Tuesday, June 30, 2009

Wages, Productivity & The Ringgit

How do we measure the progress of a nation? I propose to measure our progress by an increase in the job opportunities available to ourselves and our children, as well as an increase in our incomes in terms of the quantity and quality of things that we can buy for our families.

In other words, household incomes in addition to corporate profits. We want our companies to make more profits so that they can reinvest and create better jobs and pay better. We do not want companies to make more profits so that the executives can pay themselves better while suppressing wage increases down the corporate ladder.

We started as a commodity-producing country, as in primary commodities. Do we continue to be a commodity-producing country, even as we embark on the industrial development with MNCs providing jobs for our people, as in electronic assembly? In other words, do we continue to produce goods and services where prices are determined by the world markets and not by the quality of our products?

If the prices of our products are dictated by the global commodity markets, then to stay competitive, we have to keep our nominal wages low and the ringgit weak. There are then only two ways by which corporate profits can be increased:
(i) Increase in production volume - two or three shifts
(ii) Fortuitous increase in global commodity prices.
Nominal wages per head stay relatively unchanged. If there is an increase in the trade surplus because of (i) and/or (ii), to keep the ringgit unchanged, the central bank increases the supply of ringgit in the domestic economy which will then be translated in higher domestic prices. Wages per head after adjusting for inflation then decline and the welfare of the people is reduced.

If, in trying to increase their profits, companies pitch local workers against desperate foreign workers on the grounds that foreign workers can work harder and longer for less, and if the government condones such a policy, then the nation is commoditising the unskilled local labour market. In such a situation, our people become displaced in their homeland and become unemployed. Herein lies a potential social problem which can have long-term detrimental impact on our society.

The reason why such a policy should not be condoned is that, in order for the nation to progress and for real wages per head to rise, there must be an increase in productivity gains. There must be corporate and economic structural change which can be initiated by allowing the ringgit to appreciate naturally in the face of the trade surplus. The trade surplus may become less as a result, but companies have already made their profits and therefore there should be pressure for them to invest in other businesses such as by going into downstream industries where there is higher value-add. Corporate profits are then fruitfully spent in upgrading technology and in ensuring productivity gains rather than paying fat dividends to shareholders.

Plantation companies may not wish to reinvest here and may instead wish to venture into the same industries in neighbouring countries (because of similarity of climate). Electronic-assembly companies may wish to move to other low-cost countries (because of similarity in labour laws). Certainly, any change in the key parameters of the country - ringgit and wages - will bring about the dynamics of change and change for the better is called national progress.

Such national progress in the use of more advanced technology and the improvement of productivity gains in the country - in consonance with the aspiration of having more literate and educated children and young generations who can think and innovate and a better life outside of plantations in air-conditioned executive office suites - must be the result of a systemic and consistent government plan and policy that encourages all and sundry among the citizenry and friends of the nation to participate and contribute.

We have to realise that the strategy of encouraging FDI in providing jobs for unskilled and semi-skilled labour is anachronistic to the aspirations of our children.

In moving forward, therefore, we should not get stuck in the policy traffic jam of a national car policy and APs and highways which unjustifiably drains the resources of the young just to be mobile in town. We should be building infrastructure for the application of ICT in order that our young can participate in the global supply chain that links our nation, with the region, the West and the markets. Instead of creating jobs for our young at home, corporates are leaving home to invest in nearby markets to invest.

It may be hard for a nation of traders to invest in technology on a long-term basis. While we are finding our own feet in basic research (which we have), we also need groups of young people to commercialise existing technology (which we have), to find venture capital (which we have), and to find new market (which we may or may not have). We should a set up a network that can cater to investments systematically in more technology as well as traditional technology in downstream activities of old industries.

Whether going for the service industries is the right answer or not is a big subject in itself.


de minimis said...


This series of yours is very insightful. I do hope other blog readers will make an effort to place some comments so that some useful discussion can commence.

I do sense that readers are somewhat intimidated by the reach of your thoughts. But, they shouldn't be coy. They should give your blog more support because the views and analyses that you have offered is of great value to Malaysia's economic development.

Keep going!

walla said...

Looking forward, what is the determining factor?

It's oil. That's almost forty five percent of government revenues. That money which pays to employ almost two million civil servants and provides subsidies for education, health and security besides stimulus prime-pumping packages.

When we become a net oil importer, what happened at the petrol stations recently after the plug was pulled on fuel subsidy will probably be magnified ten times.

If oil price rises when we become net oil importer, natural gas and coal price will also increase so power rates will go up which means the pressures which manufacturers already face now with the present rates will go up even more. Also price of everything else which means inflation will erode disposable household income. And those essential goods the government will not have the money to subsidize. By ricochet effect, everything will cost more. And the prices will sticky higher and longer. No beer anymore, for instance.

Meanwhile cost of production will make our produce pricier on the international market without any noticeable increase in value of their content to justify the increase in price. Which means our goods won't sell well. So trade finance will go down and the economy will shrink which means bankers will be even more jittery to invest the slush funds in their vaults to raise corporate investment that is needed to kickstart the economy.

