Benefit of tapping Middle East FDI

招揽中东资金好处多

Ever since Malaysia embark on its industrialization vision, attention has been devoted to attract huge amount of FDI to Malaysia and hoping that the FDI inflow could bring positive effect to GDP growth. It is through FDI that helped Malaysia transform more rapidly from an agricultural to industrious country. FDI has generally increased throughout the years in Malaysia, with some minor hiccups along the way, such as during the Asian Financial Crisis years (1997-98) and the “dotcom” burst (2000). In year 2004, FDI also faced significant decline due to competitions form lower cost manufacturing countries. Delay in application processing, slow decision making by local authorities and absentness of a one-stop centre for businessman sums up to the time-consuming bureaucracy in Malaysia. In year 2005, Malaysia’s FDI has shrunk to a miserable state to US$3.97 billion (RM14.69 billion) from US$4.62 billion (RM17.09 billion) in 2004. Malaysia used to rank fourth in the world for FDI in 1990, but was ranked 62 in year 2005. Malaysia’s sinking FDI may be attributed to erosion of competitiveness over the last eight to ten years due to raft of factors, including shortage of human capital, upward pressure on wages and increased competition from China and India.

There are many FDI determinants which include monetary based incentive policy but often ignore international relations. Two common assumptions are that “higher monetary incentives given, easier to attract FDI” and “higher FDI inflow could lead to higher economic growth”. However, the former is too shallow as “incentive” not necessary monetary-based like tax exemption or availability of cheap labour but could be relationship-based that seek long term mutual benefit rather than instant one-sided gain.

Economic Transformation Plan (ETP), the five economic corridors (Iskandar, NCER, ECER, SDC and SCORE) as well as Greater Kuala Lumpur Plan need a lot of FDI inflow. Thus, the disappointing pattern of FDI in Malaysia has drawn attentions of the government, researchers and policy makers to look into this problem and determines the key factors that can stimulate the FDI in Malaysia. Regrettably, existing research regarding the effect of international relations on FDI are still inadequate and not thoroughly, especially on conceptual studies from various possible perspectives.

Hence, Malaysia may wish to explore an “Ummah network” for Malaysia-West Asia partnership. Establishment of a relationship-based social capital networking between Malaysia and West Asia may be beneficial to all parties.

Exploring Bourdieu’s Social Capital Philosophy

When we mention the word “capital”, economist will tell us it is “machine and investment”. Human resource people will add “human” into the list. French philosopher, Pierre Bourdieu had a broader view, conceptualizing “capital” in four forms – “economic capital”, “cultural capital”, “social capital” and “symbolic capital”.

His social capital concept mainly refers to connections within and between social networks as well as connections among individuals, which coincidently similar to the conceptual of “relationship networking” or “guanxi” of the Oriental. The important role of guanxi in Chinese business and its related network known as “Bamboo network” has been widely mentioned due to increasing economic importance of China.

However, Western may see guanxi or relationship-based business deal as “cronyism” or has high tendency towards corruption. Yes, this may be true but a pure and sincere guanxi-based economy is based solely on trust upon each other, not unethical and corrupted practice. From economic reasoning, “trust” or “acquaintance” is associated with “low business risk” because the dealing parties have adequate information about each other. Low risk is a non-monetary incentive for business deal or foreign investment decision. Therefore, Malaysia’s international relations with Islamic countries of West Asia, an ummah networking could bring potentially huge win-win benefit as of the guanxi networking in the Chinese community.

Malaysia’s International Relations and FDI

In colonial era, foreign direct investment (FDI) to Malaysia mostly originated from United Kingdom (U.K). British colonial encouraged FDI in primary sector, predominantly in plantation and mining sector. British investments help developed (but also depleted) Malaysian tin mining sector and rubber planting. During early post-independent period, relationship with British through Commonwealth continued help attracting investment from United Kingdom. Nevertheless, the beginning of Mahathir’s era caused a change in Malaysia’s international relations policy from British friendly relationship to “buy British last”. The then Prime Minister launched “Look East Policy” in 1982, aiming to foster better international relations with Japan, Taiwan and South Korea. This policy was successful in term of increasing the amount of foreign investment from Japan and Taiwan, but not much from South Korea. As for Germany, the establishment of German-Malaysia Institute in 1992 might have started to foster stronger relationship between the two countries. However, the two countries relationship greatly improved in the early 2000s that also witnessed the first ever visit of the Chancellor of Germany, Gerhard Schroder to Malaysia from 11^th to 13^th March 2002 and the Malaysian-German Business Forum held in Munich on 18^th March 2002. Accordingly, German’s FDI to Malaysia increased tremendously in 2001 and 2002 but fluctuate greatly in subsequent years. German companies have further expanded their activities in Malaysia, investing EUR 806.8 million in 29 projects in 2007.

