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

How not to be poor, Irwan Serigar-style


October 3, 2017

COMMENT: This is going to be a rather brief reaction to my friend Nadeswaran’s article. It is easy  for Mr. Siregar to comment about foreigners like Indonesians, Bangladeshis and Filipinos making a living. He forgot that the Malays are making big bucks by being UMNO cronies and parasites sucking blood out of the economy.

Nades has not mentioned one thing about the Irwan Serigar-style and that is, one has to convert to Islam, use Muslim name, be more Malay than a Malay, and finally become Najib’s cheerleader. Both Serigar and Ali Hamsa  got it right and both are prosperous with directorships and status for a long long time to come (beyond the age of 70).–Din Merican

How not to be poor, Irwan Serigar-style

By R. Nadeswaran@www.malaysiakini.com

COMMENT | As one steps off the escalator at a supermarket in Petaling Jaya, there are makeshift stalls in the walkway leading to the shopping trolley rack. The mobile phone repair and accessory stall cannot be missed. Manning it are two Bangladeshi and business is booming.

Down the aisle, there’s a Pakistani in salwar-kameez pushing his ware – carpets. Further down, is an Indonesian woman selling telukung (head scarves). The murukku stall opposite the money changer is staffed by a Sri Lankan.

In the neighbourhood kopi tiam, two Filipinas are busy on the grill dishing out chicken chops and steaks. Elsewhere, the Burmese cook is frying Hokkien mee.

Yes, Treasury Secretary-General Mohd Irwan Serigar Abdullah is right. Foreigners are surviving and thriving in Malaysia. He argued that if Indonesians can make a living here, Malaysians should be more prosperous.

Well said, Sir. But has it ever occurred to you that in each of the instances cited above – and in the case of Indonesian traders in Chow Kit – they are all operating illegally, if not through dubious means.

Foreign workers are allowed into the country through work permits – applied by and issued to employers. Conditions in such permits stipulate their scope of employment. More importantly, nothing in these documents state that they can engage in business or be self-employed.

Are authorities closing one eye?

So, how do they end up behind the wok or engaged in selling shirts and jeans, or for that matter, pisang goreng? Aren’t these activities prohibited? If so, are we to assume that these are illegal immigrants?

 

Therefore, how come they can apply and get licences? Are the local authorities ‘tutup satu mata’ (closing one eye) and approving such applications? One may argue that they have valid work permits but the caveat and government’s ethos include: No hawker or petty trading licences for foreigners. If they don’t have licences, why aren’t they being shut down?

So, are some local authorities defying government policies and using their powers as little Napoleons to milk the system for their own benefits? Or is the Ali-Baba system flourishing in a different way? Previously, if it was the Malays who were selling or leasing their licences to the Chinese, now the trend is for Malay traders to ‘pajak’ (lease) their licences to their Indonesian brethren.

So if the licence was an issue, it has been ‘kau tim’ (settled) and rules and regulations have been compromised. But how do foreigners occupy and operate in hawker centres that are actually owned by local authorities?

Parasitic rent-seekers

A similar arrangement comes into play. The local (usually a political party minnow with connections) is allocated the stall and pays a rental of RM60 monthly to the council. He then ‘pajak’ (leases) the stall for RM1,000 to the foreigner. For doing nothing, he gets RM940. Why should he work when he is making money by sitting at home and shaking legs? He is part of the rent-seeking crowd, perhaps on a smaller scale.

Aren’t these the same traits we see before each festive season when “special” trading licences are issued? Even the Malaysian Anti-Corruption Agency (MACC) probed claims that licences change hands for a few thousand ringgit. Why work when you can sit back and enjoy the fruits of your connections?

The Immigration Department does not approve work permits for “salesmen” – but a walk along Petaling Street in Kuala Lumpur will reveal that Bangladeshis are now running the operations for the ‘towkay’ (boss). Even if they have permits as general workers, engaging in a different trade certainly breaks the law.

“If they have hands and legs and can walk, they can make a living in Malaysia,” says Irwan Serigar. But these are not enough. Are locals accorded the same opportunities to use their talents and skills and become entrepreneurs?

