Monday, December 14, 2009

Paul A Samuelson & the Keynesians

The great economist Paul Samuelson died last Sunday 13 December 2009 at age 94. He brought mathematics to economic analysis along the line of Keynes. His textbook, "Economics" brought him wealth but it was his PhD thesis on 'The Foundations of Economic Analysis" which brought him fame and the Nobel prize.

There are many excellent orbituaries written on him around the world.

Below I will put in some thoughts on what I was taught about his theories, for the purposes of talking about economic analysis in the hope that it will not be taken as an attempt at a cheap shot at a giant at such a sad moment, which this is not. It is about ideas, not person.

Samuelson can be credited for bringing mathematics into analytical rigour in economic theorising. While many major implications can be brought out from the established framework (or paradigm), nonetheless, the danger, in the views of his opponents, was that it prevented people from thinking outside that established box. Here, Keynes' theory degenerated at the initial attempt by Hicks (with his ISLM model) through Alvin Hansen (Samuelson's teacher) to Samuelson into what is now called the Neoclassical Synthesis.

The Neoclassical Synthesis is an attempt to incorporate Keynes' ideas into a Neoclassical model, resulting in a Neoclassical model with Kynesian characteristics, principally in the form of the demand for money function which replaces the demand for loans equation. The rest remained essentially unchanged.

Disatisfaction by the "true" disciples of Keynes over the Neoclassical Synthesis rages in the form of the Capital Theory Controversy which attempts to show the tautology in the Neoclassical construction. If the profit rate is the return on capital, what is "capital" and how do you calculate it without the resorting to the return on capital which is the profit rate and the rate of interest, in equilibrium. Joan Robinson, followed GC Harcourt and then Paul Davidson won't let go.

The capital theory controversy still lingers in the minds of bored Keynesians, while the rest of the world happily ignores this logical inconsistency and runs the global economy down to ground with zero interest rates. Is there no such a thing as "profit" except the extraction of surplus value?

Thursday, December 10, 2009

What Is So Sacrosanct About the Stock Market?

Greg Mankiw picked up a piece by his old prof, the one who wrote A Random Walk Down Wall Street, who recently argued that a transaction tax on the stock market will kill the economy by discouraging stock market speculation and hence the inflow of cash into the US to fund its budget deficit. Is the stock market so sacrosanct?

The only major reason for economists to argue that there should be no tax on stock market incomes is that there is no value add in stock market incomes - that the people involved in the stock market do not add any value to the economy. What they are engaged in is merely the transfer of income from one pocket to the other.

But the current argument by the stock market guru that there should no a transaction tax on stock market trading because it will hinder the functions of the stock market.

"Transactions taxes would make most current high-frequency trades unprofitable since they depend on the thinnest of profit margins. Trading volume would collapse, and there would be a dramatic shortfall in the tax dollars actually collected by the government. Market liquidity would decline, bid-offer spreads would widen, and all investors would pay significantly higher costs on their trades."

But brokers do get paid for doing transaction work for investors. But the article argued that transaction costs have come down due to technology and a transaction tax on stock market trading will raise the transaction cost and make that market uncompetitive.

So the argument is really not about whether there should be a tax or not, but how much.

Which means that the stock market is not sacrosanct.

The stock market survives on two major factors in descending order of importance:
1. Value of the companies on the stock market. No amount of speculation will raise that intrinsic value which is based entirely on correct investment and value addition.
2. Liquidity which will arise if the corporate values are intrinsically good and when the central bank becomes silly by pumping loads of cash into the system to inflation market prices which result in a diversion of focus from investment in companies to speculation in the stock market.

We have seen from the Malaysian experience of the 1990s, and the US and Europe today, how an extremely active stock market has ruined the resolve of corporate investors in undertaking proper business plans.

In a highly liquid global market that we are in today, the fear of not illiquidity but lack of investment ideas - which leads to an oversupply of the same old stuff that everybody has already.

Furthermore, the stock market leads to a massive redistribution of wealth (since there is no income generated), and a transaction tax can be seen as a mild wealth tax, on the argument that traders on the markets are savers and investors with the wealth to invest.

A transaction tax will hopefully divert investor focus from the frail financial world to the real economy.

Wednesday, December 9, 2009

GST & Tax Reform for Malaysia

In the current furore over the GST, I have been having a rethink on the tax regime in Malaysia.

1. It is not a good reason for the government to tax the people for the purpose of building a bureaucracy or to stimulate the economy. The only good reasons are: affordable or free and good quality education and healthcare for everyone, urban public transport, security and law and order.

2. If the government have to raise taxes, how can it do it most efficiently, in the sense of with minimal cost to the government but without overburdening the people to the extent that the economic growth suffers.

3. In the past, the thinking on tax was that the rich should be taxed more than the poor. The progressive income tax regime of today was designed precisely for the reason of redistributing income. The wealth tax and the property gains tax are to redistribute wealth.

4. The current fashion in tax thinking is to tax consumption rather than income. A major reason for doing this is to reduce consumption and encourage income, so that savings and investment will rise. If this is the reason, then income tax should be abolished and be replaced with the consumption tax which is a tax on both goods and services bought.

5. Abolishing the income tax is not that far-fetch an idea. Many big companies are exempt from paying the corporate income tax, for one reason or another, as an incentive to invest. It is just a matter of extending that privilege to the many small companies as well as salary-earning employees.

6. In turn, the GST can be imposed across the board, although there are many potential problems of implementation. (It creates a huge load of paperwork for many small establishments. Presumably, this can be computerised which implies the need to itemise every transaction. The GST is also subject to abuse by establishments who happy impose a service tax and a government tax. There seem to be no enforcement on extraneous charges on bills.) The poor can be compensated by increasing their allowance, if they have any.

7. The GST may not be the main source of revenue. Other sources should be explored, including taxing stock market transactions.

8. In the absence of the income tax, the government can really go into the Public-Private Partnership (PPP) by designing and specifying public projects which the corporate sector or rich individuals can offer to finance.

9. There should also be a freeing up of government restrictions on areas of entry by the private sector, such as healthcare and education, so that more of these services can be privately funded as charities or business organisations.

10. Alternatively, another way to reform the tax regime is for the government to do a 5% across the board - on corporate incomes, personal incomes, retail transactions on goods and services, stock market transactions, without exemptions for big companies. This will really broaden the tax base.

Friday, December 4, 2009

Scarcity & Markets

Economists talk of scarcity of resources and the role of the market in ensuring the efficiency of resource allocation. Is this true in real life?

To a certain extent, scarcity exists when we talk of what is available at our disposal today, and our ability to transform those available natural resources into things we want or desire.

In reality, given what we already know, there is still immense scope for people to produce the things that we want or desire. It is just a matter of unleashing the productive talent, and things will be produced. A whole new world is being created in China just by the stroke of the pen, and the freedom for people to follow their instinct for survival or security.

The efficiency that economists talk about is really the efficiency of production or getting what we want from the same amount of resources. This reflects our technological knowledge.

Of course, market efficiency can be obtained if the market is not controlled so that more output and lower prices can be obtained by consumers as producers compete to survive.

If we have businesses controlling policy, then the tendency is for policy to ensure prices high enough for business to make money, not matter how inefficient they may be.

But the markets we have in the world today is an exchange market. The market is where different producers of different products exchange with each other their products.

The market is an attempt at diversity, to exchange what we have plenty with others for the little or nothing that we have but where they have plenty. It is not an attempt at unity except probably for the price, and even this is possible only under very special conditions.

But the market does not spread efficiency between those who have with those who have not. Those who have not are excluded from the market. They are outside the market. They cannot participate. To participate, they must attempt at production, and hopefully something which they like and which others like as well. They must also be able to increase the production, so that there is a surplus to trade.

There can be no advantage to be obtained by restricting others in production, so that one can have the market. This will merely result in a lower output level.

The only way that restrictions can work is in commerce, where one can trade but others cannot trade. This assumes that both the market demand and supply are available, without any productive work involved. In this case, with market restrictions, market demand may not be sustainable because there is a constant leakage from the system in the form of rent or profits from restrictions, and the tendency is for the economy to go down on a vicious cycle.

A temporary way out of that vicious cycle is by printing money, when the central bank lends to the government or when banks lend to consumers.

A better way out of the vicious cycle is by increasing confidence and investment, aided by banks lending to businesses and investors.

Monday, November 30, 2009

The Economic Enlightenment Of Adam Smith: The Lesson For Malaysia & China

Most economists, learned or otherwise, associate Adam Smith's economics with the workings of the invisible hand in markets - and presumed that the market economy is the best way an economy works. Whilst this may be true under special conditions, there are limitations to the market such as the existence of monopolies, the insufficiency of market size, and the failure of market signals. So the market economy is more than just supply meeting demand.

So, Adam Smith's greatness, to me, is not his views on the market, but his enlightened view that economics is not about the accumulation of wealth but the increased production and consumption of goods and services that results in an improvement in human wealth.

He argued against the focus of the policies of politicians on the accumulation of gold and foreign reserves (wealth) as such policies tend to create monopolies, trade restrictions, the underpayment of workers (his labour theory of value led to Marx's militancy), and general inflation who adversely affect the general public.

Instead, Adam Smith argued that the focus of policy should be on building the prerequisites for an improvement in human welfare where more consumption can be obtained using the same amount of resources simply through specialisation and exchange. It is not a question of price but economies of scale and exchange.