Malaysia-West Asia International Relations

Besides building new relationships with Western and Asia Pacific countries, Malaysia also had long history of relationships with West Asian countries. In April 1965, in order to further raise the profile of Malaysia, the King had paid state visits to several West Asian countries, which include United Arab Republic (UAR) and Saudi Arabia. The bond between Malaysia and Saudi Arabia were then further improved when both countries became members of the Organisation of The Islamic Conference (OIC) in 1969. During the period 2003-2007, Turkey, Saudi Arabia, and Malaysia are three of the largest Muslim majority economies, which have shown significantly larger growth in trade with OIC member countries than with the rest of the world.

During June 2003, the visit of Turkish Prime Minister, Recep Tayyip Erdogan to Malaysia further enhances the existing relationship between both countries. Not only was the bilateral relations between both countries improved and became more active, Turkey also aimed to boost up the bilateral trade between both countries to U.S. $1 billion a year. In 2007, Turkey was ranked 6^th in the top OIC trading partners of Malaysia.

Tapping the Ummah Network

“Ummah” is an Arabic word meaning “community”, “collective nation of states”, “community of the Believers” or “brotherhood of Islam”. The phrase Ummah Wahida in the Qur'an (the "One Community") refers to the entire Islamic world unified (definition through Wikipedia).

The success of Bamboo Network could be modified into beneficial Ummah network or informal partnership among countries in the Malays world, especially Muslim communities of Malaysia, Indonesia, Brunei and East Timor with its brotherhoods of Western Asia that comprises the Arab states in the Middle East, Turkey, and some Islamic Northern African countries like Egypt, Sudan, Algeria and Morocco. Nevertheless, due to economic disparity, potential FDI most possibly may come from richer countries like UAE and Saudi Arabia while countries that relatively less developed than Malaysia could be friendly investment destination to our investors.

There are certain mutual benefits in relying FDI from Ummah network rather than purely using monetary-based incentives as attraction. Firstly, social network is truly borderless in which they neither constraint by nation state boundaries nor binding agreement. It is also a misconception that informal network is constraint by certain ideology or ethnicity. For example, despite having a “Chinese businessman club” identity, Bamboo network is Chinese-centric yet not limited to Chinese diasporas only but also business associates of other races. Western investors include giant Microsoft to smaller trading business divert great effort to join the network and build strong guanxi with the Chinese, especially in China and Taiwan. Indeed, this “Chinese businessman club” does not intrinsically exist, thus so does the limitation of its membership. Nevertheless, since it is rooted in Chinese business communities since hundreds or even thousands years ago, it is not surprising that if any non-Chinese wishes to join the club, certain advantages have to be given to its “original” Chinese members as the “host” of this network.

Here, we see a big different to the capitalism system where the giant foreign investors usually emerge as winner over the host countries. This phenomenon has never been solved through WTO, which itself is commonly being blame for its biasness towards big capitalist nations such as the United States. In reality, Malaysia and Western Asian countries, be it individually or collectively, did not have the economic power to negotiate terms and conditions with global giant investors.

Conclusion

International relation is believed to a hidden resource, which could have great impact to economic but unfortunately, often overlooked. International relation has usually been treated as an endogenous variable in various economic modelling, in which its effect would not explicitly being captured by the model nor utilized in real world. Thus, this conceptual study on international relation between Malaysia and West Asia with possibility of establishing a virtual but powerful Ummah network could bring mutual benefit to all participating countries. In addition, Malaysia is a multi-racial society comprises of many ethnic groups, mainly Malay (predominantly, Malay are also Muslim), Chinese and Indian. Malaysia’s historical background as former colonial of British and its contemporary international association with Commonwealth, regional blocks like ASEAN and various other international bodies provide ample “hidden resources” in the form of international relation. Hence, this adds to the significant of this study where Malaysia could establish not only Ummah network, but various social capital-based partnerships for sustainable economic prosperity.

