More Thoughts on the NEM

Random musings, in no particular order:

1. Changing education from “rote learning to creative and critical thinking” – I don’t think this will be a big factor in getting Malaysia across to high income status, though it will be vital in maintaining it. This type of transformation will take a generation to complete, because you have to start from the beginning (pre-school, primary). Just applying change at all levels won’t have the desired effects, because you’re talking about not only changes to the syllabus, but also reskilling/retraining the teachers/lecturers, building the facilities, and reforming the mindset of both parents and children. It’s already mostly too late for the present crop of university and secondary school students i.e. the ones entering the work force during the next ten years. An unrelated issue is the requirement for capacity, because we have increasing sizes of age cohorts entering the school system over the next 20-30 years, plus the need increase college level education enrolment to at least match developed countries. Malaysia’s present level of sub-30% enrolment rates is way off from the 60%-80% that developed countries achieve – that means doubling the student capacity of universities in the next ten years, a tall order. I am however very happy with the proposed emphasis on vocational and technical training, as this offers a way out from the almost purely academic approach of our universities, which hasn’t proven to be nimble enough to meet the technical, skills and knowledge demands of the private sector.
   
2. Helping palm oil small holders (included under Appendix I of the NEM and reported on here) – I think this is a bad idea, and won’t be an effective policy. Small holders will probably benefit from better-yielding stocks, but they still suffer from diseconomies of scale. A better idea would be to encourage corporatisation of small-holders, or outright takeovers by the bigger players like Sime Darby or IOI. That’s obviously political suicide, but makes better economic sense and should also apply to the fishing, rice, and vegetable industries. Our agricultural policy has been badly designed since the 1980s, and perpetuating inefficiencies isn’t going to be effective in raising rural incomes, nor help us achieve food self-sufficiency.
   
3. Financing SMEs – From my own experience in the banking industry, lending to SMEs is quite frankly a bloody risky business – you’re probably better off buying junk bonds. That’s the real reason behind banks’ reluctance to lend to small companies. Note that bank lending to the SME sector largely consists of working capital and trade finance, which have the benefit of being collateralised and don’t require much capital charge. Hence the importance of agencies such as CGC, and the various BNM-run loans and guarantee schemes to grease the wheels of SME finance. I’m unsure whether the NEM will bring about any substantive change in this area. On a separate note, I’m happy that a review of bankruptcy laws is on the table, as under the current framework Malaysian bankruptcy protection is largely afforded to creditors, not debtors. This approach needs to be turned on its head. The research literature suggests that it takes an entrepreneur at least three tries before actually being able to run a business successfully, which means that we need to reduce the penalties of failure and facilitate “on-the-job” training. The current disincentives means that budding entrepreneurs have to give up too soon because the penalties against bankrupts are just too severe. We need to have “Chapter 11” style debtor protection so entrepreneurs have the chance to succeed and keep trying (maybe three strikes before you’re out?). The banks won’t be happy.
   
4. R&D – I don’t like the idea of a “technology research powerhouse”, commercially run or not. I had a chance to review the research literature on science parks over the last month, and the empirical evidence is not very encouraging. Clustering benefits from science parks/tech parks are short ranged for SMEs i.e. distance matters. I would rather use a scatter approach to this issue, rather than a centralised national approach – each public university must have an associated science park/research lab/tech park for collaboration with local industry. A centralised approach will only benefit the bigger companies not SMEs, but the bigger companies can afford to run their own R&D programs. However, I’m pretty happy with the rest of the R&D proposals – I had to draft a speech for my boss on university-industry collaboration recently, and I’m gratified that my own thinking is reflected in the NEM. About the only thing I would add is to increase the tax deduction to triple, rather than double as it is now, and broaden the coverage to support research in some of the social sciences like management, business and marketing, rather than just the “hard” sciences.
   
5. Minimum wage – I’m not that much against the idea as the NEAC is, with the proviso that any national minimum wage scheme be designed to limit employer abuses. It’s just not an effective tool for poverty alleviation, nor for raising wages generally. The unemployment effects and impact on “disadvantaged” groups are very real, except when the minimum wage is close to the market clearing wage. The trick is to find the market level in the absence of market information, and handle the differences between regions and between rural and urban areas – one rate is not going to get it done. Also, we need to be wary of union support for the minimum wage – their members will gain most of the wage and employment benefits, to the detriment of the poor and the inexperienced.
   
6. High-income=high-cost economy – There is no way we’re going to get away from this. Higher wages=higher input costs=higher price level=higher inflation. That’s why I believe the proposed social safety net and transformation fund are imperative, not optional, because the impact is going to fall the most on the poor and lower income groups. Having said that, a more nuanced view would be that material goods (especially imports) will become relatively cheaper, but costs of intangibles like healthcare and education will be more expensive. That’s a consequence of (a) a stronger emphasis on skills and knowledge, and (b) a higher internal exchange rate (tradables against non-tradables) which in turn drives a higher external exchange rate (the Ringgit). I don’t think this cost increase will necessarily turn up in the CPI, as you have the disinflationary effect of cheaper imports against the inflationary effect of higher services prices – the breakdown by components bears watching from now on. If it does however, BNM would likely raise interest rates which would induce a faster appreciation in the Ringgit, and balance out domestic-led cost-push inflation with even cheaper imports. Yes, a higher Ringgit is on the cards, if the NEM is effectively implemented.