Creating efficient sustainable growth: Remodelling system need fair competition

(打造高效可持续增长基础重塑系统需公平竞争)
夏伟文 & 陈薛卉 (20 June 2016)

A barren land may produce few big trees but not a forest. Malaysia has a world badminton champion in Datuk Lee Chong Wei but didn’t have enough champion players to make a world champion team. One dominant reason for this is the “system”. Portugal and Argentina may have Ronaldo and Messi winning the world best player award for record of times but it is the German system that produce enough talents and good fundamental (include technical expertise and teamwork) to perform consistently at highest level and then, finally won the football World Cup.

Therefore, the foundation of high and sustainable economic growth should be good system in every aspect. In November/December 2014 article in this same column, we proposed a new analysis model as in Figure 1. As we can see, the “system” plays critical role as catalyst or platform to enable development for “human”, “science & technology” and “capital”. The “system” is akin to “soil, environment and root”. If it is good, it will grow strong branches in the form of “human”, “science and technology” and “capital”. Those branches will bear fruits of economic growth.

Figure 1: Four Economic Triangles

Unfortunately, some of main systems we are using now are ineffective, thus did not provide good platform for holistic and sustainable growth. Two aspects need foremost attention for remodelling. They are (i) the needs to induce fair domestic competition and (ii) reduce big government systems (will not be discussed here).

Fair competition within New Economic Policy framework

Officially, New Economic Policy (NEP) has ended in 1990 after a lifespan of 20 years. Subsequent policies are like “old wine in new bottle”, which make NEP like never ended. NEP has two main objectives which can be considered as “practical” rather than “racist”. It first objective aimed to eradicate poverty irrespective of races. The second objectives is to restructure Malaysian society to reduce identification of race from economic function with the purpose that Malays and other indigenous groups play full role in all aspect of economic function. This second objective is actually fair despite look like bias to Malay group. In general, the NEP (as well as any other affirmative policy in other countries) is actually based on Rawlsian welfare principle to maximize the welfare of the least well-off members, which in Malaysia case is the Malay group. With an extra push from privatization during Mahathir’s era, NEP successfully eradicated overall poverty and uplift Malay and indigenous group’s welfare, income and involvement in the economy. Thus, income distribution becomes fairer and the economic growth became healthier.

Taking a neutral and academic point of view, the problem of NEP (the Rawlsian-based system) is its longevity. Giving “unconditional” advantage with no expiry date to the least well off group will cause dependency. Dependency comes with (i) expectation that the advantage will be forever coming, and (ii) fear of losing everything if this advantage is gone. These will lead to slower improvement in productivity, cause misallocation of resources and give chances for political manipulation. The important thing here is NOT asking for completely removal of these advantages but to at least make it “conditional”, which is competition and synergy cooperation for both intra and inter groups.

A historical case of affirmative policy during the Germany re-unification in 1990 can be used as reference. During that time, Eastern Germany was ways behind West Germany. Robert J. Barro (Professor of Economics in Harvard University) in his book “Nothing is Sacred (2003: 95 - 101)” highlighted that Eastern Germany was given a lot of advantages. These advantages include a one-to-one currency conversion rate, taxing the West to aid the East development programs and wage-equalization effort. Like Malaysia, both are Rawlsian welfare system. As results, wage and salary payments per worker in eastern region (exclude Berlin) increased from 49% of the western region (include Berlin) in 1991 to 75% in 1995 and 77% in 2000.

However, productivity (measure in “gross domestic products per worker) grew much slower. In 1991, eastern region’s productivity is 31% of the western region. It only grew to 46% in 1995 and 48% in 1997/98. Meanwhile, between 1992 to early 2001, unemployment rate in the eastern Germany is about 6% to 8% higher than western region. In addition, Barro also criticized the Germany government’s transfer and subsidized policies (welfare system) that retarded migration from east to west. He believed more westerner working in the higher productivity environment of the west would be better.

These reflect that wages convergence can be forced through government policies but it cannot improve economic fundamental, which in this case are high productivity and low unemployment. It is like the government planting an adult tree in an unfertile land and hope the tree will grow healthily ever after.

