedly during the presidential campaign to withdraw from the Paris climate agreement. But the evolution of Trump’s position on NATO suggests that he may yet see merit to working through these organizations as he comes to recognize that the world economy, too, is a dangerous place.

Following the election, Trump acknowledged having an open mind on the Paris climate agreement. His position seemed less to deny the existence of global warming than to insist that policies mitigating climate change not impose an unreasonable burden on American companies.

The way to limit the competitive burden on US producers is, of course, by ensuring that other countries also require their companies to take steps to mitigate climate change, thereby keeping the playing field level. And this is precisely what the Paris agreement is about.

The real test of Trump’s stance on multilateralism will be how he approaches the WTO. Persuading the US Congress to agree on corporate and personal income-tax reform, a $1 trillion infrastructure initiative, and a replacement for Obama’s signature health-care reform won’t be easy, to say the least. Doing so will require patience, which is not Trump’s strong suit. This suggests that he will feel pressured to do what he can unilaterally.–Barry Eichengreen

The same can be said of the Basel Committee’s standards for capital adequacy. Holding more capital is not costless for US banks, as advisers like Gary Cohn, formerly of Goldman Sachs and now the head of Trump’s National Economic Council, presumably tell the president morning, noon, and night. Leveling the playing field in this area means requiring foreign banks also to hold more capital, which is precisely the point of the Basel process.

Trump may similarly come to appreciate the advantages of working through the IMF when a crisis erupts in Venezuela, or in Mexico as a result of his own policies. In 1995, the US Treasury extended financial assistance to Mexico through the Exchange Stabilization Fund. In 2008, the Federal Reserve provided Brazil with a $30 billion swap line to help it navigate the global financial crisis. But imagine the outrage with which Trump’s supporters would greet a “taxpayer bailout” of a foreign country or Mexican officials’ anger over having to secure assistance from the same Trump administration responsible for their country’s ills. Both sides would surely prefer working through the IMF.

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Jim Yong Kim–From Brown University to The World Bank

Trump can’t be pleased that the Obama administration rushed to push through the reappointment of its chosen World Bank president, Jim Yong Kim. But he clearly recognizes the benefits of development aid. While he has said that the US should “stop sending foreign aid to countries that hate us,” he has also observed that failure to help poor countries can foment instability.

This would appear to be an area where Trump will favor bilateral action, which would enable him to assuage his conservative critics by insisting that no US funds go toward family planning, while taking credit for any and all assistance. At the same time, minimizing the role of the US in the World Bank would create a vacuum to be filled by China, Trump’s bête noire, both in that institution and through the activities of the Chinese-led Asian Infrastructure Investment Bank.

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The real test of Trump’s stance on multilateralism will be how he approaches the WTO. Persuading the US Congress to agree on corporate and personal income-tax reform, a $1 trillion infrastructure initiative, and a replacement for Obama’s signature health-care reform won’t be easy, to say the least. Doing so will require patience, which is not Trump’s strong suit. This suggests that he will feel pressured to do what he can unilaterally.

One thing he can do unilaterally is slap duties on imports, potentially in violation of WTO rules. We’ll soon find out whether those rules will deter him.

https://www.project-syndicate.org/commentary/trump-nato-reluctant-mulitlateralist-by-barry-eichengreen-2017-02

Economic Crises and the Crisis of Economics


January 17, 2017

Economic Crises and the Crisis of Economics: Economists should learn to be humble and accept their own limitations

by Paola Subacchi@www.project-syndicate.org

Paola Subacchi is Research Director of International Economics at Chatham House and Professor of Economics at the University of Bologna. She is the author of The People’s Money: How China is Building an International Currency.

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Is the economics profession “in crisis”? Many policymakers, such as Andy Haldane, the Bank of England’s chief economist, believe that it is. Indeed, a decade ago, economists failed to see a massive storm on the horizon, until it culminated in the most destructive global financial crisis in nearly 80 years. More recently, they misjudged the immediate impact that the United Kingdom’s Brexit vote would have on its economy.

