Warning: Too long for my liking. But now that it's done, I'll just let it through.
I concluded my last post as follows:
"Half the problems of the nation can be solved by the simple act of engineering a slow but steady strengthening of the ringgit in the next 5-7 years - as part of the strategy to bring about an improving in productivity gains and a rise in the real income and wages of the people."
There are two possible ways of reading this statement:
1. That the central bank push up the ringgit and let the economy adjust accordingly. This is not an unrealistic approach. Afterall, the whole economy is interlinked with itself and the rest of the world.
2. Let the ringgit find its own path. This is an idealistic way of looking at things. This could be a culmination of the balance on goods and services, or the flows of short-term capital (as well as long-term capital) depending on the market view of the economy and the stock market.
Taking the economy as an integrated whole, therefore, there is a correlation between a stronger currency and productivity growth and real incomes and real wages.
Let me elaborate, using scenario (1).
Consider that the central bank positions the ringgit at RM3.00 to the USD.
Can the central bank just do that? Of course, it can. The central bank can support the currency at any rate that it wishes. Look at how long we did it at RM3.80!
Is it a stupid thing to do?
It depends on who you are.
If you are a strong headed PM with a finance portfolio, and if you are fighting foreigners in the name of the national interest, then you are a hero to fix the exchange rate. You can even pull all the stops just to get it done. Chop off the head. Chop off the hands. Chop off the legs. (Remember the Last King of Scotland.)
And let the whole economy adjusts....
And the Malaysian economy has been adjusting since.
How did the economy adjust?
1. The game stops for the stock market. No foreign portfolio investor will touch the Malaysian stock market, save for some brave souls from down south who figure they can do a hit and run. The KLCI is not reported by the whole press any more. It is off the radar screen.
In the meantime, we are waiting for Godot. We sit and wait and get ourselves all excited over nothing. The market treads sideways, simply because the corporate sector is dead - well, more of it being dominated by a handful of monopolies.
2. The current account in the BOP blossomed. Suddenly, from a massive deficit, we have a massive surplus. What happened? We have stopped importing machinery and investment goods. We get the surplus from commodities, electronics (this can be argued to be exaggerated), and services (more specifically, tourism, where measurement is disputable).
We have a scenario where the entire economy stopped investing and entered into an era of mass consumption. Banks with plenty of cash (or, in the jargon, excessive liquidity) find that they have interest to pay on deposits. So, they are going to create a self-sustaining virtuous circle. Because of the wholesale rescue of the economy from bankruptcy by the prevention of the workings of the financial markets, real estate values were preserved, more or less. The short-lived new central bank governor ordered an increase in the money supply by 5% per annum. Banks lent out of the basis of the surplus of the asset market value over debt. The surplus was massive. Bank loans to real estate boomed. That started the phase of the escalation of real estate prices. In this manner, the great surplus on the current account got translated into higher prices.
Is it an equilibrium?
You bet it is. With an exchange rate that was suppressed, the net foreign assets of the banking system was over-blown, which allowed them to lend and lend - not to businesses, but households.
I must confess. There is truth in the observation that, after 7 lonely years of suppressed currency, the economy has been brought closed to equilirium following the sustained escalation of domestic prices.
3. Higher Imported Prices. So when commodity prices in the global markets hit their peak just prior to the Beijing Olympics, what did we do?
We allowed full pass-through of the imported prices.
The general prices in Malaysia jumped a hefty 40%. (Who was that smart guy who argued for full pass-through?)
What happened to the economy? From my ground investigations, every other ordinary businessmen and hawkers suffered at 40% drop in business.
I presumed they meant in volume terms. And that was the start of the current economic downturn, unhelped by the bust in the US financial markets.
4. Bailing out of talents. Because of the poor business volume, local salaries and wages do not rise. Employer says to employees: "You are lucky to have a job. Oh, by the way, let's take a 40% pay cut across the board so that I do not have to sack anyone." Against the backdrop of 40% increase even in hawker food, then is a drop in real incomes and real wages.
Those who have good skills will try to look for a better jobs. Of course, you are not going to find them in Malaysia. You are going to get out of here. We are losing our talents, and hence a loss of our productivity gains. (Well, maybe the loss will result of loss of motivation and probably lack of ideas.)
5. So, as the economy grinds to a screeching halt, what did the monetary authorities do? Zero deposit rates. So cash should also flow out of the local currency and the local economy. With the people with also go capital, natural if there is emigration.
