Monday, June 16, 2014

The Meaning Of Innovation

Malaysia is pretty poor at doing R&D. Spending relative to GDP is by any standards low; so are the number of researchers relative to the population. Patent applications, in absolute terms, in relative terms, and in the ratio of local to foreign applications, are in a word: pathetic. The government has all kinds of programs to get R&D and innovation going, the latest of which is MaGIC. Much of these ideas revolve around the invention and commercialisation of new products.

While this is certainly one way to get innovation off the ground, it’s not the only – or even the best – way of increasing productivity, incomes, and local value added. Getting to and sustaining high levels of development involves much more than that. I think we really need to put as much emphasis on process innovation and managerial innovation as well.

Take the classical definition of an entrepreneur in economics – someone who combines capital and labour to produce something. Joseph Schumpeter talked about waves of entrepreneurship, where successive generations of entrepreneurs find new and better ways of doing things, which drives obsolete industries out of business and drives new economic growth. Hence the term creative destruction.

And I think that’s a formula that Malaysia needs to take to heart. As much as coming up with the newest disruptive technology is an enticing goal to achieve, you can grow and become rich not just by coming up with new things, but by simply doing things better, faster and cheaper than anyone else. Put another way, organisational efficiency and technology-driven productivity should be put up there along with product and service innovation. That was the initial impetus behind Japan, and later Korea and Taiwan’s, route to development.

Put in yet another way, this is about raising total factor productivity – the part of productivity growth that can’t be explained by greater labour supply, a bigger capital stock, or more investment in ICT. It’s the indefinable difference between an organisation that learns and grows, and one that does not.

Take for example this relatively old study (abstract):

The Adoption and Diffusion of Organizational Innovation: Evidence for the U.S. Economy
Lisa M. Lynch

Using a unique longitudinal representative survey of both manufacturing and non-manufacturing businesses in the United States during the 1990's, I examine the incidence and intensity of organizational innovation and the factors associated with investments in organizational innovation. Past profits tend to be positively associated with organizational innovation. Employers with a more external focus and broader networks to learn about best practices (as proxied by exports, benchmarking, and being part of a multi-establishment firm) are more likely to invest in organizational innovation. Investments in human capital, information technology, R&D, and physical capital appear to be complementary with investments in organizational innovation. In addition, non-unionized manufacturing plants are more likely to have invested more broadly and intensely in organizational innovation.

In EconoEnglish: it was found that about a third of the big improvement in US labour productivity in the 1990s came from improvements in organisational efficiency, and not just from investment in ICT. Further translation: you can raise profits and wages by improving the way you work, and not just by spending oodles of money on product development, marketing, computers, and equipment. Those things are necessary too, but there’s a not insignificant boost to the bottom-line (and economic growth) by improving management and workflow practices.

Here’s another one (abstract):

Convergence to the Managerial Frontier
William F. Maloney and Mauricio Sarrias

Using detailed survey data on management practices, this paper uses recent advances in unconditional quantile analysis to study the changes in the within country distribution of management quality associated with country convergence to the managerial frontier. It then decomposes the contribution of potential explanatory factors to the distributional changes. The United States emerges as the frontier country, not because of better management on average, but because its best firms are far better than those of its close competitors. Part of the process of convergence to the frontier across the development process represents a trimming of the left tail, much is movement of the central mass and, for rich countries, it is actually the best firms that lag the frontier benchmark. Among potential explanatory variables that may drive convergence, ownership and human capital appear critical, the former especially for poorer countries and that latter for richer countries suggesting that the mechanics of convergence change across the process. These variables lose their explanatory power as firm and average country management quality rises. Hence, once in the advanced country range, the factors that improve management quality are less easy to document and hence influence.

As much as there is an income gap between developed and developing countries, a part of it is due to a managerial quality gap as well. Now, correlation is not causation, but one would think that improving one (especially if it involves export-import firms) would also improve the other.

A second finding is that some of the difference is due to differences in distribution – lower income countries have extended left tails i.e. management quality is not only worse, but is more dispersed in lower income economies. Translated: There’s a greater difference in the worst firms between rich and poor economies than there are in the better ones. That suggests that raising organisational and managerial quality will have a substantially greater impact in less developed economies than in rich ones. Given that improvements in managerial quality have already had a significant impact when at the global frontier, productivity growth should be significantly higher when you’re below it.