Of course, the post-Brexit forecasts may not be entirely wrong, but only if we look at the long-term impact of the Brexit vote. True, some economists expected the UK economy to collapse during the post-referendum panic, whereas economic activity proved to be rather resilient, with GDP growth reaching some 2.1% in 2016. But now that British Prime Minister Theresa May has implied that she prefers a “hard” Brexit, a gloomy long-term prognosis is probably correct.

Unfortunately, economists’ responsibility for the 2008 global financial crisis and the subsequent recession extends beyond forecasting mistakes. Many lent intellectual support to the excesses that precipitated it, and to the policy mistakes – particularly insistence on fiscal austerity and disregard for widening inequalities – that followed it.

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Some economists have been led astray by intellectual arrogance: the belief that they can always explain real-world complexity. Others have become entangled in methodological issues – “mistaking beauty for truth,” as Paul Krugman once observed – or have placed too much faith in human rationality and market efficiency.

Despite its aspiration to the certainty of the natural sciences, economics is, and will remain, a social science. Economists systematically study objects that are embedded in wider social and political structures. Their method is based on observations, from which they discern patterns and infer other patterns and behaviors; but they can never attain the predictive success of, say, chemistry or physics.

Human beings respond to new information in different ways, and adjust their behavior accordingly. Thus, economics cannot provide – nor should it claim to provide – definite insights into future trends and patterns. Economists can glimpse the future only by looking backwards, so their predictive power is limited to deducing probabilities on the basis of past events, not timeless laws.

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And because economics is a social science, it can readily be used to serve political and business interests. In the years leading up to the financial crisis, global economic growth and profits were so strong that everyone – from small investors to the largest banks – was blinded by the prospect of bigger gains.

Economists employed by banks, hedge funds, and other businesses were expected to provide a short-term “view” for their employers and clients; and to dispense their “wisdom” to the general public through interviews and media appearances. Meanwhile, the economics profession was adopting more complex mathematical tools and specialized jargon, which effectively widened the gap between economists and other social scientists.

Before the financial crisis, when so many private interests and profitable opportunities were at stake, many economists defended a growth model that was based more on “irrational exuberance” than on sound fundamentals. Similarly, with respect to Brexit, many economists confused the referendum’s long-term impact with its short-term effects, because they were rushing their predictions to fit the political debate.

Owing to these and other mistakes, economists – and economics – have suffered a spectacular fall from grace. Once seen as modern witch doctors with access to exclusive knowledge, economists are now the most despised of all “experts.”

Where do we go from here? While we should appreciate Haldane’s candid admission, apologizing for past mistakes is not enough. Economists, especially those involved in policy debates, need to be held explicitly accountable for their professional behavior. Toward that end, they should bind themselves with a voluntary code of conduct.

Above all, this code should recognize that economics is too complex to be reduced to sound bites and rushed conclusions. Economists should pay closer attention to when and where they offer their views, and to the possible implications of doing so. And they should always disclose their interests, so that proprietary analysis is not mistaken for an independent perspective.

Moreover, economic debates would benefit from more voices. Economics is a vast discipline that comprises researchers and practitioners whose work spans macro and micro perspectives and theoretical and applied approaches. Like any other intellectual discipline, it produces excellent, good, and mediocre output.

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But the bulk of this research does not filter into policymaking and decision-making circles, such as finance ministries, central banks, or international institutions. At the commanding heights, economic-policy debates remain dominated by a relatively small group of white men from American universities and think tanks, nearly all of them well-versed devotees of mainstream economics.

The views held by this coterie are disproportionately represented in the mass media, through commentaries and interviews. But fishing for ideas in such a small and shallow pond leads to a circular and complacent debate, and it may encourage lesser-known economists to tailor their research to fit in.

The public deserves – and needs – a marketplace of ideas in which mainstream and heterodox views are afforded equal attention and balanced discussion. To be sure, this will take courage, imagination, and dynamism – particularly on the part of journalists. But a fairer, more pluralistic discussion of economic ideas may be just what economists need as well.