Back to Malaysia, advantages in the name of welfare should not be overly-extended to the less productive people (regardless of race) and low value-added industries or economic sectors unconditionally as it may retard the country’s long term productivity growth. Others programs like Bantuan Rakyat 1Malaysia (BRIM) that did not help in increasing productivity or economic efficiency should be stopped. Education scholarship, research grant, entrepreneurship grant and others financial support should be given to the needed but by merit.

Figure 1: GDP per person employed Gap (Malaysia vs. Singapore) (%)

Note: Data sourced from World Bank. The number represents percentage of different (Singapore minus Malaysia) divided by Malaysia GDP per person employed.

There is no data on GDP per person employed (proxy to productivity) for both Malaysia and Singapore prior to year 1991. However, the trend after 1991 in Figure 1 implies that (i) Singapore’s productivity is way above Malaysia, and (ii) Malaysia’s productivity was very vulnerable (drop drastically) during crisis years like 1997/98 to 2000 and 2008 to 2010. Throughout those years, every worker in Singapore produces about 2.5 times to 3 times more output than workers in Malaysia.

Figure 2: GDP per capita Gap (Malaysia vs. Singapore) (%)

Note: Data sourced from World Bank. The number represents percentage of different (Singapore minus Malaysia) divided by Malaysia GDP per capita.

Figure 2 reveals equally embarrassing comparison. The different between Singapore’s GDP per capita goes up to 400% of Malaysia GDP per capita. In another words, average output per Singaporean is five times every Malaysian. Thus, what can we say about the long-term effectiveness of our affirmative policy and other development plans?

Solutions

Two simple solutions may be applicable. First is promotes fair competition in everything from government’s welfare support and procurement to providing business opportunity. Even with protective privilege to the Bumiputera group, creating competition within them may be very helpful in increasing efficiency and productivity. Same can be applied to protect domestic infant industries from foreign competition but at the same time promote domestic competition. United States, Japan and South Korea did practiced protectionism economy before their industries become strong. Yet, very fierce domestic competition existed to ensure rapid growth of strength. History has proven this solution. Malaysia protects domestic industries but lack of competition. Can our airline, automobile and telecommunication compete with foreign companies?

Second proposed solution looks weird but seems indirectly worked well in United States. It is to legalized abortion. Since 1991, homicide and violent crime in United States has fallen dramatically by 44% each. Rate for property crime has also reduced by about 50%. Research study by John Donohue (Stanford Law School) and Steven Levitt (University of Chicago) found that legalization of abortion in the 1970s. The logic is that “those children who were not born (abortion) would have been more likely to grow up in poverty and on welfare with a young and poorly educated single parent” (see Barro, 2003: 74 – 77). These unborn children would have been prime candidates to be criminals fifteen to twenty-five years later. Hence, their absent would contribute in drop of crime rate and perhaps also reduce government’s social welfare burden and improve overall productivity. There will be lots of debates on humanitarian ground versus practical needs.

Summary

Competition may be cruel. Only the fittest is to survive but this is the best system for civilization to grow and prosper. Even human genetic will automatically select the best gene to ensure our survival and growth. On the other hand, mercy is needed to correct the initial imbalances of strength. Helping hand (affirmative action) ensures the weak ones to grow strong one day and provide fair competition to the rest. Yet, beware that if we give unlimited mercy on the weak ones, we are also taking away their incentive and urge to improve.

[Chinese version published at 南洋商报经济周刊 Nanyang Press – Business News, page A8 on 18th January 2016. Available online at http://www.enanyang.my/news/20160620/打造高效可持续增长基础br-重塑系统需公平竞争. This English version may be slightly different from the Chinese online/printed newspaper version]

Received 270 billion GST, budget cut become concern

(收270亿却削减预算案消费税去向受关注 )
夏伟文 & 陈子莹 (23 May 2016)

Imagine there is a father who always gives allowance money to his son. Due to his son profuse spending, the son asked for more money from his father. Do you think it is right for the son to ask for more money? Yes, only if the allowance is too little for survival. What make no sense or cause anger is not the demand for extra allowance but the profuse spending.