A third, and very critical finding: ownership structure matters. Specifically, family owned or founder-run firms tend to do significantly worse, both between economies and comparing between companies within economies. Ownership structures that are more dispersed and less concentrated tend to be better run. That strongly suggests improvements in corporate governance matters a great deal more than is generally understood.

In sum, innovation isn’t just about R&D, patents or world-class products, it’s also about how we work. And it’s about time that we started putting some real resources behind this.

Technical Notes

  1. Lisa M. Lynch, "The Adoption and Diffusion of Organizational Innovation: Evidence for the U.S. Economy", NBER Working Paper No. 13156, June 2007
  2. William F. Maloney and Mauricio Sarrias, "Convergence to the Managerial Frontier", World Bank Policy Research Working Paper 6822, March 2014


  1. It's about talent too, or the lack thereof.

    Also, when the government and GLCs offer semi-permanent "iron rice bowls", where is the incentive for the best young graduates to go and work in the private sector or to labour away in startups in the hopes of creating the " next big thing"?

    1. @Olek

      Actually, the image of bright young things creating disruptive technologies via startups is a Silicon Valley myth, driven by the success of companies like Facebook and the like. Most successful companies and entrepreneurs are actually begun by mid-level/senior executives from large companies. They have the experience, access to capital, and contacts to get a startup off the ground quickly.

  2. Just my view.... In Schumpeter's example, the best firms move forward, the worst shrivel and die. Indeed, in capitalism, there are always winners and losers - that is what gives it is dynamism. But in democracy, the losers have a voice. I think that in the managerial and process improvements you suggest, there may be a need for some restructuring and streamlining. Problem is when that happens, there will be lots of people who will not be able to adapt who will be left behind....And you know what happens next. I think that is happening in Singapore too... We can have all the Skills Upgrading programmes etc but in the end, those who get left behind get angry. So we see a growing "Foreigners Out" and "Singaporeans First"" voice.

  3. The Slug is right about people being left behind becoming disgruntled and expressing it in a political way. And. in addition to attitudes against foreigners in Singapore, may I add the recent wins of the far right in the European Parliament elections.

    Many people who are made "obsolete" in the process of creative destruction, either become so due to lack of aptitude to make the transition to new technology, the lack of finances to pay for the retraining and worse still they upgrade themselves and end up in a glutted job market.

    From 10.28 to 11.17 minutes, this CBC documentary, Doc Zone Generation Jobless points out that information technology firms such as Facebook, Twitter, Linked-In and Groupon together employ only 20,000 staff WORLDWIDE despite their huge revenues, which knocks on the head the myth that technology-innovation driven industries can create enough jobs to make up for losses in manufacturing jobs.

    As a journalist whose written about the IT industry in Malaysia for nearly 20 years, I say that economists, management types and national policy planners should get off their high horses of theory and do a reality check of what's real on the ground, and it is not pretty.

    Here are more videos on technological unemployment.

    There are many more but the bottom line is that there will be social consequences, including ultimate social unrest.

    From historical experience, economic hardship has been the cause of major revolutions and drastic political changes, such as the rise of Hitler and of Mussolini.

    1. @The Slug and IT.Scheiss

      Technology driven change is with us, whether we like it or not. When I entered the workforce, clerk/typists were still an integral part of the staff strength. Now you do your own typing. My car workshop foreman says all cars used to be purely mechanical and you can learn on the job. Now you almost have to be a computer scientist to figure what's wrong.

      The question is, how do you manage this continuous transition? Would you prefer to focus on innovation based on new products and services (which may or may not result in sufficient employment), or innovation that focuses on people?

      At bottom, what we're looking at is an education system that hasn't really caught up with the new paradigm of labour - and this is a global problem, not a Malaysian or Singaporean one. Education has to shift from turning out people with basic skills capable of doing things by rote, to one that turns out people who are taught how to learn.

      A couple of links that came up this morning on Twitter that are also related to this topic and kinda echo my thoughts on this:

    2. Quote from that last link:

      "So here's a revolutionary thought: maybe we need to do less disruption and put more effort into whatever we do well."

    3. Would it be too cheeky for me to point out I've been saying since 2010 that we're going to get people left behind as we aim for high income status? :)

  4. I think you forgot some points on the factors - local habits and culture. Even if we bring in the best practice for the management, it would not help if we still want to follow with existing habit and culture. We should improve the habits too, removing the bad but retain the good one, since people tend to follow something that they are already comfortable with (if it's good, then good outcome, but if it's bad, bad outcome). Evolution is better than revolution.

