Singapore: Understand History and Lee Kuan Yew

July 5, 2015

Singapore: Understand History and Lee Kuan Yew

SingaporeLee Kuan Yew’s Legacy

Given what is happening in Malaysia, it is refreshing to learn that not far from our shores is an island state called Singapore. It will be constant reminder for  all  of what it would take to build a modern nation state with first class infrastructure and a united nation. It took  leadership, true grit,  a talented team, and honest government. That leader was the late Mr. Lee  Kuan Yew who had a team of loyal and dedicated lieutenants and their successors. So let history be the judge of their achievements.–Din Merican

The Malaysian Ringgit’s Slide

June 11, 2015

The Malaysian Ringgit’s Slide tells the story of Malaysia’s Political Mess

Story by G. Sharmila


The weakening ringgit appears to have investors scared, with the currency hitting a 9-year low of 3.77 against the US dollar on Monday. But are investor concerns warranted, or simply overdone? Tiger examines the matter in greater detail.

On Monday, the ringgit hit a 9-year low, the lowest level since January 2006, according to a Bloomberg report on the same day. Yesterday, the ringgit closed at 3.7525 against the US dollar, with some analysts reportedly saying this was merely a technical correction. Additionally, data from Bloomberg showed that the ringgit had fallen to as low as 3.76 to the US dollar.


Market talk says that the ringgit would break the 3.8 level today. At the time of writing, this hasn’t happened yet and Tiger doesn’t think it will last even if it does. Even if it does, it is not a disaster unless there are fundamental reasons for the ringgit weakness. In the long-term, the currency performance is tied to economic fundamentals, and the fundamentals are still strong.

In fact soon after the Bloomberg report, there was another one from the same agency which said that the ringgit was the best performing currency in the immediately preceding two weeks! That simply indicates how volatile conditions are in the currency market now.

US Federal Reserve

An economist Tiger spoke to said that increased volatility and downward pressure on the ringgit is expected preceding the meeting by the US Federal Reserve next week. Other economists have noted in previous media reports that investors have been selling the ringgit in anticipation of an increase in interest rates by the Fed, which could very well be true as interest rates do tend to influence currency movements.

It is also worth remembering that the ringgit is a managed float currency, which means that its exchange rate is allowed to appreciate and conversely, depreciate against other currencies according to market conditions. With a managed float currency, the central bank intervenes when necessary to stabilise the currency. As the economist pointed out to Tiger, it is not unusual for the current weak condition of the ringgit as the greenback has also been strengthening against other currencies of late.

There are also other short-term concerns such as uncertainty over 1Malaysia Development Bhd or 1MDB but this would have already been pretty much discounted and is probably already in the equation unless there are unexpected developments here. Also, the issue has taken a political dimension with pressure on the prime minister to step down which adds to uncertainty.

Meantime, there is the overhang of a possible downgrade on Malaysia’s sovereign rating by international rating agency Fitch which has said that there is even chance of it downgrading Malaysia. Again this has been in the market for a while and is possibly discounted.

But back to economic fundamentals. Economists have pointed out that the country’s 2015 gross domestic product forecast of 5.5% is healthy and that investor reactions towards falling crude oil prices have already been priced in. In fact the subsequent recovery from the earlier huge fall in oil prices was said to be positive for the ringgit as it will reduce pressures on the trade account. They have said that the investor selldown of the ringgit has been sentiment-driven as opposed to motivated by a drastic change in fundamentals.

According to a forex strategist from AmBank, the ringgit is falling due to positive economic data from the US and timing over the hiking of interest rates there following the easing of liquidity injection there. He also said that “increasing political noise over the sensational development in 1MDB, risk of fiscal slippage and threat of a sovereign rating downgrade by Fitch Ratings have caused the sell-off of the ringgit as well.”

To illustrate the strength of the fundamentals, let’s take a look at Bank Negara Malaysia (BNM)’s foreign exchange reserves. When forex reserves decrease, it signifies an outflow of funds. If you look at the graph below, the country’s forex reserves have been on the rise from 1997 to 2013, except for dips during the 1997/1998 Asian financial crisis and the 2007-2009 period, which coincides with the global financial crisis.


In fact, data from the BNM website show that the forex reserves as of May 29th this year are RM394.3 billion, unchanged from the RM393.4 billion in the fourth quarter of 2014. As economists have noted in the past, the amount of forex reserves is sufficient to absorb foreign outflows in the short-term and since the country’s current account remains in surplus, there’s every chance that the experts are right about the ringgit selldown being sentiment-driven.