Applying the story to Goods and Services Tax (GST) issue, the “father” is the citizen. The “son” is the government while the “allowance” is tax. Government has it logic to claim that current base of tax paying citizen is too small. In February 2014, Prime Minister Najib Razak announced that only one out of ten Malaysians pay their taxes. This portion is considered “too little for survival”, especially to rectify decades of budget deficit.

However, what anger the Malaysians is the “profuse spending” of the government. Rampant report of corruption (which is a leakage of fund) and inefficiency in public sector added to call for to stop the wastage first before implement more taxes. Malaysians also worry and sceptical on whether the extra revenue from GST will be wisely used or not.  

 Let’s continue with the father-son-allowance story. After the son get the extra allowance (GST) from the father, the son still not satisfied. Citing that scholarship (oil revenue) has decrease, the son announced reduce caring effort (budget cut) to the father. Will this be acceptable?

In between its implementation on 1^st April 2015 to 31^st December 2015, over RM27 billions of GST revenue was collected. Surprisingly, this extra revenue is seen as not enough to fight drastic drop of oil revenue due to global oil price slump. In January 2016 during the recalibration of Budget 2016, Prime Minister Najib Razak announced that Malaysia’s oil revenue fell closed to RM14 billion. Simple maths will give you a net RM13 billions from GST extra revenue minus loss of oil revenue. This make extra budget cut not acceptable and sceptical. Where are the revenues from GST?

Brief Recap

From a high of over USD 100 per barrel, crude oil dropped to a low of USD 26 per barrel before rebound to around USD 40 per barrel after Saudi Arabia and Russia co-operate for a supply restriction. Subsequently, government of oil exporting countries include Malaysia announced painful budget cut. Reason given is drastic drop of oil revenue.

In wake of high federal government debt and reduced revenue from Petronas oil loyalty/dividends, Malaysian government adjusted its fiscal policy. Good and Services Tax (GST) was introduced a year ago. Despite some havoc in its initial implementation, GST brought in higher than expected revenue to the government. It also successfully increase tax based (percentage of people paying tax) in Malaysia. Nonetheless, there are some drawbacks. Its implementation is messy and costly. GST burden the low and middle income consumer groups. People still doubt that government will use the extra GST revenue wisely.

Despite many viewed GST as “bad”, it is still a needed long-term fiscal adjustment to increase revenue to eased huge budget deficits and debts. Thus, the “bad” should be restricted to the two things mentioned, namely (i) more tax revenue from GST may encourage more wastage from inefficiency and corruption, and (ii) the extra GST revenue may not be wisely used.

In Malaysia context, some called this twin fiscal adjustments (GST and budget cut) a “needed daring” move in current unfriendly global economic scenario but some criticized it as “wrong desperate” choice. Some think it is a “no choice” for the government. Nonetheless, it is not “my choice” for most consumers. While GST is a “short term pain, long term gain” (if its revenues are utilized wisely), budget cut, especially in education and healthcare sector is reversed – a short term gain but long term pain.

Education and National Productivity

Academician or administrator in Malaysia education sector may have realized the extent of inefficient in our education system. Relatively low world universities ranking and bad Program for International Assessment (PISA) results merely a confirmation of our deteriorating education standard. All these are after decades of efforts, plenty of resources (from budget allocations and private investment) and overwhelming regulations/quality assurance (from Malaysia Qualification Agency, MQA) to boost our education standard.

What will happen if all those mentioned are suddenly reduced due to budget cut with no appropriate fundamental reform? As compare to Budget 2015, Higher Education Ministry suffered budget reduced by RM2.4 billion to RM13.378 billion. Public universities’ funding is to be reduced by RM1.442 billion. Universiti Malaya believed to has the most severe cut of 27.30% while Universiti Utara Malaysia is 19.31%, Universiti Sains Malaysia is 17.14% and Universiti Teknologi Malaysia is 16.53%.

As results from the allocation cut, various public universities in Malaysia have stopped their subscription to journal databases. Both public and private education institutions are also getting less research grants from the government. These greatly hamper research capability for academicians and deprive students of necessary education materials (subscribed online journals and books) and various tools for scientific research.

Less optimistic on current economic scenario plus increase cost due to GST have discouraged business sectors to give funding or sponsorship to private education institutions. Fierce competition in private education sector has driven down profit margin and students’ intake. This may (or already) cause rounds of cost cutting measures from less sponsorship for conference and scholarship to even stop supplying toilet papers!

