ADB Identifies the Keys to Economic Progress


April 9, 2017

ADB Identifies the Keys to Economic Progress

by Philip Bowing

http://www.asiasentinel.com/econ-business/adb-identifies-keys-economic-progress/

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Get your investment priorities right. That is the message which emerges from a detailed study by the Asian Development Bank of the ways for countries to transform themselves from low to lower-middle, upper middle and finally high income. Those priorities change over time but none in itself is self-sufficient.

The good news is that most of Asia has already moved out of the low-income bracket – much though that may surprise hundreds of millions in India, Bangladesh and Pakistan for example. The main reason is that the ADB, like other such institutions, using a fixed Purchasing Power Parity measure of income which is absolute, not relative. Thus we are told that the Netherlands reached lower-middle income status in 1829 while Argentina get there in the late 19th century.

Yet at the time those were among the top two or three most prosperous societies in the world. So it is a measure of Asian progress that almost all countries are now at least at the level of the richest 150 years ago. But it may be scant comfort to Mumbai slum dwellers or Bangladeshi farmers to know that they have now reached the income levels of Argentinians more than a century ago.

Categorization is also at times problematic. Thus by some measures Malaysia, Kazakhstan and Turkmenistan are high-income (manly thanks to oil and gas) but are treated as Middle Income by the World Bank.

So what are the most important factors that lead countries up through the income rungs, absolute and relative? For those in the low- and lower-middle brackets, by far the most crucial issue is standard of education. Thus of major Asian countries today, India has most to gain from raising the number of school years. Raising educational scores (as judged by maths and science tests) could double Indian income levels over 30 years.  Philippines and Thailand would also benefit exceptionally from raising their educational sights.

However, for those with already high levels of education such as Kazakhstan, they need to find other avenues to progress further.

For the lower income countries, human capital is first priority, but it also needs to be accompanied by physical capital – the roads, transport and communications systems needed to spur output and trade. These physical investments become even more important as countries climb the middle-income ranks, as China has shown with infrastructure and housing spending making possible a boom in car and consumer durables production and bringing outlying areas to play a larger role in the national economy.

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Phnom Penh, 2017

In recent years, Cambodia has moved closer to lower-middle-income status through resounding economic growth. This has been driven by solid performances in garment manufacture, tourism, paddy and milled rice, and construction.–Asian Development Bank

Clearly, the inference from the ADB is that in Southeast Asia the Philippines and Indonesia stand out as in need of both human and physical capital investment to speed income gains while Thailand needs to focus on education. Bizarrely, however, as noted elsewhere in the ADB report, much of the region, including the Philippines, Cambodia, and Thailand, (but not India and Indonesia) exports capital even though returns to domestic investment should be higher. The problem seems to lie in the longer term nature of investment in human capital and infrastructure.

For those already at the top of the middle-income range and moving into the high bracket, the biggest gains need to come not from a greater quantity of investment but in raising Total Factor Productivity – the output per unit of invested capital. The conclusion here is very clear. Those such as South Korea which made the most difficult transition – to the highest level – showed TFP contributing 1.2 percentage points to income growth compared with just 0.4 percent for those stuck in the upper middle range.

The report identified several factors contributing to TFP growth: research and development spending; access to foreign investment bringing new skills and increasing the complexity of production skills; scope for entrepreneurship, and allowing creative destruction of older industries. Infrastructure investment also needed to keep up with technological change. The report noted that income convergence in the European Union had primarily been the result of TFP growth rather than high investment.

China scored highly on R&D. human capital, patent applications and industrial complexity though by implication the size and power of its public sector and aversion to closing factories could hold it back.

For China, as for some other countries such as Korea, Taiwan, Japan and Thailand, rapidly aging populations increase the importance of TFP in maintaining growth in the face of static or declining work forces. Meanwhile the country in Asia nearest to high income seems unlikely to make that jump while entrepreneurship, competition and access to capital are hobbled by race-based politics and commercial structures.

Hire Good People and Let them do the Job


March 14, 2017

Retired Admiral Thad Allen Opens the Leadership Forum Series That Carries His Name

The expert on managing crises talks to Trachtenberg School of Public Policy and Public Administration about governing in a complex technological age.