Irwan Serigar proudly pronounces that “if we go to Chow Kit, half of them are Indonesians”. Yes, Sir, but how and why have they been allowed to operate there? Isn’t the policy of the government to promote local petty traders?

Local authorities are quick to “raid” local traders for the slightest breach of licencing laws but yet, these foreign traders have been allowed to operate and thrive. The Immigration Department’s crackdown, for some unknown reasons, has never covered hotspots like Chow Kit.

Being able-bodied does not take the ordinary local man anywhere. Let us not forget the politics of patronage, where even the guy who puts up the posters or arranges the chairs at the ceramah expects to be rewarded in one way or another. A hawker’s stall guarantees him life-long pension!

With the election around the corner, don’t expect a clean-up of the rent-seeking culture that has entrenched itself in the system. While the small man gets three figures from his small operation, in existence are vultures who earn millions through similar arrangements.

Unless the government has the will and determination to put an end to such a system, local traders will continue to be sidelined and be subservient to foreigners who have learnt the workings of the system.

 

‘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.

Think For Yourself


August 31, 2017

Image result for tunku abdul rahman merdeka kartun

 

COMMENT: Normally, I will join fellow Malaysians to watch television with my wife, Dr. Kamsiah Haider to celebrate  Merdeka Day.  However, this milestone year, the 60th Anniversary of Independence, we choose to spend our time together in stead of witnessing a farce at Dataran Merdeka, Kuala Lumpur. Kamsiah and I feel there is nothing to rejoice.

Our Malaysia today is not what I had expected when my teenage friends and I–I was 18 years old– welcome Merdeka on August 31, 1957. My generation listened to Tunku Abdul Rahman Putra Al-Haj’s Independence Proclamation in a newly built Merdeka Stadium amidst pomp  and ceremony with excitement and hope.

Image result for Tunku Abdul Rahman quotes

Today we are divided, unequal in terms of rights, opportunities, and widening income disparity. We are identified by race and religion; and we are being governed by a corrupt and inept Najib’s UMNO regime which disregards the rule of law. Tunku, Tun Razak and Tun Hussein Onn would be disappointed to see what we have become.

Dr. Kamisah and I would like to advise millennial Malaysians  to “Think for Yourself”. The future of a wonderful country is in your hands. You can make a difference. You can work to achieve Tunku Abdul Rahman’s dream that “We are all Malaysians. This is the bond that unites us” come true. That bond is broken  by the present generation of political leaders.–Dr. Kamsiah Haider and Din Merican

Ivy League Scholars Urge Students: ‘Think for Yourself’

by Conor Friedersforf

https://www.theatlantic.com/education/archive/2017/08/ivy-league-scholars-urge-students-think-for-yourself/538317/

As the fall semester begins, 15 professors from Yale, Princeton, and Harvard have published a letter of advice for the class of 2021.

 

Fifteen highly accomplished scholars who teach at Yale, Princeton, and Harvard published a letter Monday with advice for young people who are headed off to college: Though it will require self-discipline and perhaps even courage, “Think for yourself.”

The “vice of conformism” is a temptation for all faculty and students, they argue, due to a climate rife with group think, where it is “all-too-easy to allow your views and outlook to be shaped by dominant opinion” on a campus or in academia generally.

They warn that on many campuses, what John Stuart Mill called “the tyranny of public opinion” doesn’t merely discourage students from dissenting from prevailing views:

It leads them to suppose dominant views are so obviously correct that only a bigot or a crank could question them. Since no one wants to be, or be thought of, as a bigot or a crank, the easy, lazy way to proceed is simply by falling into line with campus orthodoxies. Don’t do that. Think for yourself.

They go on to explain what that means: “questioning dominant ideas,” and “deciding what one believes not by conforming to fashionable opinions, but by taking the trouble to learn and honestly consider the strongest arguments to be advanced on both or all sides of questions,” even arguments “for positions others revile and want to stigmatize” and “against positions others seek to immunize from critical scrutiny.”

