Malaysia The Most Corrupt Nation?

Actually, that’s not what EY said. I wonder if the person writing the following actually read the report (excerpt):

Malaysia one of the most corrupt nations, survey shows

Malaysia has been ranked as one of the most corrupt nations and listed as a country which is most likely to take shortcuts to meet targets when economic times are tough, according to a recent survey by Ernst & Young, signalling that the government's Performance Management and Delivery Unit (Pemandu) has failed in its role to transform the economy.

Malaysia, along with China, has the highest levels of bribery and corruption anywhere in the world, according to the latest report, Asia-Pacific Fraud Survey Report Series 2013.

Competition And Private Sector Waste

A fascinating blog post from Antonio Fatas, and having worked in the private sector for many years, one I fully agree with (excerpt):

Does competition get rid of waste in the private sector?

It is very common to hear comments about the waste of resources when referring to governments and the public sector…In fact, we all have our list of anecdotes on how governments waste resources, build bridges to nowhere and how politicians are driven by their own interest, their ambitions or even worse pure corruption. If only we could bring the private sector to manage these services!

July 2013 Employment

The July employment numbers depict a healthy economy, quite at odds with the growth numbers (‘000):

August 2013 Consumer Prices

Consumer price inflation for August was released a couple of days ago (log annual and monthly changes):

Who’s Doing The Saving?

This recent paper from the World Bank confirms something I’ve suspected and been concerned about for a long time (abstract):

What are the causes of the growing trend of excess savings of the corporate sector in developed countries ? an empirical analysis of three hypotheses
Leandro Brufman, Lisana Martinez & Rodrigo Perez Artica

Summary: This paper analyzes annual accounting data for a sample of 5,000 publicly traded manufacturing firms from Germany, France, Italy, Japan, and the United Kingdom. The analysis uses data from 1997 to 2011 and finds an increasing trend of excess savings (defined as the difference between gross saving and capital formation) and a gradual decline of gross capital formation. This trend is accompanied by a steady deleveraging process and a decrease in the share of operating assets in total assets. This process is more acute among the more credit constrained, the more volatile, and the less dynamic firms.

Why Spending RM160 Billion On Rail Isn’t Completely Bonkers

It’s last week’s news, but still relevant (excerpt):

Najib: An additional RM160bil to be invested in rail projects by 2020

KUALA LUMPUR: The Government is expected to spend an estimated RM160bil more on rail-related projects until 2020, said Datuk Seri Najib Tun Razak.

The Prime Minister said the railroad industry had seen "massive expansion" in Asia and was becoming an increasingly significant mode in Malaysia's efforts to improve public transportation...

Talking To Your Kids: Inequality And The Parenting Gap

As a follow up to my previous post, anybody interested in income inequality, social mobility and equality of opportunity needs to read this (excerpt, emphasis added):

The Parenting Gap

High-income parents talk with their school-aged children for three hours more per week than low-income parents, according to research by Meredith Phillips of UCLA.They also provide around four-and-a-half extra hours per week of time in novel or stimulating places, such as parks or churches, for their infants and toddlers.

The Bumi Agenda: The Importance Of Evidence Based Policy

Saturday’s announcement by the Prime Minister of measures to rekindle the Bumi Agenda, if I can call it that, has taken its share of brickbats and support (more of the former rather than the latter, by the commentary on social media).

Here’s my take: I think the Bumi problem is real and shouldn’t be sidelined. But, I also think that these new measures don’t go far enough, or go too far in the wrong direction, to be truly meaningful in addressing the situation.

July 2013 Industrial Production

Something is in the wind. US Purchasing Managers Indexes zoomed up in June, and lo and behold, Malaysia’s IPI is following suit (log annual and monthly changes; seasonally adjusted):

Documenting Income Inequality: 2012 Update

I posted the data on household income over a year ago, but the 2012 household income survey summary results have since been released, and I’ve had quite a few queries about this issue lately.