To improve human welfare given the resources we have, it is far better for individuals or societies to specialise in what they are good at rather than trying to do everything themselves. It is possible to do everything on one's own but it is far better for everybody to cooperate - each doing what they are good at, for otherwise, we will be wasting the opportunities to do things better for oneself and everybody else.

Who does what therefore depends on what one is good at, naturally or trained, and depending upon consumer needs the renumeration or return one gets. It is just a question of knowledge and training.

If this system can be made open and unbiased (through proper teaching and training), then it is possible to train people to do good for society and to think and formulate in the interest of society.

It therefore does not augur well for our economic future if we teach our young to be self-interested and restrictive in their generosity. They may be wealthy but we will pity for their selfishness.

We can be generous only if we are confident about ourselves and our environment.

China can grow on its own if its entrepreneurs and captains of industry can bring themselves to pay workers sufficiently so that they can live a better existence. Afterall, the whole purpose of production is for the consumption of the people - rather than just to export and accumulation foreign reserves who turn out to be the worthless papers of a silly government.

That's why we should always focus to specialise in order to do things better so that we can all have everything that we need - which means that we should strive to be ordinary and homogeneous so that others may also have what we have. Otherwise, we'll all live poor lives.

Disequilibrium & Positive Change

Sometimes I wonder whether we human beings know exactly what we want.

We are constantly unhappy with what we have in order to create change.

1. Equilibrium

We dislike equilibrium and create disequilibrium.

Equilibrium means a stable state where everything is functioning well and smoothly. There are two such states: desired, or undesired.

If undesired, we want to get out of our low equilibrium by creating change and disequilibrium. In so doing, we hope to start the journey of arriving at a higher desired equilibrium state.

If desired, we would be quite happy for the equlibrium state to carry on forever.

2. Malaysian Society

In the context of Malaysia, when we started out in 1957, the economy was in high equilibrium but the society was in low equilibrium.

There was intention to disturb the low social equilibrium in the hope of maintaining the same high economic equilibrium.

In so doing, the social disequilibrium led to the downward adjustment of the economy as confidence evaporated.

3. What Do We Do?

Efforts are now made to re-establish the social equlibrium in the sense of social harmony. This is a good thing and should be vigorously pursued.

Whether this will necessarily lead to a higher economic equilibrium is another matter.

For all we know, we may want an economic disequilibrium with a process or dynamics that can bring us higher and higher, rather than stagnating at some sketchy vision.

It is a fact that Malaysia today faces an unsettling of its society with agitation at all levels.

While agitation will create change, there is no guarantee that things will necessarily change for the better. It takes good people in high places who know what they are doing to create positive change.

We cannot go back to where we were. We may not want to. But the forward march should start with more than just the same old agitation. It should be a modern view that our young generations can relate, for it is going to be their burden.

Saturday, November 28, 2009

Consumption Tax Or GST

de minimis stirred up some dust on GST with the help of walla; I here contribute a speck or two.

Q: What is the purpose of imposing a consumption tax?
A: To reduce consumption and to increase tax collection.

Q: Whose consumption will be reduced?
A: Those at the margin.

That is, those who have a very tight and they have to decide whether they want to buy A or B because now they cannot afford it because of the GST when they could buy both A and B before. They may forego B and left with A and have some cash to spare.

But if A is rice and B is milk, then obviously there is a problem for the consumer which the government may wish to step in to help if it wants to stay in power.

If A is a watch and B is a phone, then probably the problem isn't that severe and the government is happy to reduce that consumption.

Q: What is the reason for reducing consumption?
A: There is no particular good reason. In fact, it goes against the latest craze over stimulating demand by reducing the EPF contribution and putting money into the pockets of consumers.

But if you insist, then we have to go back to the textbook which says that it is better to impose a consumption tax to discourage consumption and to reduce income tax in order to encourage work and production.

Q: So will there be a reduction in the income tax with the impostion of the GST?
A: The answer is probably no, and the justification is probably that there has been a cut in the income tax already in the last budget.

Q: Why is it that the GST will be 4% when the last income tax cut was 1%? Is it fair?
A: The probable answer is yes because the objective is to raise taxes. But this answer is not healthy.

The GST will hit the total turnover or revenue as this is what final consumers will pay. Income comprising profit and wages and fees are at best a fraction of the total turnover of the economy. If profit and wages are 30% of the final sale price, then the income tax may need to be cut 3% to be equivalent to a 1% imposition of the consumption tax.

Since the expressed objective of the government is to increase tax collection, we may accept a 1% consumption tax to the 1% income tax cut.

Q: Will the consumption tax stimulate work and production?
A: No, if there is no or no significant cut in the income tax. The government then cannot claim to be stimulating work and production when it is imposing the consumption tax which will discourage consumption.

Q: Will there be inflation?
A: No, because it's objective is to reduce consumption. When retailers expect a reduction in their sales, they are likely to absorb the consumption tax.

Q: Will there be a reduction in consumption?
A: No, if the retailers are absorbing the consumption tax.

Q: Will it put marginal retailers at risk?
A: If no reduction in income tax, yes. If there is sufficient income tax reduction, consumption may even rise. This then defeats of discouraging consumption (and encouraging savings) and increasing the incentive for work.

Q: Will a consumption tax increase savings?
A: Not necessarily, if there are insufficient savings instruments.

Q: Will the consumption tax stimulate the economy?
A: Not necessarily. The consumption tax will increase the tax collection for the government. Somebody has to pay for it. If it is the local consumers, then there is a net reduction of the welfare of the local people. The only time when an increase in tax does not impair the welfare of the people is when the economy is growing and that growth comes from investment.

The trick for the government in trying to solve its fiscal problem is not to raise more taxes but to spend less and at the same time trying to encourage more investments by pulling up its socks!

Monday, November 23, 2009

The Closing And Re-Opening Of The Malaysian Mind

The Malaysian Mind has been closed since 1970 when the policy thrust was changed from economic growth to economic sovereignty.

The global past-time was to fight colonialism and capitalism, to look inward with import-substitution and the chasing away of investors ostensibly colonial.

The closing was not only of the Malay Mind. The Chinese Mind was also closed, and so was the Indian Mind. Each looks to its own past and forgot its future.

The closing of the Malaysian Mind resulted in the systematic and willful destruction of the entrepreneurial spirit of an already advanced high-income global economy - with a narrowly defined educational system, and a narrowly defined arena for investments.

The future of the Malaysian economy lies not with foreign investors, but with the opening of the Malaysian Mind so that Malaysian Talents can flourish and Malaysian Capital released to take calculated risks and be entrepreneurial again.
The Malaysian Mind must be allow to flourish like the Malaysian Cuisine which is intermingled and where the hybrid is far more exciting than the original, although the original still display its quiet authencity.
The Malaysian Mind could have been distracted by political shinanigans, and probably still is, such as the PR ploy of 1Malaysia.

It is far better for Malaysians to forget who they think they are and for them to be themselves and as freely as a bird display what is in the innermost self. I bet, under those circumstances, we truly display ourselves as Malaysians.

Friday, November 20, 2009

How Does Malaysia Get Trapped In The Middle-Income

This question is mesmerising so long as it is not answered properly.

So far, most of the answers given are either too disjointed or too outcome driven. Let me give you an example. We are now told that for the economy to make the quantum leap we have to be technology savy, created more IP stuff, attract more IP, etc. The policy action then becomes a simple immigration issue.

But by far the most significant underlying trend that is the cornerstone of Malaysian economic policy since 1970 until today (we'll see how the transformation is taking place) is the redistribution of wealth. We all know this. It is obvious. It is explicit as a policy. It is a policy and a national characteristic which we are proud. We defend it, locally and internationally. We even try to export it to Africa.

I think the original idea behind it is good - that there should be a more equitable distribution of wealth in the country, or in any country for that matter. It has always been an economic issue. But unfortunately it has become a political problem.

In its metamorphosis from an economic issue into a political problem, all the energies of government has been turned into an efficient process for the redistribution of wealth - all done simply by the indiscriminate spending of savings and reserves of the people and the nation extracted from the labours of the past in mining, plantations and oil and gas.

During this process of wealth redistribution, the focus has been on how to spend that wealth, which is demonstrated by tall buildings that we have in the capital cities but nowhere else in the country and by the investment of those wealth by individuals in instruments of higher returns which typically are more developed economies which a better organised system.

As the nation is drained of its economic juice and energy, the only major policy that we have going in this country follows the major policy of the other big but dying economy which is the US. It is symptomatic of economic decline when the only policy that seems reasonable is one of monetary expansion brought on by printing of money to finance government and consumer deficits - because banks find it not lucrative to fund industries.

With a loose monetary policies, we know that the value of money (both domestic and external) declines and this leads to increase the suffering of the ordinary people as they go about their daily business of living. This suffering causes a loss of confidence in the government and potentially a change in government.

To reverse the process, therefore, the following would seem appropriate, in decreasing order:
1. Refocus the economy on investment and growth, with redistribution built automatically into the income and wealth tax system. Remove ad hoc redistributive policies.
2. Tighten monetary policy. In the language more comfortable with central bankers - bring about gradually a monetary policy that is not as loose as before but at the same time make sure that the reversal in policy will not be detrimental to the lending activities and growth of the banks and without jeopardising the smooth operations of the banking and financial system.

Wednesday, November 18, 2009

The Sins of Economics & The Death Of Money

Kurtzman may be a bit simplistic as shown in his optimism that the electronic financial system can just reset itself and life will go on as usual.