  5. just like mas union

    zuo de

  6. Good topic. Was hoping you would come up with something like this for awhile.

    May I also suggest this research paper in line with this topic:

  7. Hi Hisham, in reply to your question, I believe that we should focus on people. I totally agree that it comes down to education. I also believe that in creative destruction there will always be people who will be left behind, that is inevitable. While I believe everything should be done to help these people adapt and upgrade, the very nature of shifting times is that there will always be a group of people who cannot, or worse, refuse to adapt, change with the times. Problem, or shall I say, issue is, in a democracy, these people have a voice, an equal one. Again, I am all for doing everything to help people move and upgrade, but I am worried that sometimes governments do too much and become overly populist. While a lot of my friends laud the new "Singaporeans first" mentality, I tell them that Singaporean firms should have the ability to decide who to hire, who would best allow them to remain competitive. They then argue back that many firms think foreigners are better just because they are cheaper but that actually they are not as productive. My reply in turn is:- Fine. The Market Should Decide. That is the whole concept of capitalist economics. I know it is not an easy issue but a line has to be drawn. I don't have the answer but I would like to give an example:-
    The coach who has a son in the track and field should show extra care for his son if he wants him to succeed and be in the school relay team. He can do that by giving his son extra, personalized training, he can give his son extra tips and pointers. He can by the best running shoes and equipment for his son. But at the end of the day, he must NEVER pick his son for the team if after all the extra help, his son is still not fast enough to make the grade. This to me is the role of government. Help your citizens by making them more able and competitive, not by shutting out competition. And that is the problem sometimes.... The coach will ultimately be able to pick the best team because his son cannot vote him out. That is not the same sometimes for well-meaning governments....

    1. @The Slug

      The problem is that the market has decided that, despite having a national income level exceeding that of the US, Singaporeans are on average paid 20%-30% less, coupled with a price level that is considerably higher. No wonder Singapore's brain drain per capita is double Malaysia's. There is something seriously wrong across the causeway.

      Second, your example would only result in higher social welfare (fielding the best team possible) if you make the unrealistic assumption that everyone trying out for the team has exactly the same level of ability.

      If they are not, then the probability of fielding a better team (from the base case of equal ability) is at best 50%. The extra training given to the coach's son is not necessarily welfare enhancing - you get a local maximisation, not a global one.

      The better strategy is to focus the extra training on those who are likely to make the team anyway, irrespective of whether the coach's son is included or not. That would result in a higher overall skill level for the team (higher social welfare), and the team would be more likely to perform and succeed.

      Instead of government substitute the coach with parents, and you'll get a better idea of how inequality becomes embedded in society. Higher income parents have greater means to invest in their children, irrespective of the natural ability of those children.

      Applying meritocracy without taking this into account thus means that a society will never reach its full potential.

    2. Thanks Hisham, I agree with you totally that we should focus on those who are likely to make the team. But as I mentioned, in a democracy those who do not make the team will make a lot of noise, sometimes enough to depose the team selectors. In my post I was trying to find a balance as to how the coach can show "favouritism" without crossing the line. It would of course be great if the son who was currently not as good said, "No favouritism. Just treat me fairly like anybody else. I will work harder and get on the team". But that is not how it works a lot of the time. So I was thinking how, if any, one can help those currently not as well off without, well, rigging the race or team selection.
      Also, the earlier part of your posts suggests you think adhering to market forces is not enough and there needs to be some intervention. If so, what? But then, wouldn't that be at odds with your recommendation to focus on those who are likely to make the team?
      I have always been a believer in the first-past-the-post system. On the other hand, I realize that runners are not equal and that the gap becomes wider and the 'have-nots' become unhappy. To draw the line, I think it is allowable to help people pre-race. Extra training, free better running shoes etc. But the race must be run fairly.
      In economic terms, I think it is fair to help those currently behind close the gap by giving "pre-race" handouts like free/cheaper education, training subsidies, free/ cheaper healthcare etc. But the "race" or "selection" itself must not be interfered with. To that end, I am against hiring/education quotas and mandated hiring practices. I know it is not that simple and the line is often blur. But I think one has to draw one. Question is where and how.
      So final question. Your last paragraph - so how in your opinion should one apply meritocracy?
      So sorry if I'm rambling or if I do not make sense. I don't often post on blogs but your views fascinate me.

