Wednesday, August 7, 2013

On Post Partisanship
by Raymond Woo
Mat 29, 2013

What is post-partisanship?

According to American political theorist Mark Satin, it is an approach to dispute resolution between political factions in which collaboration and compromise are emphasized over party discipline and ideology. However, unlike bipartisanship which Canadian health policy expert Neil Seeman described as “horse-trading”, where patchwork legislation is crafted to allow all sides to feel satisfied that some thread of their vision or ideological essence found its way into law, post-partisanship is a solution-based approach to complex public policy problems in which the input of all sides are considered and utilised based on agreed-upon principles.

In the aftermath of the highly-divisive and emotional Malaysian 13th General Elections (GE), it is clear from the poll results that there are fundamentally two Malaysias — not necessarily Chinese and Malay, but urban and rural, or West Malaysia and East Malaysia. All sides have made their stance quite clearly, where urbanites of all races have cast their lots with Pakatan Rakyat, while the mostly-Malay rural heartland stuck to the symbol of the status quo, Barisan Nasional. The accumulated anger and distrust between the symbols of the two Malaysias have been laid bare.

And yet, the governance of Malaysia must not be allowed to remain stuck in May 5, 2013 forever. Somehow, solutions to mundane local and national problems must continue to be found.

It is known that Malaysia faces a lot of ills — a deteriorating national education system, rising national debt and inflation, corruption and abuse of power, increasing socio-economic policy and a disunited nationhood. These are the true concerns of most urban Malaysians regardless of race and religion, and patronage and communitarian identity are not as important to urbanites as they are to the rural folk. I believe it was the lack of attention and the will to address those national concerns that has led to the decimation of urban support for BN.

Yet, I believe that Malaysians who love their country from both sides of the political divide believe that these problems must be solved to prevent Malaysia from being labelled as the “sick man of Asia”. But the question is, of course, how?

Perhaps, post-partisanship may be useful. This approach does not necessitate the avowal of political neutrality amongst warring parties; rather, broad but clear objectives can form the basis of technical cooperation to achieve common outcomes. Compared to other countries, Malaysia is already fortunate in that we do have many rules of the game that mainstream parties agree upon and would not violate — a democratic and representative system of government, an equitable capitalist economic system, constitutional monarchy, and the need to take care of the welfare of all communities in Malaysia.

Post-partisanship in Malaysia involves building upon those agreed-upon rules and principles to pursue technical solutions for technical policy problems. Intermediate issues that are seen to be politically intractable and not directly related to the policy problem should be left alone, to be settled another day.

One method that can be used is the multicriteria decision analysis, where different parties are allowed to select weighted-solution criteria, and enables a neutral and independent body with assigned legislative powers to identify and remove partisan biases in any final policy solution. An example of this would be the bi-partisan Congressional committees on various policy issues in the US.

As an example of a policy issue, take the case of improving Malaysia’s competitiveness in our national education system. How do we judge an education system’s competitiveness? Usually, we rely on international math or reading scores, and this is where Malaysia has declined dramatically in the past few years. Now, who do we engage in a dialogue on this? Education policy experts, of course, from both sides of the political divide, such as PR’s Dr Ong Kian Ming and Tony Pua, apart from the Minister of Education and its senior civil servants. Then, we can sit down and plan how to improve math and English skills of our students, and how to give more autonomy and incentive to our public universities to improve their faculties and student bodies, and so on. Maintaining or abolishing vernacular school systems or UiTM is an intractable political problem that should be left for another day. Yet, increasing the education quality at these schools without abolishing any of them can also be done to improve general national competitiveness, as the pursuance of national unity may not be directly related to educational excellence.

Or take the issue of health policy, which has even less “political hot potatoes”. The current shortage of drugs and high prices in public hospitals may be due to the lack of suppliers, which are heavily regulated and subscribed by the Ministry of Health. Incidentally, pharmaceutical supply is subject to the Bumiputera quota rule. Sensibly, we should increase the quality and quantity of the suppliers to resolve the problem of drug shortage. If the sacred cow of Bumiputera quota has to go, it has to be done, as affirmative action may not be a necessity to the general public’s access to medicine and healthcare. Again, we can get healthy policy experts from both sides of the political divide to concretise the problems and solutions.

