Economic Horoscope

Will there be structural adjustments in the economy?

The current global economic crisis is caused by the US means that structural adjustment is badly needed in the US. What does this mean?

1. The US has printed too much money to solve its economic problems which has resulted not in an increase in output but in an increase in prices. The deflation only reduces the money stock and prices to their appropriate levels, and reveals the actual amount of production that is going on in the economy. Hence, the surge in unemployment.

2. The problem of low production in the US has been disguised by the surge in the imports of cheap Chinese products paid for by the printing of the US dollar. At the same time, the export of paper money has allowed the US to overconsume its fair share of the world's production as evidenced by the high level of indebted at the personal and government levels.

3. The solution to the US economic problem is to increase the production of goods, which may have been hampered by high nominal wages caused by the printing of money. US wages may have to fall in order to be able to compete with the wages in China. In other words, the US has to with content with a lower standard of living, even if the US recovers.

There are also structural problems in the Chinese economy, the mirror economy to the US.

1. The Chinese had pursued an economic strategy that was used by the Japanese before and shown to be a failure - mercantilism. The tenet of mercantilism is to export and accumulate foreign reserves - a process that is not self-sustaining. If China wants to export, it must also consume imports. This it has done but not in a bilateral way. China exports to the US but imports from Europe. The closure is for Europe to buy from the US which it tries not to. The problem in the global nexus may be the European Community which has a strong anti-trade sentiment with the US.

2. China first absorbed foreign direct investment from the US to set up plants to export back to the US. With China's open door policy in place for nearly three decades, that FDI had been fully repaid. The Chinese export boom has therefore funded the domestic asset inflation, in shares and property - the boom that was exported by the US printing of money. The collapse of the US economy therefore causes a collapse of the share and property prices in China.

3. The solution is for China to allow old export-oriented companies to collapse, and out of that rubble for new enterprises to come up that cater to the new export markets and new domestic markets. For this to happen, China has to improve on its labour laws, the present ones exploits rural workers. Labour laws on minimum wages and proper contracts for employees mean that there will be increasing recognition of labour as a valuable input to production which therefore warrants a higher wage rate. But China's relative lack of innovation especially in quality may have been overlooked by its low prices, as well as disguised by successes in other areas of the economy, particularly tourism. China should refocus on food production. The only major things China needs to import are raw materials for manufacturing.

The EC may be rather insulated from the global crisis, as a result of its clever politics.

1. The EC as an economic bloc may be working much better than expected. The greater mobility within the EC has created an in-house boom which has fueled its economic optimism. While Europe is also affected by the US financial meltdown, its real economy is intact and so long as the banks continue to lend, the EC will grow but at a very low rate. The EC has protected itself with its stringent import rules, which they probably could have learned from the Japanese. But the Asian penchant for European luxuries especially the new rich Asian class is a boom to the Europeans. Structurally, Europe is in good shape.

What about Malaysia?

1. The Malaysian economy has long suffered from a series of bad policies disguised as successes by the use of heritage petrol money to the extent that the petrol reserve may not be there anymore when we really need it.

2. The Malaysian economy has been destroyed by the nationalisation of economic opportunities and the dispensing of the licence to economic opportunities to the elite has created an economic structure that is lopsided and unstable - in the sense that there has been so much extraction of economic rent at all levels that the underlying support industries are weakened. With economic opportunities coming from patronage, businesses are clear that this is not sustainable and therefore has been bailing out of the economy under the cover the outward investments. Even ostensibly government-linked companies (GLCs) whose mandate is to spearhead the structural change in the economy has joined in the Outward Bound movement, abandoning the more difficult job at home (while they continue monopolistic dominance). The attempt by the government to ensure the profitability of natural monopolies in Malaysia will also spell the doom for local business as all rates of basic infrastructure facilities will be raised to uncompetitive levels. The problem runs in the real sector as well as the banking sector.

3. The way out for Malaysia is to rebuild its entire socio-economic-political profile. Fairness and integrity are key issues that affect confidence, not only in the political system but also in the decision to invest long term in this country by ordinary people - which means it will affect their decision to put their roots, pour in their savings and work to improve the society. Without confidence, there will be no genuine investments - investments in one's homeland - and the weakness of the economy will be shown by the secular decline in the standard of living as the cost of living soars and the currency plunges in value. There is a need for an entire remake of the economy which no stimulus packages no matter how will solve.

Monetary Policy In General. Greenspan has done the world a great disservice by preaching the blessings of keeping monetary policy loose. Now, the world has taken monetary policy off the leash - because monetary expansion was not reined in earlier to keep inflation in check. The inflationary pressures are still there. But unemployment rises, there is a political need to act as if to create jobs. Pouring more liquidity into the system will not allow price adjustment but will keep asset prices high while jobs may not be created.

My conclusion is that this is a good time for economies to take time to formulate policies to restructure their economies by removing distortions and by improving the market mechanism. No more politics.