Complacency Will Be Tested in 2018


December 15, 2015

Complacency Will Be Tested in 2018

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

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

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

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

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

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

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

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

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

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

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Will the Republican Tax Plan work?

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

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

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

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

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

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

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Trumpian Economics

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

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

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

 

Cambodia: Democracy Update


December 9, 2017

Cambodia: Democracy Update

by Sorpong Peou

http://www.eastasiaforum.org

In recent months, the Cambodian government led by Prime Minister Hun Sen has taken stronger steps to guarantee a win in the national election scheduled for July 2018. Hun Sen’s objective is simple — to prevent his Cambodian People’s Party (CPP) from losing power by whatever means necessary.

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Prime Minister HE Samdech Techo Hun Sen– sustaining economic economic growth and maintaining national security. World Bank October 2017 Update is positive

Hun Sen has relied on a combination of three tactics — coercion, co-option and control — to maintain his domination over Cambodia’s politics in the name of protecting national security. Those who cannot be co-opted into the CPP’s sphere through material rewards can be coerced into submission, and those who do submit are still kept under tight control.

The CPP is also resource-rich, well equipped with coercive means and in control of state institutions, especially the armed forces and the judiciary. Those who have refused to defect to the CPP or who resist it face acts of intimidation and threats of punishment.

Disarming the CPP’s political opposition involves taking pre-emptive action to make it difficult for opposition leaders to mobilise effective political support far ahead of the 2018 election. Hun Sen has been successful in suppressing the political opposition and shutting out any help offered to his opponents. The opposition Cambodia National Rescue Party (CNRP) has been the primary target. The recent jailing of its president, Kem Sokha, is a good example of Hun Sen’s tactics. The recent decision by the Supreme Court to dissolve the CNRP ensures the CPP will not face any credible challenges in 2018.

Any organisations, domestic or foreign, perceived as politically supportive of or sympathetic to opposition parties are also viewed as potential targets by the CPP. Media outlets have come under pressure, especially those that broadcast news produced by foreign media agencies such as Radio Free Asia and Voice of America. The government recently shut down The Cambodia Daily, a major English language newspaper in the country, and sent its owner a bill of several million dollars for its failure to pay taxes. In August 2017, the government closed the US-funded National Democratic Institute and expelled its staff from Cambodia.

Hun Sen claims these ‘legal’ actions against the CPP’s political opponents and its critics are about protecting national security. Is this true?

The answer is no. Since the end of the Cold War, Cambodia has not encountered any serious external threat. In fact, the country has been blessed with goodwill from countries around the world. Cambodia did the right thing when it joined ASEAN in 1999. In spite of some unresolved territorial disputes and minor border clashes between Cambodia and two of its fellow ASEAN members, Thailand and Vietnam, Cambodian relations with its neighbours have been relatively peaceful. Western democracies may want to see regime change, but evidently have not done anything credible to undermine the CPP.

The unarmed opposition to the CPP does not pose any threat to Cambodian national security either, but it has threatened to undermine the ruling party’s political dominance. Although the CPP won in the 2013 national election, it lost 22 seats to the CNRP, giving the opposition more leverage over the ruling elite. In spite of good economic growth, ratings of Hun Sen’s performance among urban populations remain low. If elections were free and fair, the CPP would end up losing.

While they have done a lot of good for the country, including taking part in the war against the murderous Pol Pot regime and helping many Cambodians to enjoy the fruits of economic growth, the CPP elite have reason to worry about their political future.

Hun Sen and other top CPP leaders have been accused of human rights violations and rampant corruption and thus can never be sure of what might happen to them if they were to lose power. Hun Sen has already been threatened with legal action — another reason why the CPP has tightened control over the security forces and the judicial system, using the courts to prosecute any serious opponents threatening its survival.

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Cambodia remains an attractive tourist destination

Cambodia’s politics of survival is likely to continue unless or until members of the CPP elite and those in the opposition see their common problem: the inherent weakness of Cambodia’s state institutions, which perpetuates the toxic dynamics of threat and counter-threat. Both sides tend to demonise each other. They keep engaging in the nasty politics of character assassination, killing any possibility of advancing a common interest or any hopes for solidifying the culture of dialogue.