2017 — A Thunderous Clash of Politics, Economies and Policies


January 6, 2017

2017 — A Thunderous Clash of Politics, Economies and Policies

Martin Khor is Executive Director of the South Centre, a think tank for developing countries, based in Geneva.

The Paris agreement, which was adopted in December 2015 and which came into force in record time in October 2016 as a demonstration of international concern over climate change, may face a major test and even an existential challenge in 2017, if Trump fulfils his election promise to pull the US out. Credit: Diego Arguedas Ortiz/IPS.

The Paris agreement, which was adopted in December 2015 and which came into force in record time in October 2016 as a demonstration of international concern over climate change, may face a major test and even an existential challenge in 2017, if Trump fulfils his election promise to pull the US out. Credit: Diego Arguedas Ortiz/IPS.

PENANG, Jan 2 2017 (IPS) – Yet another new year has dawned.   But 2017 will be a year like no other.

There will be a thunderous clash of policies, economies and politics worldwide.   We will therefore be on a roller-coaster ride, and we should prepare for it and not only be spectators on the side-lines in danger of being swept away by the waves.

With his extreme views and bulldozing style, Donald Trump is set to create an upheaval if not revolution in the United States and the world.

He is installing an oil company chief as the Secretary of State, investment bankers in key finance positions, climate sceptics and anti-environmentalists in environmental and energy agencies and an extreme rightwing internet media mogul as his chief strategist

US-China relations, the most important for global stability, could change from big-power co-existence with a careful combination of competition and cooperation, to outright crisis.

Trump, through a phone call with Taiwan’s leader and subsequent remarks, signalled he could withdraw the longstanding US adherence to the One China policy and instead use Taiwan as a bargaining card when negotiating economic policies with China.  The Chinese perceive this as an extreme provocation.

He has appointed as head of the new National Trade Council an economist known for his books demonising China, including “Death by China: Confronting the Dragon”.

Trump seems intent on doing an about-turn on US trade and investment policies, starting with ditching the Trans Pacific Partnership Agreement and re-negotiating the North American Free Trade Agreement.

Other measures being considered include a 45% duty on Chinese products, extra duties and taxes on American companies located abroad, and even a 10% tariff on all imports.

Martin Khor

Thus 2017 will see a rise in protectionism in the US, the extent still unknown.  That is bad news for those developing countries whose economies have grown on the back of exports and international investments.

Europe in 2017 will also be preoccupied with its own regional problems.  The Brexit shock of 2016 will continue to reverberate and several European countries facing elections will see challenges to their traditional values and established order from xenophobic and narrow nationalist parties.

As Western societies become less open to the world and more inward looking, developing countries should revise their development strategies and rely more on domestic and regional demand and investments.

As North-South economic relations decline, this should also be the moment for expanding South-South cooperation, spurred as much by necessity as by principles.

2017 may be the year when resource-rich China, with its huge Road and Belt initiative and its immense financing capacity, fills in the economic void created by western trade and investment protectionism.

But this may not be sufficient to prevent a finance shock in many developing countries now beginning to suffer a reversal of capital flowing back to the US, attracted by the prospect of higher interest rates and economic growth.

Several emerging economies which together received many hundreds of billions of dollars of hot money in recent years are now vulnerable to the latest downturn phase of the boom-bust cycle of capital flows.

Some of these countries opened up their capital markets to foreign funds which now own large portions of government bonds denominated in the domestic currency, as well as shares in the equity market.

As the tide turns, foreign investors are expected to sell off and transfer back a significant part of the bonds and shares they bought, and this new vulnerability is in addition to the traditional external debt contracted by the developing countries in foreign currencies.

Some countries will be hit by a terrible combination of capital outflow, reduced export earnings, currency depreciation and an increased debt servicing burden caused by higher US interest rates.

As the local currency depreciates further, the affected countries’ companies will have to pay more for servicing loans contracted in foreign currencies and imported machinery and parts, while consumers suffer from a rapid rise in the prices of imports.