The current account is the balance of trade between a country and its trading partners, including all payments between countries for goods, services, interest and dividends. A current account surplus is a positive thing for the long-term outlook for the ringgit because it implies that a country is a large exporter and has a positive balance from inflows and outflows of trade and service.

The balance of payment includes the current account plus outflows of capital, both long-term and short-term. What is happening right now is that short-term portfolio outflows have been high in recent weeks. These outflows tend to weaken the ringgit because ringgit funds are converted,  into other currencies, mainly the US dollar. But unless the outflows are sustained, the pressure on the ringgit eases off after some time.

BNM data show that the current account balance was RM9.968 billion for the first quarter of this year, versus RM5.666 billion for the immediately preceding quarter – the last quarter of 2014. That indicates that the trade and services account has actually done better during the period, recording a surplus which is substantially higher.

What’s happening with the ringgit now is essentially volatility, due to the factors mentioned above and this too, shall pass. Experts have said that the volatility is short-term due to portfolio outflows, hence once sentiment improves and outflows normalise, the fundamentals shall prevail.

But until the interest rate position in the US becomes clearer, one should expect volatility of not only the ringgit but all other currencies as well in the coming months. That does not necessarily indicate a fundamental change in the economic position.

11th Malaysia Plan: Quick Impressions

June 2, 2015

11th Malaysia Plan: Quick Impressions

 by HishamH
 11th Malaysia Plan2

This was supposed to have come out a couple of weeks ago, but I ran out of time before leaving on a holiday. Just some quick thoughts on the 11MP:

  • Overall, the 11MP underscores the shift in the government’s strategy. There’s been a gradual but noticeable shift from boosting growth to labour and social issues in the last few years. This means potentially accepting a lower rate of growth to making sure that what growth we do get is more equitably shared.
  • A common thread in the commentary, and in my conversations with people on the 11MP, is the lack of detail on projects/programs in the 11MP. Thinking about it later that night, I remembered why. There’s a concurrent complaint that the annual government budgets are lacking in strategic direction, but full of projects and programs. See where I’m heading with this? The Malaysia Plans establish strategy and budget priorities; the details are contained in the annual budgets. The two should always be referenced together.
  • Another complaint is that the 11MP isn’t really revolutionary. I don’t think it needs to be. The basic ideas haven’t really changed for a generation, only the emphasis. But I’m encouraged by the larger focus given to issues of inequality.
  • The overall macro targets aren’t a stretch, but some of the individual policy targets are. I still don’t understand the mechanisms underlying international differences in the wage to GDP ratio, for example. Putting in a target without defining the intervention space makes achieving the target that much harder. Again, the (understandable) lack of detail on specific programs is a drawback.
  • Like the 10MP but unlike all the previous Malaysia Plans, there is a stronger emphasis on outcomes and achievements. One of the issues I’ve always had with previous Malaysia Plans is the consistent lack of mention of what targets were actually met in the previous plan period. Both the 10MP and 11MP fill this transparency gap, which makes for greater accountability.

Apart from the above, this 5 year plan hits all the right notes – productivity, inclusivity, environmental sensitivity, and even a chapter on beyond 2020. But the devil’s in the details – policy/program formulation and implementation will be key (as they always have been).

Lee Kuan Yew and the Asian Model

March 31, 2015

Lee Kuan Yew and the Asian Model

by Martin

Lee-Kuan-YewAn important legacy of Lee Kuan Yew was the formulation of one of the Asian models that have been driving successful Asian economies forward.

HUNDREDS of obituaries and articles have been written about Lee Kuan Yew, who was laid to rest last weekend.

The articles were overwhelmingly in tribute of the vision, leadership qualities and achievements of Singapore’s founding father, who left his imprint on so many aspects of the island state’s system and way of life.

The tributes were mixed with criticisms of the political authoritarianism that was mixed with the spectacular economic growth.

There will be many PhDs written, which would make judgments on his side of the story and that of the critics. As for Lee’s own assessment, he summed it up thus: “What did I achieve? A successful Singapore. What did I give up? My life.”

On the TV news of LKY’s passing, I was impressed by an interview with a young man who runs an Internet views service. He said this was the time to pay tribute to Lee and his achievements, after which would come a period of collective reflection on what happened in the past five decades and how Singapore should go forward.