[As always, you can click on any of the graphs to view a larger version. Note that all the data presented here is inflation adjusted (2000=100); please refer to the sources linked to at the bottom of this post for the raw data]

Breaking The Poverty Trap: Financial Services Edition

The Governor is on Project Syndicate, talking about financial inclusion (excerpt):

Financial Inclusion Now

KUALA LUMPUR – Making the financial system accessible to the world’s poorest people can unlock their economic potential, improve their lives, and benefit the wider economy. So it is no surprise that financial inclusion of the poor has become an important component of public policymaking. Central banks and regulators worldwide are taking the lead in making financial inclusion a priority, in addition to their traditional mandates of maintaining monetary and financial stability.

Breaking The Poverty Trap

From my point of view, one of the biggest problems with the whole ideological debate about equal outcomes (“affirmative action”) versus equal opportunity (“meritocracy”) is that it’s really a false dichotomy.

In many ways, you can’t have one without the other. A meritocracy that truly rewards merit only works if you assume everyone starts off equally. If you want to be wonkish about it, it’s a one-generation, equal-endowment model of lifetime income.

Middle Income Pain? Try High Income

From the Edge Daily (excerpt; emphasis added):

Highlight - Middle-class pain

KUALA LUMPUR: Salary earners in the “sandwiched” middle-income group will soon find themselves at the losing end as the government continues its fiscal consolidation.

The middle-income group is defined as individuals who earn between RM2,300 and RM7,000.

This group forms 40% of the country’s workforce. The middle-income earners are mostly taxpayers and are the vast majority who drive consumer spending — a main growth engine for the domestic economy...

Erm...slight problem here. By all accounts, less than 20% of the workforce is eligible to pay tax and about 10% actually does, which is totally at odds with the numbers quoted here. And it turns out the problem is the definition – the text shouldn’t read individuals, it should read households.

The data compiled by DOS show the mean monthly household income level for the middle 40% is just RM4573 in 2012, or approximately RM2570 per income earner. A single person earning that amount who only deducts EPF contributions pays zero tax, and I don’t think they’re the ones referred to as, "The middle-income patrons of gourmet coffee outlets will have to either cut down their visits or opt for cheaper alternatives."

Sorry, if you can afford to drink gourmet coffee in Malaysia, chances are you’re not middle income. It doesn’t detract from the main point of the article, but it should’ve been made clearer who exactly we’re talking about.

Ringgit Getting You Down? Don’t Panic

The stock market is losing ground, the Ringgit is being hammered, interest rates are slowly rising, inflation is increasing, and growth is anaemic. Not a whole lot of good news lately.

Don’t Panic.

The market selldown is general; it’s happening across the region and pretty much affecting most emerging markets. Malaysia is one of many, and we’re not being singled out. Just as expansionary monetary policy in advanced economies and greater global liquidity helped support emerging markets in 2010-2011, we’re seeing a pullback as the Fed begins signalling its willingness to reverse course.

Don’t Panic.

July 2013 External Trade

Friday’s trade report was a pleasant surprise (log annual and monthly changes; seasonally adjusted):

[Note: I’m still using my old seasonally adjusted figures, even though DOS now issues there own. I’ll be shifting over to the official figures as and when I manage to find time to transfer the data in. The differences between the adjusted series does not substantively change the following analysis]

BNM Watch: No Change In OPR

Don’t think anybody expected anything more (excerpt)

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.00 percent.

The global economy continues to experience modest growth...Although global monetary conditions remain highly accommodative, market uncertainties on the direction of policy have resulted in substantial volatility in global financial markets. The reversal of capital flows from the emerging economies following a prolonged period of strong inflows has resulted in the depreciation of emerging market currencies.

In the Malaysian economy, domestic demand has continued to support growth amid the weaknesses in external demand. Going forward, economic growth is expected to be underpinned by the continued expansion in domestic activity...The impact of subsidy adjustments on consumption spending is expected to be contained by targeted financial assistance. Domestic investment activity which has been robust will continue to be led by capital spending in the domestic-oriented industries and the ongoing implementation of infrastructure projects. Overall growth prospects, however, could be affected by risks in the global economy and international financial markets...

...Going forward, inflation is expected to increase in the remainder of the year and into 2014 resulting from domestic cost factors, including subsidy adjustments...

...In the MPC’s assessment, there are increased uncertainties to the balance of risks surrounding the outlook for domestic growth and inflation...