Once emotions from the GE have died down and heads become cooler, I hope Malaysians of all stripes can put aside their political beliefs and convictions and aim to resolve some of the pressing issues that eventually affect every single citizen in a methodical and results-based manner.


Monday, October 15, 2012


The Case for a “Sovereign-Debt Restructuring Agency”

by Mark Pui and Raymond Woo

Malaysia-based consultants with a multinational professional services firm, Raymond Woo and Mark Pui analyse the impending Greek financial bailout and indicate possible moves to ease the crisis.
The tragic inevitability of Oedipus’ life is well-known. He was the ancient Greek drama character who, despite having tried his best to prevent the fulfillment of the prophecy that he would murder his father and marry his mother ended up doing the same. Mirroring this inevitability, the markets see a significant probability of a Greek sovereign default and its exit from the euro-zone. Despite the recent slim victory by pro-bailout Greek parties, as long as the still-powerful anti-austerity Greek parties refuse to cooperate to follow the terms of the austerity package as imposed by the European Central Bank (ECB) and the International Monetary Fund (IMF), trouble still looms.
The disagreement among EU member states on a long-term stabilization plan not just for Greece but also for all the crisis-hit EU periphery countries increases the probability of default too. In fact, The Economist (May 19 2012) predicted that a “Grexit” will happen in a matter of weeks.1 As recent as last week (15 June 2012), the Wall Street Journal ran an article citing operational plans and preparations being made by financial services firms for the eventual exit of Greece from the Euro-zone.2
The troubles of the Euro Zone are far from confined to one isolated nation.  Nary has a day passed without mention of severely worsening economic and fiscal conditions at other Euro Zone countries as Portugal, Italy and Spain.  Therefore, this issue – and the proffered solutions to it – are of great relevance to policymakers and investors alike.
Recovery via austerity is not a “silver bullet”
The initial proffered solution, as laid out by the ECB and IMF, was “recovery via austerity”.  The bailouts for Greece in 2010 and 2011 were conditioned on Greek implementation of the austerity terms, with the second bailout being further conditioned on all private and public creditors agreeing to a restructuring of Greek sovereign debt. As part of the second bailout conditions, private creditors agreed to a 53.5% haircut3 on Greek bonds held, among others. However, the uncertainty over how to quickly and effectively restructure the debt of Greece and the periphery countries, and how to stimulate growth in the EU economy again is killing the global economy. Sovereign bond yields and interest rates continue to rise incessantly, and the recession risks being prolonged further than necessary, which leads to increasing concern among global players such as the US, China and the IMF. It is becoming clear that despite the restructuring after the second bailout which involved deep haircuts and bond-swapping, the market is not confident Greece will be able to repay or service its debts, and this leads to a vicious cycle of recession and further default risk. Indeed, we argue that the current practice is akin to throwing money at crisis-hit countries without having control of restructuring debt and fiscal policies.
Spending-led recovery as an alternative
The other proffered solution, as championed by the Federal Reserve Bank and by economists such as Paul Krugman, was “recovery via spending”. During recessionary periods, fiscal policies such as stimulus packages and monetary policies such as quantitative easing and reduction of interest rates are implemented to boost demand. Such policies should lead to increasing economic growth and employment. However, expansionary fiscal policies can lead to higher national debt load and fiscal deficit. Expansionary monetary policies can lead to higher inflation, and if the policies do not create more economic growth, stagflation (a combination of high inflation and low economic growth) will occur. Further, even if expansionary monetary policies do not lead to higher inflation, low growth or even deflation can still persist such as in the case of Japan where nominal interest rates are almost zero and monetary policy has very limited power in boosting the economy. The critical issue is that structural problems must be addressed.  Expansionary fiscal and monetary policies are not long-term solutions in the face of unsolved structural problems in the economy.
Championing a workable alternative:  A supranational sovereign debt restructuring and asset management agency
As a workable alternative, we propose the establishment of a supranational sovereign debt restructuring and asset management agency to manage new challenges.  Using Danaharta as a reference point, we believe that a supranational debt restructuring and asset management agency, a Super-Danaharta if you will, is required to address this crisis – and future potential crises.
Before we explain why such an agency is needed and how the agency will work, we first explain the fundamental problems involved with the current status-quo of providing bailout money to sovereign-debt crisis-hit countries.
Flawed thinking exists that bailout money is the solution
The notion that a country cannot go bankrupt is mainstream thinking; the state will always have the power to impose further taxation to improve revenue, or depreciate its currency (i.e. print more money) to reduce the real value of its debts. The state’s sovereignty in itself is the basis for issuing sovereign debt, and thus such debt are not backed by tangible assets such as property. However,  three factors are increasingly proving this thesis wrong: the loss of monetary sovereignty such as after Greece joined the euro currency union; the rise of bonds and derivatives like CDOs (collateralized debt obligation) that has changed the nature of international creditor-debtor relationship by making international creditors more atomized and dispersed, which gives rise to collective action and collective representation problems for creditors;4 and, rise of populist measures in states due to the rise of representative democracy and social media that shifts policy priorities and erodes the trust in countries to repay its sovereign debts as seen in the example of Greece.
Features of a supranational debt restructuring and asset management agency
Using Anne Krueger’s (2002) proposed core features of a sovereign debt-restructuring mechanism that are based on corporate debt-restructuring models,5 our proposed sovereign-debt restructuring agency includes the following features.
1. Stay on credit enforcement by qualified majority creditor vote