[Chinese version published at Nanyang Press, 26th May 2014. Available online at http://www.nanyang.com/node/6023743. This English version may be slightly different from the Chinese online/printed newspaper version]

Do not do mindless consumption for vanity

别为虚荣盲目消费

Economics always assume that you can do only two things with your income (money), namely consume (spend) it or save it. An interesting question is how about “burn” it? Some may consider burning money as “spending” but it does not create the multiplier effect as when money are actually spent.

The more important matter is which one is more preferable? Spend or save? Parents, particularly in Asian countries, will tend to advise their children to save as much money as possible for rainy days. Government may prefer us to spend to boost the economy. Through banking system, economist may assume saving equal investment. The money households save in the banks will be lend to companies for investment (consumption).

In a macro-institutional-economics perspective, an important aspect is how the government spends public fund. Is money being spend on essential economic “needs” or just unnecessary “want”? “Needs” is something necessary for human to life a healthy life. In economic sense, “needs” is necessary elements or conditions for sustainable development. “Want” is some sort of emotional desire. Thus, it can be related to “economic ego”, which function may be merely for self-boosting.

Unfortunately, the temptation to spend on “want” is way too strong to resist for developing countries including Malaysia. To a paraphrase the famous Nike’s slogan, Malaysia’s government’s “just spend it” attitude on particular two aspects needs to be moderated. First aspect is unnecessary financial burden spending on large public sector. Second is appetite on building mega projects, perhaps for glory?

(i) Public sector costly responsibility

If we take economic analysis as human anatomy, public sector is like our blood vassals. It must not be too large or too small but must be efficient to enable blood (economic activities) to circulate to all over our body (whole economy/country). If public sector is getting too big, unnecessary spending is required to support it. Worst case is this sector grows until become “too-big-to-fail” and thus, becomes too costly to be downsized. Unfortunately, Malaysia’s public sector is too big, but still can be downsized to a more effective level with strong political will.

Based on Table 1, Malaysia’s federal government’s expenditure is relatively higher than all five selected Asian countries (Thailand, Singapore, Indonesia, Japan and South Korea). It is relatively lower than selected European countries (Germany, United Kingdom, Greece and Iceland), United States and Australia. Nonetheless, this could be due to high social welfare expenditure for senior citizen and unemployment benefit given by those Western countries but not Malaysia. Therefore, Malaysia’s federal government spending is not relatively overly high but there are two glaring aspects for improvement.

First is compensation to employees (public servants) is too high. World Bank defines this “compensations” as “all payments in cash (e.g. salary), as well as in kind (such as food and housing). Malaysia’s compensation to public sector employees is highest, comparable only to Singapore.

Table 1: Expenses and Cash Balance

Countries	Expense (% of GDP)		Compensation of employees (% of expense)		Cash surplus/deficit (% of GDP)
	2011/12	Average	2011/12	Average	2011/12	Years of deficit
Malaysia	21.65	18.83	29.45	27.85	(4.53)	14 out of 14
Thailand	20.98	18.10	37.15	36.55	(2.15)	4 out of 10
Indonesia	16.53	16.53	14.43	12.44	(1.67)	8 out of 8
Singapore	12.74	14.35	28.72	29.76	8.70	zero
Japan	19.39	17.36	6.32	7.24	(7.99)	8 out of 8
South Korea	18.90	17.90	10.12	10.91	1.69	zero
Germany	29.15	30.88	5.63	5.54	0.14	12 out of 14
United Kingdom	44.71	40.24	14.11	14.34	(5.80)	11 out of 14
United States	23.89	22.08	10.34	10.43	(7.52)	12 out of 12
Australia	26.35	25.57	10.52	10.40	(3.04)	5 out of 14
Greece	54.03	46.28	20.64	22.74	(9.40)	14 out of 14
Iceland	35.90	33.78	24.08	27.92	(3.41)	8 out of 14

Note: Average is from 1999 to 2012; number of years subjected to availability of data

Source: World Bank

However, in term of public sector’s efficiency, Singapore is well known as much better than Malaysia. Table 2 shows some analysis of Malaysia’s operating expenditure as well as brief comparison with Singapore.