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Ret. Adm. Thad Allen addresses the Trachtenberg School of Public Policy and Public Administration in the inaugural public leadership forum that carries his name. (Logan Werlinger/GW Today)
The secret to good public leadership, Mr. Allen said, is lifelong learning, an insatiable curiosity that drives you to understand changes that are going on. The other essential element for navigating “choppy seas,” he said, is emotional intelligence.–Admiral (rtd) Thad Allen

By B. L. Wilson

https://gwtoday.gwu.edu/retired-admiral-thad-allen-opens-leadership-forum-series-carries-his-name

As the U.S. Coast Guard commandant who headed the government’s response to Hurricanes Katrina and Rita, as well as the clean up of Deepwater Horizon oil spill in the Gulf of Mexico, retired Adm. Thad Allen, M.P.A. ’86, said he would offer the following advice to President Donald Trump about managing a disaster.

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“Be the President. You can’t do everything yourself,” Mr. Allen said he’d tell Mr. Trump. “Hire a competent person to [focus on the problem] to the exclusion of everything else without the intrusion of policy, politics and partisanship.”

He added that it was also important for that person to be allowed to speak directly to the American people. It doesn’t matter who is President, Mr. Allen said, the government would face challenges from rapid technological advances, increased globalization and human impact on the environment.

In the first annual Trachtenberg School of Public Policy and Public Administration Public Leadership Forum that will carry his name, Mr. Allen shared insights with graduate students and alumni Tuesday night. Throughout this series, Mr. Allen and other senior government executives from across the political spectrum will conduct interactive conversations on the value and challenges of government service.

“There’s plenty to do regardless of who is leading the nation,” he said. “It is a question of how leaders and policymakers have to carve out an area that they’re responsible for, protect their subordinates and explain what’s going on.”

The side benefit of having been involved in crises that included the Haitian earthquake and serving as the Atlantic commander of the New York Harbor and Potomac during the 9/11 terrorism attack, he said, was the opportunity it gave him to take notes about what else was happening and how public policy and administration was handled.

 His talk at Jack Morton Auditorium was billed as a non-partisan conversation, “Public Service Leaders: Navigating Choppy Seas.” Mr. Allen, who is a partner with the Booz Allen Hamilton Inc. consulting firm, characterized himself as an “agnostic to science,” comparing taking a position on climate change and global warming to touching a deadly third rail.

“There’s water where none used to be, and I’m responsible for it,” he said. “You can argue about why it happened and the source, but there’s a perception and expectation that somehow government is going to do their job and attack the problem.”

He described a U.S. government that was having trouble keeping up with issues around the use of computers, involving encryption and privacy, data analytics and machine learning. Companies like Apple, he pointed out, are not waiting for the government or an international organization to come up with cell phone standards for a global navigation satellite system and are adapting to different systems in different regions and countries.

“It’s now become a stern chase where we’re falling further and further behind,” he said. “That also involves how we actually regulate and deal with safety issues.”

As an example, he noted that companies in Detroit are equipping cars with technology faster than the National Highway Transportation and Safety Administration can come up with rules to regulate their safety. He said it is unlikely the process will get overhauled anytime soon unless there is more collaboration between the government and the private sector. If that doesn’t make your head hurt, he said, natural disasters continue  even as the country is hit by outbreaks of diseases such as the Zika virus.

The problems in dealing with such events,  Mr. Allen explained, are made harder because there may be no clear channel for seeking emergency authorization and appropriation of resources and funding due to overlapping jurisdictions and the involvement of multiple federal agencies.

“This is the issue going forward—increased complexity, scope and scale,” Mr. Allen said.  “When you get things this complex, the complexity becomes a risk aggregator because it starts to defeat statutory responsibilities, standard operating procedures and doctrine.”

The secret to good public leadership, Mr. Allen said, is lifelong learning, an insatiable curiosity that drives you to understand changes that are going on. The other essential element for navigating “choppy seas,” he said, is emotional intelligence.

“Especially when you’re working across boundaries on complex problems, you have to have empathy and listen to the other stakeholders and understand what they are trying to say to you,” the retired admiral said.