A temporary stay on creditor litigation in the time before a restructuring agreement is reached but after debt-related payments have been suspended would support the effective operation of the majority restructuring provision.6 The stay will be activated by a qualified majority of creditors, whose resolutions and decisions are binding on the minority creditors. This approach can alleviate the collective action problem inherent in such a complicated undertaking, in which the problem can disincentivize both states and creditors from undergoing debt-restructuring.
2. Assuring the agency’s independence to verify all credit claims
First, there is an issue of conflict of interest as the IMF and the World Bank are lenders of last resort and their members with voting power might have other interests that might not align to the best interests of the sovereign-debt crisis-hit country. In the IMF in particular, each member state has a number of “basic votes”7 with an additional vote for each Special Drawing Right (SDR) of 100,000 of a member country’s quota.8 The basic votes generate a slight bias in favor of small countries, but the additional votes determined by SDR outweigh this bias.9Second, the agency must be absolutely independent in order to verify the true value of all claims to prevent the debtor from inflating its debt stock10 through currency depreciation and other means, and also to prevent creditors from deliberately withholding the stay on credit enforcement to pressure the IMF to carry a higher proportion of the burden in the debt-restructuring.
3. Priority financing
The agency can incentivize new financing by providing an assurance that any new financing to support the debt-restructuring such as bailout money extended after the activation of the stay would be given priority.11 We propose that priority financing be extended to all claims, both public/sovereign debt owed to other countries as well as preexisting private debt.
4. Management of assets during sovereign debt restructuring
The last and potentially most controversial feature is the management of state assets in the process of debt-restructuring. By managing the assets, the proposed agency can have more control over the process, and thus increase confidence among creditors and the sovereign-debt market which can stabilize bond yields. Sovereign debts are not backed by any tangible assets, and at the same time we have seen the possibility that the trust in governments to be able to repay their debts can decline as seen in Greece and other EU periphery countries. In order to implement this, debt-and-asset valuation must be performed, and the proposed agency’s independence should be able to mitigate hesitations from both the state and the creditors. The concern about losing sovereignty is valid, but it can be argued that the concept of sovereignty has evolved, and the country that is most affected by a sovereign-debt crisis, Greece, had surrendered monetary sovereignty after joining the euro-zone. Further, the concept of “new sovereignty” has emerged, as is illustrated in the writing of Chayes and Chayes (1995):
It is that, for all but a few of self-isolated nations, sovereignty no longer consists in the freedom of states to act independently, in their perceived self-interest, but in membership in good standing in the regimes that make up the substance of international life. To be a player, a state must submit to the pressures that international regulations impose… Sovereignty, in the end, is a status – the vindication of the state’s existence as a member of the international system.12
Thus, it is implied that a unilateral default on sovereign debt that can endanger the stability of the international financial market and system, cannot continue to be legitimized and hidden behind the veneer of “old” state sovereignty. Debts and assets can be restructured with the welfare of the crisis-hit state given top priority, but just walking away from repaying the debt might become increasingly unacceptable for the international community.
Creditors have a vested interest in managing and funding this agency
Lastly, we come to an important question: who will manage and fund this supranational agency? We have already expressed hesitation of it coming under the Bretton Woods institutions, in order to preserve its independence which is vital as an impartial arbitrator between creditors and a credible valuer of national assets. There are two possible options to manage the agency: to come up with a new international treaty which creates an organization to manage it and requires funding from member states; or, rely on the Paris Club, which is an informal group of official creditors that finds coordinated and sustainable solutions to the debtor countries’ debt-repayment problems. The former option is problematic, as the lengthy and difficult process of negotiating a new treaty with dozens of nations is well-known. The latter option is more manageable, as getting the informal group of creditors to fund and manage the proposed agency is a step to systemize and formalize their existing objectives.
Alternatively, the agency can dispense bailout funds from the IMF and other lenders of last resort through a contractual agreement, and manage national asset management and repayment of sovereign debt to creditors in an orderly, predictable and institutional manner to prevent instability in the international capital markets. The creditor nations will then fund only the operations and daily management of the agency, with rescue package funds coming from elsewhere.
To summarize, there are two rationales for our proposing the sovereign debt-restructuring agency. First, collective action problems will most likely prevent creditors of all claims from working together on their own, hence a need for an agency to mitigate such problems through measures such as majority voting on the stay of credit enforcement. Second, an independent agency to enforce sovereign debt-restructuring in an equitable manner to both the sovereign state and creditors can prevent the moral hazard of default of sovereign debt due to lack of disincentives and punitive measures against it. Basically, the agency shows that the international community is serious on insisting that sovereign debt must be repaid without overly large injuries to creditors through steep haircuts and defaults, but the international community is there to help the crisis-hit country get its feet back by stabilizing bond yields and interest rates so the state can continue to borrow again quickly.
It’s time for a rethink of the way we manage sovereign debt defaults
In conclusion, recovery, whether by way of austerity or spending, is not the only component of the solution.  Dealing with sovereign debt crises requires a more thorough re-thinking of the way that the world’s policymakers, acting as a collective group of nations, enforce and manage debt defaults at the sovereign level.