6. We respond with the liberalisation of the services sector. What does this mean? Liberalisation means we are letting foreigners open up shop in the local economy. There should be some happiness among bankers and financiers since these foreign financial institutions will pinch them by paying them 20% higher. This may not be good enough to cover for the consumer inflation but better than nothing. The same goes for other parts of the services sector. Other services: law, transport, computer, health, tourism. Yes, there could be increases in the salaries and wages of these sectors, although those unemployed will be grateful for a job regardless of pay.
7. If the services industry is going to expand as a result of the liberalisation, there could be an absorption of the unemployed but experienced workers (particularly, those who had escaped into the stockbroking business during the good old days) and probably spotted increases in salaries but I do not expect much. (Qualify: Top managers always feel they command top pays, so I won't say no to the likelihood of salaries being raised for these people. I shall wait for the NPL to rise in their last firms and look at their faces.)
This will create more jobs for white collar workers (Malaysian graduates), rather than more jobs for construction workers (foreign workers).
8. So, by taking all things into consideration, where do we think the ringgit should go?
I am not too sure about the impact of the higher salaries in the services sector on the exchange rate. (I learned that one theory says that, technically, if the services sector is big enough, the ringgit can be stronger to be at par with service prices in other countries, assuming the currencies are in equilibrium in the first place.)
Let me now try to think.
I think the salaries will have to go very much higher if we were to be able to retain the very good workers in the services sector in Malaysia, if we have a weak ringgit. If not, then we may have to let the ringgit strengthen in order that the hike in local salaries to get top-notch workers in the services sector be not too excessive - we need them to create an efficient and competitive services sector.
If the ringgit is weak, then the differential between the top-notch workers (at international prices) with the ordinary workers (at local prices) will be so huge that there will be bound to be jealousy in the work place.
Are we already in this situation in the work place? I think we are. Foreign consultants with their foreign fees which are probably 10x to 20x more than what a local professional will earn doing the same job, but probably with different experience and exposure.
This is because of systemic inefficiency and lack of competence giving rise to a weak ringgit and which together produce a vicious circle of secular economic decline.
9. I can also think of the zero deposit rate as a reflection of the current economic problem at home. Productivity growth is so low at home, and ideas so bankrupt, that even if you throw free money at the corporate sector, you ain't going get any improvement in the economy. Traders and carpetbaggers simply do not invest.
At zero deposit rates, I think we are asking for trouble.
There is this mistaken view that the 30% to 40% "gross national savings rate" is a big number.
This savings rate includes the EPF that most people have to save for the retirement. (Thank you, government for consistently eroding the real purchasing power of our future savings through sustained inflation and sustained weakness in our currency.) If we are to consider the household sector as a whole, the savings rate was only 1% (2004), according to the National Income.
The gross savings rate of our government was 24%. But by far the largest was the corporate sector (80%), largely financial sector (83%) and non-financial sector (80%).
So, I don't think we should kid ourselves. The truth of the matter is that the corporate sector was a net lending in Malaysia, while the government and households are net borrowers.
Why should the government and household sectors be asked to support the economy, specifically, the corporate sector which is sitting pretty - especially, the big, strong, friendly ones.
Where are the corporate investments?
10. Do I think the RM2.70 to the USD for the ringgit is mythical? No! It is a clear number. I dream of RM1.80 to SGD and RM4.50 to the pound sterling - like the alignment of planets.
11. Engineering the strengthening of the ringgit? Conclusion.
I think in terms of direction. In central banking parlance, it is called the exchange rate "stance" if you like. You take a position. It becomes a signal to the world.
Once the signal is clear, the world knows what to do.
For central bankers who want a quiet life, the best thing is to say nothing. To give no clue to the market, so that the market cannot speculate against it. Fine! That's another stance.
If nothing is happening, the market just ignores the ringgit. There is no engagement.
How do you think the ringgit can stay "so stable for so long"? We are being ignored.
The little transactions in the local forex market, for trade purposes, is not a really free market. It is a provincial market in some forgotten town.
Is Malaysia ready to engage the world and play the global economic and financial market game professionally, without thrashing the game board when we lose?
Tuesday, June 23, 2009
Thursday, June 18, 2009
Malaysia's Problems V: Weak Currency & RM1 Trillion
Malaysia has a weak currency that is wrecking havoc on the relative values in the country.
Since 1990, the ringgit has weakened by 23% against the US dollar, 17% against the pound sterling and 38% against the Singapore dollar, among others.
The period chosen is arbitrary and hence the percentages are just for illustrative purposes.
The point is that the ringgit has weakened severely among major currencies.
Of course, the momentuous event was the 1997/98 crisis - which was dubbed the Asian Financial Crisis - although nobody has just suggested that it had also been a Malaysian economic disaster.
The economy has not really recovered since then.