    3. Oh...oh...oh... One more question. You said Singaporeans are paid around 20-30% less but has a higher national income... Then where is all the money going to (heh. is there a secret vault which I can hunt?)
      The other thing. My check on the IMF figures show that Singapore is very high up on the list when it comes to GDP per capita at Purchasing Power Parity, higher than US. Doesn't that mean that we are able to buy more for the same amount of money in Singapore than in the US?

    4. @The Slug

      My viewpoint might take a while to explain. The key intervention point is not at selection - I have no problem with a meritocratic approach on that score (pace the cultural and racial discrimination as brought up by Mr Joker)[sic]. We have to focus on equality of opportunity, not equality of outcome.

      Here's the model I have in mind when thinking about this:

      Assume that there is a distribution of natural ability among the population - some are born better than others. Further assume that this distribution of ability is orthogonal to the distribution of income - i.e. the natural ability of children is independent of the income level of their parents. Parents don't get to choose the ability level of their children, and children have no say in the choice of parents.

      But parents of higher income can afford to invest more in their children. This isn't purely monetary - studies show that higher income parents spend more time and talk more to their children, both of which increase social and human capital (brain and social skill development).

      But within this framework, social and human capital investment is also necessarily independent of a child's natural ability. Since every parent wants their children to succeed, but the capability level to do so is not evenly distributed, those who receive above average investment are not always the ones who can best take advantage of it.

      I can add a few other advantages that children from higher income families enjoy, like more extensive social networks, and alumni rules (e.g. I could have gone to Stanford, because my father is an alumni), and how these interact with labour market search frictions, but the main point still stands even without these.

      That's where government intervention has to come in - right at the start.

      It all boils down to education, and education at the earliest possible stage. Social (pre-cognitive) skill development usually takes place before formal education even begins - before pre-school. The UK is experimenting with parental classes, for first-time expecting parents. There have been pilot studies in Latin America showing how teaching mothers to provide experiential stimulation to their babies increases education outcomes in later life.

      Children from higher income families also benefit from not just better quality education and investment but more of it and a greater variety of it (think: music classes, drama, riding).

      Given initial conditions however, there might be a weaker argument for intervention in later stages. But the main point is that creating a level playing field is a necessary (though not sufficient) condition for a truly meritocratic society to function. otherwise, it's just another pathway towards creating a de facto aristocracy of the rich.

    5. @The Slug,

      On your other question, Singapore's capital/labour (profits/wages) split of national income is approximately 60/40 while Malaysia is about 67/33.

      That's where the money is going to - owners of capital. In the US, the share is approximately reversed (40/60) while in Europe it's about even (50/50).

      For the PPP question, approximately yes. But you might want to read this first:

    6. Thanks so much! Really thought-provoking, especially the pre-school part

  8. hisham, will you touch again on budget deficit? tq sir

    1. @mb

      I've no particular reason to. It seems to be of less concern now than it used to be.

  9. Sir,
    Speaking of learning and incremental improvements, I came across similar arguments made by Mariana Mazzucato in her book The Entrepreneurial State where she stated much of the improvements in technology had its in government initiatives. She further stated that when the narrative of government being inefficient in "doing things that should be left to the market" being constantly drummed into the heads of the people eventually it becomes a self fulfilling prophecy; people enter into government workforce with that pre-established mindset that things gonna be slow and inefficient...

    -Bumbling Paddler-

  10. Hello Bane

    Need to correct you here..

    The author of the blog only supports equality of opportunity when mechanism to remove discrimination in the job market and supply channel are in place AND that the general population is given access to positive traits (eg pre school education) currently only accessible to high income family . Lest the author argues "you (will) just embed existing inequality in the fabric of society, as the underlying factors that lead to higher incomes"

    read below

  11. Fascinating comments!

    I have just read an article "Understanding meritocracy" by Pravin Prakash that was published in the TODAY paper ( Wednesday 25 June 2014.

    Mr Prakash, according to the paper, is pursuing his master's degree in political science at NUS, where he also tutors undergrads.

    In his article, Mr Prakash quoted from a recent book "Hard Choices - Challenging the Singapore Consensus" by Donald Low.

    Mr Low identified meritocracy as "a core principle of governance in Singapore" and that it is "as close as anything gets to being a national ideology".

    Mr Low, as quoted by Mr Prakash, refers to the meritocracy principle as one in which " we try to equalise opportunities not outcomes, and we allocate rewards on the basis of an individual's merit or his abilities ".