Cambodian leaders have a big choice to make. Either they continue along this current trend with no end in sight, or they band together to build the country’s democratic state institutions for the benefit of their own nation. Working together is certainly the only way out and the best option, but this is likely to fall on deaf ears. This is the tragedy of survival politics in Cambodia — a real threat to democracy and its national security.

Sorpong Peou is President of Science for Peace, based at the University of Toronto, and Professor in the Department of Politics and Public Administration, Ryerson University.

Maybe Trump knows his base better than we do


December 3, 2017

Maybe Trump knows his base better than we do

by Dr. Fareed Zakaria

https://www.washingtonpost.com/opinions/maybe-trump-knows-his-base-better-than-we-do/2017/11/30/b4ca2164-d60e-11e7-b62d-d9345ced896d_story.html?utm_term=.227592e3afbc

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The most important revolution in economics in the past generation has been the rise of the behavioral scientists, trained in psychology, who are finding that people systematically make decisions that are against their own “interests.” This might be the tip of the iceberg in understanding human motivation. The real story might be that people see their own interests in much more emotional and tribal ways than scholars understand. What if, in the eyes of a large group of Americans, these other issues are the ones for which they will stand up, protest, support politicians and even pay an economic price? What if, for many people, in America and around the world, these are their true interests?—Dr. Fareed Zakaria

 

 

Watching the Republican tax plan race through Congress, one is reminded of a big apparent difference between President Trump’s program and other populist movements in the Western world. In the United States, Trump is leading something that is best described as plutocratic populism, a mixture of traditional populist causes with extreme libertarian ones.

Congress’s own think tanks — the Joint Committee on Taxation and the Congressional Budget Office — calculate that in 10 years, people making between $50,000 and $75,000 (around the median income in the United States) would effectively pay a whopping $4 billion more in taxes, while people making $1 million or more would pay $5.8 billion less under the Senate bill. And that doesn’t take into account the massive cuts in services, health care and other benefits that would likely result. Martin Wolf, the sober and fact-based chief economics commentator for the Financial Times, concludes, “This is a determined effort to shift resources from the bottom, middle and even upper middle of the U.S. income distribution toward the very top, combined with big increases in economic insecurity for the great majority.”

The puzzle, Wolf says, is why this is a politically successful strategy. The Republican Party is pursuing an economic agenda for the 0.1 percent, but it needs to win the votes of the majority. This is the issue that University of California at Berkeley political scientist Paul Pierson discusses in a recently published essay. Writing in the British Journal of Sociology, Pierson notes that Trump’s program does have strong populist aspects, especially on trade and immigration. But, he points out, “On the big economic issues of taxes, spending and regulation — ones that have animated conservative elites for a generation — he has pursued, or supported, an agenda that is extremely friendly to large corporations, wealthy families, and well-positioned rent-seekers. His budgetary policies (and those pursued by his Republican allies in Congress) will, if enacted, be devastating to the same rural and moderate-income communities that helped him win office.”

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Republican Party is cleverly and successfully hoodwinking its supporters, promising them populism and enacting plutocratic capitalism?  –Thomas Frank’s book “What’s the Matter with Kansas?

Pierson argues that Trump entered the White House with a set of inchoate ideas and no real organization. Thus, his administration was ripe for takeover by the most ardent, organized and well-funded elements of the Republican Party — its libertarian wing. Nurtured and built up over the years, this group of conservatives decided to ally with the Trump administration to enact its long-standing agenda. Pierson quotes Grover Norquist, the fiercely anti-statist GOP operative, explaining in 2012 his views on the selection of a Republican presidential nominee. “We are not auditioning for fearless leader. We don’t need a president to tell us in what direction to go. We know what direction to go. . . . We just need a president to sign this stuff.”

Image result for “The plutocrats are riding on a hungry tiger,” writes Wolf.

Is it that the Republican Party is cleverly and successfully hoodwinking its supporters, promising them populism and enacting plutocratic capitalism instead? This view has been a staple of liberal analysis for years, most prominently in Thomas Frank’s book “What’s the Matter with Kansas?” Frank argued that Republicans have been able to work this magic trick by dangling social issues in front of working-class voters, who fall for the bait and lose sight of the fact that they are voting against their own interests. Both Wolf and Pierson believe that this trickery will prove dangerous for Republicans. “The plutocrats are riding on a hungry tiger,” writes Wolf.