Nominal GDP growth has been poor, but there’s a potential for a turnaround with higher oil prices, which could boost prices all around. We’re also seeing slower growth in credit and in the money supply. If anything, the bias to policy should still be on the downside – I don’t think the MPC is going to be panicked into doing something silly like trying to “defend” the currency. Currency weakness in fact plays into BNM’s hands, by lowering relative prices and a de facto loosening of monetary policy, even if the primary policy instrument is not adjusted.

GST And Tax Evasion

One of the main advantages of a GST/VAT system, at least from the point of view of the tax collector, is that it provides an incentive for businesses to comply. The ability to claim offsets against GST/VAT paid on inputs (which businesses have to pay for anyway), brings them into the tax collection net. That widens the scope of coverage and increases the number of goods and services that are taxed. Higher compliance = higher tax yield, relative to alternatives such as Malaysia’s existing single-stage sales and service taxes (SST).

I’m not going to discuss what this does to consumers and prices.

The other advantage here is that in theory, due to higher compliance, the probability of tax evasion (though not necessarily fraud) should fall. This is especially important for developing countries, as the size of the economy outside the formal sector is much larger and the capability of tax authorities to audit transactions is comparatively poorer.

This NBER working paper outlines an experiment to see if GST/VAT does indeed reduce tax evasion in the real world (abstract):

No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax
Dina Pomeranz

Tax evasion generates billions of dollars of losses in government revenue and creates large distortions, especially in developing countries. Claims that the VAT facilitates tax enforcement by generating paper trails on transactions between firms have contributed to widespread VAT adoption worldwide, but there is little empirical evidence about this mechanism. This paper analyzes the role of third party information for VAT enforcement through two randomized experiments among over 400,000 Chilean firms. Announcing additional monitoring has less impact on transactions that are subject to a paper trail, indicating the paper trail's preventive deterrence effect. Tax enforcement leads to strong spillovers up the VAT chain, increasing compliance by firms' suppliers. These findings confirm that when evasion is taken into account, significant differences emerge between otherwise equivalent forms of taxation.

All I can say is:

Technical Notes

Dina Pomeranz, "No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax", NBER Working Paper No. 19199, July 2013

Are Entrepreneurs Born Or Made?

A new NBER working paper explores this and many other questions (abstract; emphasis added):

Smart and Illicit: Who Becomes an Entrepreneur and Does it Pay?
Ross Levine, Yona Rubinstein

We disaggregate the self-employed into incorporated and unincorporated to distinguish between “entrepreneurs” and other business owners. The incorporated self-employed have a distinct combination of cognitive, noncognitive, and family traits. Besides coming from higher-income families with better-educated mothers, the incorporated—as teenagers—scored higher on learning aptitude tests, had greater self-esteem, and engaged in more aggressive, illicit, risk-taking activities. The combination of “smarts” and “aggressive/illicit/risk-taking” tendencies as a youth accounts for both entry into entrepreneurship and the comparative earnings of entrepreneurs. In contrast to a large literature, we also find that entrepreneurs earn much more per hour than their salaried counterparts.

Are Entrepreneurs Born Or Made?

A new NBER working paper explores this and many other questions (abstract; emphasis added):

Smart and Illicit: Who Becomes an Entrepreneur and Does it Pay?
Ross Levine, Yona Rubinstein

We disaggregate the self-employed into incorporated and unincorporated to distinguish between “entrepreneurs” and other business owners. The incorporated self-employed have a distinct combination of cognitive, noncognitive, and family traits. Besides coming from higher-income families with better-educated mothers, the incorporated—as teenagers—scored higher on learning aptitude tests, had greater self-esteem, and engaged in more aggressive, illicit, risk-taking activities. The combination of “smarts” and “aggressive/illicit/risk-taking” tendencies as a youth accounts for both entry into entrepreneurship and the comparative earnings of entrepreneurs. In contrast to a large literature, we also find that entrepreneurs earn much more per hour than their salaried counterparts.

Twitter, Finally

Yes, I finally took the plunge. And I’m half regretting it already, as it looks like a great way to waste time. FWIW, you can follow me (the link is on the right hand column of the page), but I make no promises to be too actively involved tweeting.

