Parsing the New Economic Model

First, for what is essentially a strategy paper, the New Economic Model is a hefty read. Not so much for the length (it runs to 209 pages), but the density – there are a lot of proposed changes, with some uncontroversial while others pretty incendiary. The next three months are going to be very interesting, as what we have now is just the strategy framework, with details on the implementation due in June/July to coincide with the unveiling of the 11th Malaysia Plan.

To be honest, some of the proposed policies are rehashed from the 8th and 9th Malaysia Plans, which indirectly points to the failure to actually realise these development goals. More than a few are actually covered by other policy documents such as the National Innovation Model and the National Higher Education Plan. But a few of course are a completely radical departure from business as usual, that give this document the right to carry the title “New”.

I find the language of the document itself pretty refreshing. If you’ve ever read through any of Malaysia’s Economic Reports or BNM Annual Reports, you’ll now what I mean – the NEM doesn’t pull many punches. A few examples:

...The difficulty of starting businesses, enforcing contracts, and dealing with construction permits — as just specific examples — bear testimony to a sluggish bureaucracy no longer fit for purpose in a fast-moving world.

...Some have suggested that a formal minimum wage might be helpful to cushion workers against such shocks or downturns. The NEAC strongly believes this would be a wrong approach and in fact could exacerbate the situation by reducing competitiveness and reducing employment opportunities.

...Resistance is likely to come from the business community including protected industries, employers of foreign labour, licence holders, beneficiaries of subsidies, and experts at doing business the old way. Some segments of the rakyat who no longer qualify for government subsidies and grants might react strongly, and those that have enjoyed secure jobs and a stable lifestyle from protected firms may feel threatened. Both these groups might then turn to their political representatives and politicians may then attempt to lobby and water down the needed measures. The resistance from these vested interest groups must be dealt with fairly and transparently, following genuine consultation.

There’s enough here to make virtually every special interest group unhappy. The unions won’t like the proposed changes to make hiring and (more importantly) firing easier, nor with strong dismissal of the minimum wage idea. Employers are already unhappy about the restrictions on hiring foreign employees, and the new pension schemes – they’re going to be even less happy with the proposal to put foreign workers on equal legal footing with domestic workers. Staff at GLCs must be wondering what the future will hold for them.

And more than a few are going to be up in arms over the roll back of affirmative action.

This is the biggie, and the true litmus test for the success of this administration. If Najib can pull this off, he may be remembered as the greatest PM in Malaysia’s history…or its most vilified (fingers crossed, I hope this doesn’t descend into violence). I have to say, the delays in announcing the NEM and hints dropped by other ministers had me wondering if this wouldn’t be watered down in some way – but the NEM was unequivocal about this issue.

It went even further than I thought it would, with means-testing instead of a race-based policy. I thought the former was very likely and more desirable from a social welfare perspective, but I didn’t suspect dropping the latter. Ironically, this places the NEM as the direct spiritual descendent of the 1970 New Economic Policy, a back to basics move so to speak. While the NEP is often used as justification for Bumiputera preferment and ended up being used that way, the original intent was for poverty eradication irrespective of race. It just so happened that most Bumiputeras were below the poverty line in 1970, hence the blanket race-based approach. I haven’t outlined my thoughts on the NEP in this blog, but you can find most of my thinking in the comments of this post on SatD’s blog.

As far as the targets go, I don’t think them too demanding:

We’re looking at 8.8% nominal GDP growth over the next decade, which funnily enough isn’t actually much different from what we did over the last decade. I continue to believe that it’s more important to focus on the type of country and economy we want to be, rather than on getting to high income status. We’ll get to the latter soon enough, as much from demographic factors as anything else.

I don’t know if I want to get into more specifics of the NEM just now, especially since we’re still looking at debating the merits of each proposal over the next three months. Nor am I yet going to comment on any of the announcements made during the PM’s speech relating to EPF, Khazanah or Petronas. There will be ample space and time for debate on these issues as they arise in the public sphere.

On a personal note, I’m chuffed to find an ex-colleague in the NEAC office – and my Masters supervisor on the Advisory Group. It’s a small world.

Technical Notes:

1. Prime Minster’s Speech at Invest Malaysia (pdf link)
2. New Economic Model for Malaysia, National Economic Advisory Council

The New Economic Model – Get It While Its Hot

The PM has delivered his speech at Invest Malaysia, and the NEM report (part I) (pdf link) is available on the NEAC website. The goal is USD15,000-20,000 in per capita income by 2020, which neatly brackets my point estimate of USD16,975.

More to come!