Money Supply
I am astonished to discovered that the M3 money supply has now reached RM948 billion at the end of April 2009.
We are only a step away from having a RM1 trillion worth of M3 money supply - which could be reached before the end of 2009!
What happened?
M3 grew at an average growth rate of 8.8% in the last night years from 2000 to 2008.
Starting with an M3 of RM436 billion in 1999, we have of course more than doubled it to MR948 billion in 2008.
There has been aggressive increase in the money supply since 2002 - growing at double-digit rates on average.
The whole upward spiral started with the crash in the ringgit in 1998 and by keeping the currency at low values, the central banks and other financial institutions have been able to revalue their foreign assets at inflated ringgit values.
That increase in the ringgit value of foreign-denominated assets provided the financial institutions a justification to multiply their loans.
Between 2000 to 2005, the loans of commercial banks grew RM231 billion, from RM295 billion - which is a 78% increase.
85% of the loan increase went to the household sector: 47% for residential property, 30% for transport vehicles and 5% for credit cards and 3% for personal uses.
Which means 15% of the loan increase went to the business sector.
Between June 2006-March 2009, loans of commercial banks rose another RM157 billion or 27% in the three years.
About 47% of the new loans went to the household sector: 25% for residential housing, 10% for cars, 7% for personal use and 4% for credit cards.
About 25% went for working capital (which is good), and 6% for the purchase of shares.
But there was not much for business expansion.
Implications
We can see that the problem of the economy is a banking system that is awashed with cash but no ideas.
We have to stop pretending that keeping a weak ringgit will help the economy.
A weak ringgit has devalued the wages and salaries of the common people while foreigners (especially consultants) priced their work in foreign currencies.
This must surely caught a silent satobage of the human capital of the nation - with locals bailing out into foreign outfits.
In the meantime, higher imported prices chewed up the real purchasing power of the general public - which is really a way of rationing the foreign reserves so that big glamourous imports by the government or the GLCs can be made.
There is a sickening collusion by the corporate sector - as if with the banks of all kinds - to defraud the general public by escalating inflation to inflate their paper profits so that their share prices can rise despite poor fundamentals.
Half the problems of the nation can be solved by the simple act of engineering a slow but steady strengthening of the ringgit in the next 5-7 years - as part of the strategy to bring about an improving in productivity gains and a rise in the real income and wages of the people.
Further reading from hishamh: here and here and his criticisms here.
Since 1990, the ringgit has weakened by 23% against the US dollar, 17% against the pound sterling and 38% against the Singapore dollar, among others.
The period chosen is arbitrary and hence the percentages are just for illustrative purposes.
The point is that the ringgit has weakened severely among major currencies.
Of course, the momentuous event was the 1997/98 crisis - which was dubbed the Asian Financial Crisis - although nobody has just suggested that it had also been a Malaysian economic disaster.
The economy has not really recovered since then.
Money Supply
I am astonished to discovered that the M3 money supply has now reached RM948 billion at the end of April 2009.
We are only a step away from having a RM1 trillion worth of M3 money supply - which could be reached before the end of 2009!
What happened?
M3 grew at an average growth rate of 8.8% in the last night years from 2000 to 2008.
Starting with an M3 of RM436 billion in 1999, we have of course more than doubled it to MR948 billion in 2008.
There has been aggressive increase in the money supply since 2002 - growing at double-digit rates on average.
The whole upward spiral started with the crash in the ringgit in 1998 and by keeping the currency at low values, the central banks and other financial institutions have been able to revalue their foreign assets at inflated ringgit values.
That increase in the ringgit value of foreign-denominated assets provided the financial institutions a justification to multiply their loans.
Between 2000 to 2005, the loans of commercial banks grew RM231 billion, from RM295 billion - which is a 78% increase.
85% of the loan increase went to the household sector: 47% for residential property, 30% for transport vehicles and 5% for credit cards and 3% for personal uses.
Which means 15% of the loan increase went to the business sector.
Between June 2006-March 2009, loans of commercial banks rose another RM157 billion or 27% in the three years.
About 47% of the new loans went to the household sector: 25% for residential housing, 10% for cars, 7% for personal use and 4% for credit cards.
About 25% went for working capital (which is good), and 6% for the purchase of shares.
But there was not much for business expansion.
Implications
We can see that the problem of the economy is a banking system that is awashed with cash but no ideas.
We have to stop pretending that keeping a weak ringgit will help the economy.
A weak ringgit has devalued the wages and salaries of the common people while foreigners (especially consultants) priced their work in foreign currencies.
This must surely caught a silent satobage of the human capital of the nation - with locals bailing out into foreign outfits.