Not quite, if Japan's seminal experiment with money in the 1980s has anything to learn - not for Malaysia and other Asian economies in the 1990s anyway, nor even the source of all troubles, the US in recent years for that matter.

I do not think that it is the electronisation of money that the cause of all the trouble in the world today. ICT is also a tool, and it will be akin to arguing that the telephone is a major source of problem in the world in the last half century - although we will not deny that it has no appreciable impact on the way the world functions.

It is the people behind the money policy who has not mastered their economics to see beyond the old theories and to realise how the old ideas are impacting reality and how the new reality is now behaving differently from the old. It is not rational expectations, but an increasing order of expectations - how we expect to react to what people will react when something they expect is expected to happen.

The sins of economics is that we know too much, that we have dissected the matrix we have created for ourselves - markets, money, specialisation and economies of scale, and trade - and are fully exploiting them until they have lost their value.

This debasement is the death of money and the economy as we know it.

Tuesday, November 17, 2009

The Death Of Money

I have had an old copy of this book for a long long time because the title fascinated me. Now, it all seems so prophetic.

It's nice to get to read the author's updated view here copied below.

Has The Death of Money Been Greatly Exaggerated?
An Interview with Joel Kurtzman
Written By: RU Sirius
Date Published: March 19, 2009

In 1994, Joel Kurtzman — at that time a columnist and the business editor for the New York Times — wrote an alarming book titled The Death of Money: How the Electronic Economy Has Destabilized the World's Market and Created Financial Chaos. Kurtzman reported that the digitization, or virtualization, of capital was causing a disconnect from reality that threatened financial anarchy… with possible positive and/or negative results.

Given the current market crisis, I thought I'd catch up with Kurtzman. Does he believe that recent events reflect the changes he warned us about back in the mid-'90s? Is money drawing its last breath while you withdraw the last of your savings? Or is something else afoot?

Joel Kurtzman is currently Executive Director of the Milken Institute's SAVE program, focusing on energy security, climate change and alternative energy.

h+: Joel, you wrote a book about the emerging electronic economy back in 1994 titled The Death Of Money. Are we reaping the harvest of the electronic economy now, or is the current crisis about something else?

JOEL KURTZMAN: In 1994, as I went around the world interviewing people for The Death of Money, few people really understood the power of electronically linking the world's capital markets together. Computers were not ubiquitous; the internet was nascent; and no one had invented the Blackberry. But one thing that did emerge at that time was that the mobility of money would proceed in a nearly unregulated manner and that volatility would increase. Back then, I examined all the data and saw that as markets connected, volatility rose. The curious thing, however, was this: As market volatility rose, the frequency of recession fell. It was as if the markets had become something of a shock absorber for the real economy.

What do I mean by that? In many ways, for example, some of the forces that put upward pressure on inflation now are channeled into market investments. If we did not have these massive, globally connected markets, the price of real assets would rise as money is created. Now, all that rises — with some exceptions — is the price of stocks and bonds. But those shock absorbers have their limits. In the last few years, the irresponsible use of products like collateralized loan obligations have broken down the shock absorbers. And, while it will take a little time for the system to "reset," it will reset.
In 1994, I speculated that globally connected capital markets could make the entire world rich by making capital available anywhere to anyone with a good idea and a little bit of skill. That fact has proven to be true. Since 1994, many billions of people have risen from poverty into the middle class. If China or India did not have access to global capital they would be growing at 1 or 2 percent a year, not 9 or 10 percent a year.

h+: In that book you also wrote, "Every three days a sum of money passes through the fiber-optic network underneath New York equal to the entire yearly output of all of America's companies and its entire workforce. And every two weeks the equivalent of the annual product of the world passes through the network of New York — trillions and trillions of ones and zeros representing all the toil, sweat and guile from all of humanity's efforts." How deep is the disconnect between the movement of conceptual money and the creation of actual wealth on the ground?

JK: We've seen something interesting happen. In 1994, I talked about the divorce between the financial economy (money) and products like stocks, bonds and derivatives on the one hand; and the real economy of goods and services on the other. In the interim period, there has been something of reconciliation. Companies like Southwest Airlines routinely use complex hedging strategies to protect themselves against price spikes and valleys with regard to fuel costs. Manufacturing companies, like Boeing and Airbus, use these same strategies to protect themselves against currency risks from managing a global supply chain while pricing their products in dollars. That's how the financial economy has reconciled with the real economy.
On the other end, with the rise of private equity, the real economy has benefited from the financial economy. Many firms that were public have become privately owned. In the world of finance, that's like taking the racecar off the track in the middle of the race to have the pit crew work on it. Once the tires are switched, the oil is changed and the car is gassed up, the car goes back on the track. In private equity, public companies are bought by private firms where they are repaired and made more competitive. When that's done, they're sold back to the public. Private equity resembles the pit crew. That's kind of a rapprochement between the financial world and the real world. So, in my view, the disconnect has narrowed.

h+: In your response to my first question, you wrote, "I speculated that globally connected capital markets could make the entire world rich by making capital available anywhere to anyone with a good idea and a little bit of skill." I'd say we're not quite there yet, but it sounds like the theory of "The Long Boom." Is there perhaps a longer boom in the future? Is there the possibility of a sort of post-scarcity market with almost no ceiling?
Since everyone's watching everyone else, and because we're all connected, it's likely that once a recovery begins it will proceed quickly.

JK: Nothing moves in an uninterrupted direction forever. Least of all the markets. The markets dance an up and down polka. However, while they're dancing, they trend in a specific direction and the markets are trending up. They trend upward for a number of reasons, including the fact that money doesn't hold its value for very long. Inflation always looms. Since the markets absorb a lot of inflation's effect, they tend upward. That trend will continue unless greed becomes so pervasive that the system breaks down.

h+: How long do you think the system will take to "reset"?

JK: The financial system is not backed by anything real. It's only backed by the confidence we have in the system itself. It's the old circular argument. That's because money has been transformed into information and cut off from anything real, like gold, silver or wheat. Because money is information it is a blend made up partly of ideas and partly of sentiment. Investors are like detectives who come across clues, piece them together, and when they think the pieces fit they become wildly exuberant at having done so. In the midst of this crisis, investors are sniffing around, looking at the pieces and trying to see how they fit. Once they think they see a pattern, their emotions will take over and the markets will climb. Whoever glimpses the pattern first will make the most money. How long will it take? If a market tumbles at night in Asia, it is often followed a few hours later by a tumble in New York. In other words, since everyone's watching everyone else, and because we're all connected, it's likely that once a recovery begins it will proceed quickly.

The interesting thing with these markets is that we're all one — the people who were conservative and prudent have been hurt as badly as the fool who was overly-leveraged.
All the traditional risk models blew apart. Diversification — the cornerstone of good risk management — means nothing when everything goes down. But no risk manager was ever taught that everything would go down at once. Nobel Prizes were awarded to people who said just the opposite.

The Economics Of Sin

There has always been a major concern over sin in the world, especially from the religious point of view since the time when man (and woman) held his world in great mystery. What about the economics of sin?

Sin is not a term in economics because economic science sees itself to be "objective" and does not pass "value judgement" on the world (economists leave that to the priests). So long as sin is a product where there is a market, then the standard laws of supply and demand come in.

Sin may just be another term for addiction which causes a person to spin out of control and therefore a danger to society and himself, and that negative impact is sin.

Sin is therefore anything that may be self-destruct, for individual as well as society.

In the world of addiction, the economic laws says that the market will supply as much as there is demand - and the perennial demand that comes out of addiction is good for the market, as it will ensure that GDP growth will sustain. Will it?

Keynesian revelation stipulates that demand must be made effective with purchasing power, for that demand to be real. The addict knows that and he will go out and secure the power to purchase the addiction.

As he is likely to be out of the mainstream, in the case of petty addicts, then he is likely to engage in activities which his neighbours are likely to feel insecure about - so those activities are called crimes, and a professional gang called the police is hired to control him and, when nabbed, locked him away or teach him a lesson.

But if sin is in the mainstream of economic activities - as Rosa Luxemburg or Joan Robinson would say as in the case of the addiction for (unnatural) wealth - then the global economy could be gearing itself for a total disaster, such as the destruction of the natural environment in return for paper or electronic which is thought to be money. Would it?

The laws of economics say that when the natural environment is sufficiently sized down, the scarcity of supply will rise the market price for natural products so much that the demand for natural products will be drastically cut down. In time, artificial substitutes will be found, and the whole of mankind will then subsist on artificial materials - do we then get plastic people?

Interesting, because, then human beings will ease to be what we know human beings to be today - natural, pink and soft. Human beings, as Darwin will say, have evolved into what could be termed as post-homosapiens.

In the world of post-homosapiens, the world will be a barren concretised environment with its plastic leaves and fragrantless flowers. Post-humans exist, not wishing to die, aimlessly accumulating electronic digits for happiness. When they die, they will empty those digits into the pockets of the collectors called hospitals which pretend to cure, but in fact merely dispense.

The economics of sin is therefore quite dynamic, and could bring about a paradigm which post-human cannot imagine what humans do. Does it matter?

Probably not.

Sunday, November 15, 2009

Debate vs Criticism

One of the key ingredients of creativty and innovation is the willingness to offer - as well as to accept - an alternate viewpoint, however ridiculous that alternate viewpoint appear at the time. Without this alternative viewpoint, we have nothing but the same old view which we are comfortable about.