The Paradox Of Plenty

There’s this somewhat understandable idea that because Malaysia is rich in natural resources, we are…well, rich. Or at least we should be, if the government had handled things properly.

If only we could harness our reserves of oil and gas and minerals effectively and efficiently…

If only we had invested in and boosted the productivity of our agricultural sector…

If only we managed our forests and bio-diversity for sustainable development…

If only natural resource extraction wasn’t subject to leakages and corruption…

If only, if only…

But there’s a slight problem with this mindset – the empirical evidence suggests that natural resources alone do not beget wealth or prosperity, that focusing on developing such assets actually undermines the foundation of long term growth and prosperity. In fact, in development circles, it’s more common to speak of natural resources as a “curse”, not a blessing.

The Role Of Credit Ratings: No Replacement On The Horizon

Credit rating agencies aren’t perfect – in fact, far from it. Ratings can sometimes (often?) be inaccurate guides to the potential for debt defaults, and the consistency and integrity of ratings can and have been questioned. The business model used by most credit rating agencies globally, where debt issuers pay for ratings on their own debt, is subject to potentially considerable conflicts of interest.

Unfortunately, attempts to find a replacement have come up with alternatives that are even worse (abstract):

Replacing Ratings
Bo Becker, Marcus Opp

Since the financial crisis, replacing ratings has been a key item on the regulatory agenda. We examine a unique change in how capital requirements are assigned to insurance holdings of mortgage-backed securities. The change replaced credit ratings with regulator-paid risk assessments by Pimco and BlackRock. We find no evidence for exploitation of the new system for trading purposes by the providers of the credit risk measure. However, replacing ratings has led to significant reductions in aggregate capital requirements: By 2012, equity capital requirements for structured securities were at $3.73bn compared to of $19.36bn if the old system had been maintained. These savings reflect the new measures of risk, and new rules allowing companies to economize on capital charges if assets are held below par. These book-value adjustments dilute the predictive power of the underlying risk measures, Our results are consistent with a regulatory change being largely driven by industry interests rather than maintaining financial stability.

Somehow, getting fund managers and private equity firms to do portfolio risk assessments strikes me as a little bit like putting the fox in charge of the hen house.

Driven by “industry interests”, indeed.

Technical Notes

Bo Becker, Marcus Opp, "Replacing Ratings", NBER Working Paper No. 19257, July 2013

Waiting For GST

There’s a famous play by Samuel Beckett called “Waiting for Godot”, where two characters hang around, talking and interacting, waiting for someone who never turns up. Malaysia’s GST saga, by turns tragic and comedic, definitely falls into the same mould.

Now it seems that at long last, Godot might actually arrive (excerpt):

GST implementation a must

KUALA LUMPUR: The implementation of a goods and services tax (GST) is a must and not an option.

Secretary-General of Treasury Tan Sri Dr Mohd Irwan Serigar Abdullah said at the half-year Economic Transformation Programme (ETP) update that the Government was trying its best to include it in Budget 2014 if everyone was agreeable to it.

Dr Mohd Irwan added that it would only be in place in 2015 if the Government announced it in the coming budget as it would take 14 months for the GST to be implemented.

Subsidy Rationalisation Rebooted

It’s about time (excerpt):

RON95 goes up by 20 sen

PUTRAJAYA: The price of RON95 petrol and diesel has been increased by 20 sen, as one of the measures to rationalise subsidies by the Government to reduce the country’s fiscal deficit.

Prime Minister Datuk Seri Najib Tun Razak announced the decision, saying that it would save the Government RM1.1bil from September to December this year and RM3.3bil annually.

Before the revision, the price for RON95 was RM1.90 per litre and RM1.80 for diesel. The [sic} price increase for RON95 was in 2010.

2012 International Investment Position

I won’t touch too much on the 2Q2013 balance of payments which came out with GDP to weeks ago, but I thought it might be better to concentrate on something more pertinent, and quite a bit easier to understand. For all the potential for the current account to turn negative (with all the attendant consequences), it’s still only one part of a bigger picture that is the international investment position of the country.

The 2012 IIP report came out at the same time as the BOP, and shows a negative position for Malaysia, for the first time since 2007 (RM millions):