But what if people are not being fooled at all? What if people are actually motivated far more deeply by issues surrounding religion, race and culture than they are by economics? There is increasing evidence that Trump’s base supports him because they feel a deep emotional, cultural and class affinity for him. And while the tax bill is analyzed by economists, Trump picks fights with black athletes, retweets misleading anti-Muslim videos and promises not to yield on immigration. Perhaps he knows his base better than we do. In fact, Trump’s populism might not be as unique as it’s made out to be. Polling from Europe suggests that the core issues motivating people to support Brexit or the far-right parties in France and Germany, and even the populist parties of Eastern Europe, are cultural and social.

The most important revolution in economics in the past generation has been the rise of the behavioral scientists, trained in psychology, who are finding that people systematically make decisions that are against their own “interests.” This might be the tip of the iceberg in understanding human motivation. The real story might be that people see their own interests in much more emotional and tribal ways than scholars understand. What if, in the eyes of a large group of Americans, these other issues are the ones for which they will stand up, protest, support politicians and even pay an economic price? What if, for many people, in America and around the world, these are their true interests?

 

Mounting Pressure for Japan to tackle Immigration Policy


November 29, 2017

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Number 406 | November 28, 2017

ANALYSIS

Mounting Pressure for Japan to tackle Immigration Policy

By Toshihiro Menju

Prime Minister Abe has repeated over the past several years that he has no intention of formulating a new immigration policy. However, due to a population decrease and a serious shortage of workers, his administration is under pressure to change this policy. Japan has almost achieved full employment; the level of unemployment reached 2.8% in the latter part of 2017. This achievement is partly due to the success of Abenomics, but also due to the workforce shortage in Japan.

The working-age population (15-64 years old) has fallen since reaching its peak of 87 million in 1997. In 2015 it was as low as 76 million, and is expected to keep falling. Teikoku Databank recently announced that in the first half of 2017 business closures due to labor shortages were up by 290 percent from four years ago. The economic impacts of the labor shortage are becoming apparent.

To cope with the shortage of workers as well as depopulation, the Japanese government introduced a series of policies and created new ministerial posts such as Minister for the Promotion of Overcoming Population Decline and Vitalizing Local Economy in 2014, Minister in Charge of Promoting Dynamic Engagement of All Citizens in 2015, Minister in charge of Women’s Empowerment in 2015, and Minister for Human Resources Development in 2016. These measures have seen some success as female workers have increased to a record high level of 28.8 million. However, the birth rate remains low at 1.44 and the population continues to decrease.

Recent projections by the National Institute of Population and Social Security Research show that steeper population declines are ahead. The population is expected to fall by 6.2 million in the 2020s, 8.2 million in the 2030s and 9 million in the 2040s. While foreign residents have increased, the government has not changed the immigration policy at all. Vietnamese and Nepalese immigrants looking for work represent the largest increase of foreign residents. As of the end of June 2017, the number of Vietnamese residents reached 232,562 – 5.7 times higher than 10 years ago. Similarly, Nepalese residents increased sharply, reaching 74,300 – 6.4 times higher than 10 years ago.

How can foreigners come to Japan for work despite the Japanese government prohibiting foreign workers in blue collar jobs?

The main reasons for the increase are two-fold. In the case of Vietnamese immigrants, they come to Japan under the TITP (Technical Internship Training Program). TITP was ostensibly designed for technology transfer to developing countries; however, it has been used to hire foreign workers in the sectors which cannot attract Japanese workers or pay decent compensation. TITP has been internationally criticized for human rights violations including unlawfully long hours with very low compensation.

However, the government enacted a new TITP law which came into force in November 2017 to enlarge the program to include tight monitoring and penalty systems for companies acting illegally. Due to the severe worker shortage, the increase of TITP participants was increasing even before the enactment of the new law.

