Tuesday, September 28, 2010

5 Ways To Transform The Economy

I think I have been make amends to my previous post by writing what I expect the transformation of the Malaysian economy to be like.

1. External Environment

We have to take cognisance of the external environment - what we expect it to be like until 2020 and how are we going to react to it.

While the United States is still the largest economy in the world, there is a now a formidable global economic force in China and some say India. Europe will remain the centre of luxury products to feed the new rich of Asia. Indonesia may see a sharp transformation of its economy if it manages to lock into China through the new and quite impressive ministerial team.

The opportunities for Malaysia will still be in commodities, with focus now on palm oil and its downstream activities. It is not clever to just be selling the palm oil - we have to go into processing, i.e., palm oil-related industries with focus on research and manufacturing. If our plantation companies are stuck merely at planting and harvesting, then we are stuck in the middle income.

Electrical and electronics I am quite apprehensive. We cannot compete on assembly. We have to go into R&D. We have to beef up our universities - and they say they cannot be KPIed.

2. Domestic Environment

The domestic environment is probably going through its third-level expectational changes. At the first level, the New Economic Policy has created gains for a small section of the Bumiputra community (as a result of piecemeal proactive measures rather than across-the-board policy) which created discontent among the large majority of the Bumiputra community and the whole of the non-Bumiputra community.

At the second level, this discontent leads to lack of confidence in the universal goodness of government policies and consequently voting by feet. Redistribution without serious reinvestment creates a lethargic domestic private sector which therefore is substituted by foreign direct investment.

At the third level, there is now the struggle to keep the New Economic Policy (argued on rights). The challenge is to find new proactive measures which are not unilateral transfers but instead investments in human and social capital so that there will be less intrusive or discouragement to the confidence of the rest of society. In fact, there is a real need to find ways that encourages both the Bumiputra community (those who have benefited and those who had not) and the non-Bumiputra community.

There is a need to spell out a bit more clearly in practical terms the meaning of things for the nation to move forward as one.

3. Research and Innovation

The managing of expectations and the building of confidence in Malaysians in the future of this nation (and not just the confidence for foreign investors to make money off Malaysia and Malaysians) is crucial for Malaysians themselvesto start investing in the future of Malaysia. This involves pouring blood, sweat and tears to projects in Malaysia, using Malaysian resources and for the needs of Malaysians. In this context, indigenous investments must mean investment by Malaysians, Bumiputra or otherwise.

Again, our investments must be in human and social capital, as well as in scientific and commercial enterprises. Malaysians must wake up to the harsh reality that there is such as thing as technical know-how which should, ultimately, be superior to the social know-who to progress - although, admittedly, social networking is vital for individual progress in society.

4. Banking and Finance and the Capital Market

In the current global environment, there are more funds than there are good investment projects. It will be not be clever to pay a high interest rate of 5% say for financial funds. It does not bode well for the nation to guarantee foreign funds a high rate of return for the basis of undertaking some speculative real estate projects at home.

Malaysia's problem is that it has thrown the baby out with the bath water when it solved its banking problem during the financial crisis in the late 1980s. By amalgamating smaller banks into banking giants, ostensibly to ensure sufficient capital support to withstand the bad loans, the solution to the problem of the ratio of non-performing loans to total loans is to expand the loan books. Loans are thought to be more safely given out by lending to (politically-connected) single big borrowers, and the creating of collateral assets (namely, real estate). I agree that there should be a narrow cap on the loans book that goes to the real estate sector.

As a result, big banks are not structured to understand and manage and have a proper relationship with small-scale entrepreneurs. In other, big banks have killed off the small enterprises by their technical incompetence in nurturing small businesses. It is far easier for fresh undergraduates to analysis proforma balance sheets and profit and loan statement, rather than to go to the ground and understanding how the businesses are doing. Much of the paper work with banks are probably unrelated to the reality in the business world.

There is no problem with the capital market, insofar as I can see. The only problem is the lack of good businesses to invest. Businesses, especially small businesses, have discovered that it is far easier to make big bucks by conning the small investors in the stock market with their bogus prospectuses than to go out there to fight in the real business world. The excess liquidity situation does not help to identify good businesses for investment, and Malaysia's lack of competitiveness in the world does not make Malaysian firms to be good vehicles for long-term investment.

Bank officers just have to be properly trained to help grow new firms through strong relationship banking with customers.

5. Rapid Adjustments

The one consequence of a big government sector in the economy is that the economic adjustments tend to be excruciating slow or none at all. No government company has failed. No big companies associated with the government has failed. There are no distress assets to be bought on the cheap by those who have been prudent and are cash rich. The economic game continued to be in the hands of the incompetent few (or many?). Companies making losses have been given a new lease of life by restructuring and the sale of assets and as a result are now completing rundown and are in no position to compete either at home or abroad. Business decisions appear to be made without contingent liabilities to the individual directors whose are recruited from retired senior government servants.

Banks should be forced to pull the rug from under the feet of companies that are not doing well or are inefficient.


I can go on to detail out the need for a good judiciary system to settle industrial and commercial disputes and everything else to do with the business environment in Malaysia. I think I have written enough to give an idea of what I am getting it and that I probably have a legitimate basis for being not entirely happy with the Economic Transformation Programme.

The ETP should be strategic that triggers things off in the right direction. That right direction is the keenness of private domestic investors to invest in Malaysia.

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