All views and opinions presented in this article are solely those of the authors and do not represent any employer directly or indirectly.
————————
“The Greek run,” The Economist, May 19, 2012, May 25, 2012.
“Banks Prepare for Possible Greek Exit from Euro Zone”, the Wall Street Journal, June 15, 2012.
“Eurogroup Statement,” February 21, 2012, May 25, 2012.
Amita Batra, “Sovereign Debt Restructuring”, Indian Council for Research on International Economic Relations Occasional Paper, October 2002, 6, accessed May 25, 2012, http://icrier.org/pdf/OP02SovDebt.pdf.
Anne Krueger, A New Approach to Sovereign Debt Restructuring (Washington DC: International Monetary Fund, 2002), accessed May 25, 2012, http://www.perjacobsson.org/external/pubs/ft/exrp/sdrm/eng/sdrm.pdf.
Ibid, 15.
“About the Membership,” International Monetary Fund, accessed May 27, 2012, http://www.imf.org/external/about/members.htm#function.
Brock Blomberg and J Lawrence Broz , “The Political Economy of IMF Voting Power” (paper presented at the  The International Political Economy Society (IPES) Conference, Princeton University, Princeton, New Jersey, November 17-18, 2006), 4, accessed May 28, 2012, http://www.princeton.edu/~pcglobal/conferences/IPES/papers/broz_blomberg_F1030_1.pdf.
Ibid.
10 Anne Krueger, A New Approach to Sovereign Debt Restructuring (Washington DC: International Monetary Fund, 2002), 32, accessed May 25, 2012, http://www.perjacobsson.org/external/pubs/ft/exrp/sdrm/eng/sdrm.pdf.
11 Ibid, 28.
12 Abram Chayes and Antonia Handler Chayes, The New Sovereignty: Compliance with International Regulatory Agreements (Cambridge, MA: Harvard University Press, 1995), 27.

A Critique on the Theories of Treaty Compliance


A Critique on the Theories of Treaty Compliance

by Raymond Woo
(originally published in LoyarBurok, 29 May, 2012, http://www.loyarburok.com/2012/05/29/critique-theories-treaty-compliance/)