On the positive side, the currency depreciation will make exporters more competitive and make tourism more attractive, but for many countries this will not be enough to offset the negative effects.

Thus 2017 will not be kind to the economy, business and the pockets of the common man and woman.  It might even spark a new global financial crisis.

The old year ended with mixed blessings for Palestinians. On one hand they won a significant victory when the outgoing President Obama allowed the adoption of a UN Security Council resolution condemning Israeli settlements in occupied Palestinian territories by not exercising a veto.

The resolution will spur international actions against the expansion of settlements which have become a big obstacle to peace talks.

On the other hand the Israeli leadership, which responded defiantly with plans for more settlements, will find in Trump a much more sympathetic President.  He is appointing a pro-Israel hawk who has cheered the expansion of settlements as the new US ambassador to Israel.

With Trump also indicating he will tear up the nuclear power deal with Iran, the Middle East will have an even more tumultuous time in 2017.

Some countries will be hit by a terrible combination of capital outflow, reduced export earnings, currency depreciation and an increased debt servicing burden caused by higher US interest rates.

In the area of health care, the battle for affordable access to medicines will continue, as public frustration grows over the high and often astronomical prices of patented medicines including for the treatment of HIV AIDS, hepatitis C, tuberculosis and cancers.

There will be more powerful calls for governments to curb the excesses of drug companies, as well as more extensive use of the flexibilities in the patent laws to counter the high cost of medicines.

Momentum will also increase to deal with antibiotic resistance which in 2016 was recognised by political leaders meeting at the United Nations to be perhaps the gravest threat to global health.

All countries pledged to come up with national action plans to counter antibiotic and anti-microbial resistance by May 2017 and the challenge will then be to review the adequacy of these plans and to finance and implement them.

The new year will also see its fair share of natural disasters and a continued decline in the state of the environment.  Both will continue to be major issues in 2017, just as the worsening of air pollution and the many earthquakes, big storms and heat-waves marked the previous few years.

Unfortunately low priority is given to the environment.  Hundreds of billions of dollars are allocated for highways, railways and urban buildings but only a trickle for conservation and rehabilitation of hills, watersheds, forests, mangroves, coastal areas, biodiversity or for serious climate change actions.

2017 should be the year when priorities change, that when people talk about infrastructure or development, they put actions to protect and promote the environment as the first items for allocation of funds.

This new year will also be make or break for climate change.  The momentum for action painfully built up in recent years will find a roadblock in the US as the new President dismantles Obama-initiated policies and measures.

The Paris agreement, which was adopted in December 2015 and which came into force in record time in October 2016 as a demonstration of international concern over climate change, may face a major test and even an existential challenge in 2017, if Trump fulfils his election promise to pull the US out.

But Trump and his team will face resistance domestically including from state governments and municipalities which have their own climate plans, and from other countries determined to carry on without the US on board.

Indeed if 2017 will bring big changes initiated by the new US administration, it will also generate many counter actions to fill in the void left in the world by a withdrawing US or to counter its new unsettling actions.

Many people around the world, from politicians and policy makers to citizen groups and community organisers are already bracing themselves to come up with responses and actions.

Indeed 2017 will be characterised by the Trump effect but also the consequent counter-effects.

There are opportunities to think through, alternatives to chart and reforms to carry out that are anyway needed on the global and national economies, on the environment, and on geo-politics.

Most of the main levers of power and decision-making are still in the hands of a few countries and a few people, but there has also been the emergence of many new centres of economic, environmental and intellectual capabilities and community-based organising.

2017 will be a year in which ideas, policies, economies and politics will all clash, thunderously, and we should be prepared to meet the challenges ahead and not only be spectators.

Former Malaysian Finance Minister Daim Zainuddin–The Economy under Corrupt Najib Razak


December 22, 2016

Former Malaysian Finance Minister Daim Zainuddin–The Economy under Corrupt Najib Razak

Received via e-mail

Get rid of the feudalism mindset, especially among those who are the trustees of this nation. If the leader is wrong or has committed a crime, it is the fiduciary duty of the subordinates, particularly the civil servants, to take corrective actions, instead of being in cahoots to cover up the wrongdoings.–Tun Daim Zainuddin

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I have been asked to share my thoughts on key structural issues facing the country, and what we can do about it. I am most reluctant to put my thoughts into words or share them with the public. Since my retirement, I have stayed away from public discussions as I prefer to spend my time travelling. But times have changed and we are facing a very serious crisis.