Table 2: Malaysia’s Operating Expenditure Analysis

Malaysia (ratios)	2010	2011	2012
Total operating expenditure to GDP (%)	21.02	22.38	23.87
Federal government operating expenditure to total operating expenditure	79.00	80.40	80.76
State government operating expenditure to total operating expenditure	5.21	4.92	4.67
Local government operating expenditure to total operating expenditure	12.57	11.69	11.68
Statutory body operating expenditure to total operating expenditure	3.21	2.98	2.88
Singapore (ratios)	2010	2011	2012
Total operating expenditure to GDP (%)	10.37	10.48	10.07

(Source: Ministry of Finance Malaysia & Department of Statistic Singapore)

Malaysia’s total operating expenditure to Gross Domestic Product (GDP) is twice larger than Singapore. In addition, the Malaysia’s figure has been rising in the three years as shown in the table. Federal government expenditure takes up majority share of total operating expenditure, rising from 79% in 2010 to almost 81% in 2012.

Does those statistic implied that Malaysian public sector has becomes too big to fail? Government may face serious negative consequences from public servants if they try to downsize to force improvement of efficiency. The consequences may vary from protest to loss of votes in general election.

Secondly, the public administration also has various record of unnecessary and/or unaccountable spending. Various yearly Auditor General’s Reports highlighted various unnecessary (and/or unaccountable) spending that included projects delay, cost overrun, assets missing and over-priced purchases. Five general weakness that causes lots of unnecessary spending by public administrators being mentioned in Auditor General’s Report 2102 were “improper payment”, “work or supplies not according to specifications, low quality or inappropriate”, “unreasonable delays”, “wastage”, “weakness in management of products and assets”. These inappropriate spending is waste of public funds that can be used to develop the economy. Yet, why we want to keep on “just spend it” whenever is it regarding public sector?

(ii) Builds mega projects for glory?

Mega projects in Malaysia was cheers by Michelle Gyles-McDonnough, the United Nations System’s Operational Activities as “important and would indirectly enhance labour productivity within the domestic workforce”. Nonetheless, not all mega projects are necessary or important.

There is a story goes like this. Once upon a time, astronauts in space cannot use their pen to write because zero-gravity effect. Then, country A spend lots of money and time to research on solution and new pen that can write on zero-gravity. In contrast, Country B immediate solved it by a simple, cheap and fast solution – use pencil to write.

Applying the moral of the story, are we having no more under-utilized buildings to become Matrade exhibition center instead of building a new one? From cost-benefit perspective, some mega projects do not justify high amount of money spent on them. One may question whether Sepang International Circuit, Warisan Merdeka Tower and Angkasawan Program are needs (necessary) or want (for ego). How these projects can enhance our labour productivity or welfare? Given that Bukit Bintang area already well-known and there are so many other shopping attractions in Klang valley, is there also a need for Bukit Bintang City Centre?

On a smaller scale one may frequently see very good condition roads being “re-furnished” again and again. Will money be better spent to upgrade soil road in suburban areas? Will losses on government-linked-mega-companies better utilized on other development projects? Not all but there are few gardens in Putrajaya and around Malaysia need plenty of money to build and maintain. Do these gardens have many visitors consistently to justify the cost spent?

On the other hand, there are some mega-projects where money is well spent. High cost on five economics corridors (Iskandar Malaysia, NCER, ECER, SCORE and SDC) and MRT Project could be justifiable by huge benefit to the economy and society in future. Nonetheless, progresses of those corridors are to be seen. MRT is built to ease traffic congestion on the road. However, some MRT proposed stations are not near town, hence defeating its purpose to provide convenience transport.

Conclusion

Having million or billion of public fund sitting idle in the treasury is not a good practice for any level of government, be it federal, state or local council. Yet, over-spending too much until public debt accumulated is even worst. Since long time ago in ancient Western Zhou Dynasty, its government followed public finance management principle “to limit expenditure in accordance to income”. Thus, please don’t “just spend it”. Instead, spend public fund prudently and on economics “needs”, not “want”.

[Chinese version published at Nanyang Press, 6th October 2014. Available online at http://www.nanyang.com/node/654057. This English version may be slightly different from the Chinese online/printed newspaper version]