The government and relevant stakeholder should understand that research and teaching are important source for productivity growth. Productivity is important source for economic growth and sustainability. Economic growths that based on increase in production inputs are not long-lasting. Increase in productivity (technology progress) through education, research and innovation is long-lasting. Asian Miracle during the 1990s is a good lesson to learn.

Asian Miracle Lesson – Perspiration vs. Inspiration

South East Asian and South Korea continuous very high economics growth for years had been dubbed as “Asian Miracle”. However, Paul Krugman (Economic Nobel Prize) revealed that those “miracle” were actually due to rapid increase in population growth. He cautious us that the miracle will not last because total factor productivity (TFP) for those countries has been stagnant or even decline slightly.

The moral of the Krugman story is Asian countries use “perspiration” (hard work) to growth while developed Western countries use “inspiration” (innovation/technology progress/productivity) to growth. Perspiration is not lasting and less impactful. Inspiration needs consistent investments in education, research and development especially in science and technology areas. Not only investment in term of money is important, great political will is also needed in providing resources and fostering the spirit of innovation.

A sudden cut in budget on education sector will deprive needed funding. It also gives bad impression that education is not important in national agenda. Once our momentum towards improve productivity through education, science and technology improvement is stopped, it is hard to kick it back to high speed level – it’s a Newton’s scientific law of moment. Hence, should the government risk of long term pain for short term gain?

Healthcare – Public Amenity vs. Private Initiatives

Healthcare is one of twelve “National Key Economic Areas” (NKEA) in Economic Transformation Plan (ETP). Forty projects are announced and private investments are encouraged to participate and collaborate with public sector. All these plans are announced in September 2010 when oil price was strong while existing debt and continuous budget deficit are still not a big issue.

In January 2016, budget for Health Ministry is expected to be reduced by 10% or between RM250 million to RM300 million. Health Minister is optimistic that budget cut will be counter with increase in efficiency in health sector at various levels. Nonetheless, budget cut in healthcare trigger many alarming questions. For example, will budget cut in healthcare jeopardize or at least delay the ETP progress? Will the citizens, especially those who are depending on public amenity (like public hospital) suffer due to lesser allocation to public healthcare? Can the private sector fill the gaps left void by public amenities? How about the different of cost for healthcare services between public and private providers? All these questions need detail data and information to answers. Ineffective, costly and secretive nature of information regarding public sector hamper debate and discussion to find precise effect and alleviation methods to safeguard public welfare after budget cut.

Nonetheless, one aspect needs serious attention – low expenses on insurance means that dependency on public healthcare or “god blessing for good health” are still crucial. In the United States, the Affordable Care Act (more famously known as “Obama Care”) defines affordable health insurance as cost less than 8% of your annual modified adjusted gross income after subsidies. If their citizen can’t find a plan that will cost less than 8% of their family’s income, they won’t be required to have insurance starting in 2014. However, most Americans shopping in the private market will be able to find an affordable insurance option.

How about Malaysia? Affordable insurance options are widely available. Unfortunately, willingness to spend on insurance is relatively too low as shown in Table 1. Despite increased 1.5 percentage points from 1990 to 2014, Malaysia most insurance expenditure as percentage of Gross National Income (GNI) in 2014 is only 4.4%, which is about half of the standard required by Obama for United States. While there are effort and progress to expand private insurance sector in Malaysia, it take time and changes of Malaysians’ mind-set towards acceptance of insurance as an important element in their life and financial planning. Before we reach United States or developed countries level, budget cut in healthcare most likely will give significant negative impact to its citizens.

Table 1: Insurance Expenditure as percentage of Gross National Income (GNI)

Year	1990	2006	2007	2008	2009	2010	2011	2012	2013	2014
Premium (% of GNI)	2.9	4.5	4.3	3.8	4.4	4.3	4.2	4.4	4.4	4.4
Life (% of GNI)	1.5	3.1	3.0	2.6	3.0	2.9	2.6	2.8	2.8	2.8
General (% of GNI)	1.4	1.4	1.3	1.2	1.4	1.4	1.6	1.6	1.7	1.6

Conclusion

Reform in budgeting strategies has been long overdue. Implementation of GST is a short term pain but promise a healthier fiscal strength to the country. Yet, its implementation is disappointing. Its benefits could be dwarfed by big amount of seemingly unstoppable wastage in government spending. In contrast, government’s response to reduced revenue from global oil price slump by cutting budget is a short term gain but long term pain. This is especially cut in allocation in two critical sectors, namely education and healthcare.