In the meantime, higher imported prices chewed up the real purchasing power of the general public - which is really a way of rationing the foreign reserves so that big glamourous imports by the government or the GLCs can be made.
There is a sickening collusion by the corporate sector - as if with the banks of all kinds - to defraud the general public by escalating inflation to inflate their paper profits so that their share prices can rise despite poor fundamentals.
Half the problems of the nation can be solved by the simple act of engineering a slow but steady strengthening of the ringgit in the next 5-7 years - as part of the strategy to bring about an improving in productivity gains and a rise in the real income and wages of the people.
Further reading from hishamh: here and here and his criticisms here.
Tuesday, June 16, 2009
Malaysia's Problems IV: Transport
By insisting that we should have our own motor car manufacturer, Malaysia has put itself in a situation whereby we must put x number of cars on the road a year or else the local car manufacturer will go bust.
I have a sinister feeling that this could be somebody's disingenous scheme to ensure that there are sufficient numbers of cars to go on the then to-be-build North-South Expressway and ensure its viability.
This may be well and good.
But here are the costs.
1. Traffic Jams in Major Towns and Cities
What a nuisance - the constant need to search for parking and the cat-and-mouse with parking lot attendants.
2. Higher Price of Cars
Thanks to the high excise duties, the price of cars in Malaysia can be nearly double that in advanced countries like the US or the UK.
This is a strain on the purchasing power of the average consumer and, especially in times like this, one would wish that the government is wise enough to reduce cost inefficiencies by reducing completely the excise duties on cars.
If car prices could be reduced by half, this will put more cash into the pockets of new car buyers to buy other needed stuff.
With a local motor car manufacturer to worry about, policy has an added degree of freedom in demand management. When the economy becomes too heated up, the terms for car financing can be tightened without having to fear political repercussions from local car dealers. Afterall, the car importers can worry about those things, not policy makers.
3. Poor Public Transport
With the need to constantly push to put cars on the road, the incentive schemes for car purchasers have been ridiculously simple.
One could literally walk into a car showroom and drive off a car without having to put any money down.
As many people now has a car and many families have several cars each, housing developers could simply build their projects anywhere and even in the middle of a jungle and find buyers.
There is no need for housing developers or town planners to think or worry about the public transport system. The car will take care of their locational problems.
Under present circumstances, the attempt to introduce an efficient public transport system is crowded with problems. The traffic congestion caused by motor cars gives no leeway for buses. In ensure room for buses to move, motor lanes are reserved for buses at the expense of lanes for other vehicles which worsen the traffic congestion. Our transport system is caught in a Catch-22 situation.
4. Economic Relative Inefficiency
Having to support a local car manufacturer costs the nation its efficiency in resource allocation. So much resources are focused on an area of economic activity where Malaysia does not stand a chance to compete effectively in the world market.
By not being at the forefront of R&D, we get stuck for more than 20 years with the same old engine with insubstantial modification to the form. This is the recipe for commercial disaster.
If in the current crisis, even veteran car manufacturers of international repute can go bust, what should a little local car manufacturer at home try to be. I certainly hope it does not become a small timer terrorising the local population.
Conclusion
We should remove all the artificial support system for the transport sector and try to reconstruct the whole system based on proper cost consideration - as incentives for the real private sector to get involved in the economy.
I have a sinister feeling that this could be somebody's disingenous scheme to ensure that there are sufficient numbers of cars to go on the then to-be-build North-South Expressway and ensure its viability.
This may be well and good.
But here are the costs.
1. Traffic Jams in Major Towns and Cities
What a nuisance - the constant need to search for parking and the cat-and-mouse with parking lot attendants.
2. Higher Price of Cars
Thanks to the high excise duties, the price of cars in Malaysia can be nearly double that in advanced countries like the US or the UK.
This is a strain on the purchasing power of the average consumer and, especially in times like this, one would wish that the government is wise enough to reduce cost inefficiencies by reducing completely the excise duties on cars.
If car prices could be reduced by half, this will put more cash into the pockets of new car buyers to buy other needed stuff.
With a local motor car manufacturer to worry about, policy has an added degree of freedom in demand management. When the economy becomes too heated up, the terms for car financing can be tightened without having to fear political repercussions from local car dealers. Afterall, the car importers can worry about those things, not policy makers.
3. Poor Public Transport
With the need to constantly push to put cars on the road, the incentive schemes for car purchasers have been ridiculously simple.
One could literally walk into a car showroom and drive off a car without having to put any money down.
As many people now has a car and many families have several cars each, housing developers could simply build their projects anywhere and even in the middle of a jungle and find buyers.
There is no need for housing developers or town planners to think or worry about the public transport system. The car will take care of their locational problems.
