Monday, November 3, 2008

Nurturing Home-Grown Investments

Our market is right in front of us - China - for the next hundred years.

How do we go about seizing this opportunity, as a nation?

Malaysia is no more just a commodity exporter - and luckily we still are. The agriculture sector was at risk of being detroyed by the housing boom (which has only recently died down).

Malaysia now has an industrial base - after IMP1, IMP2 and IMP3 - a fairly decent industrial base, industries and industrial parks of all sorts. It is arguably whether we have managed to develop industrial clusters - although we can say the palm oil cluster is well-developed, but the motor cluster is in shambles. We have a few SME clusters around the MNCs, as suppliers of components - but we do not have enough of value-added downstream industries where technical knowledge is needed to allow higher salaries to be paid to employees.

Malaysia has an assortment of service industries - from transportation and logistics to ICT and the arts and culture and entertainment - although these need critical mass to support it.

SMEs have difficulties in getting adequate funding from the formal banking system. There are several factors. (a) The structural lopsided nature of the economy has made funding of the creation of collateral assets by the banking system a self-sustaining virtuous cycle, and thereby resulting in the unbridled expansion of the building industry. Hard-working manufacturers appear to be relatively slow and unattractive, for lender. (b) There does not to be any barrier to entry into the SME industry, so competition will drive down the rate of return for the entrepreneurs - who must therefore resort to all kinds of tricks to make that extra buck - and the demise of small provincial banks has made relationship banking with the small entrepreneurs a thing of the past - banks seems to be happier dealing with big corporate boys in order to grow their loan books. (c) The crude and unsupervised method of implementing sensitive government policies has caused grave uncertainty in the minds of small businessmen who survive through blood, sweat and tears - and wits. It is unlikely that they will willingly make all those sacrifices for naught. Hence, they are unlikely to put in their capital for reckless expansion and if at they are more ready to cash out when the opportunity presents itself. The loss of confidence is a drain on the investment spirit.

I imagine far-sighted broadly planned programmes for investments in the nation by Malaysians for the purposes of exporting to new growth centres such as China. These programmes will provide technical and financial as well as networking assistance to young entrepreneurs and businessmen to grow and expand their businesses. There would be a general national awareness programme of inculcate the spirit of adventure within the discipline of prudence, to grow on the basis of savings and investments and where possible with the added impetus from bank loans - and all with a proviso that loans must be repaid so that banks can repay their depositors. It is this broad spirit of adventure and hard work and reaping the reward from one's own sweat that this nation needs to promote.

It is immaterial the colour of the entrepreneur so long as he or she successfully undertake investments - the making of goods and services for the benefit of consumers.

The Minister of Finance must sit down with the Central Bank and the Securities Commission to discuss the direction of funding of the economy and the instruments and systems by which this can be accomplished. There is a need to straight the whole financial system, away from the inclination towards speculative activities.

The central bank must pursue a long-term policy of maintaining the strength of the ringgit in order to protect the savings and investments of the nation from erosion by systematic depreciation as we have seen in the last twenty-odd years. (The last financial crisis of 1998 when the ringgit depreciated is an indictment of the central bank for not performing its statutory function of protection the value of the local currency.)

The tariff system should be reviewed. Malaysia is not more just a commodity exporter. Malaysia in future will have to start importing raw materials to feed its industries which value-add (rather than just assembling) and there should be as little distortion as possible (through customs) of the market prices of the inputs for industries.

Lastly, strenghten the educational system. We may to dump the useless professors and put in the real ones who can do research and add and disseminate knowledge - so that the nation can move up the value chain, rather than be stuck at the bottom of the food chain.

In this way, investments will be nurtured at home over the long run.

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