Clearly, there are important long-standing structural issues that may affect our march towards developed country status. These are related to education, the labour market, the government’s fiscal policy, inclusive growth and sustainability, among others.

However, what this country needs at this moment is much simpler but seems harder to solve. What we need to address now, which I have repeated so many times, is the chronic trust deficit. In order to overcome this deficit, we must first understand its origins. There are a few reasons why we are facing this trust deficit.

First, it is the lack of integrity, honesty and moral courage. The lack of good moral character seems pervasive among the elites in this country, especially among those in power. Corruption and bribery remain rampant, to the extent that cases of public money being siphoned off for private use or government servants stashing away obscene amounts of hard cash do not amaze us anymore. It is as though systemic corruption has taken a hold of us and our nation, and we have accepted it. The culprits must be punished. We should have no sympathy for them.

But in some instances, politically connected culprits were not brought to the courts fast enough. In the case of the Sabah Water Department, it has been nearly two months since the main officers were released on bail. This has given room for further speculation and abuse of the system. The same goes for the Ministry of Youth and Sports’ case. And, of course, who can deny the existence of the biggest elephant in the room pertaining to corruption and abuse of power?

It is worth being reminded that lack of integrity has disastrous consequences, and it extends beyond the damage to the current generation. Studies have shown how countries that are perceived to be corrupt tend to grow at a much slower rate than those that are corrupt-free and this has a negative impact on long-term growth. No one would want to invest in a country that does not respect the rule of law.

Lest we forget, the root cause of why a community or a nation succeeds or fails, why great civilisations or empires collapsed, always comes back to one reason — integrity or the lack of it.

Tun Daim Zainuddin (right) and author of ‘The Colours of Inequality’ Dr Muhammed Abdul Khalid during the launch of the book at the International Islamic University of Malaysia in Kuala Lumpur, November 11, 2014. — Picture by Yusof Mat Isa

Thus, solving all those structural issues will depend on ensuring the highest level of integrity among those in power. In fact, a nation’s survival and its success depend on the integrity of everyone, most crucially, its leadership.

The leaders must always uphold the highest level of integrity and not betray the trust assigned to them or take advantage of their position. Those with positions must remember that there is no honour in abusing their power.

Second, the lack of empathy and common sense among those in power plays a role in widening the trust deficit in the country. When the people are feeling the pinch of slower wage growth, higher cost of living with the removal of subsidies and weakening of the ringgit, we are pouring more than half a billion ringgit of the rakyat’s money into a public park. This is outright insensitive and mind-boggling when allocations for essential services, such as health and education, have been reduced. Yet, if the government is sincere about its concern about parks, why hasn’t it gazetted Bukit Kiara?

Third, expertise in oversight of the nation’s economy is seriously lacking. We proudly proclaim that our “fundamentals are strong”. But the economic growth is fuelled by debt. This is not sustainable. Government debt with its contingent liability has easily exceeded the debt limit. In fact, for next year’s budget, we have to borrow about 90% to finance our development expenditure.

For every RM1 we expect to collect next year, 98 sen will be spent on operational expenses, such as paying salaries, interest and subsidies, among others. This is not sustainable.

Household debt is already at an all-time high; in fact, it is one of the highest in the region. With lack of savings, our households are vulnerable to poverty. Our outstanding non-financial corporate sector debt is also high, about 105% of GDP as at end-2015, which is higher than the debt of emerging economies.

Yet, we are still proud to state that the economy is growing, and we are proud when the incoming president of US reportedly is impressed by our high economic growth. But the US is approaching full capacity as evidenced by falling unemployment and rising wages.