    Mr Prakash identifies meritocracy as a principle rather than a system of government.

    So, his take on meritocracy, if I understand him right, is

    - offering equal opportunities, not outcomes

    - that it is a principle rather than a system of government

    - that "merit-based selection is based on the notion of non-discrimination: blind to colour, creed and class".

    He references British author Matt Cavanagh who wrote that meritocracy is " less interested in giving everyone a chance to earn the right to a job" and is more focused on "revealing" the ideal candidate.

    Mr Prakash concludes that "meritocracy is a principle of efficiency, not equality. It identifies the best cogs for a machine to ensure optimal efficiency".

    He goes on to write that "... when viewed as a principle of ensuring efficiency and unburdened with having to create equality, meritocracy is a fundamental basis for Singapore's success.

    " Meritocracy has promoted a competitive environment by providing equal opportunities for a driven and ambitious populace to continually strive for excellence and success. This is what meritocracy as a principle should be judged on. As a governing principle, it has created a nation fixated on growth and development."

    One could argue that Singapore, in 1965, after separation from Malaysia, had little choice but to embark on this path. With no natural resources, there was precious little to fall back on.

    So, is meritocracy in Singapore an unqualified success? Mr Prakash doesn't think so, especially where social mobility is concerned. He argues that, in Singapore, "the system of governance needs to evolve beyond meritocracy to address inequality to a greater degree than before".

    How much of Mr Prakash's analysis is applicable and relevant to Malaysia?

    The different paths that Malaysia and Singapore took after the 1965 separation have been analysed in many commentaries and books, even in Mr Lee Kuan Yew's memoirs.

    Could Malaysia have benefitted post-1965 with a modicum of Singapore-style education and meritocracy?

    It was, and is, like having a living case study right on it's doorstep!

  12. A. I hate storytelling SOBs who are nothing better than c-suckling POSs!!. Now here is some from William Lee’s paper:

    1.Table 5 shows the results from GLSE technique of pooled time-series regression
    analysis of the three base-income models. The findings show that Malays and Indians have
    greater returns from education than Chinese do. But when holding education at constant,
    Chinese have higher returns (S$8,239) for being members of the majority group. Malay
    workers receive S$5,958, and Indian workers receive S$3,247 for being members of
    minority groups. This reflects discriminatory factors that work against Malay and Indian
    workers. Given these estimates, we can now compare income differentials among ethnic
    groups by decomposing the base-income equations for Malays and Indians.

    2. Table 5 also shows that Chinese on average have more schooling than Malays and
    Indians. Chinese, with 8.19 years of schooling, earned an average income of S$10,540.
    With 7.85 years of schooling, Malay workers earned an average income of S$8,289, while
    Indian workers with 7.45 years of education earned an average income of S$7,329. Based
    on the Chinese wage structure, Malay hypothetical income would be S$10,445, while hypothetical Indian income would be S$10,332. Therefore, the difference of S$2,156(S$10,445–S$8,289) between Chinese and Malay workers was due to discrimination, while discrimination would account for the S$3,003 difference (S$10,332–S$7,329) between Chinese and Indian workers. According to the models, income differences due to educational differences between Chinese and Malay workers, and between Chinese and Indian workers were S$95 (S$10,540–S$10,445) and S$208 (S$10,540–S$10,332) respectively. It is clear from the above analyses that only a very small portion of the income differences between Chinese and the other two ethnic groups can be explained by educational differences.

    Harlequin, Joker, and Dr Freeze

  13. B. From the Discussion section

    3. The British and Chinese complemented each other; as Trocki noted ‘Each possessed economic factors the other lacked, and each sought to exploit opportunities the presence of the other offered.”The Chinese needed access to British capital and the British sought to gain access to Chinese labour to gain control over the pepper and gambier economy that was not limited to Singapore but included the Riau–Lingga Archipelago. At the same time, the British were committed to the preservation of the feudal system of the Malay society.Hence, Malays were left peripheralised in their villages and were excluded from the economy, while the Chinese, through the kongsi managed to keep whole sectors of the economy under their control.
    4. With British withdrawal, Chinese dominated the economic sphere Malay cultural inferiority has been blamed for the Malays’ non-participation in the economy, and this ideology has gained legitimacy in post independence Singapore.
    It is important to note that the cultural explanation for Malays’ non-involvement has been generated by non-Malays assessing the Malay population,……
    5. It is clear that a cultural division of labour is highly entrenched in Singapore’s work world. Thus, extant historical differences proliferated by colonial policy, cultural division of labour, late entry into the labour market and perceived threat of such entry by the Chinese have led to the erection of barriers which have been successful in excluding Malays and Indians from some of the higher paying occupations in Singapore. Based on extant cultural differences, employers placed greater emphasis on the role of ethnic subculture in perpetuating the inferior occupational status of Malay and Indian workers. Thus, ethnic minorities are excluded from high-paying occupations not because of inadequate human capital