They go on to explain what that means: “questioning dominant ideas,” and “deciding what one believes not by conforming to fashionable opinions, but by taking the trouble to learn and honestly consider the strongest arguments to be advanced on both or all sides of questions,” even arguments “for positions others revile and want to stigmatize” and “against positions others seek to immunize from critical scrutiny.”:

Monday’s letter argues that “open-mindedness, critical thinking, and debate” are “our best antidotes to bigotry;” that a bigot is a person “who is obstinately or intolerantly devoted to his or her own opinions and prejudices;” and that the only people who need fear open-minded inquiry and robust debate “are the actual bigots, including those on campuses or in the broader society who seek to protect the hegemony of their opinions by claiming that to question those opinions is itself bigotry.”

The letter’s signatories are Paul Boom, Nicholas Christakis, Carlos Eire, and Noël Valis at Yale; Maria E. Garlock, Robert P. George, Joshua Katz, Thomas P. Kelly, John B. Londregan, and Michael A. Reynolds at Princeton; and Mary Ann Glendon, Jon Levenson, Jacqueline C. Rivers, Tyler VanderWeele, and Adrian Vermeule at Harvard.

Tricia Yeoh’s Advice to Malaysian Prime Minister– Don’t provide misleading information to foreigners


August 18, 2017

Tricia Yeoh’s Advice to Malaysian Prime Minister– Don’t provide misleading information to foreigners

by Tricia Yeoh@www.freemalaysiatoday.com

Image result for Tricia Yeoh and Najib RazakSpeak the Truth, Keep Your Promises and Act with Conviction

 

Mr Prime Minister, you gave an outstanding speech to international investors at the Invest Malaysia 2017 conference. I am sure many were impressed with the economic achievements that have been accomplished to date under your leadership. However, I do believe that some of the facts that you quoted would require some further elaboration.

Please allow me to do so, especially since one would not want to provide misleading information to foreigners who may not know any better about this beloved country of ours.

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Malaysia–Beautiful from afar, but rotten at the core

You started your speech by saying that you introduced the New Economic Model (NEM) seven years ago at the very same conference, with a plan that has worked and is continuing to work. Perhaps I may remind you that one of the key approaches of the NEM’s economic development plan was to move away from “dominant state participation in the economy” towards “private sector-led growth”.

An IDEAS policy paper published last year examined GLC disposal and investment exercises from 2011 to 2014 (after the NEM was published, by the way) and found that the total acquisition value of RM51.7 billion dwarfs the total disposal value of RM29.5 billion. In simple language, GLICs and GLCs combined have acquired far more than they have sold.

Second, you quoted a Bloomberg article which stated that the ringgit is “easily the strongest major Asian currency this quarter”. What you failed to note was that this is considered a remarkable improvement only because the ringgit had recently rebounded from a 19-year low. Anyone who has children studying overseas would know that as recently as January this year, the ringgit had lost about 22% since the start of 2015 and was at that point the worst-performing currency in emerging Asia. In fact, an analyst in the very same article you quote from seems to imply that the recent growth momentum is strongly related to the impending election, and asks “but what happens after it?”

Third, you said that your government is one that is committed to transparency, accountability and good regulation. I, for one, am particularly pleased that you place public importance on the need for these values in your administration.

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The Architect of NEP-Crony Capitalism and Patronage Politics

Having integrity and governance units at all GLCs – at both federal and state levels – should certainly be applauded. However, these units are monitored by the Malaysian Anti-Corruption Commission, which reports to the Prime Minister’s Department. It is difficult to see how any conflict of interest involving your administration could be avoided if the integrity and governance officers were to uncover a certain wrongdoing within their GLCs placements.

Fourth, you referred to international bodies such as the Organisation for Economic Co-operation and Development (OECD), International Monetary Fund (IMF) and the World Bank, all of whom apparently heaped praises upon Malaysia’s glowing economic performance.