Being net oil importer means there is no extra oil revenue even if oil price goes up. And if oil price goes down, the private sector will have to be extra productive in order to raise more tax revenue to the public sector to compensate for its loss of oil revenue so that it will remain employed to provide aforementioned basic services. Meanwhile, some states go bankrupt and the federal deficit balloons.

This country has too much government in it.

So, from oil we come to private sector productivity. Its twin is public sector productivity and cost justification.

How to raise private sector productivity? Automate. How to automate? Get rid of dependency on low-cost labour activity. How to do that? Enforce it. What happens when it is enforced? Garments industry in Johor collapses. Electronics assembly industries in Shah Alam and Bayan Lepas close down. Construction and housing industry everywhere sputters to a stop. Why? Because unlike the auto industry it is not so easy to automate these industries. The machine to sew a button will be too costly for the local investor to buy. Especially now.

walla said...

So, move the goalpost. Steer away from oil-dependent activities. Commodities. Plants take time to grow. A pineapple needs fourteen months to grow and ripen. There is not much money in it. Palm oil cannot be horizontally differentiated much. Soap, cooking oil, dish-washing liquid. What else to squeeze out? Rubber died with tin. Timber is too late. Now conservation movement up in arms with global warming. Markets closed in Europe while staple Japan has fallen to bottom gdp growth rate. Also wood is heavy and bulky. Cocoa is messy; prone to disease. Biotechnology? What big industry can come out of it by 2012 when none came out of it for Singapore in 2007?

So, scratch commodities and manufacturing and go hightech industry. Knowledge(K)industry. Our k-industry was kayo-ed when someone gave a black eye to someone else. Also, locals don't like programming. Playing with codes, job for foreigners. You need maths, method and discipline. And knowledge industry needs knowledge. Knowledge is in non-local language. Locals only good in local language. The best is this - trainers of locals only know local language. That's why there is a shortage of non-local language lecturers in the private sector. So that a lecturer in finance has to double-up teaching history of science. Standards will drop. Even in private sector. Twinning or no twinning, it doesn't matter.

This country is a sitting duck.

Downstream of traditional industries. Food industries, grocery shops, barber shops, franchising, selling insurance, empat ekor, online betting, tourism.

Food industries, problem. Seafood boycotted by horrified europeans. Grocery shops nullified by big foreigners. Barber shops replaced by assembly-line snipping. Comes with vacuum cleaner. Franchising. To who? Selling insurance. Pay with what? Stock-market tepid; insurance companies can't make back. Empat ekor. House always wins. Online betting. The speed is not 100 MBps; besides the computers have been confiscated. Tourism. Cannot compare to Thailand.

Bleak so look for silver lining. Imagine it is 2012.

- more foreign investors have come in; mostly in service sectors; tinkering with all sorts of services; opening new types of restaurants and health spas;

- more locals who can afford have left; where they go, no one knows;

- rich will remain comfortable, poor will just get by; mostly all will just live on less; personal savings non-existent; no one thinks of the future anymore; those old will fade away, wondering what their lives have been all for.

Not silver, more like grey.

People need more money. They must do better work. Work that is in higher demand which can command a better pay. What is the work and where is the pay?

In this country, service industry is stir-fry mee and smile at hotel guest. Maybe also brokering a deal, doing an audit, recommending unnecessary surgery, repairing cars, pacing the grounds as a security guard, printing the next set of terrace house plans, plumbing, wiring, writing things no one bothers.

Will etheorist and hishamh punch a hole through all this?

etheorist said...

de minimis,

Thank you. I only want my readers to enjoy a different perspective, however wrong it might appear to be.


Exuberant thoughts.

I don't think it would be that dismal. If all the oil's gone, we will be forced to put everything in education and go from there.

In the meantime, a little nudge to the ringgit in the right direction may set off a ripple effect across the economy hopefully up the productivity curve. The present stance has brought us no dynamics.

hishamh said...


I'm still scratching my head over the petroleum income figures - they don't add up. What appears officially on the government's accounts is only petroleum income tax, corporate income tax, and payment of royalties.

The only thing I can think of is for some reason Petronas' payment of dividend is not recorded as government revenue. Where it goes I don't know. If anybody knows, feel free to drop me a line.

In any case, I fully support introducing a petrol tax at the present time. Peak oil will come sooner or later, not just for Malaysia but for the rest of the world. A fiscal move to reduce petrol consumption NOW, will have benefits down the road in terms of promoting alternative energy sources, while conserving what we have. And hang the cost to the consumer - this is in the country's best interests (and this is coming from someone who drives a gas-guzzler of a car).

Rubber is doing just fine thank you - we're still the number 3 producer in the world.

:) Your conception of the services sector is much like mine. No fancy consultants and such - very much blue collar work. On that score, I doubt we'll see much foreign investment, but then that's the point.


Plantation companies have invested overseas for years now - half of Sime Darby's plantations are in Indonesia. That kind of thing will increase as the Ringgit appreciates, which makes investing overseas much cheaper. Witness what happened to Japan in the late-1980s, and India in the last few years.

walla said...


i hope it's 'rational exuberance'.
And it's 'dismal' science, isn't it?


yes, that too about petronas' accounts remains puzzling.

petrol tax only works if people have credible alternatives now; they don't.

rubber is value-adding?