    6. Social and physical attributes that Chinese possess are used as the criteria of eligibility to good jobs. Historical structures of social relationships have restricted Malays and Indians from the full extent of rewards and privileges in the labour market. Thus, as Breton states:
    ...if for historical, ecological, or other reasons, a community is structured along ethnic lines,
    that existing structure will tend to be reproduced in the organisation of work and labour-market

    7. Indeed, the consistent findings that ethnic minorities earn incomes lower than dominant ethnic groups, irrespective of educational differences, strongly suggest that ethnicity is the primarily factor for exclusionary social foreclosure to lucrative occupations. If it is true that exclusionary social foreclosure exists, then the experience of discrimination is an institutional one. In this context, Breton noted that ‘Institutional discrimination stems directly from the fact that an ethnic collectivity has control over an area of institutional activity and has thus established structures, procedures and rules of behaviour that are in accordance with its own cultural imperative and interests’.
    8. Because Chinese are the dominant group politically and are at the pinnacle of the social stratification, state policies that target ethnic minorities to improve their socio- economic statuses promote the notion that the Chinese are a different species and culturally superior to other ethnic groups, and all other ethnic groups should emulate the Chinese. Already such a perception has permeated minority groups. There is a widespread feeling among the educated ethnic minorities that they have been treated unfairly, and that social mobility is better if one is Chinese
    So much for your meritocracy crap, SOB and no wonder no one couldnt give a damn about something so fraudulent. And so much for equality of opportunity, efficience, cogs and all, POS!. Now shut your gob and go do filial piety to your mother. She will understand what is is all about.

    Harlequin, Joker, and Dr Freeze

    1. Running between meetings, so this will necessarily be short:

      @The Slug

      You're welcome. Here's further food for thought:



      I don't disagree with a wealth tax - I just don't think it's truly effective or workable. Nor do I necessarily disagree with equality of outcomes either - based on my mental model, there is a good argument for blanket affirmative action, at least for those in the lower income group (read this for instance).

      But you'll have to explain to me how a wealth tax would address Malay versus Malay discrimination, Malay versus Bumi discrimination, and Male against Female discrimination. The gender income gap is at least as large as that between Bumi and Chinese households. By your logic, all Malaysian men should be taxed an additional 10%-15%.

      @anon 4.18

      Again, based on the model I set out for The Slug, Singapore does not in fact have a meritocratic society. Income and wealth inequality in Singapore is worse than in Malaysia.

      If you decompose the sources of growth for Singapore, what it boils down to is foreign immigration, increasing capital intensity, and increasing hours worked (highest in the developed world). Labour productivity? Not so much.

      There's also Singapore's status as a tax haven - by my estimates, Malaysia loses 3%-4% of our annual GDP through transfer pricing and tax base shifting. That artificially boosts Singapore's GDP, but not Singaporean incomes.

      If Singapore truly had equality of opportunity, they would not be suffering from a rate of brain drain which is twice as high on a per capita basis compared to Malaysia.

      @Harlequin, Joker and Dr Freeze

      Thank you and point taken, but watch the language.

    2. If Singapore is a "tax haven", as you have claimed, where is the evidence to back it up?

      Has Singapore been cited by the OECD, the EU or the US as being a "tax haven"?

      I know that there have been such accusations from certain quarters about this, but these accusations have been rebutted by the MAS and the Singapore government.

      The US-Singapore FTA has been existence for some years now. Successive US administrations have not labelled Singapore as a tax haven.

      The EU and Singapore are negotiating a FTA now. No concerns have been raised about "tax havens" here.

      The purists might argue that trade issues and tax havens are separate issues and can't be conflated.

      That, in my view, is not correct.

    3. I think you are either completely ignorant or deliberately being stupid about the issue.

      I assume, gathering from your comments, that you have hardly an inkling about the term, let alone how it is derived. And that stupidity extends to the level of conflating totally unrelated issues.