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While the summaries of these reports may have been relatively positive, for which one can certainly be proud of, you failed to mention numerous other instances which are basically big, red flags. These warning signs are indicators that not all is perfect. I say this not with the intention of disparaging my own country – far be it that I would discourage investors from coming in to provide valuable capital for future long-term growth – but to be frank about what it will really take to move our economy forward. Unless we face the honest truth squarely in its face, we will never institute meaningful reforms and will merely chug along.

On this note, you quoted IMF as saying that Malaysia is amongst the fastest growing economies among peers. The very same report also highlights that our country’s “federal debt and contingent liabilities are relatively high, limiting policy space to respond to shocks”. Second, it also says that our “household debt remains high, with debt servicing capacity growing only moderately”. These are only two points that I am lifting from the report – if one looks closer, there are serious challenges that may implode over time if left uncorrected.

Similarly, you quoted the World Bank report that states our economy is progressing from a position of strength, but failed to mention that the same report says that risks in the economy “arise from growing threats of protectionism” and that there is a need to “accelerate structural reforms in the economy”.

I would advise you to personally read these documents from cover to cover to really understand the conditions of the economy today. In short, there is a need to examine the details and not just gloss over the summaries of these reports, advice I would provide to any investor looking into Malaysia.

Fifth, you deftly talked about how your administration is cracking down on “crony capitalism”, “sweetheart deals” and that there would be no more “national follies kept going to stroke the ego of one man”. I especially like this one, where you say “No more treating national companies as though they were personal property” – brilliant. Let us hope then that the national agencies such as the Attorney-General’s Chambers will lend its co-operation to any and all investigations including those from international bodies to assure us that 1MDB will not fall into such a category.

Sixth, you hailed SMEs as the “hallmarks” of your administration as they are the backbone of the economy. You also said that government policies are, therefore, meant to be business-friendly and pro small and medium enterprises (SMEs).

However, the Price Control and Anti-Profiteering Act is one such policy that is adversely affecting SMEs. The mechanism poses price ceilings on food and household goods sold at mamak and even small sundry shops. The mechanism to calculate the “right” price is so complicated that some shops have just shut down altogether because they could not afford to pay the fine. There are numerous other examples of regulations that are in fact making it very difficult for the business community to operate, which have been raised regularly at public forums but seemingly in vain.

Finally, Sir, with all due respect, your speech was peppered with many political references, many of which were obviously targeted at a specific individual. I am sure you made your point loud and clear. However, with all due respect, this may have been better said at a platform hosted by your political party – or perhaps out on the road when speaking to your electorate. To have these words uttered at a formal international investment conference may have been considered out of place.

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Perhaps your speech at the next Invest Malaysia conference could be more carefully worded – for the sake of future investment into this country we both call home.

Tricia Yeoh is Chief Operating Officer of IDEAS (Institute for Democracy and Economic Affairs).

With a firm belief in freedom of expression and without prejudice, FMT tries its best to share reliable content from third parties. Such articles are strictly the writer’s (or organisation’s) personal opinion. FMT does not necessarily endorse the views or opinions given by any third party content provider.

 

 

Malaysia Sdn Berhad: Book Review


August 11, 2017

Malaysia Sdn Berhad: Fox guarding the henhouse?

BOOK REVIEW | Minister of Finance Incorporated: Ownership and Control of Corporate Malaysia. Edmund T Gomez et al. Institute for Democracy and Economic Affairs (IDEAS), Kuala Lumpur.

by Prof. Dr. Jomo Kwame Sundaram

http://www.malaysiakini.com

In the late 1980s, the young Terence Gomez proved himself to be the worthy successor to a Malaysian research tradition begun by James Puthucheary in Singapore’s Changi Prison almost three decades earlier. Gomez single-handedly transformed our understanding of the role of politics in the ownership and control of the Malaysian corporate sector.

Employing novel methods as needed and appropriate, the auto-didact researcher showed how official policies and institutions had enabled an earlier generation of selected Malay business professionals to take over some commanding heights of the Malaysian economy.

Change and continuity

In their new book, Gomez and his team of researchers chart developments over the last three decades since he began his pioneering work, paying particular attention to developments following the 1997-1998 crisis. That crisis exposed the vulnerability of the earlier expansion closely associated with the Umno leadership then.