An analytical book review comparing Goldsmith and Posner, Chayes and Chayes, Raustiala, et al.
Goldsmith and Posner’s book, “The Limits of International Law” [1] articulates the various theories by well-known scholars on the formation and compliance of treaties, and non-legal agreements. The authors keenly agree or disagree with, as well as add to or deduct from many well-established theories and empirical studies in the field of treaty compliance, while forwarding their own findings and theories. Nonetheless, I found the book to have several contentious points, on which I will elaborate in this book review.
First, Goldsmith and Posner attempt to explain the reason behind the empirical observation of states preferring formal treaties to non-legal agreements. They reason that it must be due to the added values of treaties as compared to non-legal agreements, and thus offered examples of those added values: (i) treaties usually require legislative
consent, which convey important information about state preferences for the treaty, (ii) treaties implicate certain interpretive default lines, and (iii) treaties convey a more serious commitment compared to non-legal agreements.
However, their reasoning of the prevalence of treaties among states is simplistic. In the article, “Form and Substance in International Agreements”, [2] Raustiala offers a more sophisticated explanation by using both functionalist and liberal methodologies to explain the empirical abundance of contracts, which is Raustiala’s term for treaties. He raises Abbott and Snidal’s four conditions under which states would prefer treaties: when the risk of opportunism is high; when noncompliance is hard to detect; when they may serve as a sorting device to form clubs of like-minded parties; and when executive branches use them as a means of committing other branches of government. [3] This functionalist analysis emphasizes credibility and flexibility when trying to understand state preference, in which rational states would trade off ex ante credibility for ex post flexibility.
Raustiala also provides the central explanatory variables from the functionalist perspective that Goldsmith and Posner do not provide, other than their ambiguous proposition of the added value of treaties. Raustiala’s variables are: (i) uncertainty in the underlying cooperative issue; (ii) desire for speed or confidentiality, (iii) the risk of opportunistic behavior by other states; and (iv) diversity in interests and preferences. Accordingly, treaties would become more concentrated in cooperative-type situations as compared to coordination-type situations, due to higher uncertainty and less risk of opportunism of the latter. Thus, treaties are often found in cooperation-type issues such as global warming and fishery controls, as compared to coordination-type situations such as the international monetary system and telecommunications codes. The liberalists, however, would give three different explanatory factors instead, which are: domestic preferences, domestic institutions and relative state power. Indeed, domestic “constituencies for cooperation” would affect state policy depending on their relative power, and since there is an inherent bias among domestic constituencies towards contracts when it comes to reliability, Raustiala concludes that domestic actors who prefer cooperation would exhibit a tendency in favor of treaties.
Second, Goldsmith and Posner propose sanctions as a primary incentive for treaty compliance. According to them, retaliation is actually a form of sanction against non-compliance in the absence of a third-party enforcer, and this is usually the most common commitment mechanism for multilateral treaties, in particular that of cooperative games such as the World Trade Organization (WTO). Thus, when one talks of retaliation, the discussion will invariably lead back to the perpetual controversy of the importance of sanctions in treaty compliance.
However, there is literature espousing sanctions as not being an important factor in compliance. For example, Chayes and Chayes’ propose the managerial model of ensuring compliance in their book, “The New Sovereignty”. [4] To begin, they move away from the traditional rational-choice instrumentalist explanations, and first look at why states comply with treaties. They give three factors, which are: efficiency, interests and norms. Regarding efficiency, government and individual resources for public policy are in short supply, and it is plainly a waste of time and resources to recalculate the cost and benefits in the absence of convincing evidence that circumstances have changed since the original situation, and the alternative is to simply comply with the treaty. In regards to interest, it can be assumed that the parties’ interests are served when they entered the treaty in the first place, for modern treaty-making is not only seen as a creative enterprise where states merely weigh the benefits and burdens of commitment, but also explore, redefine and sometimes discover their own interests. Empirically, no state would negotiate a treaty with the idea that they can break them when it becomes “inconvenient”. In regards to norms, the idea of ‘pacta sunt servanda’ (treaties are to be obeyed) is not only ingrained in the minds of international actors through long-time socialization and custom, but have also become domestic laws in countries like the US. Schauer and Kratochwil has said that the norm itself is a “reason for action” and thus becomes an independent basis for conformity of behavior. [5]