But growth alone is not enough. It needs to benefit the country and the rakyat. Despite registering positive growth, the number of unemployed in Malaysia keeps growing. Since early last year, the number of unemployed grew nearly 16%. Our graduates do not have jobs; a graduate engineer has to sell nasi lemak and the government seems proud of that!

Firms also are not hiring as before; the number of vacancies reported this year is the lowest in about a decade. In fact, the number of jobs created are mostly low to mid-skilled, and not high-skilled. Not surprisingly, the share of low-skilled workers in the labour force has increased while that of high-skilled workers has declined. This does not augur well for the country becoming a high-income nation. It is pointless for a country to achieve high income when the rakyat remains low income.

These are among the factors that lead to people losing trust in the government. What do we do then?

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Household debt is already at an all-time high; in fact, it is one of the highest in the region. With lack of savings, our households are vulnerable to poverty. Our outstanding non-financial corporate sector debt is also high, about 105% of GDP as at end-2015, which is higher than the debt of emerging economies.

Yet, we are still proud to state that the economy is growing, and we are proud when the incoming President of US reportedly is impressed by our high economic growth. But the US is approaching full capacity as evidenced by falling unemployment and rising wages.

But growth alone is not enough. It needs to benefit the country and the rakyat. Despite registering positive growth, the number of unemployed in Malaysia keeps growing. Since early last year, the number of unemployed grew nearly 16%. Our graduates do not have jobs; a graduate engineer has to sell nasi lemak and the government seems proud of that!

Firms also are not hiring as before; the number of vacancies reported this year is the lowest in about a decade. In fact, the number of jobs created are mostly low to mid-skilled, and not high-skilled. Not surprisingly, the share of low-skilled workers in the labour force has increased while that of high-skilled workers has declined. This does not augur well for the country becoming a high-income nation. It is pointless for a country to achieve high income when the rakyat remains low income.

These are among the factors that lead to people losing trust in the government. What do we do then?

Two things need to be undertaken, one easier than the other. First, a new economic team must be assembled and empowered to fix the economy.

The rakyat and investors, both local and foreign, must have faith and confidence in those managing the economy. The members of this team must be professionals who are technically competent, with the highest level of integrity and dare to speak the truth. Lack of intelligence and incompetence cannot be compensated for by loyalty to the leader.

Indeed, the special economic team that was set up in August last year is a complete failure. It should be dissolved. Concurrently, the Prime Minister must let go of the Finance Minister’s post; this is bad governance.

Second, which is equally important, is to get rid of the feudalism mindset, especially among those who are the trustees of this nation. If the leader is wrong or has committed a crime, it is the fiduciary duty of the subordinates, particularly the civil servants, to take corrective actions, instead of being in cahoots to cover up the wrongdoings.

Bear in mind that political leaders who are elected by the rakyat to lead the government are basically the rakyat’s servants. They are merely given the mandate and power by the rakyat to lead the government and to rule on their behalf. Thus, the ability to be respectful and accountable towards the people who voted them in is paramount.

The leaders are not gods that must be obeyed. This clarion call is not new; nearly half a century ago, our great philosopher and sociologist, Syed Hussein Alatas, warned us of the danger: “…man in authority … expects the subordinate to be loyal and faithful in a manner that sometimes comes into conflict with the norms or ethics … he is supposed to be loyal under almost all circumstances, even if the circumstances violate the present values and philosophy of Malaysian society” (Feudalism in Malaysian society: A study in historical continuity. Source: Civilisations, Vol. 18, No. 4 [1968], pp. 579-592).

This requires, again, integrity and honesty, even if that means one is in the minority. Our first prime minister said it best: “If you think you are rich, there are many who are richer than you. If you think you are clever, there are more people cleverer than you. But if you think you are honest, then you are among the few and in this instance, it is best to be among the few.”

 

In dealing with the rakyat, whether on economic, social or political issues, honesty is really the best policy. Lies can only lead to more lies, and once the rakyat has lost faith in you, even when you are stating the truth, they will not believe you. You cannot fix the problems of the nation when there is a trust deficit.