The corporate restructuring and refinancing institutions and processes that followed were not simply bailouts at the public expense, as alleged by some critics then. Instead, as the book shows, most major assets are now under new management, ultimately controlled by the current prime minister cum finance minister.

The authors focus on seven government-linked investment companies (GLICs), namely Khazanah Nasional, Permodalan Nasional (PNB), both under MoF Inc, Kumpulan Wang Simpanan Pekerja (KWSP or EPF), Kumpulan Wang Persaraan (KWAP), Lembaga Tabung Angkatan Tentera (LTAT) and Tabung Haji.

Malaysians may be comforted to learn that of the seven, only Tabung Haji is run by politicians, and the others by professionals. But after all, 1MDB too has been run by professionals (Jho Low is a Wharton graduate) while Felda Global Venture’s previous boss claimed to have a doctorate. The not-so-magnificent seven covered do not include others, such as those in the Felda group, controlled directly by the PM since 2004.

Most bumiputera entrepreneurs who emerged in the dozen years or so before the 1997 crisis also had impressive professional credentials. The apparently better performance of the more recent crop of professional managers may have less to do with their qualifications, than the ethos, checks and balances of the new institutional arrangements introduced and enforced by some GLICs.

Government control

The range of activities undertaken by government-linked companies (GLCs) overseen by the GLICs includes familiar ones from the 1980s such as utilities, finance, plantations, property and construction. Media, previously controlled by the ruling party and its trustees, are now held by GLCs, while investments in hospitals and other services have also grown. With development finance institutions now under GLCs, their original objectives and rationales have been undermined by commercial considerations.

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The Gomez team has done Malaysians a great service by describing how things have changed, tracing the bewildering variety of new arrangements. However, how to interpret this variety remains moot, and some informed readers will have their own bones to pick with what is considered most significant in their analysis.

Protracted crisis

Two economic developments help us better understand the recent growing unrest, especially among informed Malays. First, the Saudi-initiated oil price collapse in late 2014 precipitated a more general commodity price collapse. Meanwhile, lacklustre growth in Malaysia since 1998 has been exacerbated by premature deindustrialisation unconvincingly presented as inevitable in achieving developed country status.

Second, despite heavy censorship, news has been leaking out of corporate abuses involving not only 1MDB, but also FGV and other corporations associated with the legendary ‘Malaysian Official 1’. Easy money from China may have helped the regime with its immediate financing problems, but a generation familiar with mounting personal debt senses that this is at the public’s, taxpayers’ and future generations’ expense.

This ‘double whammy’ has been reflected in the much-weakened ringgit and by other indicators. Meanwhile, there have been heightened concerns about the recent foreign investor resurgence, especially with official non-disclosure of ownership data since 2008. Recent erosion of public faith in the state and ruling coalition has been accelerated by unprecedented recent abuses for personal gain and nepotism.

Don’t shoot the messenger

Even if successfully challenged on some details, this important book should open an important new debate on how Malaysia is to progress. Gomez offers some proposals, apparently at odds with the book’s sponsor. Others, especially participants in and observers of Malaysia’s corporate sector and political economy, will promote their own alternative purported solutions. The ensuing debate can only benefit the nation, as Gomez’s first decade of publications shaped the earlier debate and reforms, even if most outcomes may have disappointed him.

While this regime is undoubtedly associated with unprecedented abuses, there is little in the study to support the publisher’s faith in leaving things to the market and simplistic insistence on government withdrawal from the economy as a universal panacea to the myriad problems the nation faces. In the face of the wide-ranging and complex issues involved, this would be tantamount to throwing the baby out with the bathwater.

Unsurprisingly, this publication on the regime’s role in ownership and control of contemporary corporate Malaysia is silent on the current political crisis as the nation approaches the next general election. Nevertheless, IDEAs must be congratulated for sponsoring and publishing this important work.

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JOMO KS received the 2007 Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. The views expressed here are entirely his own.