 

 

A blinkered Fiscal Vision-There is no such thing as a free lunch, Mr. Trump


Match 7, 2017

Donald Trump may have veered from self-inflicted crisis to self-inflicted crisis over the course of his young presidency, but he has kept one policy goal steadily before him: tax cuts for the wealthy. A case in point is his recent proposal to find $54 billion more for military spending by slashing Head Start, food aid for low-income pregnant women, environmental protection and other programs. Those trade-offs are bad enough in themselves. But they also reveal a ruinous worldview in which nondefense spending is always excessive and tax cuts are necessary for growth. This sort of thinking will only weaken the economy and betray the people who put their hopes in Mr. Trump.

Spending on the nonmilitary discretionary programs that have been targeted by Mr. Trump comes to 3.2 percent of the economy — well below the average of 3.8 percent going back to 1962. By calling for cuts that would average about 15 percent in almost every category other than defense and “mandatory” programs like Social Security and Medicare, Mr. Trump would undermine his promises to make sure “every child in America has access to a good education,” to help the “poorest and most vulnerable” and to rebuild infrastructure. Other categories at risk of being cut include scientific and medical research, job training, national parks, air traffic control and maintenance of dams.

Worse yet, some Republicans may call for limiting Mr. Trump’s proposed reductions by cutting instead from Social Security and Medicare, which Mr. Trump has pledged to protect. That would be needlessly tightfisted. A rich nation with a resilient economy can afford to care for both the poor and the elderly. Besides, support for the elderly is already becoming stingier as a result of changes instituted years ago, including an increase in the Social Security retirement age from 65 in 2002 to 67 by 2027.

That is not to imply that all spending cuts are off limits. But it’s sensible to mix them with tax increases. The approach of Mr. Trump and congressional Republicans would deeply cut taxes even as spending is slashed.

Mr. Trump has essentially called for three tax cuts: a personal income tax cut, a corporate income tax cut and a cut achieved by repealing the Affordable Care Act. Specifics are scant, but one thing is clear: All three would overwhelmingly benefit the wealthiest Americans. A campaign draft of the income tax plan indicated that at least half of the proposed multitrillion-dollar tax cut would flow to the top 1 percent of earners in 2025, according to the nonpartisan Tax Policy Center. Repealing the A.C.A. would end the additional 0.9 percent Medicare Hospital Tax on incomes above $200,000 ($250,000 for married couples).

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Donald Trump is a bold conservative. But he’s not just a conservative on fiscal issues… He is a foreign policy conservative, too! That’s why  on MSNBC’s Morning Joe, Donald Trump explained his plan to do what President Barack Obama is unable to do: Destroy the Islamic State (ISIS). But make sure that these mentally deranged Islamic fanatics don’t screw  you first like they did to George W. Bush on September 9, 2011

Mr. Trump and Republican lawmakers say tax cuts spread prosperity by generating economic growth and thus increasing federal revenue — a thoroughly debunked claim. Experience shows that large tax cuts either deepen the nation’s debt or necessitate spending cuts. Forecasts from the Congressional Budget Office indicate that if tax revenue is not increased in the coming decade, spending cuts of $3 trillion — or about 25 percent outside of Social Security and Medicare — will be required to keep the debt at its current level of 77.5 percent of the economy. Clearly, if defense spending rises in the coming decade, as Mr. Trump has called for, while tax revenue declines, either the debt will rise or spending cuts will need to be even deeper.

Both outcomes can be avoided by abandoning deep tax cuts. It would be wise to take on new debt for stimulus during economic downturns or for infrastructure investments, but not to finance tax cuts during a military buildup. Economic activity could be encouraged by bolstering wages, including federal overtime protections. Tax revenue could be raised in constructive ways, including a carbon tax.

Giving the wealthy never-ending tax cuts while gutting programs for the middle class would create more of the resentment and inequality Mr. Trump has promised to address.