[Chinese version published at 南洋商报经济周刊 Nanyang Press – Business News, page A9 on 18th January 2016. Available online at http://www.enanyang.my/news/20160523/收270亿却削减预算案br-消费税去向受关注. This English version may be slightly different from the Chinese online/printed newspaper version]

Control Inflation and Dealing with Globalization to Realize the People Economy

(控制通胀应对全球化 实现人民经济)

夏伟文 & 陈薛卉 (18 January 2016)

Another two obstacles towards achieving people economy highlighted by Dr. Robert Pollin are (iii) controlling inflation and (iv) countering the pressures resulting from globalization, including the trade deficit, immigration and managing foreign exchange. Implementation of Goods and Services Tax (GST) and continuous depreciation of Ringgit would likely to cause cost-push inflation and import inflation. Globalization and liberalization of financial sector have already altered many economics theories. The United States’ Trans-Pacific Partnership Agreement (TTPA) and China’s “One Belt, One Road” Initiative will bring impact to Malaysia but unsure for good or bad. These challenges are like waves of tsunami that can easily drown an emerging economy like Malaysia.

Controlling inflation

Malaysia’s official consumer price index (proxy for inflation) averaged about 2.25% in a period of 15 years from 2000 to 2015. The inflation rate looks small and smaller than the growth rate of nominal Gross Domestic Products (GDP) (see Figure 2) for most of years since 1961. Is there a problem? Let look at the practical aspect as follow.

A pack of nasi lemak sold at RM1 in 1999 (sometimes can get it from as low as at RM0.60 during those years). Take that price and times with 1.0225 every year until 2015. This is known as “compounding” and it is easy to calculate with Microsoft Excel. You will get about RM1.40 per pack at 2015. A cup of Chinese tea for 30 cent in 1999 theoretically should sell at 40 cent. In city or highly populated area (usually university and commercial office area) the prices are much higher. In Bandar Sungai Long where a popular private university is located, Chinese tea is selling as high as 70 cent!

Figure 2: Malaysia Inflation and GDP per capita growth

(Data sourced from World Bank)

Worst case is housing price versus salary. A normal (about 1400 square feet) double story link house of RM250,000 in 1999 compounded at 2.25% annual inflation should be sold at RM357,000. Now, such price will not get you the double story link house especially in urban area. Price of a comparable house can go until RM600,000 to RM800,000 in Kajang and reach RM1 million in highly populated area like Petaling Jaya. A fresh university graduate can get RM2000 to RM2500 per month salary in 1999. Theoretically with 2.25% compound inflation, they starting salary now should be about RM2900 to RM3600. Is there any company willing to pay that salary to a fresh graduate? Then, can university graduates afford to own a house? This is impossible especially if they need to first buy a car to enable them to go to work unless they have rich parents or exceptional talent. Do not forget the cost of food and other living expenses also increased.

Pensioner will find their saving depleted fast through inflation and weakening of Ringgit. Middle class citizens, who spend heavily including overseas trips and imported goods also suffered. Parents who need to send their children to study overseas or at least bought imported textbooks need to fork out more expenses. Therefore, is “people economy” going to exclude the welfare of youthful fresh graduates and old pensioners?

Depreciation of Ringgit benefits export-oriented businesses most due to higher price competitiveness that more than offset higher costs of production due to inflation of inputs cost. However, how large is this benefit from increase export versus the burden of all citizens to pay higher price for imported goods? Will benefit to export business trickle-down to overall society?

Inflation is getting harder to control after GST and huge currency depreciation causing hardship to almost all levels of society. If social welfare is negatively affected, is the country still rightly moving towards people economy?

Countering the pressures resulting from globalization

Nowadays, what happened in other countries is no longer “none of our business”. What happened in financial market may affect foreign exchange and real sector as a result of globalization, liberalization and digitalization. Major international development affecting Malaysia are Trans-Pacific Partnership Agreement (TPPA) and China’s “One Belt, One Road” initiative.