Another source of the sudden increase of foreign residents is the student visa program. Foreign students in Japan are allowed to work 28 hours per week legally. Many foreigners come to Japan as students registered at Japanese language schools which have been established everywhere by business corporations in the last few years. Local agents in Nepal send young Nepalese to Japan to enroll language schools, and many of them work beyond the 28 hour per week limit, often suffering under inhumane conditions.

If the Japanese government does not formulate an immigration policy, it heightens the risks of illegal work becoming more common and of more foreign nationals staying in the country illegally. For example, the number of absconders from TITP has nearly tripled in last three years. While TITP may help secure workers on a temporary basis, it will not serve as a medium to long-term solution to the population decline and aging.

It seems the government is overly afraid of the political consequences of admitting immigrants to Japan. It was regarded as almost taboo until a few years ago; however, the view of the general public towards immigrants has dramatically changed due to the severity of the population decline and labor shortage. In addition, the explosive increase in foreign tourists to Japan – which is championed by the government – has helped ordinary citizens to directly interface with foreigners at the grassroots level. In 2017 the number of foreign tourists is expected to reach 29 million, which is much higher than the 8.6 million in 2010.

The government also underestimates the grassroots experience of accepting foreigners. Mr. Kazuyohi Hamada, mayor of Akitakata city (population: 29,000), Hiroshima Prefecture publicly announced that his city welcomes foreign residents to support older Akitakata citizens, and presented the demography projections for 2035, when the largest population cohort will be over 80 years old. Akitakata is not an exception; rural cities of the same size will face the same challenge if Japan does not accept immigrants.

One of the main reasons that the government is slow in making decisions on tackling immigration policy is that there is a perception gap between people living in local regions and in Tokyo, where political and business leaders reside. Tokyo is still young compared with the rest of Japan and its population will continue to grow until 2025 although Japan started to suffer from population decline around 2010.

However, Tokyo is expected to eventually age rapidly as well, and it will not able to survive without foreign caregivers. The time has come for Japan to make decisions on immigration.

About the Author

Toshihiro Menju is Managing Director at the Japan Center for International Exchange. He can be contacted at tmenju@jcie.jp.
The East-West Center promotes better relations and understanding among the people and nations of the United States, Asia, and the Pacific through cooperative study, research, and dialogue.

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The Asia Pacific Bulletin (APB) series is produced by the East-West Center in Washington.

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Dr. Lim Teck Ghee’s latest book will be launched on November 8, 2017


November 7, 2017

Congratulations to Dr Lim Teck Ghee with this quote from the late Steve Jobs to commemorate the launch of your book, Challenging Malaysia’s Status Quo:

Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma – which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. –Steve Jobs

Teck Ghee,

It has been indeed my pleasure to host your writings on Malaysian issues of public interest on my blog for the benefit of readers around the world.

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Dr. Lim Teck Ghee

Your commentaries on various aspects of contemporary Malaysian political economy have been critical, fair and balanced, succinct  and very readable. I look forward to owning a copy of this book and reading your articles with a fine tooth comb. I share your concerns and like you, I am optimistic about the future of our country.

You and I and all our friends like Patricia Martinez, Azmi Sharom,  Ooi Kee Beng, Thayaparan, et.al have been identified with the political opposition for having the guts to speak the truth to power.  Nothing is further from the truth. We are loyal and citizens of Malaysia with certain inalienable rights under the Constitution. We seek to hold our leaders accountable for their decisions and actions. –Din Merican

Challenging Malaysia’s Status Quo Book Launch

Strategic Information and Research Development Centre is pleased to invite you to the launch of our latest and highly-anticipated book, Challenging the Status Quo in Malaysia.

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We are proud to have as our guest of honour Tan Sri Datuk Yong Poh Kon to launch the book.  He, together with the book author, were members of a 5- man committee chaired by then Dato Seri Abdullah Badawi to draft the final report of the National Economic Consultative Council (NECC)  in 1990 as inputs for the successor policy to the NEP.

Tan Sri Yong Poh Kon was a President of the Federation of Manufacturers (FMM) and the Co-Chairman together with the Chief Secretary,  of PEMUDAH, the Task Force to Facilitate Business from 2007 to 2013.  He was also  a founding Commissioner of the Malaysian Communications and Multimedia Commission and Board Member of Bank Negara Malaysia (Central Bank of Malaysia) and EPF. From  2009 to 2014, he served as a member of the Advisory Board of the Malaysian Anti-Corruption Commission and in 2013 he was appointed a member of the Economic Council in the Prime Minister’s office.