Both your respective learned replies confirm my worst fears which you can still however dispel if you will just help answer this question(reposted):

"People need more money. They must do better work. Work that is in higher demand which can command a better pay. What is the work and where is the pay?"

in exchange for this:


If you need Brookings Papers on Economic Activity too....

etheorist said...


I think there are those who are prepared to take the challenge as SMEs. There are those who think they are in the forefront of the ICT. There are those who think services. We need the environment to trigger them.

My unhappiness with the current environment is that trying to get a freebie from the government is still the name of the game.


Sure, plantation companies will go their own way. But we should move on and move up. As we go further up the value chain, we need good people to create the opportunities. We must tighten up our macro conditions.

hishamh said...


The whole idea of a petrol tax is to boost demand for alternatives. Hybrid cars are available right now (the Prius is a hit in the US), and investment in alternative fuels won't go forward with oil prices as they are.

As for work and incomes, which would have a better chance of succeeding as a strategy: one based on trade, where wages are arbitraged globally, or a more domestic service-oriented focus, where wages are based on local supply and demand conditions? Services run the gamut from burger flippers to airlines to management consultants. There are a lot of markets that haven't been explored yet in a domestic context.

What I'm afraid of, and oppose, is an over-concentration in finance. That's the route Singapore went down, and it increased rather than decreased their external vulnerablity.

I'm not sure of the point you are trying to make with the EIU report - it's predictable that demand and supply are coming down this year. It's a global recession, right? I don't see the relevance, since we're talking about long-term structural change.


What exactly do you mean by "tightening"?

etheorist said...

Exactly what I have trying to say in my recent posts - stronger ringgit, some positive returns on traditional savings instruments, less excess liquidity, etc.

walla said...


i agree more can be done to create real business enablers but maybe the equally real reason freebies are sought is because they already know how hard it is to get real assistance from banks and agencies where the thrust to create enablers should also be directed.



one section of the report is on southeast asia which belabours cost cutting and impact of the recession; under such a situation, people are already having problems maintaining their guzzlers let alone buying pricier hybrids so that if tomorrow a petrol tax is imposed when our public transport infrastructure is still found wanting, it will be as it was when the petrol price was hiked. Namely, bad for the public, although it might be better for the govt.

that's the relevance.

To both

i still have a problem; the main message coming out from all the reports is that our domestic demand has collapsed. If that be the case, how will springing more domestic services diffuse the pressure, especially when the money is with the banker and not the people who will be the customers of the loan-takers embarking on services?

I know there are some services which don't need much start-up but freelancing doesn't contribute much to longterm structural rearrangement.

Over to you.

hishamh said...

Because under the current circumstances, there's a severe pullback by both consumers and businesses in terms of spending - it's a confidence issue, not just a result of falling external demand. Banks are reacting in the same way, by restricting loan growth.

That report essentially says the same thing - companies are reacting to the environment they see. If the environment improves for whatever reason, then all the agents involved will react accordingly. This is essentially a short term problem and not a permanent thing.

The larger long term issue is structural - since we no longer have a global consumer of last resort and in an environment of unwinding of global imbalances and balance sheet repair, at best we can stabilise the economy but not enjoy growth based on global trade.

Hence the look for alternatives. From a structural development perspective, the next step after industrialisation is improving the services sector. Ergo, here we are.

walla said...

Thank you, hishamh.

Brilliantly balancedly put, if i may say.


now i await etheorist.

Nehemiah said...

I agree with most of the sound policy measures especially the need to enhance value in the services sector.

Yet, there are many ideas and possibilities that need to be explored further.

If Malaysia does not have the culture and environment to produce marketing mavericks like Steve Jobs, entrepreneurs like Dell and Bill Gates, we will be competing in the same arena/level as the Chinese and Indians and Singaporeans, who are several years ahead of us in terms of competitiveness.

The promotion of an innovative entrepreneur culture has to start from young.

Also, policy makers should be cross examined for their political priorities/prejudices/handicaps. Despite all the great policies that may be hatched, it is politicians and their employed civil servants who jam up the system for their own personal gains.

No use driving on a long, dangerous journey if you don't trust the driver to take you to the right destination.

btw your macro perspective is getting clearer with this latest post.

etheorist said...


This is all very hard work after an evening of drinks. I shall say this and I hope you will be happy.

Sack the current crop of bankers and put in those who know how to finance real businesses - those who can see emerging trends and undertake project finance. I will encourage private venture capital. I will get the government to come up with a roadmap and ask banks to support industries. I will banish politicians from banks and the corporate sector. I will get the PM to hand over the finance portfolio to somebody who knows the job of encouraging private investment and macro stablisation policies.

While the logic is to go from manufacturing to services, we still haven't finished our work on the industrial sector although services should be now promoted but not by ignoring the secondary sector.

As you know, I think only of investments.

walla said...

"..but not by ignoring the secondary sector."

you got it, etheorist, and one can only hope they will too.

many thanks, and hat's off to great minds.

etheorist said...

Thank you for creating activity here from scratch.