Under present circumstances, the attempt to introduce an efficient public transport system is crowded with problems. The traffic congestion caused by motor cars gives no leeway for buses. In ensure room for buses to move, motor lanes are reserved for buses at the expense of lanes for other vehicles which worsen the traffic congestion. Our transport system is caught in a Catch-22 situation.
4. Economic Relative Inefficiency
Having to support a local car manufacturer costs the nation its efficiency in resource allocation. So much resources are focused on an area of economic activity where Malaysia does not stand a chance to compete effectively in the world market.
By not being at the forefront of R&D, we get stuck for more than 20 years with the same old engine with insubstantial modification to the form. This is the recipe for commercial disaster.
If in the current crisis, even veteran car manufacturers of international repute can go bust, what should a little local car manufacturer at home try to be. I certainly hope it does not become a small timer terrorising the local population.
Conclusion
We should remove all the artificial support system for the transport sector and try to reconstruct the whole system based on proper cost consideration - as incentives for the real private sector to get involved in the economy.
Monday, June 15, 2009
Malaysia's Problems III: Construction
Construction is a brick-and-mortar type of activity - or, in modern times, steel and glass.
So construction as an activity in the economy should not be a big deal - as, after all, it is pure brawn - or, in modern times, machinery.
But construction is a such big deal in Malaysia that it is going to be our destruction.
What we in Malaysia really need to focus on is design.
We really need to focus on plans and designs - and not just brainless construction.
1. Future
We have to plan and design our own future.
At present, we are quite happy to let consultants and other carpetbaggers tell us what the nation should be told or PRed into accepting what is to be done for us.
But we the people have our own instincts. And our instincts tell us that what's going on isn't going right.
We don't want to be told to do things anymore.
We want to do things. We want to exercise our basic individual rights - to live and earn a living.
We do not want pirates and hijackers, thieves and robbers, liars and sweet-talkers messing up our daily lives.
We want action from the local up to the town, up to the district, the state and lastly the federal - not the other way round.
2. Urban Environment
We want to plan and design our own towns.
The artificial, concrete jungle is the environment that we all end up in.
The urban setting is where "the future" lies for most people - where most people dream of being in, where modernity is.
We must therefore try to create our own little playground - to live, do business, and play.
Where is the thought in the design of our towns and cities?
Or are they mere ideas put up by developers, assisted by architects, to politicians in order to pack in as much density as possible with the narrowest of roads so that the government will have to take remedial actions by building flyovers at every major junctions to ease the traffic.
With an industrial estate on one side of the old town centre, and low-cost housing on the other side, thoughtless plans have given rise to basic daily commuting problems for workers.
3. Rural Environment
The rural environment, for a nation and to its people, is where the birth of all indigeneous culture is.
It is usually the rural setting and the rural activities that most people identity where their roots are.
If you ask people where their roots are, they will point to some obscure places with a misty hazy history.
Do we have a design of how a village can grow into a town?
Do we have a design of how rural communities can be connected to urban centres?
If we do not have an idea of where our rural communities are going, we have no idea how our culture is evolving.
4. Rural-Urban Connections
Where are the dynamics between the rural communities and the urban jet-setters?
Or is the city where people sell their souls to the devil and become filthy rich, and then return to their old homes in the villages and show off to their poor folks, waiting for adulation?
Where is service and the generosity to help the poor?
Where is the pride of the forefathers?
Conclusion
If we do not have a plan, we are doomed.
If we ask consultants to plan for us, especially if they are foreign consultants, then we are doubly doomed.
We must create an environment where our people can put into action that which they feel deeply to be our sense of identity and cultural essence - and how we can actualise that, happily within the "limits" of our own ability, the "limits" will most likely be our sense of decency.
We must be careful to bland concrete structures well with our natural environment.
So construction as an activity in the economy should not be a big deal - as, after all, it is pure brawn - or, in modern times, machinery.
But construction is a such big deal in Malaysia that it is going to be our destruction.
What we in Malaysia really need to focus on is design.
We really need to focus on plans and designs - and not just brainless construction.
1. Future
We have to plan and design our own future.
At present, we are quite happy to let consultants and other carpetbaggers tell us what the nation should be told or PRed into accepting what is to be done for us.
But we the people have our own instincts. And our instincts tell us that what's going on isn't going right.
We don't want to be told to do things anymore.
We want to do things. We want to exercise our basic individual rights - to live and earn a living.
We do not want pirates and hijackers, thieves and robbers, liars and sweet-talkers messing up our daily lives.
We want action from the local up to the town, up to the district, the state and lastly the federal - not the other way round.