To create and maintain a healthy atmosphere of debate, there must always be that courtesy and respect that one party bestows on the other party. Without that basic courtesy and respect, we shall reduce ourselves to nothing but hooligans who think that those who shout the loudest and have the strongest muscles will win the end; indeed, hooligans have won but there are some of us who may wish to contribute to society but engaging with each other at a more civil manner.

The purpose of debate is to arrive at the truth - whatever we may imagine truth to be.

Most of the time, we do not know the truth. So, we examine each other's arguments to make sure that we do not end up in circular argument - using logic to justify a prejudice.

It is easy to be inadvertently prejudiced but of the paradigm that we are caught - caught in The Matrix, so to speak.

We should therefore watch our thoughts and guard our mouths - lest we fall into the senselessness of a barking dog.

Of course, to aid debate, we may wish to point out errors in logic or unconscious prejudice that we find in other's arguments - from our own perspective. A criticism becomes constructive in this manner.

If there is no room for alternate views or arguments, then all that we are doing in blogs is nothing but reinforcing old prejudices. That is dangerous.

Sunday, November 8, 2009

Improving Education: The China Perspective

China is reported to have sacked its Education Minister last Saturday for slowness to bring about improvement to the education system, as evidenced by corruption involving construction of education facilities, the high unemployment rate among graduates, the dilution of marks, the selling of degrees and rampant plagiarism.

China's rocket scientist, who died on October 31, was said to have complained to the top leadership before his death over his disatisfaction with the education system as it failed to produce students who can think.

This got me into rethinking the problems of the education system in Malaysia.

1. It looks to me that the language has become a major distraction from the real issue - of teaching students who can think, and be creative and innovative.

2. Without this new creative force being generated by the system, Malaysia is likely to be burdened by a body of its citizenry who is unable to get itself out of its quandry - and thus tightening the rope around the neck of the future of the nation.

3. We know the first pre-requisite for creativity and innovation is open-mindedness.

If we fail to keep our minds open, we will together be stuck with our old ideas - which includes preserving as much as we can our old habits and traditions.

Our situation is worse: the vernacular hammered in by the religion imperative.

4. Of course, there is always the fear of losing one's sense of identity. This can be done by improving one's confidence in oneself by raising one's sense of self-worth - without having to resort to outward show and paraphernalia - such as degrees, awards, and titles.

6. We must learn to think for ourselves, and encourgage our children to think for themselves. To think, we must ask questions - even if there are no answers. If an answer is already available, there is no need to think - because there is no problem and no issue.

5. To help us to think, we need accurate information. There is now so much disinformation - opinions masquerading as information, and information masquerading as truth.

6. It is the unwillingness to accept the status quo, and a preparedness to reach out for the impossible and the ideal and give us the passion to live our lives meaningfully. Otherwise, we are only looking for a job before we fear death.


I wish to offer some comments for those who have been short-changed by the education system as per my last post.

i. I understand the anguish and the hurt for not getting what you want for your children. Do not let that episode turn your emotion from the positive to the negative.

ii. Though easier said than those, adversity can be an opportunity as necessity is the mother of invention - or innovation. I find that it is only when we subject to the most severe constraint or handicap that we are the most creative.

iii. Education is free - though one has to pay for a degree or some qualification - which is nothing more than external authentification.

iv. In economics, we consider the role of qualifications as a screening process - for those who want to participate in the mainstream. For those who do not, their real education is in the living.

v. At the end of the day, the ultimate cannot be a house and a car; it must be self-realisation and self-contentment. Don't be distracted by the mirage.

vi. One must learn to keep one's mind expansive, and one's heart true.

Friday, October 30, 2009

How Not To Be Innovative: The Case Of Mixed Parentage

Under 1Malaysia, one has to be careful about the purity of one's blood.

Cases reported here.

1. Marina Undau, 18, of SMK Simanggang scored 9As and 1B in the SPM examinations last year. She thought she could undergo a university matriculation programme, but was rejected by the Ministry of Education because was deemed not to be a Bumiputra. Her father is Iban but her mother is Chinese.

2. Lymie from SMK Kuching Town No 1 scored 9As and IB in her SPM examinations but was also rejected because her father James is Iban-Bidayuh but her mother is a Chinese-Iban.

The decision on the classification of whether a person is a Bumiputera or a non-Bumiputera for the purpose of entering the national universities or its matriculation programme is made by the Student Intake Management Division, Higher Learning Department and Higher Education Ministry.

The classification is apparently based on Article 161a of the Federal Constitution:
"(6) In this Article "native" means:
(a) in relation to Sarawak, a person who is a citizen and either belongs to one of the races specified in Clause (7) as indigenous to the State or is of mixed blood deriving exclusively from those races; and
(b) in relation to Sabah, a person who is a citizen, is a child or grandchild of a person of a race indigenous in Sabah, and was born (whether on or after Malaysia Day or not) either in Sabah or to a father domiciled in Sabah at the time of the birth.
(7) The races to be treated for the purposes of the definition of "native" in Clause (6) as indigenous to Sarawak are the Bukitans, Bisayahs, Dusuns, Sea Dayaks, Land Dayaks, Kedayans, Kelabit, Kayans, Kenyahs (including Sabups and Sipengs), Kajangs (including Sekapans, Kejamans, Lahanans, Punans, Tanjongs and Kanowits), Lugats, Lisums, Malays, Melanaus, Muruts, Penans, Sians, Tagals, Tabuns and Ukits."

1. Is the Ministry of Higher Education run by people of lower education?
2. Is it trying to mix education with politics?
3. Is the federal government trying to undermine another of its state governments?
4. Doesn't the article read dated and rigid and disregarding the dynamics of human love and emotions?
5. Is the ministry concerned about supporting students with good marks - the future leaders of the nation?

Tuesday, October 27, 2009

The Economics of Wasteful Spending

For those who think that quick spending by the government including the construction of mega projects is the way to go for stimulating the economy, then wasteful spending is really not a bad thing.

It does not matter how one spends the money so long as one spends it. They may even quote the great mighty Lord Keynes to lend support to their thinking - "You can employ men to dig holes on the road...."

There is a certain truth in this kind of thinking. The whole idea is to put cash into people's pockets so that they can spend in order to keep factories running so that people can continue to be employed by these factories.

At the macroeconomic level, it does not really matter how the money is spent - because we are thinking in the aggregate - not that the microeconomic workings are not important but that they are not being considered yet.

At the extreme, we could have money being printed and passed in boxes from the mint to the central bank who then delivered the cash to the government to be distributed - by some criteria - to the people.

The people receiving the cash would in principle spend on the things they need - like rice and salt - and then are happy. This is the political side. This is how elections in the free world are won.

But the economic consideration is slightly tricky. You want to see how that cash is used, specifically whether that cash can be used to stimulate production of products that people want. If the additional cash does not trigger additional effort on the part of the people, then the whole economy is in deep trouble. You have money without effort. This may sound like utopia for individuals, but it spells disaster for the whole nation - because it is not sustainable. More money can be printed - for forever - but the nation is likely to be incapable of doing anything else.

So when we are talking about "stimulating" the economy, we are talking about how to excite people into effort or more effort because they have become motivated to become active in the economic mainstream. There are incentives that they can see, incentives that excite them to excellence, that there is reward at the end of the day - either in terms of cash, awards or mere recognition from peers or community.

The money part is an important and crucial part, but it is only one small little part. The money is required because of the structure of the modern economic system, where there is such a great dicotomy between production and consumption - of the right stuff - that without money, we as individuals are dead in society.

The money part is the wheel that moves. The real part is the exercise of men and women in their daily existence - of the things they do to make themselves feel alive, every day, every moment.

The judge of the correctness of our government spending is whether it is exciting the right thing in the people. This is how we know whether we are heading the right direction, and whether we are going to have an economic future.

Blogs & Budget 2010

I haven't been writing of late basically because I have been very busy, including three weeks of ale and fish and chips. Second, I feel there is nothing worth my trouble to put thoughts to print - not even Budget 2010. Third, blogging has failed to become a pleasant thing for me to do. I write to entertain, not to please. I write to provoke, not to justify. The sanctity of the freedom to think and write is paramount - I am wry of thought-police.

Nonetheless, there are 3 things I can say about Budget 2010.

1. Budgets, by definition, are basically about the government's finances. Should the government balance its budget? Yes, if you can't borrow any more. No, if you can continue to live on credit. This question is important because it affects all the other issues. Budget 2010 promises to bring down the deficit as a proportion of the national income. This percentage balloons in recent years for two reasons: that the national income failed to grow or even contracted, and that as a result the government borrowed more to try to beef up the economy. This is a double whammy for the target percentage but it is something that one should expect. Once the economy recovers strongly, we will see a sharp reduction of that percentage by virtue of the improvement in the denomination of the measurement. Budget 2010 expects its deficit to fall to 5.6% of GDP from 7.4% in 2009 as a result of a sharp reduction in the Federal Government's operating expenditure - if this effort fails, the deficit will be back up to 7%. But it doesn't matter.

2. The direction of Federal Government spending especially development expenditure is crucial because it is strategic. It is a bit off the point when the government is talking about the efficiency of spending - although important for the purpose of stopping a corrupting culture - but not for saving the economy from nosediving further or turning it around. The government should spend to build new foundations for the new economy. Properly educated children is necessary but not sufficient. We have to lay the foundations for our technological base. Importing expensive foreign machines is a first step so long as we have money. But getting our young men and women to invest their time and talents to build sophisticated things need to be encouraged. I am happy with some encouragement for the arts (RM200 million) but I hope will not be squandered on some undisciplined wannabes. Creativity is serious business.