In my experience during the 1986 and 1998 crises, I was upfront about the problems we faced but the people had the confidence to give us time and space to solve the problems. Without the people’s trust and support, it will be difficult to solve the economic problems, especially when it affects them. It is a partnership between government and the governed.

Reforms in institutions are also required. We must take all necessary actions, including amending laws, to ensure the independence of judiciary and security institutions. Tolerance for dissent and differences in opinion and ideologies must be welcomed, and not prosecuted. These are the ingredients for a truly open and functioning democracy.

Failure to undertake these paramount reforms means we are moving away from prosperity. Otherwise, we all should be seriously worried about the future that we are leaving for our children and grandchildren.

Bear in mind that political leaders who are elected by the rakyat to lead the government are basically the rakyat’s servants. They are merely given the mandate and power by the rakyat to lead the government and to rule on their behalf. Thus, the ability to be respectful and accountable towards the people that voted them in is paramount.

The leaders are not gods that must be obeyed. This clarion call is not new; nearly half a century ago, our great philosopher and sociologist, Syed Hussein Alatas, warned us of the danger: “…man in authority … expects the subordinate to be loyal and faithful in a manner that sometimes comes into conflict with the norms or ethics … he is supposed to be loyal under almost all circumstances, even if the circumstances violate the present values and philosophy of Malaysian society” (Feudalism in Malaysian society: A study in historical continuity. Source: Civilisations, Vol. 18, No. 4 [1968], pp. 579-592).

This requires, again, integrity and honesty, even if that means one is in the minority. Our first Prime Minister said it best: “If you think you are rich, there are many who are richer than you. If you think you are clever, there are more people cleverer than you. But if you think you are honest, then you are among the few and in this instance, it is best to be among the few.”

 

In dealing with the rakyat, whether on economic, social or political issues, honesty is really the best policy. Lies can only lead to more lies, and once the rakyat has lost faith in you, even when you are stating the truth, they will not believe you. You cannot fix the problems of the nation when there is a trust deficit.

In my experience during the 1986 and 1998 crises, I was upfront about the problems we faced but the people had the confidence to give us time and space to solve the problems. Without the people’s trust and support, it will be difficult to solve the economic problems, especially when it affects them. It is a partnership between government and the governed.

Reforms in institutions are also required. We must take all necessary actions, including amending laws, to ensure the independence of judiciary and security institutions. Tolerance for dissent and differences in opinion and ideologies must be welcomed, and not prosecuted. These are the ingredients for a truly open and functioning democracy.

Failure to undertake these paramount reforms means we are moving away from prosperity. Otherwise, we all should be seriously worried about the future that we are leaving for our children and grandchildren.

Daim Zainuddin is former finance minister of Malaysia

The Geo-Politics of Populism


December 20, 2016

The Geo-Politics of Populism

by Danny Quah

 

Image result for Danny Quah and Kishore Mahbubani

Danny Quah is Li Ka Shing Professor of Economics at the Lee Kuan Yew School of Public Policy at the National University of Singapore. He is the author of The Global Economy’s Shifting Centre of Gravity.

and

Image result for Danny Quah and Kishore Mahbubani

Kishore Mahbubani

Kishore Mahbubani, Dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore, is the author of The Great Convergence: Asia, the West, and the Logic of One World. He was selected as one of Prospect magazine’s top 50 world thinkers in 2014.

https://www.project-syndicate.org/columnist/kishore-mahbubani

For Asian countries, the policy prescription is clear: take care of disadvantaged populations and provide retraining and new employment opportunities for displaced workers.–Quah and Mahbubani

SINGAPORE – The big question in Asian countries right now is what lesson to take from Donald Trump’s victory in the United States’ presidential election, and from the United Kingdom’s Brexit referendum, in which British voters opted to leave the European Union. Unfortunately, the focus is not where it should be: geopolitical change.

Instead, for the most part, economic narratives have prevailed: globalization, while improving overall well being, also dislocates workers and industries, and generates greater income disparity, creating the anxious electorates that backed Brexit and Trump. An alternative narrative asserts that technological advances, more than globalization, have exacerbated economic inequalities, setting the stage for political disruptions in developed countries.