The times have changed. Singapore too is changing and will doubtless change even more. One of LKY’s major achievements was to be a pioneer of combining the roles of the state and the market in a way that succeeded in generating and sustaining high economic growth, and with widespread social benefits. He did it in a way that was suitable, or that was adapted, to the situation of a nation with a small population, no natural resources and no significant market.

He opted for the model of being a “global city”, that used the world as a source of capital, technology and markets, with foreign companies providing the engine, the world’s population providing the market, and Singapore providing its geographical location and skills.

Singapore also diversified from trade to oil refinery and industry and to being also a global financial centre. It is the combining of state and market that made it part of the East Asian models of development.

This strategy is based on having the state play the leading role not only in setting the overall framework for development but also sometimes playing a direct role in it.

By also involving the private sector in an important role, this model is different from the old state socialism, and by being based on the manifold roles of the state; it is also different from laissez faire free market capitalism. While most manufacturing companies are private and foreign-owned, the state in Singapore has played important roles in selected industries, in banking, in transportation and a range of other services.

Public housing was based on a combination of the state being the developer, construction being undertaken by private contractors, and the ordinary people being the owners by paying the mortgage through their salaries, the whole enterprise organised by the Housing Development Board and the Central Provident Fund.

The state’s overwhelming role in the social sector was based partly on subsidies but also significantly on self-financing by individuals, through the CPF scheme that includes withdrawals for housing and medical needs.

The Economist magazine in 2012 credited Singapore for starting what it called “the new kind of state capitalism” which it said had become the fashion in emerging markets and had come to be a major challenge to Western liberal capitalism.

In fact, there are important variations of this so-called “state capitalism”.Singapore relied on foreign companies to lead its industrial revolution (while the state focused on providing services). Japan and South Korea built their own domestic industries, with eventually world-beating private companies that were egged on by a lot of state assistance and nurturing.

In Malaysia, we have our own model, with the state taking over ownership of the once foreign-owned plantations and tin mines, through state-owned commercially run companies. It has its own national oil company and a production and benefit-sharing arrangement with the global oil multinationals and foreign companies predominant in several industrial sectors; while the state also has its own enterprises in banking, real estate development, telecommunications, utilities, agriculture and manufacturing, usually in competition with local and foreign private firms. The Malaysian model is a hybrid of state and private enterprises, often having both co-existing and competing in commercial activities.

China is said to have been inspired by the Singapore model. After Deng Xiao Ping’s visit to Singapore in 1978, he began the change in the old China model, which through many metamorphoses is now an evolving system of its own – a confusing and complex mixture of state and private enterprises, but always with the leading role of the state.

It has become its own unique hybrid model, combining the Singapore model of attracting foreign investors with the Japan-Korea model of establishing domestic enterprises and industries which dominate the local market and then increasingly penetrate the world market in trade and investment.

The Western countries which now espouse “free market economics” grew on the basis of “state capitalism” in their formative years. Indeed, often a much cruder form of it. Example: the East India Company owning economic sectors in many Asian colonies, supported by military colonial rule and massive economic subsidies.

Having helped their companies to grow into giants, it appears they now want to forbid others from taking policy measures to do so.Even now, the Western countries give massive financial and other forms of support to their agriculture sector. Free market economics is rejected by their states in sectors where they are unable to freely compete.

The East Asian models are now being challenged by Western attempts to de-legitimise the economic role of the state, the latest being free trade agreements such as the Trans Pacific Partnership Agreement, in which the state’s policy space to set the rules in investment policies, government procurement and key services such as finance and telecommunications is being narrowed.

The TPPA also has a section not present in previous FTAs, which seeks to discipline how governments treat their state-owned enterprises (SOEs). It forbids the state from giving any advantages to these enterprises, and the SOEs are not allowed to give an advantage to locals when they buy or sell services and products.

The concept that the “free economy” is best and the state has no role except to enable it has been promoted in developed countries for export to developing countries as the recipe for development. But they did not practise it when they were developing and still do not practise it in areas where they cannot compete.

Martin Khor is Executive Director of the South Centre, a research centre of 51 developing countries, based in Geneva. You can e-mail him at The views expressed here are entirely his own.

1MDB: A Case of Bad Governance, Muzzled Mainstream Media and Over-Concentration of Power

March 15, 2015

1MDB: A Case of Bad Governance, Muzzled Mainstream Media and Over-Concentration of Power

By Anisah

Brown of Sarawak Report

Over-concentration of power in Malaysia, weak public institutions, the muzzled mainstream media and lack of transparency had allowed businessman Low Taek Jho to allegedly siphon billions of ringgit from 1Malaysia Development Berhad (1MDB), Clare Rewcastle Brown said today.