      If there is even a germ of truth to your contention, no country's tax office would dare to announce the obvious given the economic and political implications:

      Only stupid and ignorant people like your silly self would be deluded enough to deny the obvious.

      It would be better for you to keep silent rather than announcing to the whole world as to how stupid you are..

    4. Which country's government or tax authority has officially labelled Singapore as a "tax haven"?

      Note I wrote " government" or "tax authority". Not third-party organisations (such as the Tax Justice Network) or investigatory journalists (like those who work for the Sydney Morning Herald or a German newspaper).

      Are you even serious in claiming that trade issues and tax havens are not related?

      Let alone the issue of "transfer pricing" which is both a trade and tax issue, there is also the question of double tax agreements and tax avoidance schemes (both legal) and tax evasion (illegal).

      For example, has the Malaysian tax authority ever claimed that Malaysians guilty of tax evasion are stashing their funds in Singapore? If it has, please show where it has done so.

    5. Sorry, which your above citations show that these MNCs practise tax evasion (illegal) as opposed to tax avoidance (annoying, maybe morally reprehensible, but still legal).

      Which MNC/MNCs have been brought to court for tax evasion involving "tax havens"? If there are any, name them.

      Today, July 1, the US Fatca law comes into force. Is Malaysia compliant with Fatca as Singapore has done?

  14. Oh, this is priceless!

    The OECD lists Labuan as an Offshore Financial Centre, along with countries such as Singapore, Brunei, Hong Kong and the Philippines.

    Yup, forgot about Labuan, did we?

    Here's a link to a report in Le Temps 12/09/13 ( under the heading "A Tiny Malaysian Island Has Quietly Become A Favorite New Global Tax Haven".

    The sub-heading reads: " Since January (2013?) more than $(US?)540 billion has passed through the tax shelters of the largely unknown island of Labuan".

    I am curious, Hisham - did not Labuan come up in your analysis of "tax havens" when you commented on Singapore being one?

    1. @anon,

      1. Actually, it's pretty clear I know more about them than you do. Yes, I'm more than aware that Labuan is a tax haven, as is the state of Delaware (the US's onshore, offshore centre), and a lot of other obscure and not so obscure places. However up to a couple of years ago, Malaysians were not allowed to deal with Labuan based FIs.

      2. You'll notice that I made no moral judgement in my original comment. The situation is what it is. You seem to be reading something quite different into what I wrote. I made no mention or reference to tax evasion, which in fact isn't a terribly big factor in capital outflows from Malaysia. Transfer pricing practices are perfectly legal - if not exactly ethical.

      3. No country actually labels another as a tax haven - this is straw man argument, and totally irrelevant to the point I was making.

      4. Nevertheless, my original point still stands. Whether you accept it as legal or not, there does exist an undocumented transfer of profits (and thus tax liability) from Malaysia (actually from a whole bunch of countries) to Singapore, via the trade channel. This has the effect of artificially raising Singapore's GDP, without necessarily raising Singaporean incomes or wages.

      Don't believe me, you can check it out yourself:

      There are discrepancies between what Singapore reports as its trade, and what the rest of the world reports as trading with Singapore, discrepancies that are far too large to be explained away by transport costs.

    2. On FATCA, Singapore has an agreement in substance, while Malaysia has an agreement in principle. There's still plenty of teething problems however, mainly to do with whether the government wants to opt for Model 1 or Model 2.

  15. Hisham - are you saying that Singapore is "fudging" it's trade statistics?

    I recall that there was a controversy between Indonesia and Singapore about this some years back. The then Singapore Foreign Minister had said that all the relevant trade figures as compiled by Singapore had been given to the Indonesian government, and that it was up to the latter to make them public.

    I have gone through the literature on this. It appears that Indonesia then chose not to do so. Why is anyone's guess.

    Fast forward to the present. I find it hard to believe that the Malaysian tax authorities and the Malaysian Customs have not raised this issue with their Singapore counterparts on a G-to-G level.

    Note that this is specific to Malaysia.

    In fact, with reliable electronic customs and trade reporting systems in place, it's hard to understand why this issue hasn't been resolved.

    I would have thought that the Malaysian side would be very keen to clamp down on this sort of "fudgy business".

    1. @anon

      I don't understand - why would Singapore fudge their statistics?

      Note that this is NOT an issue specific to Malaysia. Trade misreporting is endemic across the region, particularly trade with China, Singapore and Hong Kong.