The reason why Chayes and Chayes rejected the sanctions thesis is because of cost and legitimacy problems. Although they base their argument on the example of the lack of third-party enforcement in the international arena, we can also see how retaliation might not even be a primary aggregate factor in making states comply in cooperative games, as the actors would know that it depends on relative state and economic power for such to be effective. Even then, retaliation would be expected to be intermittent and ad hoc due to multiple preferences among other states, thus making cooperation to effect retaliation difficult, and therefore ameliorating the negative effects and also increasing the persuasive power retaliation has on states. Based on the aforementioned factors, Chayes and Chayes built their managerial model to encourage compliance among states, by having an array of pointed activities to reinforce the effect flowing from participating in the regime, attending meetings, responding to requests and meeting deadlines that will realign domestic priorities and agendas. These activities include ensuring transparency, dispute settlement, capacity building and the use of persuasion.
Third, Goldsmith and Posner’s assertion of treaties conveying a more serious commitment – as compared to non-legal agreements – as an added value of treaties ought to be qualified. Although Raustiala has highlighted the inherent bias among certain domestic constituencies for treaties, care must be given to disaggregate domestic constituency preferences with state and other preferences across the board. Just because one constituency treats treaties more seriously does not mean that others should or would. Raustiala categorizes agreements into “deep” and shallow” ones, regardless of whether they are treaties, or non-legal agreements (or what Raustiala calls “pledges”). If one were to use only functionalist explanations, Goldsmith and Posner’s assertion would be true, because functionalist analysis does not distinguish between “deep” and “shallow” treaties or non-legal agreements. Accordingly, there can be shallow treaties and deep non-legal agreements. “Deep” agreements would mean that the parties have to significantly change their policies and thus pay for significant material and political costs, while the reverse would apply to “shallow” ones.
Raustiala also argues that the functionalist argument provides two contrasting conclusions. The first is that legality and depth are negatively correlated, as when credibility reflects expectations about performance – the more shallow the commitment, the more likely performance will be, and therefore the more credible the commitment ex ante. As such, negotiating commitments as treaties should lead to a reduction in the depth of those commitments – all else equal – because states seek a “compliance cushion” or a large margin of error. On the other hand, the second conclusion that legality and depth are positively correlated occurs when states fear the prospect of cheating by other parties, especially when they negotiate deep commitments which are costly to implement, and casting such commitments as treaties raises the costs of nonfulfillment. Thus, the deepest, most costly commitments are contracts to maximize the probability of compliance by other parties, and are reflected in the experiences of the World Trade Organization (WTO), the North American Free Trade Agreement (NAFTA) and many arms control agreements. Both conclusions are plausible, as the first is illustrated by the question, “are states more concerned about the risk of their own noncompliance?”, while the second is illustrated by the question, “are states more concerned about the risk that other parties will fail to comply?”.
Next, Raustiala argues the need to distinguish the structures of international agreements, regardless of whether it is a treaty or a non-legal agreement. He categorizes agreement review structures as “strong” or “weak”. “Strong” structures render individualized decisions about state performance; these decisions may, but not necessarily be accompanied by sanctions, and they also need not address particular disputes, as they may be statements about individual actors and their performance. On the other hand, “weak” structures either make no such evaluations, or make evaluations only about collective party behavior, and in either case the evaluation does not specify any tangible sanction. Taking into consideration Raustiala’s analysis of the legality-depth correlation as well as the structure of international agreements, we can conclude that there exists “shallow” and “weak” agreements, like environmental accords (for example, the Kyoto Protocol), as well as “deep” and strong” non-legal agreements, like international monetary accords (for example, the Plaza Accord). Therefore, Goldsmith and Posner’s assertion that treaties are always more “serious” than non-legal agreements is flawed.
In conclusion, although Goldsmith and Posner’s account of international agreements can be a tad shallow and simplistic, they are nonetheless very accommodating towards the views and theories of political scientists and international law scholars from different schools of thought.

