A Matter of Principle

(I’ve been drafting this for a few days, and then Tun Mahathir has to go and steal my thunder!)

There are a few unspoken rules and principles I have followed since I started this blog. But since the readership has expanded, and I’ve gotten a few queries about writing outside the blogosphere, I thought I’d make these explicit, so there’ll be no misunderstandings. This post should also explain why I try not to write on certain subjects, even if they fall within the general ambit of the Malaysian economy.

Since I work in a public company that works for and services the financial needs of many Malaysians, there’s always a risk that my thoughts and opinions might be construed as representing the policies of who I work for. Even on an anonymous basis as I’ve tried to maintain on this blog, enough people know who I am and where I work, for this to become a potential issue.

The Miti Blog On The FDI Issue

It reads like a FAQ (you can read it here). You may or may not believe the answers, but for a précis about the whole situation, it’s a good place to start.

An Absence Of Markets: IKEA Edition

It sometimes fun to apply economic principles to everyday matters, and the way people interact with each other. And sometimes, it’s a little depressing. This post outlines a case of the latter.

I was at the IKEA store at IKANO Power Centre in Kota Damansara last Saturday, having dinner with my family and my sister. It being the start of the IKEA sale, the place was of course packed to the gills. The in-store restaurant was no exception, with fairly long queues into the cafeteria area.

JP Morgan Chase Says Malaysia Is A Safe Refuge

And they’re sorta right, though I wouldn’t put too much credence in the idea of a “weak correlation”. Correlations have a way of reversing just when you least expect them to, and when you can least afford it. To turn that old chestnut on its head, the absence of correlation does not necessarily imply a lack of causality. Correlations are also highly sensitive to the sample you choose – relying on them isn’t a great idea:

Malaysian Stocks Offer Foreigners ‘Safe Refuge,’ JPMorgan Says

July 28 (Bloomberg) -- Malaysia’s stock market is a “safe refuge” for foreign investors seeking shelter from volatility in other Asian markets because of its domestic economy and defensive qualities, JPMorgan Chase & Co said…

…The Malaysian market has “defensive characteristics such as low volatility and weak correlation with major indexes,” he said. “The market is back on a high; we see evidence of foreign monies trickling in based on foreign incremental buying and ownership levels.”

Foreign ownership in Malaysia’s market rose to 20.6 percent at the end of June from 20.3 percent in February, signaling a pickup in net buying by foreigners, Oh said.

How Effective Are Retraining/Reskilling Programs?

One of the big concerns under the NEM is that with a structural shift away from low-value added export industries towards higher value-added activities and towards services, existing workers will be poorly equipped to handle the transition and find jobs under the new paradigm. With that in mind, the NEAC has suggested a transformation fund to pay for job retraining and reskilling of displaced workers to better fit the requirements of the new growth sectors.

But going by some new research, this is going to be a tough proposition. Although it focuses on youth education, this paper covers optimum investment in education across a person’s lifecycle and comes to some pretty strong conclusions (excerpts; emphasis mine):

Investing in Our Young People – Flavio Cunha and James J. Heckman

This paper reviews the recent literature on the production of skills of young persons. The literature features the multiplicity of skills that explain success in a variety of life outcomes. Noncognitive skills play a fundamental role in successful lives. The dynamics of skill formation reveal the interplay of cognitive and noncognitive skills, and the presence of critical and sensitive periods in the life-cycle. We discuss the optimal timing of investment over the life-cycle...

The Future of Economic Models

One of the key issues that has bedeviled the economics profession in the last three years has been the almost complete failure to predict the financial crisis and its contributing factors. Apart from a prescient few like White, Roubini, Shiller and Roach (among others), regulators, policymakers and pundits were caught off guard by the near collapse of an over leveraged financial sector in the Western nations, and the speed and depth of the downturn.

Part of that failure has been the poor performance of standard econometric models of both New Classical and New Keynesian varieties to adequately explain what’s going on. There’s a great critique of the current state of macro-models at the Macro Advisors Blog – well worth an investment of time, if you have some basic econometric knowledge.

An article in last week’s Economist magazine points a potential way out of this mess (quoted in full):

What’s Behind The Drop In FDI?

You may have heard that inward FDI to Malaysia crashed in 2009 – Tony Pua has a nice roundup on his blog. You can read the full report from UNCTAD here.

As far as knowing the cause, I haven’t a clue…yet. There is of course the general drop in FDI across the globe in 2009 due to the global recession, but that doesn’t explain why Malaysia’s inward FDI dropped more than most. There’s also some interesting anomalies with the data that I really would want to know about before commenting on the situation, such as the massive increase (like, 100%+ a year) in both inward and outward FDI stocks from 2007-2009. This isn’t something that is confined to Malaysia – it runs across the global database.

As far as suspecting why inward FDI has been so poor lately, however, I have a few ideas.

June 2010 CPI: Prices Still Under Trend

June’s Consumer Price Index report shows inflation slowly picking up (log annual and monthly changes;2000=100;click for a bigger pic):

Note that I’m incorporating my pain index now as part of the coverage (see details on this index in my post on May CPI).

Opportunity Knocking

From a forthcoming paper, Malaysia is ranked in terms of its opportunities and capabilities for future growth:

Development and accumulation of new capabilities: The Index of Opportunities

This column introduces the Index of Opportunities – a ranking of countries by their capacity to undergo structural transformation and develop. It suggests countries at the bottom are in urgent need of implementing policies that lead to higher diversification and sophistication of exports.

International Reserves And The Balance Of Payments

From the comments:

Wenger J Khairy said...

Dear HishamH,

Appreciate your response. Perhaps would like to comment further on the link between reserves and the BOP. The argument was presented in the book the "Dollar Crisis".

The author presented the case for the link between reserve build up and a growth in the money supply. He cited Thailand and Japan and as the example.

The thrust of the story

(a) From strict correlation point of view, reserve and credit growth was correlated for the case of Japan, Malaysia and Thailand. The lag maybe between 1-2 years.

(b) Build up of reserves act as high powered money entering into the domestic banking system.

(c) One can draw a simple flow chart how lets say surplus US dollars earned by Sime Darby gets deposited as Ringgit in Maybank, and at the same time increases Bank Negara reserves.

In the case of Thailand, their reserve build up was due to surplus on the Capital and Financial account

(d) Build up of reserves act as exogenous source of credit creation in the domestic banking system. If there was a build up of credit due to solely endogenous factors, wouldn't it be highly inflationary?

My wife told me that I’m barely comprehensible to readers who aren’t that knowledgeable about the inner workings of economics or finance, so I’m going to answer Wenger’s query in some detail – though this post will feature a little bit of double-entry accounting.

Khazanah Is In The Market

…for an economist. Check out the advert here.

I’m going to take this opportunity to clarify my comments regarding the job openings at Public Bank and Public Investment Bank that I posted on before. What you’re seeing here is the difference in emphasis between the “sell” side and the “buy” side in the financial sector.

The NEM In Numbers: Nominal Versus Real

I’ve been meaning to cover this issue for some time now, but haven’t had the time. It’s very late to be talking about this, but I suppose better late than never.

One of the things that has been bothering me about the New Economic Model is that the public discourse revolves around trying to reach over 6% real growth. That’s largely false, or to be more precise, largely misleading.