Needs vs. Want (需要与想要)

Needs vs. Want Part 1: High debt and low public efficiency

华商与经济转型系列104: 需要与想要（上）债务膨胀 政府效率偏低

夏伟文 & 陈薛卉 (16 Dec 2013)

“When we gained our independence, we ranked among the poorest countries in the world. Now, we are classified as a high human development index nation. Our nominal income per capita is RM20,900 – a 26 fold increase from the time of Merdeka” said former Prime Minister Abdullah Badawi in December 2007.

Despite the continuous achievement since then, rapid development of Singapore always cast a shadow upon Malaysia. Question remains on why Malaysia still so much behind even though we are endowed with much more resources than Singapore. Perhaps, the answer is Malaysia’s economic transformations were (in the past) and are still currently more focused on “want” rather than “needs”.

It is believed that Warrant Buffet, the world most successful investor has once said: “Buying too many things we want will one day end up having to sell things we needs.” In this context of needs versus want, economic transformation that focuses on want and not needs is like trying to grow branches and leaves without strengthening the roots. The tree (economy) will not be healthy.

In our eagerness to “transform” our economy, fundamental needs should to be addressed first. We should be transforming to fulfill our “needs” first. “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.

Historical Lessons

In the past, we switch from mining to rubber and palm oil plantation. That change was a need because tin mining was fast exhausting at that time. After that, we shift to light industry, mostly for import-substituting purposes. As both our populations as well as the world industrialization were growing rapidly, this change was needed to provide sufficient employment and boost value added to the economy. However, when we ventured into heavy industrialization, we made some wrong decision in needs versus want situation. Heavy industrialization is a need but some selected projects, especially national car project were merely “want”. That project was based on estimates of annual car sales rising 8% from 110,000 in 1982. Instead, total sales dropped to only about 30,000 in 1987. In other projects, cement production capacity doubled the domestic consumption in the mid-1980s. Perwajar Steel’s RM1.2 billion investment on prototype found not viable but only could get back RM46 million compensations.

Mahathir Mohamad has been aggressively propelling Malaysian economic growth in his premiership era. The country does need that aggressive growth initially but we do need to slow down for some “economic maintenance” too. Thus, several mega projects like Sepang F1 circuit and KL Tower maybe just “want”.  One may also wonder whether our costly astronaut program is a “want” or “needs”. How about building the Menara Warisan? Perhaps, the most amazing “want” may potentially go to building a bridge to Sumatera!

Luckily, Mahathir’s successor, Abdullah Badawi understood some crucial economic need and thus, initiated serious effort to improve public sector efficiency as well as combat corruption for sustainable growth.

What do we need now?

Taking economy as human, “needs”, in a less stringent concept, can be redefined as something necessary for the economy to be at least sustainable or preferably, to improve. In Malaysian economy context, five major needs urgently require our attention and action. They are the needs to (i) reduce debt, (ii) further improve public sector efficiency (iii) stop brain drain, (iv) stop corruption and (v) create a super industry.

Reduce debt

A healthy economy should be best sustained by continuous increase in labor productivity and improve in technology. Next best is through inflow of foreign direct investment. Worst but very common method is through debt. Latest Economic Report expected federal government’s debt to increase to RM541.3 billion or 54.8% of Gross Domestic Product (GDP) for year 2013. This is alarming as the percentage is almost touching legalized debt ceiling of 55% of GDP. Reaching the limit may cause government shutdown like the United States. Thus, debt problem in both public sector as well as private sector urgently need our attention and effort.

Nonetheless, level of debt cannot be judged per se. Both quantitative comparison and qualitative aspect needed. Based on Figure 1, Malaysian central government’s debt has been raising gradually above the 50% of GDP. For year 2011, it is at comparable level to some developed and developing countries like India (48.5%), Spain (55.2%), Brazil (52.8%) and Germany (55.6%). Malaysian central government’s debt is even lower than the United States (81.8%), Portugal (92.5%), United Kingdom (101.2%), Greece (106.5%), Singapore (110.2%) and Italy (110.9%). In addition, Malaysia’s sovereign credit by Standard & Poor is higher than many Asian and European nations (see Table 1).

The quality of the debt is important. For example, Singapore’s debt is more than its GDP but still get the best AAA rating. Its government through their official website claimed that Singapore’s debt is not used to fund its (usually balanced or surplus) Budget. Their borrowing is all invested with return that is more than debt service amount.