1MDB’s debt restructuring plan hits snags


December 26, 2016

1MDB’s debt restructuring plan hits snags

 

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Dato’ Johari has downplayed tensions with Abu Dhabi over $9.4 billion in debt obligations, saying the two sides are “not in arbitration”.PHOTO: BLOOMBERG

A complex debt restructuring plan at scandal-torn 1Malaysia Development Berhad (1MDB) is stumbling over delays in the disposal of real estate assets and prickly differences with Abu Dhabi over a dispute involving more than US$6.5 billion (S$9.4 billion) in debt obligations.

1MDB’s prospective project partners and lawyers involved in the troubled sovereign fund’s debt work-outs said the proposed disposal of prime parcels of real estate in Kuala Lumpur and Penang for joint development has been bogged down by disagreements over valuations.

Separately, already tense relations with the Abu Dhabi government over a dispute involving billions of dollars in debt obligations have worsened in recent weeks, after a breakdown of an earlier deal where Malaysia would settle part of the disputed debt as a precondition for both governments resolving the matter through private negotiations, lawyers said.

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Malaysia’s Second Finance Minister Johari Abdul Ghani, who is overseeing the debt resolution at 1MDB, acknowledged some of the bumps facing the restructuring plan. But he insisted to The Straits Times that the problems would be ironed out. 1MDB declined to comment.

A special task force headed by Dato’ Johari, codenamed the Budiman Committee, was set up to handle the divestment restructuring of 1MDB. “We are pushing ahead (with the debt rationalisation plan). There are many issues, but key milestones, such as the sale of the power assets, have been completed,” he said in an interview.

 KEY MILESTONES COMPLETED

We are pushing ahead (with the debt rationalisation plan). There are many issues, but key milestones, such as the sale of the power assets, have been completed. Our next move is to kick-start the property development of Bandar Malaysia and TRX.

DATO’ JOHARI ABDUL GHANI, Malaysia’s Second Finance Minister, who heads a special task force handling the divestment restructuring of 1MDB.

“Our next move is to kick-start the property development of Bandar Malaysia and TRX.” He was referring to 1MDB’s massive real estate projects on the fringes of Kuala Lumpur. TRX, or Tun Razak Exchange, is an upcoming financial district.

The 1MDB-International Petro- leum Investment Company (Ipic) dispute is related to a deal last year in which the Abu Dhabi fund guaranteed US$3.5 billion of 1MDB bonds when they were issued in 2012. Last year, when 1MDB was short on cash, Ipic also agreed to give an emergency US$1 billion loan and make interest payment on the same bonds.

1MDB was to repay the loan through an Ipic subsidiary, but Ipic in April revealed for the first time that it never received the money.

Mr Johari conceded that Prime Minister Najib Razak’s administration and 1MDB were facing issues with Ipic, which is demanding the US$6.5 billion settlement that includes accumulated interest on the bonds and loan. “Abu Dhabi wants certain conditions but we need to look at the dispute in totality,” he said. He downplayed the tensions with Abu Dhabi. “We are not in arbitration. We are in the case management stage. So let us deal with this,” he said.

Executives involved in the debt work-outs at 1MDB said top government officials from Malaysia and Abu Dhabi have been in private talks since June to hammer out a settlement to avoid what could potentially turn into a messy arbitration battle. Both parties had reached a tentative agreement in recent weeks that Malaysia would settle roughly US$1.2 billion of the disputed amount, as a precondition for a government-to-government deal on the rest of the disputed monies.

“There was a deal but the Malaysian side is having a change of heart, so it looks like it will go to arbitration,” said a financial executive involved in the negotiations.

Dato’ Seri Najib, who set up 1MDB seven years ago to spur development at home and to pursue strategic investments abroad, has repeatedly rejected claims from his critics that the fund had morphed into a private political slush fund for him and his ruling Umno party.

Bloomberg, which interviewed Mr Johari, on Wednesday reported that 1MDB had paid the interest on its bonds due this quarter to the Abu Dhabi fund.