The editor of whistleblower site, Sarawak Report, told a forum today that all these factors had prevented anyone from revealing more info on Jho Low, as he is better known, and his 1MDB dealings earlier on, despite the fact that he was just a “30-something businessman”.

“In a more open, strong, check-and-balance set up, he would have been flushed out, sorted and put in his place a long time previously,” said Rewcastle Brown, as she addressed the 1,000-plus audience at the Crystal Crown Hotel, in Petaling Jaya today, via an online video conference on Skype.

But in Malaysia, power was too concentrated, she said, pointing to the fact that Najib controlled two of the most important portfolios in the government.

“The checks and balances are eroded to the extent that the prime minister is the finance minister.I mean, why do you think there are two positions? Why is it a good idea that the same person should occupy both?” said Rewcastle Brown at the forum titled “1MDB: The Ultimate LOW Down”.

She added that there was also a lack of robustness in Malaysia’s institutions, despite the huge pool of talent and manpower the country has.

Brown and MahathirTun Dr. Mahathir and Ms. Brown

“The other thing that struck me is the lack of transparency. Politicians like Tony Pua, Rafizi Ramli and UMNO’s Tun Dr Mahathir Mohamad have asked valid questions and those answers should be available in public paperwork.”

Instead, she said, the questions remained unanswered and anyone who digs deeper were treated as traitors.

Referring to the mainstream media in Malaysia, she said that the “muzzled media” was overly obedient and Malaysians could only rely on blogs and online news portals to objectively discuss politicians’ actions, added Rewcastle Brown.

“There seems to be an attitude that a strong government is a good thing, and that’s why you have over-concentration of power and weak institutions. But I think it’s a recipe for disaster. And that’s what 1MDB is, a very big disaster for Malaysia,” said Rewcastle Brown.

She said it would take just a “half-decent investigation” by authorities to discover 1MDB’s financial irregularities and Low’s role in it, adding that she had her eye on the company since 2010.

“I picked up the story by asking a lot of questions and I obtained a lot of sources that allowed me to shed more light on what had happened,” she said.

Rewcastle Brown’s Sarawak Report released a series of hard-hitting exposés in recent weeks on 1MDB, including its 2009 joint venture with PetroSaudi International and its alleged links to Low.

Petro Saudi and 1MDB

Sarawak Report claimed that Low had used PetroSaudi as a front to siphon off US$700 million from 1MDB.It also alleged that Low had engineered the joint-venture between both companies, which resulted in 1MDB repaying a loan to PetroSaudi. But the funds allegedly went to a company controlled by Low, called Good Star Limited.

Low, PetroSaudi and 1MDB have since publically denied they had committed any wrongdoing, while the Cabinet on March 4 cleared 1MDB, saying the allegations only concerned external parties and not the government’s strategic investment vehicle.

However, after much pressure, Prime Minister Datuk Seri Najib Razak said that the Auditor-General will be directed to conduct an independent audit of 1MDB’s accounts. The report will then be passed to the parliamentary Public Accounts Committee, the police and the Malaysian Anti-Corruption Commission for any further action.

Najib has vowed action against any wrongdoing if found.


Indonesia–The Emerging Tiger of ASEAN

March 10, 2015

Indonesia–The Emerging Tiger of ASEAN with some challenges ahead

by Ajeya Bandyopadhyay, Kolkata, India | Opinion–

Indonesia's Open Government Partnership

Indonesia has experienced impressive growth in recent years. On the basis of purchasing-power parity (PPP), the gross national income per head doubled to US$4,730 during the decade to 2012.

The proportion of the population living in poverty fell by almost half, from 24 percent in 1999 to 12 percent in 2012 (World Bank). The booming young population joining the workforce created huge demand for real estate and brought foreign investment in construction and consumer goods.

Yet Indonesia’s growth has been quite uneven and perhaps unsustainable in the long run. Real consumption grew by about 4 percent a year on an average in 2003-2010. More alarmingly, for the poorest 40 percent of households it grew by only 1.3 percent.

In contrast the consumption by the richest 20 percent grew by around 5.9 percent. In other words the income disparity between rich and the poor is rising rapidly. Indonesia’s Gini Coefficient, a measure of income inequality, jumped from 0.29 in 2000 to 0.38 in 2011. High income inequality in the long run, hurts higher growth potential and disrupts social cohesion.