This has prompt Singapore government proudly clarifies that they do not borrowed to spend. In contrast, Malaysian government borrowed to spend! We did not have investment assets backing every Ringgit borrowed (like Singapore). Hence, can Malaysia sovereign rating hold? Flitch Rating has already issued a possible downgrade warning. Servicing debt and its interest will also burden current generation and deplete resources for future development.

Figure 1: Central Government Debt

(Source: World Bank database. Data is not available or incomplete for various other ASEAN countries such as Philippines, Brunei, Vietnam, Cambodia and Myanmar)

Table 1: Standard & Poor’s Sovereign Rating (Local Currency)

Country	Rating	Country	Rating
Malaysia	A	Italy	BBB
Indonesia	BB+	Spain	BBB-
Thailand	A-	Germany	AAA
Singapore	AAA	Portugal	BB
India	BBB-	United Kingdom	AAA
China	AA-	Greece	B-
Philippines	BBB-	Brazil	A-
Vietnam	BB-	United States	AA+

(As viewed on 2^nd November 2013)

Further Improve Public Sector

Malaysia public sector has seen amazing improvement in Abdullah Badawi’s premiership era. In current Najib’s era, this aspect is an important element in Economic Transformation Plan (ETP) too. However, there is still huge room for further improvement. To improve, we need to both reduce public sector and increase its productivity.

In addition, this need is closely linked to the public sector’s debt problem in Malaysia. Large public sector causes high operating expenditure. 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. Inefficiency in public sector, imprudent public finance and corruption has magnified the negative effect of a large public sector to economic growth and sustainability.

Conclusion

Human greed and ego cause us to want a lot of things but scarcity limit our ability to get everything we want. Therefore, choices need to be made. Then, it is up to us to suppress our greed and ego to choose needs over want. Malaysia’s transformation should now give priority to achieve economics needs to ensure we become a holistic and sustainable developed nation beyond 2020.

Needs vs. Want Part 2: Corruption virus can defeat economy

华商与经济转型系列105：需要与想要（下）腐败病毒击垮经济

夏伟文 & 陈薛卉 (23 Dec 2013)

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). Debt is like drug. We may need it to ease some pain (example, economic downturn) or as booster (fiscal stimulus). Over-consumption of drug (debt) will lead to serious negative side effect in the future. Talent or “brain” is akin to vitamin needed to keep the whole body (economic) system growing healthily. Thus, what will happen to our growth if these vitamins (brains) are regularly drained off from our body? Corruption is like virus. This virus may not kill us immediately but sooner or later, the body (economy) will collapse by it. Thus, it needs to be eliminated, or at least to be contained. We also need our internal organs (industries) to be as strong as possible.

Thus, we need to trim our over-size and inefficient public sector, reduce or eliminate debt and corruption, stop brain drain as well as create at least a super strong industry.

Stop Brain Drain

The government always aims to have brain gain as in Singapore and United States. That is good. However, it will be much practical to first focus on the need to stop brain drain, which has been a norm since decades ago. Nobel Prize winner, Paul Krugman has famously and correctly predicted the fall of Asian Miracle through the stagnant or decline of total factor productivity (TFP) in many South East Asian countries. Brain drain is the cause of this decline.

Besides monetary factors, our previous article (on 28^th January 2013) highlighted five other major factors: (i) perception of “Moon overseas is brighter and better”, (ii) perception of “social injustice”, (iii) fear of unemployment or underemployment, (iv) “3C” factor (cost of living, crime and corruption), and (v) talent does not fulfill Malaysia’s industrial needs. Currently, Economic Transformation Program (ETP) and TalentCorp have plans to solve this problem. However, looking at those factors, solving it will not be easy. Yet, we need brain drain to stop now if we are to push towards to become developed nation by 2020.

These few options can be considered. Firstly, Malaysia needs to reduce the wage gap, especially between us and Singapore. It can be done by shifting from low value-added to high value-added industries as well as having a strong Ringgit policy. Secondly, the country needs to create a sense of proud to work in Malaysia. Having our own “super industries” whose brands are recognized globally will help. Thirdly, perhaps the hardest, is to create social justice and economic fairness to all as this is one of the major factors that cause brain drain. Besides all those, we also need to restructure our education system to produce more and better Malaysian talents.

Stop corruption

There is a popular quote saying “corruption is like a snowball, once it is set rolling, it will increase.” After become huge, this snowball will then destroy everything in its path. Corruption is a major factor that caused the fall of empire while issues of corruption encompass mismanagement of public funds.