 

Present at the launch will also be Dr. Lim Teck Ghee and Dr. Azmi Sharom, Commander (retired) Thayaparan and Dr. Patricia Martinez who will make short remarks about the book and their take on the book’s subject matter.

Following the formal launching of the book there will be a question and answer session. Copies of the book will be available for sale after the event. Light refreshments will also be provided.

 

Endorsements:

No Malaysian concerned with the future of Malaysia or anyone with an academic interest in the country can afford not to read this superb collection of essays by Dr. Lim Teck Ghee, one of Malaysia’s foremost public intellectuals. With his impressive critical eye, deep historical insights, and extensive experience in political and social activism spanning almost five decades, Dr. Lim offers his critical analysis and reflections on several political, economic and social issues in Malaysia with the vision of making change happen in a country on the brink of becoming a failed state. – Alberto Gomes, Professor LaTrobe University, Australia

 

Malaysia has been in a low-intensity crisis – punctuated by occasional moments of real confrontation – for so long that it is all too easy to normalise the status quo as the only imaginable world. The crisis encompasses every element of the social order. For nearly five decades Lim Teck Ghee has been one of Malaysia’s most principled and eloquent critics of this system, and of a ruling class that has entrenched itself, its ideas and its interests into the body politic. His writing and political engagement are the epitome of the public intellectual – thinking about and reflecting broadly upon the realities of society, and offering solutions. He straddles the worlds of rigorous scholarship, social activism and public discourse. He embraces every possible medium to circulate his message: acclaimed academic books, policy reports, position papers, online commentaries, op-eds and more besides. And his views remain steadfastly subversive. The publication of Challenging Malaysia’s Status Quo brings together some of  Teck Ghee’s most penetrating analyses from the past decade. They offer a critique, a challenge and a chance to imagine that another world is possible for all Malaysians. – Gareth Richards, Gerakbudaya Bookshop, Penang

 

History professor, consumer advocate, policy analyst and public intellectual par excellence Dr. Lim Teck Ghee has put together this important collection of critical essays on the existential crisis of the Malaysian nation today. The essays are sharply critical of Malaysia’s current economic policies and social practices as its title suggests. Essays cover topics on the New Economic Policy (NEP)’s prolonged and untenable extension of ethnic privilege into the New Economic Model (NEM), on the role of GLCs which may have helped over-achieve the 30 per cent threshold of Bumiputera equity, on the ruling coalition’s egregious use of electoral manipulation, on the rising tide of religious intolerance condoned or unchecked by the government and many other issues that make for riveted reading.Through these essays, Dr. Lim systematically exposes the poor state of governance in the Malaysian state and the flaws of its past and current policies. Although a bleak picture is presented about an apparent lack of progress, Dr. Lim’s explicit use of Ockham’s razor to dissect governmental practices show us clearly how we could construct a more progressive Malaysia in the future. His pointed analyses of how and why we must render change to ineffectual and moribund policies is essential reading for academicians, politicians and activists. – Johan Saravanamuttu, Adjunct Senior Fellow, S. Rajaratnam School of International Studies (RSIS)

 

The life time spent by Dr. Lim Teck Ghee on studying and analyzing issues affecting the well-being of Malaysia and the world is exhibited in impressive fashion in this collection of articles. Often controversial, always informed, his incisive words confirm his standing as one of the country’s most intrepid and resolute public intellectuals. – Dr Ooi Kee Beng, Deputy Director, ISEAS-Yusof Ishak Institute, Singapore

 

The enigma of Malaysia’s high household income growth


November 6, 2017

The enigma of Malaysia’s high household income growth

 

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 Who is fudging the household income figures, if not this Prime Minister cum Finance Minister? Malaysians are a whiney lot.

 

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Image result for Hwok-Aun Lee Enigma of Income Growth

 

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

Image result for Hwok-Aun Lee Enigma of Income Growth

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

Figure 3

Image result for Hwok-Aun Lee Enigma of Income Growth

 

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

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

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

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

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

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