3. The 15% flat income tax for Iskandar Corridor is a curious case. While it is now unfair by being preferential, it cannot be removed at all in future without the collapse of Iskandar. The only future move for it must be, if it proves itself to be good, to apply it nationwide. The whole country should be competing with the rest of the world, and not Iskandar competing with the rest of the country.

In all, Budget 2010 is champagne without the bubbles. To be fair, it is only an annual budget. The bigger directional one must be the 10MP.

Monday, August 24, 2009

Deficits & Taxes

I read with great alarm in recent press reports about the need to close the budget deficit and the need to raise consumption taxes to close the gap.

1. For the record, the budget has always been in deficit - saved for the period from 1993 to 1997 when the privatisation of natural monopolies reduced government expenditure and clawed back some revenue. It is therefore not factually correct to argue the overall deficit of the Federal Government should be in surplus.

2. Furthermore, it has always been the traditional discipline of Malaysia to maintain a surplus on the operating expenditure of the Federal Government so that we live within our means. This has always been true except during times of exceptional difficulties such as 1972 and 1986-87.

3. The deficit on the budget in Malaysia, therefore, has always come from development expenditure. This is a good thing so long as the development expenditure is properly planned in order to increase the productive capacity of the economy.

4. It is for this reason that the EPF was set up to fund domestically the economic development of the nation - so that with the increase in productive capacity, tax revenue will rise and sufficient to give a good return to EPF. It is correct that the future income stream of long-term savers should be tied to the long-term prospects of the national economy.

5. The problem of the economy started when the government focused more on job creation rather than increasing productivity - by giving excessive concessions to transnationals whose profits are not translated into the national revenue. The opening up of the stock market to entice stockbroking activities to fund investments provided another leakage to the national revenue. In the end, this arrangement fell flat in its face in 1997.

6. With the holes created in the direct taxation system and the loss of economic direction, the government stifled its own capacity building without properly rejuvenation of the civil service and raised development expenditure to resuscitate a dying economy. As the economy falters, the cost of keeping it alive becomes higher and higher.

7. The economy fails to recover even with constant fiscal stimulation because there is massive structural breakage in the economy. The manufacturing sector that was to be did not materialise.
>The privatised monopolies became GLCs whose KPI to turn a profit without appreciable improvement in their operating systems or future development plans means an economy burdened by higher costs.
>The FDIs all disappeared to China, together with the SMEs which had cashed out through the second board.
>What we have left is a plantation economy that is reliant on a low-currency policy and low wages (through imported labour) to survive in the increasingly competitive global economy.
>The only activity worth pursuing is speculation as a result of an easy money which stimulates the real estate sector - which is probably the only game in town.
>The investments in manufacturing that was to come from Khazanah did not materialise in this country - Khazanah is making splendid investments abroad developing foreign economies in search of paper profits.

8. In other words, the Malaysian economy has come round one big circle to become yet another commodity exporter, now with more housing estates and shopping malls and more roads for more cars to drive around - financed by oil money and an incapacitated banking system.

9. With the economy in the doldrums, it is perverse that experts are calling for the imposition of the consumption tax to burden the people by raising their purchasing price and reducing the volume they consume - in order to close the gap in the budget. If that is the objective, it is far better to reduce the development expenditure called stimulus packages and keep the consumption tax at bay, at least, for the time being.

10. To rebuild the economy, we have to rebuild our industrial base. We have to retrain our entrepreneurs and SMEs not to speculate in the stock market and the real estate and to devote their talents to creating goods for which there is a need for, to create a new world. The services sector should grow but not on its own; it should be in conjunction of the needs of the agriculture and industrial sectors. The central policy should mature from an agarian concern to one of the needs of modern industries where the challenge is to set the environment for the rewarding of the persistent efforts at increasing productivity gains and hence the payment of higher income per head when benchmarked internationally.

Tuesday, July 28, 2009

Six National Key Result Areas

The government announces 6 National Key Result Areas:

KRA1: Reduction of Crime Rate
>KPI1.1: Reduce Street Crime by 20% by 2010

KRA2: Combat Corruption

KRA3: Widening Access to Affordable and Quality Education

KRA4: Raising the Living Standard of the Poor

KRA5: Improving the Infrastructure in Rural Areas
>KPI5.1: Add 1,500 km roads in Sabah and Sarawak by 2012
>KPI5.2: Not more than 5km of walking to tar roads in Peninsular by 2012
>KPI5.3: Clean water supply to 90% of Sabah and Sarawak by 2012
>KPI5.4: Electricity cover of 95% in Sabah and Sarawak by 2012
>KPI5.5: 24-hour electricity supply to 7,000 orang asli families in Peninsular by 2012

KRA6: Improving Public Transport in the Medium Term
>KPI6.1: Increase the number of public transport users from 16% to 25% by 2012
>KPI6.2: Add 35 sets of four-car trains on Kelana Jaya LRT by 2012

These KRAs are important for providing the basic rudiments of a modern life to all Malaysians.

I suppose we shall now have to wait for the New Economic Model to bring the whole economy to greater heights.

Promoting A Language

It stands to reason that, if the objective is to promote a certain language and ensure that it is alive by being properly spoken and properly written, then the logical action is to promote it properly.

In this country, it is strange to have a policy to hire native-speaking experts to promote English as a language - when the strategy should be to hire native-speaking experts to promote Malay as a language - not only to the Malays and Malaysians but also to other people.

We should have language experts in the Malay language to teach properly so that the language can be used properly.

Those of us who had spent some years in a foreign country know that the natives or the local people cannot read and write their own language as well as non-native users like us students who had learned to write and spell properly. Although the spoken part wasn't initially good enough but improved within months through practice with natives.

A language, therefore, can be kept alive by illiteracy by the poor and those who cannot get onto the mainstream - for they are the ones who have to live with what they have inherited from their parents and ancestors. This language is spoken everyday in the street markets. It will be a stretch of logic to argue that promoting tourism in remote parts of the country will help to spread the spoken language to foreigners.

In the area of education, it does not necessarily follow that native-speaking teachers in technical subjects will (a) speak and write the local language well for thinking and communicating abstract ideas and (b) will be competent in teaching those technical subjects.

If a learned language is better written (and fairly well spoken), then there is a case for teaching a foreign language in schools in the early years to inculcate in the young minds the importance of the need to put in effort to acquire knowledge in order to join the mainstream. The emphasis is on the need for conscious effort.

There is also a case for learning a language even if that language is the so-called mother tongue - for really there is no such thing as the mother tongue. Different communities even within the same political confines speak their own dialects no matter how similar the sound may be. There are so many dialects of the Malays, as there are for the Chinese and the Indians and all the other colourful tribes of our nation.

There is clearly a case for having a special strategy to promote the Malay Language and keeping it alive and kicking. The promotion can be through setting up a language institute - which I presume was what Dewan Bahasa was originally established for. There should be Malay Language Centres where one can seriously study the language and be exposed to its usage and beauty.

Personally, I would love to have a TV programme that gives a good Malay lesson for English-speaking Malaysians - not just in grammar but also in the literature, poetry including pantuns, and the wisdom that has been handed down in the form of sayings.


The our national education system must be founded on two cores: (a) language and communication ability, and (b) thinking and problem-solving ability. We should hire the experts and specialists in their fields, regardless of nationality, to teach our young.

In national schools, the young can be taught (a) English as a language and through literature and Maths and Science and thinking and problem-solving skills, (b) Malay as a language and through literature, history, culture, moral lessons, and (c) Mandarin as a language.

There should be the Malay Language Centres to promote the Malay Language to Malaysians and foreigners.

Monday, July 27, 2009

Language As A Policy

When language becomes a policy matter, the crux is the policy intent.

For the purpose of enhancing the livelihood of the people, the intent must be commercial and economic.

In the matter of culture, if culture is seen as a way to increase the likelihood of the survival of a people (which also means an improvement to their welfare) under all circumstance, then culture should have a stronger economic element than mere sentimentality over an established sense of identity.

Preserving a culture strictly in its old mode may be a futile attempt at stopping the flow of time and the changes in the environment. It resists adaptability and resourcefulness. It builds up narrowness for ease of control which in turn may quicken its own demise.

A good language policy is one that liberates the young from the grips of the old so that the young can chart a new future for themselves in the new world that will confront them, where they like it or not, as a direct consequence of the mindless actions of the old generations. The young will suffer the consequences of our errors and we must give them the means to save themselves from us. We must educate them by exposing to the frontier knowledge of the world, rather than hidding them under the coconut shell.

A good language policy should enourage the flourishing of knowledge in order for wisdom to grow.

Thursday, July 23, 2009

Speaking A Language

While the mastery of a language - namely, the ability to use words properly - is crucial thinking and communicating clearly especially on highly specialised subjects, we merely need "pasar" knowledge of languages in order to be able to undertake commercial transactions.

I am constantly amazed to notice how easy people in the streets can speak a smattering of different languages and dialects and can be successful in making money. This you will notice in most urban centres where shopkeepers have to pay monthly rent and they are like rats constantly on the commerical treadmill. Necessity is the mother of invention, and the cost pressures simply force them to be innovative in their choice of location and store display and their ability to communicate to with all and sundry who pass by their store front. In Shanghai, the old ladies may even pull you into the shop by the arm.