      This has in fact been raised between all the governments involved (BNM is leading a multi-agency task force on this), though what any one can do is an open question. Neither Singapore nor Hong Kong have any incentive to clamp down, since 1) their economies are the primary beneficiaries and 2) it's all perfectly legal.

    2. From what you have posted, it seems that BNM, the Malaysian tax authority and the Malaysian Customs can't solve this problem.

      How, then, can we get accurate trade data, even if sophisticated IT systems and electronic trade documents are in place and are being properly used?

      I think that the "perfectly legal" reason hasn't really been tested. Why is anybody's guess.

    3. Hisham - will all due respect, that sounds like a major cop-out to me.

      Are we saying that, between them, the Malaysian Customs, tax authorities and Bank Negara can't resolve this problem once and for all?

      What will happen when the Asean Common Market kicks in? More of the same?

      What will happen when MNCs further expand their regional supply chains? Do we have to "grin and bear" transfer pricing shenanigans, even if they are "perfectly legal"?

    4. @anon

      Who says this is a Malaysian problem? This is a regional problem. Let me give you two scenarios, and then you tell me what the Malaysian authorities can do about it.

      Scenario 1:

      MY affiliate produces goods, then transfers at minimal mark up to HQ based in HK. HQ marks up for management fees, interest on internal capital costs, CIF costs etc, etc, then transfers to distribution affiliate in SG. Distribution affiliate marks up even more, before transferring goods to final assembly in China. Main tax liability: HK and SG. Main legal jurisdiction: HK

      Because China has capital controls, you'll want to maximise cash outflows from any companies you have there.

      Scenario 2:

      MY company sells to SG company at minimal mark up. SG company re-exports to rest of the world at market price.
      SG company actually owned by MY company shareholders through shell corporation registered in Cayman Islands. Main tax liability: SG. Main legal jurisdiction: CI

      Is there any illegality with respect to goods and services transferred? Nope. Is there any illegality with respect to payments? Also nope. Third party related transfers? All you need is shareholder approval.

      Unless you're saying that Malaysian authorities have jurisdictional powers over HK, SG and CI, I'm not exactly sure what you're expecting here.

      Latest on Fatca: Malaysia now has an agreement in substance

  16. came across this:

    -Bumbling Paddler

  17. Of course, the HJ&DF guy is being facetious. Isn't he?

    Leaving aside the fact that he is regurgitating the same old mishmash of allegations, the fact of the matter is that none of the concerned countries (Indonesia, the US and India) have chosen to take matters further with Singapore.

    After all, these countries aren't exactly without the means to exact retribution on financial scallywags, are they? Especially the US, which succeeded in marginalising the entire Iranian banking system, and whose sanctions on Putin's coterie of crony oligarchs forced a rethink on Ukraine and Crimea.

    So, we have the Singapore PM making nice with Janet Yellen and Jacob Lew. They must have forgotten about US State Department concerns regarding Singapore and "money laundering". That's a major lapse of memory, warranting a Congressional investigation at the very least!

    Who are we kidding here? Realpolitik rules the day and calls the shots. You are either in the " coalition of the willing" or beyond the pale.

    Guess who's beyond the pale, eh?

    Anyway, back to the topic of "fudged" trade figures. Hisham has portrayed this as being "perfectly legal", and has cited a couple of scenarios to support his argument.

    Yet this does not answer the question of whether Bank Negara, the Malaysian Customs and tax authorities have done their best to close as many " loopholes" as they can, and if they have pursued this in bilateral and multilateral meetings?

  18. @anon

    To answer your question - yes, they have (I know some of the team who have been investigating this). Why no results? Some of the remedial measures take time and political will - GST for instance has been opposed from day one, and won't come into effect until next year.

    Also, unlike the US, we have no real clout. FATCA compliance carries the big stick of a 30% withholding tax on business conducted in the US. That is not a threat we can realistically use. Things may change with Gatca. However, Fatca/Gatca really only address account holdings of individuals and corporations, not flows of goods and services.

    Also SG and HK have zero incentive to help anybody solve this problem. Why should they?

    Again, it's a mischaracterisation to say this is solely a Malaysian problem. The same "fudged" figures appears in SG, HK, CN, ID, PH etc trade numbers. CN did a crackdown last year on trade invoicing, but this largely shut down those who were fraudulently inflating invoices. MNCs were untouched.