Growth momentum in the Indonesian economy has moderated somewhat over the past several months due to a weaker performance by the export sector, together with the impact of tighter monetary policy as the central bank has hiked interest rates to control inflationary pressures. This has resulted in GDP growth rate lowering from a 6 percent a year ago to around 5 percent year-on-year (year on year) till the end of 2014.

Although Indonesia made considerable progress in macroeconomic stabilization under former president Susilo Bambang Yudhoyono, a key challenge for the present administration will be to implement crucial microeconomic reforms.  In other words, the crucial symptoms of a country falling into the so-called ‘middle income trap’ are quite apparent in all corners of the economy.

Over 3 million migrants from the countryside arrive each year in Jakarta and other cities. Many of them take recourse of jobs in low-end services, hawking food by the roadside or selling things from handcarts. They are part of Indonesia’s vibrant informal economy, which accounts for nearly 70 percent of the country’s GDP.

The “local content” restriction is acting as a deterrent for many manufacturers to open factories in Indonesia.

A large workforce engaged in the informal sectors rarely earns the minimum wage or gets access to government benefits.

The World Bank estimates that labor productivity in Indonesia’s low-end services is about double that of agriculture but it is still one-fifth of that in manufacturing. In nutshell, it means that poverty will fall much faster if agricultural laborers shift to manufacturing instead of low-end services. However, the manufacturing sector in Indonesia still remains highly uncompetitive due to decrepit infrastructure, rigid labor laws and the government’s protectionist policies.

Even though the share of Indonesia’s labor force in agriculture has been in decline for decades, manufacturing share has not changed really much at all from the 13 percent in 2012. Local manufacturing remains mostly confined to palm oil and a few other primary commodities.

To a large extent, the “local content” restriction is acting as a deterrent for many manufacturers, especially in the consumer goods category, to open factories in Indonesia. In contrast services now employ about 44 percent of the labor force, up from 37 percent a decade ago.

Jokowi WidodoAlthough it is too early to predict, it can be stated with a reasonable degree of certitude that Indonesia is likely to miss the bus in manufacturing if infrastructure and human skills continue to remain the biggest challenges. A very high level of energy subsidies (on fossil fuel and electricity), around Rp 300 trillion in 2013 equivalent to 3 percent of GDP, also pose a significant burden on the taxpayers.

Already under implementation, a phased and sequenced approach to energy subsidy reform, while protecting the most vulnerable consumers, will encourage energy efficiency, shift consumer behavior and free up resources for critical social investment.

Widening access to affordable housing, clean water, sanitation, education and healthcare might slowly start to trickle down the benefits of rapid economic growth to the less fortunate and create adequate purchasing power to sustain the next generation of industrialization.

But the defining question remains if the current level of investment (as a percentage of GDP) is adequate to support the next level of strong growth. Historical precedents reveal that sustained higher levels of investment are crucial, along with the improved efficiency of investment. China is a golden case in point with investment to GDP ratio being 46 percent in 2012.

Fortunately, Indonesia, among other middle income countries of East Asia (excluding China) is maintaining a nearly 33 percent investment rate which is above the 25 percent threshold prescribed by the Growth Commission as the necessary condition for robust and high growth.


Apart from creating world-class infrastructure — roads, airports, power plant, telecom and information super-highways, a significant proportion of investment and budgetary support should also be channelized into R&D, innovation and enrichment of human capital through high quality technical education and modern skill building.

Reforming the investment climate is essential; so are the conditions for innovation, to attract leading companies and a world-class talent pool. The present government should play a decisive role in determining Indonesia’s future economic policies: whether to pursue a strategy of globalization by encouraging greater international integration or adopt a more nationalist, protectionist approach. Each approach has its own pros and cons.

But what is apparent is that, the government needs to undertake a bunch of crucial policy and institutional reforms bundled with critical investment in hard and soft infrastructure.

All these should be accomplished with a sense of utmost urgency before it gets too late for the country to get out of the middle-income trap and graduates into a high income, industrialized nation providing a better quality of life to its citizens.
The writer is presently a senior executive of Ernst & Young (India), advising government, multilateral and bilateral clients in the area of public policy, economic growth, energy policy and governance. He worked quite extensively in the South and Southeast Asian region, including Indonesia. This is a personal view.