The ability to speak in more than one language, I believe, comes from the desire to communicate with other people, to know who they are and what they are like. Without the desire for direct contact and communication, we tend to form judgement from hearsay and prejudices without proper verification. Communicating with other communities, even if only through books or the computer, is an effective way of doing away with ignorance and hence undue fear of what we do not know. The ability to hear what others say in their own languages give one a very clear picture of their what whole mental make-up. It fosters goodwill.

I, therefore, think that promoting a myriad of languages to be spoken and understood in Malaysia even if only among people mingling in the bazaars is an effort which the government, and not necessarily the education department, should undertake if it wants the country to globalise among ourselves and with others.

Tuesday, July 21, 2009

Mastery of A Language...Or Anything For That Matter

I have been thinking lately about mastery of a language - or anything for that matter. What does it take and what does it mean to be a master.

To master anything, one must have the passion for it. Without passion, we are but pure mediocrity however smart we may imagine ourselves to be.

To master a language, we must appreciate the beauty of a language to express our emotions as precisely as we can. To do this, we must read the literature and the poetry, as well as the folklore and the fairy tales - for this is where the wisdom of our ancestors are passed down, by word of mouth, in stories that captivate our minds and captures our hearts - of love for the things that define us.

To master the Malay language, there are literature books written by lovers of the Malay language to display its natural beauty by bringing out the sounds that make our poetry and our songs a delight to our souls.

To master the English language, there are plenty of literature books to read. We older students were suckled on Shakespeare, Coleridge, Dickens, Walter de la Mare, Laurie Lee and V.S. Naipaul. We have translated versions of the Greek authors such as Euripides, Sophocles, Plato and Aristotle. We might even have enjoyed Lin Yutang, the Chinese classics or Vyasa, even if in English.

But Maths and Science are such technical subjects which do not lend themselves to easy translation. It can be done but it will have to take many years for the translations to be good and the language that is being translated into to be stable. Otherwise, we are likely to end up with codelike words which look like bad spelling. This will not be helpful to our children when we want them to be at par with children all over the world and compete in order to make our nation proud. We may be at risk as a scientific nation to immerse our children in bad translations of things which the translators may not be masters of in the first place. A bad translation of a masterpiece is a badly translated book.

Our history has shown that poor students in rural areas are capable of competiting with the best of the urban students if they are given inspired teachers and well-equipped schools. In this day and age, in this day of modern technology when information reaches all the little nooks and corners, it must be intense efforts of teachers of doing a consistently bad job to produce bad students. If teaching nowadays is not easy, this is the nature of the job and this is modern living - I don't believe there is any job now that can be said to be easy - where the person doing the job can be half asleep and hope that their incompetency will have no impact.

There is nowhere to hide in modern life except in badly concocted statistics. This goes for bad financing schemes, bad banking practices, bad accounting practices, bad politics, bad economics and bad teaching. There is a reason for governments for developing countries to constantly underfund the national statistical organisations - so that the truth will not emerge - so that they can survive on rhetoric.

Wednesday, July 15, 2009

Multi-Lingual Government Services

If the majority of the schools and population can become multi-lingual, re the last post, then the challenge is for government services to also become multi-lingual. Why not?

After all, it is silly, for example, for a tax collecting agency to make itself obscure by restricting its communication in one mode when it has to try as much money as possible from all kinds of people for all kinds of reasons, whether they are citizens or not. The tax collector should produce their rules and instructions in languages that people can understand so that their awareness will make them pay more fully.

The world has changed. The people now do not need the government: Those who can't take it have left; those who are here do not care for it. Moreover, the government now needs the people. To pay their taxes. To vote for them.

With globalisation, it is not valid for the government to have a tight grip on the people by saying: "We are the government and you are the citizens. We tell you what to do and you obey, or else you quit." People have quit. But foreigners come into the country, ignorant of the rules and laws which are written only in BM. They go about their businesses oblivious of the government. They break rules and laws, and didn't know they did.

The government now has to struggle within itself to make itself relevant not only to the citizens but also foreigners and the rest of the world.

There are also real concerns such as over public health where there is an urgent need to communicate well. Communication can be improved through better images and better use of languages.

The country needs to mobilise its resources - all its potential resources and talents - in order to lift itself out of the quagmire. The government must speak not in one tongue but consistent messages in multiple languages and modes for its diverse culture and ethnicity.

It's time for government services to go multi-lingual!

Tuesday, July 14, 2009

Teaching Maths & Science Revisited...and More

I have been increasingly troubled by the proposed change in policy on the teaching of maths and science. Maths and science are now being taught in English in all schools on the argument that it will help the country to advance technologically (hence, the maths and science) and internationally (hence, the English). The proposed policy change is that the teaching of maths and science will revert to the vernacular by 2012 but without the neglect of learning English as a language in all schools. In my last post, I have suggested some refinements to the proposed policy change, as per the views put forward by, among others, de minimis and sakmongkol AK47. I suggested there that the quality of the teaching staff may be a problem and there is a way to tackle it.

In this post, I wish to point out that problem areas still exist in my earlier policy proposal and hereby suggested a more elaborate but probably more comprehensive and satisfying way to go about thinking and dealing with it.

1. I shall conveniently classified any of the ethnic languages as vernacular: Bahasa Melayu, Mandarin and Tamil. I think the urban community would like to consider English as their vernacular. Let is then grant everybody their wishes.

Consider the medium of instruction for all subjects in these 4 types of schools:
Rural schools: BM
Chinese schools: Mandarin
Tamil schools: Tamil
Urban schools: English

We discover that keeping very silent in the whole debate are the international schools which are, in fact, English schools. By right, in the land of liberalisation, there should be no barrier to entry into international schools for students as well as private educators.

2. If, for the sake of national integration, we add in a layer of BM (one language or literature class) so that all students in the country can communicate with each other. We get this:
Rural schools: BM/BM
Chinese schools: Mandarin/BM
Tamil schools: Tamil/BM
Urban schools: English/BM

We find that the students of rural schools will be disadvantaged by being monolingual, and the students of the other schools will be bilingual (which is better).

3. Let us then introduce, for the sake of international integration, another layer of English (one language or literature class) so that all students in the country can communicate with students outside the country. We get this:
Rural schools: BM/BM/English
Chinese schools: Mandarin/BM/English
Tamil schools: Tamil/BM/English
Urban schools: English/BM/English

We find that the Chinese and Tamil schools become trilingual, while the rural and urban schools (aka national schools) are only bilingual (BM and English).

It appears, from the above analysis, that the restrictive structure of the rural schools may be holding back the advancement of the urban schools in terms of curriculum development.

4. The logical way to resolve the above imbalance across the entire school system is also to introduce Mandarin or Tamil to rural schools, and Mandarin or Tamil to urban schools.

In rural schools in Sabah and Sarawak, their own languages can be introduced instead of Mandarin or Tamil, i.e., Iban, Bidayuh, Kayan, Kenyah, Kelabit, Lunbawan, Penan, Kadazan, Dusun, etc.

I would add Arabic for those who may be interested to build ties with the Middle East.

So, the picture will come out like this:
Rural schools: BM/English/Mandarin or Tamil or Arabic or an indigenous language
Chinese schools: Mandarin/BM/English
Tamil schools: Tamil/BM/English
Urban schools: English/BM/Mandarin or Tamil or Arabic

The above analysis shows that insufficient resources may have been put into the study and promotion of the many languages that exist naturally in a multicultural society such as Malaysia's.

1. In line with the wave of liberalisation at home, we may want Dewan Bahasa Dan Pustaka to open up to the other above language to make the organisation more expansive, with such ambituous projects as the BM/English/Iban dictionary, BM/Arab/Iban dictionary, etc.

2. The government should publish bilingual BM/English textbooks for all the subjects that are being offered in national-type schools: History, Geography, Maths, Science, etc. for primary and secondary schools.

3. By implication, therefore, there should be similar changes in the universities where students from any types of schools should be eligible to enter any of the local universities - if our local universities are so keen to welcome foreign students ostensibly to improve the diversity of the campus population.

For now, I am fairly happy with what I have said about the required change for the education system in terms of the language aspect. I am happy because my proposed perspective is outside looking and therefore more liberating, at least, to the mind. The current education system that we have, and the current thinking on the teaching policy, seem to me to be conservative.

If Malaysia is to grow at a rapid pace, we should liberalise our education system and invite innovation and creativity in the way we manage the education system and our kids. Education lies in the services sector which the new government sees to be the next engine of growth. Let us start the education engine by bootstrapping it so that it will drive the rest of the economy into high-income growth filled with brain-filled ideas.

In line with outsourcing and PFIs and what-not, I suggest the Ministry of Education should focus on policy and product design (and make sure the design is first-class) and then to make known to the public the precise nature of the product so that the private sector with all the excess liquidity can participate in this great stride forward in educating our future leaders, in addition to the development expenditure (for schools and facilities) and operating expenditures (for qualified teachers and lecturers) that the Ministry of Education will fight to allocate for education.

Monday, July 13, 2009

Key Result Areas (KRAs) for High-Income Economy

When I was given a time planner in the early 1980s as a young executive, I spent an intense several months figuring how to use it properly, applying such concepts as goals, strategies, and action plans. I discovered I like the Key Result Area (KRA) better than Key Performance Indicator (KPI). It is therefore a pleasant surprise when I hear the government talking about the KRA instead of the KPI.

The problem with the KPI is its pretense to precision and measurement which may be logical but misleading. The KRA may be fuzzy but it can be more realistic because it touches on areas that are intuitively logical but not measurable with any precision (and not entirely unmeasurable).