Bank Negara Annual Report 2009

Apart from a revised forecast for 2010 GDP (4.5%-5.5%), there really wasn’t anything unexpected from Wednesday’s release of BNM’s Annual Report – but then there almost never is. Given the niceties of central bank signaling on interest rates and the economy, you will never hear anything surprising in the press release, the annual report itself, or in the face-to-face analysts briefing.

I’ve been to a few of the latter over the years (though not this year), and it’s almost always more a chance to catch up with your peers in the industry, and snag a complimentary copy of the annual report, than anything else. The only other thing of value is that BNM will sometimes show off their data (like household debt numbers) that never appears in published form. That’s changed this year, as the presentation slides are now available for download.

But you will never get the Governor or her staff to commit to anything about future policy direction, no matter how hard you try – as I remember one young man tried to do a few years back. Hence there’s almost never any questions from the “old hands”, because they know they won’t get any answers. You still have to read the tea leaves to get a sense of where the central bank is going.

Technical Notes:

1. Annual Report press release (pdf link) – contains a summary of BNM’s forecasts and views on the economy. This contains most of the relevant info.
2. BNM 2009 Annual Report
3. Annual Report Presentation Slides
4. Financial Stability and Payment Systems pres  release (pdf link)
5. BNM 2009 Financial Stability and Payment Systems Report

Exchange Rate Valuation

Menzie Chinn (Professor of Public Affairs and Economics at the University of Wisconsin, Madison) has a nice roundup of exchange rate valuation approaches, with the pros and cons of each. Worth a read if you’re interested in the subject (as I am).

Chiang Mai

No, I’m not on holiday ;)

The Chiang Mai Initiative Multilateralization (CMIM) came into effect yesterday. This is a pretty momentous occasion, if you’re a believer in regional economic integration a’la the European Union. The original Chiang Mai Initiative was a set of bilateral swap agreements between ASEAN and Japan, China (including Hong Kong), and South Korea that was intended as protection against the kind of speculative currency attacks that levelled the region in 1997-98.

CMIM takes this a step further by pooling the swap arrangements into one big fund, with an initial size of US$120 billion. The way it works is that each country commits to a certain level of US dollars to the fund, which can then be utilized by any of the members in exchange for local currency, up to a predetermined supply. That means that the ASEAN+3 grouping have a collective pool of reserves that can be used in the event of an external liquidity or solvency crisis, effectively raising the international reserves of each member. This is above and beyond the liquidity support available through the IMF or direct from the Federal Reserve – but without the strings attached.

Given the level of reserve accumulation in East Asia in the past decade (an estimated US$4 trillion at the end of 2009) CMIM is more of an insurance policy, but you can never have too much insurance, right? In Malaysia’s case, the amount is US$11.925 billion, or little above 10% of our current reserves.

What’s interesting is that this could be a precursor for a true Asian Monetary Fund along the lines of the IMF, and just like that being currently mooted in Europe to support some of their weaker members. We’ve already taken another step towards monetary integration with the Asian Bond Markets Initiative (ABMI) and the Asian Bond Fund I and II (here and here). Europe’s economic integration was never premeditated – it was a slow evolving process spanning decades that began with an agreement on steel, and then morphed into the Common Market and a Europe-wide monetary system.

East Asia is travelling the same road, though we’ll probably never achieve the level of integration found in Europe. The economic, cultural and political differences, more heterogeneous than in Europe, makes this a much tougher proposition. But travel it we will, and what the destination will be like would be interesting to see.

Woot! Monthly Unemployment Statistics

I didn’t see any press releases about this, but DOS is issuing monthly unemployment reports. I can cross this off the wish list now.

The data has been backdated to the beginning of 2009, and it’s interesting to see that it confirms that the recession reached a bottom around Feb-Mar 2009, with unemployment peaking at 4.0%-4.1% before dropping to 3.2% in June. January 2010’s actually higher at 3.6%.

Other nuggets:

1. The variability in the unemployment rate is surprising, and seems to be driven as much by changes in the labour force as it is by employment.
2. The foreign workforce is one-third of the total labour force, and obviously isn’t counted in the unemployment ratio.
3. Labour force participation rate is just over 60% – do I need to bring up the lack of female participation again?

Technical Notes:

January 2010 unemployment report from Department of Statistics

Bernama Does It Again…

A professor speaks:

Analyst: Consumption led-growth vital for re-engineering M'sian economy

KUALA LUMPUR, March 22 (Bernama) -- Consumption led-growth is vital in re-engineering the Malaysian economy, according to senior economic analysts.

Senior Advisor to the Asian Institute of Finance, Professor Datuk Dr Sudin Haron said basically, there are four main components that drive the economy of a particular country - consumption, investment, government spending and net export.

"Therefore, if the government wants to expand the economy, it has to introduce a policy that increases consumption and investment, spend more money for developmental projects and produce more products for export purposes," he told Bernama on Monday.