2. Urban Environment
We want to plan and design our own towns.
The artificial, concrete jungle is the environment that we all end up in.
The urban setting is where "the future" lies for most people - where most people dream of being in, where modernity is.
We must therefore try to create our own little playground - to live, do business, and play.
Where is the thought in the design of our towns and cities?
Or are they mere ideas put up by developers, assisted by architects, to politicians in order to pack in as much density as possible with the narrowest of roads so that the government will have to take remedial actions by building flyovers at every major junctions to ease the traffic.
With an industrial estate on one side of the old town centre, and low-cost housing on the other side, thoughtless plans have given rise to basic daily commuting problems for workers.
3. Rural Environment
The rural environment, for a nation and to its people, is where the birth of all indigeneous culture is.
It is usually the rural setting and the rural activities that most people identity where their roots are.
If you ask people where their roots are, they will point to some obscure places with a misty hazy history.
Do we have a design of how a village can grow into a town?
Do we have a design of how rural communities can be connected to urban centres?
If we do not have an idea of where our rural communities are going, we have no idea how our culture is evolving.
4. Rural-Urban Connections
Where are the dynamics between the rural communities and the urban jet-setters?
Or is the city where people sell their souls to the devil and become filthy rich, and then return to their old homes in the villages and show off to their poor folks, waiting for adulation?
Where is service and the generosity to help the poor?
Where is the pride of the forefathers?
Conclusion
If we do not have a plan, we are doomed.
If we ask consultants to plan for us, especially if they are foreign consultants, then we are doubly doomed.
We must create an environment where our people can put into action that which they feel deeply to be our sense of identity and cultural essence - and how we can actualise that, happily within the "limits" of our own ability, the "limits" will most likely be our sense of decency.
We must be careful to bland concrete structures well with our natural environment.
Tuesday, June 9, 2009
Malaysia's Problems II: Services
Is it good when an economy's growth is caused mainly by its services sector?
Technically, the answer is in the afirmative - because the economy can grow despite the doldrums in the agricultural and industrial sectors.
But what if the economic growth numbers have been strengthened by growth numbers for the services sector?
Then you have a serious problem at hand - because the economy is in fact in serious trouble but you cannot see it as a result in inaccurate growth estimates.
Inaccurate growth estimates can come not necessarily as a result of a deliberate attempt to mislead the public, but innocently by policy makers to "do good" for public confidence.
The services sector is targeted because it is a very hard sector to understand and to measure - in real terms.
Government Services
How do you measure growth in the output of the government in real terms?
Is it by the number of speeches they give? Or the number of runarounds they give you?
Well, you may never guess - the output of the government services is measured by the salary increases they get, deflated by the consumer price index.
So, if the government keeps increasing the salaries of its servants, then we have real GDP growth.
*
Financial Services
The output of banks is measured by the amount of profit by earned, deflated by the CPI. So, the growth of the banking sector in real GDP may mean that the banks have been increasing their fees or interest rates on you.
The output of the stockbroking business is measured in a number of ways that may seem to be counting the same thing - the increase in the profits of stockbrokers as they churn stocks in the market, the increase in share trading transactions, the increase in the stock market index.
In other words, when the market is "hot," the contribution of the stock trading to GDP will be thought to be large. When the market is "boring," its contribution to GDP may be small - but is it often "negative"?
Are the losses of the general public in punting stock taken into account? Or are we only counting the good side.
Communications
Is the growth of the communication sector measured by the number of ohone calls made, or the number of times people google in Malaysia? Hard to measure, but we may try to estimate it by the growth of sale of the number of units of ICT. Be are sales equal to profits?
Transport
The transport sector is quite interesting because of its variety. Is the growth of the sector measured by the profits they made or is it measured by the volume of goods that passed through sea ports and air ports and roads and rails?
Healthcare
Is the growth of the healthcare measured by the number of patients who have been cured? Or, is it measured by the amount these private hospitals bill their poor dying patients, deflated by CPI?
Education
Is it measured by the number As scored by students in one year over the last? Or, is it a measure of the poor state of public education system such that parents may resort to private education - and for those who cannot afford, they may make do with private tuition.
Commerce
Do we measure the profits of mega shopping malls and hypermarkets or do we measure their sales? Do we ignore the poor little neighbourhood shops that may to close down as a result of these newfangled modern concrete of mass consumption?
Professional Services
Do we count the number of lawyers and accountants and other consultants, or do we count the amount they charge for the work they have done?
If one clever consultant charges RM100 million for one word of advice and never worked again, what is the growth rate here?
Etc
*
I think you get my drift.
The services sector is a very difficult sector to measure.
And it is therefore very easy to bluff in the services sector.