My objective in this post is to try to put together into a coherent whole the concepts that have been reported in the press so far and see how everything fits:
High-Income Economy
New Economic Model

Vision is an image that we see in our minds of what, in this case, we imagine our nation to be. The first vision was "Independent Malaya" in 1957, expanded into "Independent Malaysia" in 1963. The vision was changed to the "New Economic Policy" in 1970 to last for twenty years. In 1991, "Vision 2020" was mooted but the clarity was clouded by the financial crisis and subsequent policy actions were to salvage what was left of the economy.

Today, the two contending visions seem to be "1Malaysia" and "High-Income Economy." (I think the "New Economic Model" is a stray to try to emulate the "New Economic Policy" but will encompass "1Malaysia" and "High-Income Economy.")

"1Malaysia" seems to be an anti-thesis to the "New Economic Policy." "1Malaysia" is now being touted as the higher vision of the NEP while the old NEP has been degraded as a poor instrument of the higher objective.

The "High-Income Economy" is not new (being nested in "Vision 2020") but works as an anti-thesis to the delapidating policies particularly fiscal, immigration, institutional and financial policies that seem to have worked to corner the whole economy into, theoretically, an equilibrium but not a happy one.

"High-Income Economy" is therefore a higher vision than "1Malaysia", with the latter acting as a crucial unifying force of higher growth.

But the level of one's eventual achievement depends on the height of one's sight. Malaysia can go higher. "Paradise on Earth" seems like a good higher vision that subsumes under it "1Malaysia" and "High-Income Economy."

Most people get the vision mixed up with the mission. Vision is this large image that we are trying to create - and not necessarily, or rather should not be, measurable. Mission deals with the question of the motivation for this vision, so as to mobilise support for the vision.

We concluded above that the vision should be "High-Income Economy" and not "1Malaysia." But "1Malaysia" is an important Key Result Area for the vision of "High-Income Economy."

But what is the mission for the goal of "High-Income Economy." The primary motivation must be "Equal Opportunity For All" rather than "Economic Opportunities For A Select Few." In which case, the manner by which the "High-Income Economy" is achieved becomes important to ensure that growth and distribution are in the right direction.

I cannot over-emphasise the importance of the nature of the implementation of the "High-Income Economy." The previous goal of high-growth economy had worked badly because of the errors in policies being implmented from which we are still reeling.

It has been reported that the foundation for the "1Malaysia" is the principle of justice for all. (The Star, 11 July). But justice can be a difficult word because of its many connotations, one of which implies the justification to resort to violence or unscrupulous means to achieve justice. I would prefer "Fairness For All," as the word "fairness" is more of a plea than a demand. Which all boils down to "Equal Opportunities For All."

The concept of the Key Result Areas is akin to the concept of the Critical Success Factors, being pre-conditions for the success of a goal or vision.

If "High-Income Society" is the Vision, and "Equal Opportunities For All" is the Mission, then the Key Result Areas should be as follows:
KRA1: 1Malaysia - National Unity as the First Underlying Force for Competitive Advantage
KRA2: High Savings and Investment Rates for Domestically-Generated Growth
KRA3: Downsizing the Government
KRA4: World-Class Education System that is relevant to the Global Economy As the Second Underlying Force for Competitive Advantage

KRA1: 1Malaysia
"1Malaysia" is a complex concept, depending on what we see when we look at diversity. If we see in diversity, enemies, then the tendency will be to dominate others to ensure supremacy. If we see strength in diversity, then the tendency will be to embrace the diversity to create new and greater synergistic strength. If Malaysia is to become an enlightened nation, then aiming for high ideals is a key result area that we must see achieved. To achieve KRA1:1Malaysia, the action plans may include:
Action Plan 1.1: No Discrimination for or against in all areas of life in Malaysia, including foreign investors. Actions have been taken to remove barriers to entry into certain areas of the economy. However, we must also be conscious that all rules apply and that foreign investors and foreign workers, however much needed, should also not be given concessions which are given to local investors or local workers.
Action Plan 1.2: Promoting "Malaysia, My Home" to every Malaysian citizens so that they feel at home in this country. This is important economically to retain savings and for those savings to be invested at home to create jobs for the young people at home. We have successfully been promoting "Malaysia, My Second Home" to foreigners and we should therefore put equal effort or more effort to promote Malaysia to Malaysians, even ex-Malaysians, in order to extend our global reach.
Action Plan 1.3: A Common Language to unite the people and this invariably falls onto the Malay Language (but whether it should be the medium of instruction in schools is another matter). This is more of a practical need for people of all walks of life to communicate with each other across different strata.
Action Plan 1.4: The celebration of cultures as a reflection of the way people in Malaysia cope with life in the nation, by preserving old cultures and the traditional way of life as well promoting the performance arts with Malaysian elements. This is not very hard to do, as Malaysians have already embraced key elements of each other's local cultural heritage, short of religious imperatives.

KRA2: High Savings and Investment Rates
No country has not grown as a result of a high savings rate. All countries that do not save have all gone bankrupt.
Action Plan2.1: There should be constant encouragement for the people to save by providing safe savings instruments with guaranteed positive returns.
Action Plan 2.2:There should be constant encouragement for the people to invest in themselves (human capital) and technology (equipment).
Action Plan 2.3:For investments to match savings, financial institutions should be made more efficient where credit officers and managers are knowledge of the evolving structure of the economy and are constantly searching for ways and means to nurture new and growing industries.
Action Plan 2.4:There should be strict controls of financial and business speculation by financial institutions.
Action Plan 2.5: Keep the Ringgit Strong whenever there is a current account surplus, and keep it weak when there is a current account deficit.

KRA3: Downsizing the Government
Action Plan 3.1: There is a need to structure the government machinery properly. There is a tendency to look far afield for expert advice when in fact the experts have been sitting so faithfully right under the noses of the leaders for so long that they have generally been ignored. Office politics have a tendency to kill immediate work rivals to the detriment of the nation; and foreign consultants hired at exorbitant sums to provide advice based on inputs of the poor local loyal workers. In other words, there is a huge mis-match between the job-holder and the job-description in the civil service as a result of past hiring policies. There is a need to discard the ill-qualified workers from their posts and hire properly-trained personnels to fill the posts.
Action Plan 3.2: The government should increase the number of technocrats who can design systems and manned systems and sure that the government system is cyber-safe. The government should be based on systems that are opened to all and there should be minimal tweeking at high levels.
Action Plan 3.3: The government should not crowd the economy. Government-linked companies (GLCs) should be asked to make profits but no more than the savings-deposit rate so that there is no encouragement of natural monopolies to make supernormal profits to enrich their executives by charging high tariffs.

KRA4: World-Class Education System
The education system is an area where a clear analysis of the root cause of the problem should be identified. From the debate in the media, it is clear that the root cause is the poor quality of the teachers that we have - not only in (i) the lack of mastery of speaking and explaining in English but also (ii) the lack of mastery in the teaching of Mathematics and (ii) the lack of mastery in the teaching of Science - factors which could be attributed to be the product of the existing education system. The inability of teachers to teach in the subjects in which they are assigned to teach is the crux of the whole debate.
Action Plan 4.1: As we have recommended for the civil service, teachers should individually be reassessed by credible and objective assessors of their core competence as to (i) their ability to teach Mathematics regardless of language, (ii) their ability to teach Science regardless of language; and (ii) their ability to speak and write English and Bahasa Melayu. Depending on where the demand or vacancies are, the posts should be filled only by competent teachers. Additional teachers can be hired from retirement or Singapore.
Action Plan 4.2: There is also the problem of the competence of the students, especially those in rural schools and those in urban schools. The medium of instruction in rural schools should be Bahasa Melayu, but students must learn an extra language preferably English or Mandarin. The medium of instruction in urban schools should be English, but students must learn an extra language preferably Bahasa Melayu or Mandarin. The medium of instruction in Chinese/Tamil schools should be in Mandarin/Tamil, but students must learn an extra language preferably English or Bahasa Melayu.
Action Plan 4.3: For rural schools, there must be forward planning for teachers for each of the states. As far as possible, teachers should be recruited from the respective rural areas so that, when properly trained, they would be willing be willing to go back to their respective kampongs to serve their communities on a long-term basis.
Action Plan 4.4: There should be emphasis in teaching on principles and methods of thinking rather than raw facts. The syllabus should be simplified by experts who know their subjects well so that the core essence of each subject is taught while exercises are given to encourage the application of ideas.
Action Plan 4.5: There should be a limit placed on the inflation of grades, and the quality of the examination questions assessed as to their level. When the exams are too easy and the grades are all high, there is no basis for proper grading of acumen and competence and flair of students. There has been less emphasis on academic training and more on professional or vocational training which a nation that wants to build its own indigenous industries from the bottom up needs. There should be some correlation between the standards that are produced from public examinations and the availability of local undergraduates positions (e.g. All 10 As students will be guaranteed a place in the local universities in the subject of their choices.)

The above is not the New Economic Model but just some thoughts of an individual who hopes to throw some light in the search for one. When properly done, it can be an elaborate and consistent set of action plans derived from a vision but based on an understanding of the reality.

Lin See-Yan on Education

Lin See-Yan wrote a good piece on education in the Star last Saturday.

He wrote of the original role of universities of educating young men and women to become good citizens and how the universities have lost the force of their initial vision along the way to commercial viability.

He questioned whether the lack of moral education and care for others have turned perfectly young men and women into monsters that are now creating havoc in the modern world that we now live in as exemplified by the financial collapse world-wide.