A version of this article appeared in the print edition of The Straits Times on December 23, 2016, with the headline ‘1MDB’s debt restructuring plan hits snags’. Print Edition

The World Bank: Right Part of the Time and Wrong On Occasion on Malaysia


October 18, 2016

The World Bank: Right Part of the Time and Wrong On Occasion on Malaysia

by Dr Lim Teck Ghee

The World Bank’s occasional economic reports on Malaysia can generally be relied upon to offer sound analysis on the country’s economic development that is different from those emanating from our national sources. They provide a more critical perspective on entrenched policies or proposed new ones by stake players who should be independent and should not be beholden to the Malaysian government or any interest or lobby group.

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Two recent reports should be of interest to our policy makers. The first which came out in June this year affirmed the importance of leveraging on trade agreements and partnerships for the nation’s continuing economic prosperity.

The Economic Monitor report noted that

  • Malaysia is one of the most open economies in the world, with a trade to GDP ratio of 148% (from 2010 to 2014) compared to 58% in developing countries in East Asia and Pacific.
  • About 40% of jobs in Malaysia are linked with export activities.

Most Malaysians are aware of the importance of trade. But we have also seen the rise of uninformed and often xenophobic sentiments targeting the Trans-Pacific Partnership when it was being negotiated by the government. The Bank’s opinion on this and other similar agreements needs to be reflected upon.

In essence the Bank argues that implementation of new regional trade agreements can help Malaysia carry out key economic reforms and accelerate the country’s transition to high-income status. It notes that the new generation of regional trade agreements – including the Regional Cooperation Economic Partnership, Trans-Pacific Partnership and European Union Free Trade Agreement – will shape trade and investment over the next decade.

It also calls for commitment to these agreements which goes beyond tariff reduction This is because not only will they have a significant impact on attracting investment, and further open up market access for the country’s exports of goods and services; they can also be used to push for deeper reform in competition policy, services trade and support to SMEs that would otherwise be difficult to initiate.

The Bank rightly warns that the transition will not be easy and proactive measures will be needed to ensure wider benefits under the new regional trade agreements.

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Notwithstanding the problems and difficulties, it is important for our policy and decision makers to get the Bank’s message and stay the course of this road of reform if we want our economy to grow and become more resilient.

Reducing Vulnerabilities the Wrong Way

The latest Bank report – a newly released East Asia and Pacific Economic Update entitled “Reducing Vulnerabilities” – focuses on current global economic uncertainties; the risks that come from external developments as well as touches in its country chapter on Malaysia on our own home grown financial crisis arising from 1MDB which “could impact investors’ sentiments and divert the Government’s focus from needed reform, while an unanticipated sharp adjustment among households to a higher cost of living or a more pronounced softening in labour market conditions could also affect private consumption”.

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To alleviate the impact on the bottom 40% population, the Bank is recommending targeted measures “to support the most vulnerable households”. This, in its view, could include the introduction of “unemployment benefits [which] could help to improve matching in the labour market and provide support as the labour market softens” (https://openknowledge.worldbank.org/bitstream/handle/10986/25088/9781464809910.pdf; p.128).

Bank guidance on this issue is clearly off the mark if not plain wrong. Firstly, the nation’s finances are in no position to support a social welfare system providing benefits to the section of the population that is registered as unemployed or do not currently have a job. For now and the foreseeable future, the nation needs to exercise financial prudence and discipline in spending. In fact, the Bank itself has noted in the same report that recent increases in the minimum wage and public sector salaries would be difficult to sustain as the necessary fiscal consolidation continues.

Any social welfare or social protection system that is being proposed needs to be sustainable, financially viable and well targeted. In Malaysia it is especially important to ensure that the new proposed system does not become a political football and/or is open to wide scale fraud and abuse. Both negative possibilities are very likely given the present state of politics and governance in the nation.

A stronger and more rigorous defence of the proposal for the introduction of unemployment benefits by the World Bank with empirical data proving its case is necessary if it wants this policy recommendation to be taken seriously. For now, the advocates of this policy in the Bank may be comforted by the fact that a de facto unemployment benefits system already exists in Malaysia through the use of the civil service to employ hundreds of thousands of otherwise unemployed and unemployable school leavers, graduates and others primarily from the  Bumiputra community.  Poor Indians have been left out leaving them marginalized from the mainstream.

Such a system has been ongoing for at least the last 20 years and makes Malaysia a role model for countries in this field of racially targeted labour market intervention.