The problem is further compounded by the underfunding the Department of Statistics.
With insufficient data collected, we all really do not know the real situation in the services sector.
We have therefore set a trap for ourselves to bluff ourselves that everything is going to be all right in the best of all possible worlds.
Technically, the answer is in the afirmative - because the economy can grow despite the doldrums in the agricultural and industrial sectors.
But what if the economic growth numbers have been strengthened by growth numbers for the services sector?
Then you have a serious problem at hand - because the economy is in fact in serious trouble but you cannot see it as a result in inaccurate growth estimates.
Inaccurate growth estimates can come not necessarily as a result of a deliberate attempt to mislead the public, but innocently by policy makers to "do good" for public confidence.
The services sector is targeted because it is a very hard sector to understand and to measure - in real terms.
Government Services
How do you measure growth in the output of the government in real terms?
Is it by the number of speeches they give? Or the number of runarounds they give you?
Well, you may never guess - the output of the government services is measured by the salary increases they get, deflated by the consumer price index.
So, if the government keeps increasing the salaries of its servants, then we have real GDP growth.
*
Financial Services
The output of banks is measured by the amount of profit by earned, deflated by the CPI. So, the growth of the banking sector in real GDP may mean that the banks have been increasing their fees or interest rates on you.
The output of the stockbroking business is measured in a number of ways that may seem to be counting the same thing - the increase in the profits of stockbrokers as they churn stocks in the market, the increase in share trading transactions, the increase in the stock market index.
In other words, when the market is "hot," the contribution of the stock trading to GDP will be thought to be large. When the market is "boring," its contribution to GDP may be small - but is it often "negative"?
Are the losses of the general public in punting stock taken into account? Or are we only counting the good side.
Communications
Is the growth of the communication sector measured by the number of ohone calls made, or the number of times people google in Malaysia? Hard to measure, but we may try to estimate it by the growth of sale of the number of units of ICT. Be are sales equal to profits?
Transport
The transport sector is quite interesting because of its variety. Is the growth of the sector measured by the profits they made or is it measured by the volume of goods that passed through sea ports and air ports and roads and rails?
Healthcare
Is the growth of the healthcare measured by the number of patients who have been cured? Or, is it measured by the amount these private hospitals bill their poor dying patients, deflated by CPI?
Education
Is it measured by the number As scored by students in one year over the last? Or, is it a measure of the poor state of public education system such that parents may resort to private education - and for those who cannot afford, they may make do with private tuition.
Commerce
Do we measure the profits of mega shopping malls and hypermarkets or do we measure their sales? Do we ignore the poor little neighbourhood shops that may to close down as a result of these newfangled modern concrete of mass consumption?
Professional Services
Do we count the number of lawyers and accountants and other consultants, or do we count the amount they charge for the work they have done?
If one clever consultant charges RM100 million for one word of advice and never worked again, what is the growth rate here?
Etc
*
I think you get my drift.
The services sector is a very difficult sector to measure.
And it is therefore very easy to bluff in the services sector.
The problem is further compounded by the underfunding the Department of Statistics.
With insufficient data collected, we all really do not know the real situation in the services sector.
We have therefore set a trap for ourselves to bluff ourselves that everything is going to be all right in the best of all possible worlds.
Monday, June 8, 2009
Malaysia's Problems I: GDP vs GNP
Is Malaysia's GDP losing out to GNP?
GDP measures the output produced in Malaysia, regardless of whether by locals or foreigners.
In trying to boost GDP, we have invited FDIs and foreign workers to Malaysia to invest and to work.
We have built massive infrastructure for these foreign investors and foreign workers to use - for them to make a profit and for them to earn a wage.
The whole purpose is to boost the "economic growth" as measured by GDP.
But I can tell you, a priori, that GNP may or may not be growing under the present circumstance as fast as GDP.
You have to net out foreign profits and foreign wages from GDP to get GNP.
GNP measures incomes that accrue to Malaysians, whether at home or abroad.
To be fair, therefore, we must add the incomes of Malaysian firms and Malaysians abroad to get a proper GNP.
Now, we have grown local Malaysian firms to become large so that Malaysia becomes too small for them and they have to get jobs from abroad.
(What happens to the strategy that Malaysian firms, when made large, will be able to reinvest in Malaysia and regenerate growth at home? Could it be that their lack of ability to innovate is forcing them to do the same stuff elsewhere - having learnt the tricks of dealing with politicians at home?)
Of course it is good that Malaysian firms can do well abroad and create jobs abroad - but that does hollow out the local economy - when we do not invest at home - why? - because the investment climate at home is not so good any more - because easy money is no more?