He wrote: "In my view, restoration of the right balance between scholarly excellence and its education role requires developing in students a philosophy of life that brings dignity, honor and responsibility to oneself.

"For Malaysia, this means helping them to believe in themselves as individuals, and not to see themselves first as members of any identity group. This simply entails creating community out of diversity. The building of self-understanding and confidence in one’s own principles remains key to the educated person and leader we all want to emerge from our universities.

"In this context, universities have proceeded to redesign curriculum that includes seven basic requirements: (i) more flexible purposeful-course requirements; (ii) written and oral communication; (iii) foreign language; (iv) quantitative skills; (v) basic science; (vi) moral reasoning; and (vii) specialisation."

Thursday, July 9, 2009

The Nature Of Economic Theory & Policy II

In my last post, I depicted, as clearly as I could, the dichotomy that between theory and policy that economic theorists have tried to maintain in order to ensure that theirs is a theoretical research programme that is as objective as it can be scientific.

As a result, there is a tendency to emphasis on the theory of growth and neglect the theory of distribution, such that formulators of distributive policies that less guidance on from theory and therefore the chances of distributive policy errors are high.

Of course, for those of us who know our economic growth theories, we cannot pretend to write a production function without being confronted with the implications on distribution of the output. It is this glaring neglect that we find ourselves talking senseless about growth without ignoring the reality of distribution right in front of our noses.

To be authentically economic, we cannot simply write a production function that is comprised of different races of people. We know the key factors of production to be land, labour and capital.

Theoretically, it requires a heroic assumption to say that race A has land, race B has labour and race C has capital. In all likelihood, every race of people has A, B and C in them. And this is why the theory of distribution inevitably falls back to class rather than race.

Land is without productivity which is embodied only in capital. Labour is without skill which is embodied in capital.

Capital, however, embodies skills, technology but I do not think it contains money. Money, as Keynes contended, is not there to earn interest. Money contends with uncertainty of capital value and hence liquidity.

Capital is that which links the past to the present and the present to the future. Without capital, we will be nothing but a subsistence living from day to day depending on our daily bread from providence and occasionally manna from heaven if we happen to have oil.

We should therefore take the bulls by the horns, if our research is to be realistic, by studying the impact of distributive policies on the accumulation of capital. (It does not bode well for a country which claims to be wealthy but having to resort constantly to foreign savings for capital.)

There should be research, especially empirical work, directed at the distributive inpact of growth policies to see whether a particular policy is sustainable or not over the long run. But there will be immense difficulty with this programme of research when even the measurement of wealth is a massive obstacle in itself.

This is an area of empirical research which I think Malaysia has sufficient data points to throw light on.

Friday, July 3, 2009

The Nature Of Economic Theory & Policy I

There is a sharp difference between theory and policy in economics. Theory aspires to be objective, insofar as a social science - the science of human beings studying themselves - can be; whereas policy is explicitly normative in the sense of being prescriptive - however much propounders of a specific slant may try to convince us all that their is the "fairest of them all."

In the natural sciences (such as physics, chemistry and biology), the methodology followed is "induction" where repeated experiments can be conducted to test the validity of a proposition in order to "get at the truth". But even induction has been famously known to have its own problem, as exemplified by the case of the black swans - a paradigm shift that can be as profound as Galileo's.

In trying to come to some kind of a decent conclusion for economic propositions, economic theorists have decided on "positivism" (a la A.J. Ayer) as the philosophical basis for its scientific foundation. The positivist argument is that while the premises may not be testable (as in "limitlessness of human wants"), the eventual conclusions or propositions derived should be subject to test and be testable. Herein lies the whole study of statistics and econometrics and modelling for the purpose of testing economic hypotheses.

We shall remind ourselves that reality is not neatly separated into economics and everything else. Reality is a mixture of economics, politics, religion, environment, etc. The economic data that we collect to test economic propositions are in themselves constructed out of theories themselves and therefore are bias towards the theoretical framework. There are many structural changes to the global economies as well as the local economies, such that the data points (for a young nation like Malaysia) are inadequate to take into account all the relevant factors. The other factors such as politics and environment are not as "quantitifiable" as economics which in turn is not as "quantifiable" as CO2, for example.

In the face of insufficient data (especially uptodate data) and poorly tested propositions (or "theories" as economists would like to call them), many economists have to resort to a particularly way of thinking on economic issues and to rely on economic insights drawn from years of keen observation to arrive at a judgement on what the economic reality actually is.

The economic way of thinking is the observation of how human beings behave to satisfy their wants and desires, and how they respond to stimuli. While economists focusing on the GDP will want us to believe everything boils down to goods and services, I wish to make the point that how the structure of the economy evolves to be what it is today and how it will evolve into tomorrow is a respond to the fears and uncertainties faced by human beings. At the meta level, i.e., the underlying fundamentals, we know that human beings are destroying the very ground on which they stand in order to have a firm grasp of their future (which we all know is elusive and never here).

In the end, the policy we pursue is a reflection of our own value judgement of how our society should be and become. Policy is normative, with no pretense on objectivity. We may argue that we should be market-oriented in order to be economically efficient, but our society may become more treacherous as a result. In policy, we wish to argue a position for our society to take, as we would wish to argue for our particular way of living. There are some basic economic relationships which we must recognise and take into consideration, if only to arrive at an ideal state - as ideal as anyone can tell us that ideal is necessarily good. But it does not mean that foolish do not exist, and that wrong policy actions are not taken. Errors occur everyday; it is the ability to undertake error-correction that keeps us from ultimate disaster.

In policy, we tend ultimately to argue for a particular way of life for our society or the degree of freedom to live the way we prefer.

Tuesday, June 30, 2009

Malaysia's Problems VII: Finance Industry

Our finance industry had exploded and collapsed within the first 7 years of the 1990s and has since not recovered enough to save the economy.

Traditionally, commercial banks financed business, finance companies financed consumers, merchant banks financed businesses through bond and share issues, and stockbroking companies created a secondary market for bonds and shares.

Now, banks had been collapsed into finance companies and the business of these new banks is consumer lending. Merchant banks had been collapsed into stockbroking firms or stockbroking firms are given corporate finance functions to be called investment banks with the purpose of helping companies issue bonds and shares as well as brokering those bonds and shares to the general public. A new crop of financial institutions enters the game to manage the wealth of the general public.

The competition in the whole finance industry is to see who can repackage the future income streams of corporates in such a way as to get the best value for their clients (companies) and flogging them off to the general public. This provides a major exit point for many small and medium sized companies such that, while we may have the largest number of listed companies, we also have the large proportion of companies that do not have profitability. The local stock market has therefore collapsed as a direct result of the intention of the major shareholders of listed companies to benefit at the expense of the minorities. This, I think, has created a hollowness in our industrial complex such that we have more shells than productive capacity. Assets are acquired at inflated prices.

The collapse of our industrial complex, which previously grew out of the determination of family-operations, means that in the end only monopolies survive. Given their mandate to be profitability, their very corporate turnaround has become a bane on the rest of the economy.

Will the replacement of the 30% rule (on equity) with the 50% rule (on shareholding spread) rekindle the small and medium sized industries? I think not. The SMIs have gone through irrecoverable transformation. Due to lack of opportunities, most would have gone to China where is real market is. At home, the government will pump funds to create new innovative and creative companies. They will hardly need any other funding. If they fail, there is no extra cash to raise. If they succeed, the 50% rule becomes irrelevant (unless of course it is also read as mandatory for the shareholding spread to go to the other parties). The ruling has failed to recognise the structural change in the industrial sector.

Will the relaxation of the equity for stockbroking firms help to revive the local stockbroking industry or the stock market? I think not. If the industrial sector has hollowed out, there is nothing to promote and no decent shares to trade in the secondary market. (There may be attempt to sell junk bonds.)

In my view, the key thing that must be done is to rebuild our industrial structure. Is expanding the services sector the answer? I think partly. I think we have not completed fully IMP1 (building an industrial base), IMP2 (creating value-add industries) and IMP3 (joining the global value chain). I think we need to overhaul and integrate better our primary and secondary industries with a view to growing the services sector. I think the integrating force is corporate efficiency.

The failure of the big banks to come down to the small business people and help them through thick and thin is one of the major factors why new SMIs have not emerged in the post-1998 economy worthy of stockmarket attention. There is no more nurture. The focus of money making is no more in the business but in the stock market. Small business people have become market speculators.

With poor corporate performance, it will be very hard for fund management repackaging stocks in the form of unit trusts to make money unless they tap into the monopolies which have monopoly profits as well as the perennial support from the EPF to increase their share prices. The cry of insufficient float for big investors (presumably foreign) merely means that there is just too much money (read: excess liquidity) chasing too few good stocks (read: monopolies). I am not surprised that the KLCI has been treading sideways and has not surpassed (except momentarily in 2007) the record index achieved in 1993.

The concern over risk management in financial institutions especially banks by accountant-type regulations may be skewing their lending portfolios towards real-estate based funding activities. Further danger will come from believing that value and profits are derived from inflation. My view is that the only safe bet for the financial industry over its long-run profitability and viability is to finance productive business activities. This will involve banks rolling up their sleeves and give their commitment to the financing of the corporate sector - rather than leaving it entirely to the corporate finance people.

But, to be fair, for the banks to get their act together, the government must come out with a credible economic plan to provide the strategic direction for the entire nation. So far, I only see direction for the protected few and the real foreigners. A better plan is needed.