He said the consumption figure is the main factor that contributes to the gross domestic product (GDP) and, it is represented by both private or consumer consumption and business consumptions.

An incredibly shallow analysis by someone purported to be a “senior economics analyst”, and more what one would expect from a 1st year undergraduate…except Prof Sudin Haron isn’t an economist, but a respected Professor in banking (particularly Islamic Banking).

Sloppy.

Want To Know How Singapore Manages Monetary Policy Differently From Everybody Else?

Get a load of this analysis from Morgan Stanley (Excerpts):

To Tighten or Not to Tighten?

Market conditions are not forcing the MAS's hand in tightening the currency policy either. Based on our model, the S$NEER has been tracking in the upper half of the bandwidth since the last monetary policy review in Oct-09 - but not pushing against the upper band as yet. Indeed, the S$NEER has been quite range-bound, broadly moving sideways since Oct-09 before trending down in Dec-09, then trending up again from the second week of Feb-10. It now stands marginally below the levels seen at the Oct-09 review, at roughly 1% above the midpoint of the bandwidth. From a balance-of-payments perspective, the appreciation pressures on S$NEER seem to have abated somewhat. Foreign reserves in Feb-10 have fallen slightly to US$187.8 billion from a peak of US$189.6 billion in Jan-10. Indeed, the monthly trailing accretion rate in the past three months has been somewhat patchy compared to the three months prior.

Separately, our conversations with our currency traders also suggest that the MAS's action in the currency market recently has been mainly smoothing operations rather than aggressive intervention or leaning-against-the-wind.

As a side note, one possible way in which the MAS could curb inflation pressures, so far primarily external cost push-related, without compromising on growth would be to re-center the midpoint of the bandwidth higher to the prevailing level of S$NEER but still retain the zero appreciation slope. This is possible but not probable, in our view.

Recall that during the boom years of 2004-07 when the economy showed signs of overheating, the MAS ran a gradual and modest appreciation stance and only increased the S$NEER slope in Oct-07 when inflation went above 2%. This time round, trailing inflation is still low and together with the poor growth visibility, we doubt that the MAS will take action to curb import-led inflation, given the low starting point on inflation at this stage.

Singapore adjusts the monetary policy stance wholly through changes in the exchange rate, unlike the more common interest rate/inflation rate-based targeting used virtually everywhere else. It works for them simply because the scale of trade is so much bigger in relation to their economy, and because they have virtually no natural resources of their own.

One consequence is that because the exchange rate functions as the policy instrument, both interest rates and money supply are fully market determined, and hence also highly volatile. It’s a case of picking your poison, but it works for them (and not necessarily for anybody else).

Feb 2010 CPI: Still Running Below Trend

One would generally expect increases in the price level to slow after major festivals. Last week’s February 2010 inflation report shows that this year has so far been no exception:

Month on month, growth was completely flat. Given that CPI growth has been below the medium term trend for pretty much the past year, there’s still very little price pressure in the economy yet.

The core measure shows even less price pressure:

If BNM does raise the OPR at the next MPC meeting in May, it won’t be because of incipient inflation. The IMF thinks that BNM was being too accommodative even last year, so setting higher interest rates won’t necessarily be a tightening move – more a case of getting back to neutral.

Technical Notes

February 2010 CPI report from Department of Statistics

Goldman Sachs Thinks The Yuan Is Overvalued. Wow.

"Goldman Sachs Says Buy ‘Overvalued’ BRIC Currencies"

This is completely against the grain – but from the brief description that was given, it appears Goldman is using a long-term valuation model. And when I say long term, I mean it in the strictest academic sense – a pure equilibrium stock model (no flows).

Innovation and R&D: Hurdles Galore

Just how bad is the situation with respect to R&D in Malaysia? Even considering our demographic profile, it’s really, really poor. The latest report available on actual expenditure paints a gloomy picture (click on the pic for the larger version; source: MASTIC):

Not pretty is it? All’s not quite lost however, as a lot of the foundation for a growth spurt in innovation and R&D intensity is already in place:

1. The legal framework is in place, from laws governing patents and trademarks to intellectual property rights, though enforcement is still a bit of an adventure.
2. Malaysia acceded to the international Patent Cooperation Treaty in 2006, which greatly speeds up the granting of international patents.
3. A little more than half of total R&D spending is done by industries rather than government.
4. Universities have mostly gotten their act together and are starting to really push for industrial collaboration to commercialise patents, and to offer research consultancy services.
5. We have a numbers of science parks operational such as Technology Park Malaysia, Kulim High-Tech, and Cyberjaya with more on the way. These developments can create the potential (I won’t say actual realisation) for cooperative R&D between academia and industry, as well as serve as an incubator for start-ups and joint ventures.
6. Various tax incentives and the IRPA grants provide financial motivation for both public and private sector R&D.