Exclusion of China, the largest economy in the Pacific Rim region in the TPPA is greatly disturbing. Center for Research and Globalization (Canada) is concerned about TPPA’s strategic policy function. Is TPPA being used to harness the power of the developing nations throughout ASEAN as an economic counterweight to Beijing for the benefit of the United States? The research center also highlighted two matters which could be the biggest challenges for Malaysia policy makers as follows.

(a) TPPA has Investor-State-Dispute Settlement (ISDS) mechanism, which would allow corporations to seek restitution against states in an international arbitration court for the contraction of their potential future profits as a result of government regulations. In another words, Malaysia’s government can be sued and needs to compensate foreign corporations for any policy to protect the interest of local industries. Subsidies for welfare of the poor can be deem “unfair competition”.

(b) On human health and well-being, TPPA urges for (i) unimpeded entry of genetically modified products into domestic markets, (ii) gradual elimination of tariffs on alcoholic beverages and tobacco, (iii) drastic extension of patents on pharmaceutical products that will impede access to affordable medicines and (iv) require Internet Service Providers (ISPs) to more actively monitor users to enforce copyright protections at the expense of individual privacy. All those examples are what Malaysia cannot (and should not) do all these years. Are we going to chance and scarify the welfare of the people just to join an international trade agreement?

Historically, on January 2009, Malaysia has suspended negotiation of Malaysia-US Free Trade Agreement (that started in 2005). Despite official reason for suspension is United States supported invasion of Gaza by Israel, the real reason could be many demands of the trade agreement that conflict with Malaysia’s national interests. If it is like that, what reason for Malaysia to agree to TPPA? Indirect conflict between TPPA and China’s “One Belt, One Road” remind us of cold war between United States and Russia. Therefore, it may create unpleasant relationship between Malaysia and China if we join TPPA.

Like TPPA, China’s “One Belt, One Road” initiative also posses challenges. A simple Google Image search for “New Silk Roads” will show the Economic Belt involving physical roads or railways through northern China to Middle East before links to Moscow and Europe (Turkey, Rotterdam and Venice). Meanwhile, Malaysia’s main export and import destinations in 2013 are Singapore, China, Japan, United States and Thailand. Thus, major nations (except China) that “New Silk Roads” passes through are not much relevant to Malaysia’s international trade. However, “One Belt, One Road” initiative gives opportunities as well as challenges in term of China’s investment inflow to Malaysia.

Table 4: Major Foreign Direct Investments Inflow

Country	Jan-Sept 2015		2014
	Projects approved	Amount (RM million)	Projects approved	Amount (RM million)
Hong Kong	9	4,374	5	70
Japan	52	2,705	55	10, 870
USA	12	2,205	23	1,350
Singapore	78	1,598	121	7,822
China	12	1,197	24	4,752
Germany	18	1,149	13	4,417
South Korea	16	678	11	1,549

Source: MIDA (2015) available at http://www.mida.gov.my/home/facts-and-figures/posts.

Based on Malaysian Investment Development Authority (MIDA) statistics in Table 4, China (exclude Hong Kong) is fifth largest foreign direct investment (FDI) inflow country in Malaysia. Will China’s and Hong Kong’s FDI inflow increase drastically if Malaysia’s trade and foreign policy pro-China rather than pro-United Stated?

Besides international trade, Malaysia also facing challenges in the aspects of digital globalization, international migration (includes brain drain and political refuges), possible global economic crisis and extremism/terrorism. Each of these could bring deadly effect to Malaysians and therefore our path towards people economy.

Conclusion

Inflation and globalization are twin challenges Malaysia facing domestically and internationally. As harvest will only comes after hard work of planting, overcoming challenges can brings positive effect. Yet, we need to first understand what are the challenges or obstacles along our path towards people economy.

[Chinese version published at 南洋商报经济周刊 Nanyang Press – Business News, page A8 on 18th January 2016. Available online at http://www.enanyang.my/news/20160118/控制通胀应对全球化br-实现人民经济. This English version may be slightly different from the Chinese online/printed newspaper version]