In either case, policymakers in emerging countries have identified inequality as a major problem, and rallied around efforts to improve social mobility, lest globalization and new technologies displace their middle and working classes, and clear a path for their own versions of Trump and Brexit. For Asian countries, the policy prescription is clear: take care of disadvantaged populations and provide retraining and new employment opportunities for displaced workers.

Of course, all societies should look out for their poorest members and maximize social mobility, while also rewarding entrepreneurship and challenging people to improve their lot. But focusing on such policies would not address the public disaffection underlying the populist uprising, because inequality is not its root cause. Feelings of lost control are.

Even if countries closed their domestic income and wealth gaps and ensured social mobility for all their citizens, the forces fueling public dissatisfaction around the world today would remain. Consider the US, where the inequality narrative’s poster child has become the displaced, older, less-educated, white working-class male. Many people credit these voters for Trump’s victory, but the poster-child cohort did not actually have the biggest impact on the election outcome.

According to exit polls, Trump won 53% of white male college graduates, and 52% of white women (only 43% of the latter group supported Clinton); he won 47% of white Americans between the ages of 18 and 29, compared to 43% for Clinton; and he beat Clinton by 48% to 45% among white college graduates overall. These Trump supporters do not fit the stereotype at the center of the economic narrative.

Meanwhile, more than half of the 36% of Americans who earn less than $50,000 annually voted for Clinton, and of the remaining 64% of voters, 49% and 47% chose Trump and Clinton, respectively. Thus, the poor were more favorable toward Clinton, and the rich toward Trump. Contrary to the popular narrative, Trump does not owe his victory to people who are most anxious about falling off the economic ladder.

A similar story unfolded in the UK’s Brexit vote, where the “Leave” campaign asserted that the EU’s supposedly burdensome regulations and exorbitant membership fees are holding back the British economy. This hardly amounts to an agenda to fight economic inequality and exclusion, and it is revealing that rich businessmen wrote the largest checks to support Leave.

Moreover, the street-level emotions that contributed to Leave’s victory were not rooted in income inequality or “the 1%”: alienated poor voters directed their anger at other alienated poor people – particularly immigrants – not at the rich. The Mayor of London’s office reported a 64% increase in hate crimes in the six weeks after the referendum, compared to the six weeks before it. So, while income equality may have been a part of the Brexit campaign’s background noise, it was not the first issue on Leave voters’ minds.

What unites Trump and Leave supporters is not anger at being excluded from the benefits of globalization, but rather a shared sense of unease that they no longer control their own destinies. Widening income inequality can add to this distress, but so can other factors, which explains why people at all levels of the income distribution are experiencing anxiety. Indeed, many people in Eastern Europe felt a sense of lost control during the harsh socialist experiments of the post-war era, as did many Chinese during the Cultural Revolution, and these societies had minimal visible income inequality.

Paradoxically, Brexit and Trump supporters might be feeling the effects of globalization because overall inequality has actually declined. Globalization’s largest effect has been to lift hundreds of millions of people in emerging economies out of poverty. Throughout the 1990s, emerging countries’ combined GDP (at market exchange rates) amounted to barely one-third of the G7 countries’ combined GDP. By 2016, that gap had essentially vanished.

Geopolitics of Populism

Low international income inequality, rather than growing income inequality in individual countries, is putting unprecedented stress on the global order. There is a growing mismatch between what Western countries can provide, and what emerging economies are demanding. The power of the transatlantic axis that used to run the world is slipping away, and the sense of losing control is being felt by these countries’ political elites and ordinary citizens alike.

Trump and the Leave campaign appealed to voters by raising the possibility that transatlantic powers can reassert control in a quickly changing world order. But with the geopolitical rise of emerging economies, especially in Asia, that order will have to achieve a new equilibrium, or global instability will persist. Closing the income gap can help the poor; but, in the developed countries, it will not alleviate their anxiety.