1. Jack Goldsmith and Eric Posner, The Limits of International Law, (USA: Oxford University Press, 2005).
2. Kal Raustiala, “Form and Substance in International Agreements”, American Journal of International Law, Vol. 99; Numb. 3 (2005).
3. Kenneth Abbott and Duncan Snidal, “Hard and Soft Law in International Governance”, International Organization, Vol. 54; Issue 03 (2000), 429-430.
4. Abram Chayes and Antonia Handler Chayes, The New Sovereignty: Compliance with International Regulatory Agreements (Cambridge, MA: Harvard University Press, 1995).
5. See Frederick F. Schauer, Playing by the Rules: A Philosophical Examination of Rule-Based Decision-Making in Law and Life (Oxford: Clarendon Press, 1991), and Friedrich Kratochwil, Rules, Norms and Decisions: On the Conditions of Practical and Legal Reasoning in International Relations and Domestic Affairs (Cambridge: Cambridge University Press, 1991).

Sunday, May 6, 2012

Human capital, talent outflow and football


Nov 24, 2011
Raymond Woo

I barely have time to sit down and contemplate about issues other than work nowadays, since my team is (or should be) wrapping up a major project in the coming few weeks. However, despite the hectic schedule, three different things piqued my curiosity.

The first thing is an interview with a director from the World Bank which I read in a local online newspaper. The director said that, while Malaysia has one of the most pro-business friendly regimes in the world, the main thing that is hindering us from progressing further into a high-income nation is our lack of skills and talent for high-level professional and technical jobs, and the resulting mismatch between demand and supply in the labor market. Indeed, our international rankings on business openness is pleasing: top 20 trading nation in the world (last I read Malaysia was Number 17), Number 18 in the World Bank’s Doing Business Index (a pretty good rank despite my grumblings in my October 20, 2011 article), a slew of tax and other incentives to attract foreign and local investment, a reasonably good record of the rule of law particularly in property rights, and so on.

But no matter how hard we try, we still lack the right people to man our growing and rapidly diversifying economy!

The second thing is related to the first issue, which is why (often extremely talented) Malaysians choose to return from a comfortable life overseas and contribute to our country. In my few months of being back from abroad, I have heard many stories, often heartwarming, sometimes heartbreaking. Of course, some returned due to ingrained idealism and confidence to help the country and community, and idealism and confidence are commodities that are not particularly abundant in this country. Others returned due to family commitments, while quite a few returned due to the economic and employment crisis engulfing developed economies. No matter what, these cosmopolitan Malaysians who have competed with the best in the world and earned their stripes are back to feed Malaysia’s growing appetite for advanced managerial and technical talent.

However, there are still more than 1 million Malaysians abroad, and more than 2/3 of them have at least an undergraduate degree. We all know that a lot is changing within the Malaysian government, the economy, politics, culture and many other aspects of life. The returning Malaysians I have met have often made tough decisions and took great risks to return, and returned they did, because of their confidence that Malaysia is changing for the better at an acceptable pace.

From the consultant point of view, I do agree that both government and society, and especially government, are changing for the better (often at a pace faster than we expect), becoming more accountable with public funds and performance, and becoming less tolerant of old diseases such as corruption and apathy. How else are private-sector consultants in Malaysia able to clinch an increasing number of jobs from the government such as PEMANDU and Khazanah Nasional Berhad? Cynicism aside, a great number of people do believe that public policy in Malaysia is far from moribund.

But, despite positive changes that are unprecedented in decades, what is holding back the return of the 1 million-plus Malaysians abroad, including the 60-70% of that number who are in the little island state less than 1 km south of Johor Bahru?

The third thing that struck my interest was of course, the victory of the Harimau Muda (Young Tigers), the Under-23 Malaysian football team in the final SEA Games football match with Indonesia just 2 days ago. Not since the days of legendary striker Mokhtar Dahari in the 70’s and 80’s has the Malaysian team clinched a back-to-back victory in SEA Games football, as the team was also champion in the previous SEA Games 2 years ago. Letters to the press were full of descriptions of tears flowing freely, or relieving the glory days of Malaysian football, or believing that Malaysia’s time has come again.

Wow, quite a spike in the level of confidence there, eh?

We know that confidence is the bedrock of the economy (just ask Ben Bernanke about confidence and the Great Depression, as he wrote his PhD thesis on it). At the same time, we also cannot underestimate how national pride and cultural confidence can lead someone to sacrifice a comfortable life for his country or community. Our deepest memories and feelings are etched in the land of our birth and upbringing. While memories and feelings cannot feed us, what can tip the balance between considerations of financial stability/career opportunities, and feelings of national pride/confidence in an overseas Malaysian’s decision-making in staying put abroad or returning? How can we help capitalize on such feelings through public policy to bring back our talents from abroad?

Perhaps, a revival of Malaysian football, and increased national pride?

Too wishy-washy and emotional a statement to be coming out from my mouth, isn’t it?

But, can there be a relationship the upsurge of positive changes in the Malaysian government, society and economy, and the upsurge of Malaysian football prowess? More importantly, how can one capitalize on either upsurge (or both upsurges) to convince overseas Malaysians that returning is not a bad idea?