There has been in fact some progress since 2006 in fostering innovation (patents applied for and granted; source:MYIPO):

Nevertheless, just looking at the chart, there’s still a long way to go before we catch up with our regional peers or even domestic based foreign R&D. Some of the issues I see (my opinions, not necessarily the facts):

1. Issue number 1 is that Malaysian companies just aren’t interested in spending on R&D, with most of the private sector contribution coming from MNCs and other foreign owned firms – that has to change. Local companies that do engage in R&D collaboration with universities run into a culture clash mainly because business and academic incentives for R&D aren’t aligned.
2. Issue number 2 is universities aren’t always doing research that can be commercially applied, and aren’t terribly good at communicating their discoveries when they do. As a result, existing patents aren’t picked up on by the private sector and bought or licensed to be commercialised.
3. Issue number 3 is that IP laws aren’t fully grasped yet, which results in disputes and delays in getting products to market.
4. Issue number 4 is that outside of the science parks, we have a problem getting R&D going in SMEs as they lack the scale and resources to conduct R&D on their own, even if it’s just market research.
5. Issue number 5 is quite simply capacity and capability. We just don’t have enough people doing research or the facilities to support them.
6. Issue number 6 is that tax incentives and government research grants are too narrowly based. While there’s a good argument for prioritising limited resources, when you talk about a new economic model based on innovation and creativity, putting your money on just hard sciences isn’t exactly going to get you far.

Technical Notes:

1. Report excerpt from Mosti Pocket Book 2008 (warning: pdf link), Malaysia Science and Technology Information Centre (MASTIC)
2. Patent statistics from the Intellectual Property Corporation of Malaysia

Media Mischief Or Ministerial Boo-Boo: The Minimum Wage Blog

Did the media get it wrong, or did the Yang Berhormat Minister get confused? It was reported in the papers that the Ministry of Human Resources would open a blog in a couple of weeks to get feedback from the public on the introduction of a minimum wage (I commented on this a week ago). Turns out the blog has been up for over a month now:

 

“Kata Aluan dari Y.B Menteri

Tuan/Puan yang dihormati,

Salam 1Malaysia.

Selaras dengan konsep “1Malaysia: Rakyat Didahulukan, Pencapaian Diutamakan”, Kerajaan melalui Kementerian Sumber Manusia sedang mengkaji kemungkinan pelaksanaan gaji minimum kebangsaan untuk pekerja sektor swasta di Malaysia. Kajian ini juga selaras dengan hala tuju Kerajaan untuk merealisasikan model baru ekonomi yang berteraskan ekonomi berpendapatan tinggi dan usaha mempertingkatkan taraf hidup isirumah berpendapatan rendah.

Tidak dinafikan, masih terdapat segelintir rakyat yang hidup di bawah paras Pendapatan Garis Kemiskinan (PLI), malahan ada yang memperoleh pendapatan kurang daripada RM500 sebulan. Peningkatan kos sara hidup terutamanya harga barang keperluan harian yang semakin meningkat, golongan berpendapatan rendah ini menghadapi kesulitan untuk memenuhi keperluan hidup mereka terutamanya di kawasan bandar. Cadangan penetapan gaji minimum kebangsaan sekurang-kurangnya akan dapat mengurangkan permasalahan ini.

Namun demikian, sesetengah pihak berpendapat penetapan gaji minimum kebangsaan akan membawa kepada implikasi negatif kerana ia boleh menjejaskan kuasa pasaran (distort market forces). Pelaksanaan gaji minimum juga boleh menyebabkan ‘kehilangan’ beberapa kategori pekerjaan di peringkat rendah yang masih ada permintaan terutamanya untuk golongan yang mudah terjejas (vulnerable groups) khususnya mereka yang bekerja di luar bandar dan secara tidak langsung akan meningkatkan kadar pengangguran negara.

Sehubungan itu, Kementerian Sumber Manusia amat mengalu-alukan sebarang pandangan, pendapat, idea, cadangan dan komen yang boleh disalurkan melalui blog ini atau menerusi e-mail: gaji_minimum@mohr.gov.my bagi membantu Kerajaan dalam menggubal dasar dan strategi mengenai gaji minimum.

Kerjasama tuan/ puan amat saya hargai dan didahului dengan berbanyak-banyak ucapan terima kasih.

Datuk Dr. S. Subramaniam

Menteri Sumber Manusia”

Go ahead and drop by. I’ll be giving my feedback as soon as I get my guns. Just kidding…I think.