Stopping corruption has always been a dominant issue in Malaysia. During Abdullah Badawi era as Prime Minister, he has been portrayed as the Chinese legendary graft-buster Justice Pao. Unfortunately, his no-nonsense effort to anti-corruption has been knocked out by shocking Auditor General’s Report 2006. Since then, yearly Auditor General’s Report has continuously catching public attention on the perpetuity of mismanagement of public funds. Anti-corruption agency was revamped but varieties of corruption-related cases remain unsolved. Among high profile examples are Lingam’s video, PKFZ and National Feedlot Corporation’s “cow” scandal.

Based on Transparency International’s Corruption Perception Index, Malaysia ranked moderately in 2012. Out of the 176 countries being ranked, Malaysia is at number 54^th with a score of 49 out of 100 (equivalent to 4.9/10 in previous scoring system, see Table 3). Despite a moderate ranking, it is still not acceptable that Malaysia ranked below less developed nations like Botswana (30^th), Bhutan (33^rd) and Rwanda (50^th) while achieved only one score point more than Namibia (58^th).

Table 3: Corruption Perception Index 2012

Country	Ranking (score)	Country	Ranking (score)
Malaysia	54 (49)	Italy	72(42)
Indonesia	118 (32)	Spain	30 (65)
Thailand	88 (77)	Germany	13 (79)
Singapore	5 (87)	Portugal	33 (63)
India	94 (36)	United Kingdom	17 (74)
China	80 (39)	Greece	94 (36)
Philippines	105 (34)	Brazil	69 (43)
Vietnam	123 (31)	United States	19 (73)

(Source: Transparency International)

Over the years from 2001 to 2012, Malaysia’s best ever ranking is 33^rd recorded in 2002 (see Table 4). Then, it gradually worsens to rank at 60^th (in year 2011) with fewest score ever at 4.3 points. These is an initial alarm that corruption in Malaysia has (i) lingers around 5.0 scores with downwards trend, and (ii) comparative ranking deteriorating from “30^th plus” (2001 – 2005) to “40^th plus” (2006 – 2008) and then to “50 plus” (2009 – 2012).

Table 4: Malaysia’s Corruption Perception Index (various years)

Year	Score	Rank	Total countries
2001	5.0	36	91
2002	4.9	33	102
2003	5.2	37	133
2004	5.0	39	146
2005	5.1	39	160
2006	5.0	44	163
2007	5.1	43	179
2008	5.1	47	180
2009	4.5	56	180
2010	4.4	56	178
2011	4.3	60	182
2012	4.9	54	176

(Source: Transparency International; Score “10” is best)

Corruption needed to be stopped as early as possible. Malaysia still has ample opportunity to do so for the sake of future economic development.

Create Super Industry/Brand

Products with no outstanding advantage or superiority is easy to be replaced thus, has many substitutes. In economic theory, these products are elastic and usually less value-added. Most if not all of products produced by developing countries including Malaysia are like that.

Contrast to developed countries, they have their own brands that are globally recognized and hardly replaceable. Thus, their products are inelastic and higher value-added. Table 5 shows world most valuable brands in 2013 by Forbes. None of them came from Malaysia. Brand value of Apple is about a third of Malaysia’s GDP in 2012. Despite lower brand value, Samsung recorded US$ 181 billion brand revenue, which is more than half of Malaysia’s GDP. If one or few of these top brands belong to Malaysia, what positive effect will they bring to our social economy? Thus, we need to create our own super industry or super brand of international standard.

Table 5: World Most Valuable Brands in 2013

Rank	Forbes	Brand value* (US$ bil)	Brand revenue* (US$ bil)
1	Apple	104.3	156.5
2	Microsoft	56.7	77.8
3	Coca-cola	54.9	23.5
4	IBM	50.7	104.5
5	Google	47.3	43.5
6	McDonald’s	39.4	88.3
7	General Electric	34.2	132.1
8	Intel	30.9	53.3
9	Samsung	29.5	181.0
10	Louis Vuitton	28.4	9.4

(* as at November 2013)

Conclusion

George Bernard Shaw, an Irish playwright, socialist, and a co-founder of the London School of Economics once said: “Doing what needs to be done may not make you happy, but it will make you great.” Thus, our economic transformation should be need-based prioritized regardless of how painful or difficult to achieve it. As George saying, we may not be happy of what we need to do now, but will be great after our need-based transformation success!

[Chinese version published at Nanyang Press, 16th and 23rd December 2013. Available online at http://www.nanyang.com/node/5586292 (Part 1) and http://www.nanyang.com/node/587947 (Part 2). This English version may be slightly different from the Chinese online/printed newspaper version]