For accounting purposes, we can require Malaysian firms to declare their global income and add that to our GNP.
For Malaysians abroad, I am not so clear.
It has to do with how we treat fellow Malaysians who have decided to work abroad.
If they take up a PR or a foreign citizenship, Malaysia seems to be very happy to "get rid" of them.
If that is the case, then we may not technically be correct to include the earnings abroad of fellow Malaysians who have decided to make a foreign country their home - although they may each feel every inch a Malaysian in their hearts.
In the meantime, we seem to be quite happy to trade our well-educated multi-lingual born-and-bred Malaysians for illiteral foreign unskilled labourers.
We seem to have traded off our middle class for a low-class manufacturing sector and basic services sector that rely on cheap third-world labour.
As we now stop the inflow of illiteral labour, are we changing our policies to bring back our talented professionals?
For 1Malaysia to work, we may have to redefine Malaysians.
GDP measures the output produced in Malaysia, regardless of whether by locals or foreigners.
In trying to boost GDP, we have invited FDIs and foreign workers to Malaysia to invest and to work.
We have built massive infrastructure for these foreign investors and foreign workers to use - for them to make a profit and for them to earn a wage.
The whole purpose is to boost the "economic growth" as measured by GDP.
But I can tell you, a priori, that GNP may or may not be growing under the present circumstance as fast as GDP.
You have to net out foreign profits and foreign wages from GDP to get GNP.
GNP measures incomes that accrue to Malaysians, whether at home or abroad.
To be fair, therefore, we must add the incomes of Malaysian firms and Malaysians abroad to get a proper GNP.
Now, we have grown local Malaysian firms to become large so that Malaysia becomes too small for them and they have to get jobs from abroad.
(What happens to the strategy that Malaysian firms, when made large, will be able to reinvest in Malaysia and regenerate growth at home? Could it be that their lack of ability to innovate is forcing them to do the same stuff elsewhere - having learnt the tricks of dealing with politicians at home?)
Of course it is good that Malaysian firms can do well abroad and create jobs abroad - but that does hollow out the local economy - when we do not invest at home - why? - because the investment climate at home is not so good any more - because easy money is no more?
For accounting purposes, we can require Malaysian firms to declare their global income and add that to our GNP.
For Malaysians abroad, I am not so clear.
It has to do with how we treat fellow Malaysians who have decided to work abroad.
If they take up a PR or a foreign citizenship, Malaysia seems to be very happy to "get rid" of them.
If that is the case, then we may not technically be correct to include the earnings abroad of fellow Malaysians who have decided to make a foreign country their home - although they may each feel every inch a Malaysian in their hearts.
In the meantime, we seem to be quite happy to trade our well-educated multi-lingual born-and-bred Malaysians for illiteral foreign unskilled labourers.
We seem to have traded off our middle class for a low-class manufacturing sector and basic services sector that rely on cheap third-world labour.
As we now stop the inflow of illiteral labour, are we changing our policies to bring back our talented professionals?
For 1Malaysia to work, we may have to redefine Malaysians.
Tuesday, June 2, 2009
Concept X: Economic Model
A model is a beautiful thing which is the result of the focusing on a few perceptible attractions and the exclusion of which that which is true but irrelevant for the moment.
What is an economic model?
An economic model is the relationships between a few parameters that are considered to be key.
In a narrow sense, the economic relationships take the form of restricted social justice.
In the broader sense, the economic relationships take a universal perspective to include - not only my own people, our own people, the people of this region or religion - but all people who are friends of this nation and who are willing to work to improve the national climate as a good on earth to live but for a while.
Without this sense of belonging, there will be no confidence and no investment - and this country will end up as a great trading post, now unfortunately in the backwaters of global investments.
It is simply silly for a national policy to be an enemy to a section of its own society, for the policy will become a tumour to the whole national wellbeing.
An economic model should be all-embracing and enlightened. If not, it is just another pair of coloured glasses, nay, blinkers.
What is an economic model?
An economic model is the relationships between a few parameters that are considered to be key.
In a narrow sense, the economic relationships take the form of restricted social justice.
In the broader sense, the economic relationships take a universal perspective to include - not only my own people, our own people, the people of this region or religion - but all people who are friends of this nation and who are willing to work to improve the national climate as a good on earth to live but for a while.
Without this sense of belonging, there will be no confidence and no investment - and this country will end up as a great trading post, now unfortunately in the backwaters of global investments.
It is simply silly for a national policy to be an enemy to a section of its own society, for the policy will become a tumour to the whole national wellbeing.
An economic model should be all-embracing and enlightened. If not, it is just another pair of coloured glasses, nay, blinkers.
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