Just some rambling thoughts on Thursday evening. 

A brave new year 2012 for Malaysia


Jan 26, 2011
Raymond Woo

After several weeks of heavy workload and depressing news about the never-ending global economic gloom, social unrest and national scandals, I finally found a flicker of light at the end of the tunnel after reading Paul Krugman’s latest article, “Is Our Economy Healing?” (New York Times, Jan 22, 2012).
According to Krugman the incorrigible pessimist, data has shown that the main problems of the economic gloom in the US – depressed housing prices and high private debt are gradually easing. Despite today’s broad undersupply of housing in the US, Americans are not throwing money into buying property because of remaining uncertainties of the job market. However, Krugman suggests that the trends of increasing home sales, declining unemployment claims and rising builders’ confidence should provide room for the optimistic view that America is experiencing an incipient recovery. Indeed, the main threat to this recovery is does not come from within the country, but from the still-continuing Eurozone sovereign debt crisis.

So, how will Malaysia’s economy perform in 2012? The International Monetary Fund (IMF) lowered its 2012 global GDP growth forecast to 4% from its previous forecast of 5.1%, due primarily to global uncertainties surrounding the Eurozone crisis (again), and cuts to this forecast would be undertaken later this year. While Malaysia’s growth was more resilient at an average of 5.1% across the first three quarters of 2011, its growth rates for the Industrial Production Index, Retail Trade Index and Residential Property Index have declined significantly. Further, the Malaysian Institute of Economic Research (MIER) has discovered that consumer sentiment in Malaysia has worsened quite a bit. Overall, economic growth and sentiment has moderated in 2011 and will become more unstable in 2012.

While we cannot do much about global economic uncertainties, the following items can and should be handled well to ensure our continued economic dynamism.

Corruption
While Malaysia’s score in Transparency International’s Corruption Perceptions Index has improved slightly from 4.4 in 2010 to 4.3 in 2011 (with 0 being the most corrupt and 10 being the cleanest), its ranking has worsened from 56 in 2010 to 60 in 2011, perhaps due to anti-corruption efforts in other countries. A study by IMF economist Paolo Mauro (1985) shows that, “if a given country were to improve its corruption "grade" from 6 out of 10 to 8 out of 10, its investment-GDP ratio would rise by almost 4 percentage points and its annual growth of GDP per capita would rise by almost half a percentage point." In other words, the less the corruption, the higher the economic benefits and savings.
We should all have heard of this by now: US-based financial integrity watchdog Global Financial integrity (GFI) reported that Malaysia’s illicit money outflows in the 2000-2008 period was RM 888 billion, ranking fifth behind China, Russia, Mexico and Saudi Arabia. How much of that sum was actually due to corruption rather than organised crime such as human trafficking and smuggling is unclear, but the very fact that an uproar has ensued in Malaysia shows that the corruption perception among the people is not very pretty indeed. Remember that measuring corruption is always a matter of measuring the perception of corruption, and as I have mentioned in my previous articles, intangible indicators such as perception and confidence are what drive an entire economy, at least in the short-term.

Public debt
The Star reported in October 2011 that Malaysia’s public debt rose 12.3% to RM 407 billion in 2010, according to the Auditor-General. The ratio of the Federal Government's debt to GDP at the end of 2010 was 53.1%, which was over 50% for the second year in a row, and with Act 637 of the Loan (Local) Act 1959 and Act 275 of the Government Investment Act 1983 recommending that combined loans raised domestically should not exceed a ceiling of 55% of the nation's GDP, we are fast approaching our legislated debt ceiling.

The data speak for themselves. In 2010, Malaysian government revenue was RM159.65bil which was an increase of 0.6% over 2009 revenue. However, operating expenditure and development expenditure were RM151.63 billion and RM52.79 billion respectively, and the gap between revenue and expenditure must be covered by debt. In fact, Malaysia has run budget deficits for all but 5 years since 1970, which if handled sustainably (i.e. devotion of resources to investment and development) is beneficial to the economy. If not, the budget deficit will be wasted due to leakages and low productivity, and its negative effects will cascade through the economy.

Is Malaysia on the road to glory in the year 2012? Only time will tell.


Malaysia’s Low-Productivity Trap


Oct 20, 2011
Raymond Woo

Today, I would like to talk about a subject close to the hearts of many working people - labour productivity. In this article, I argue that Malaysians’ low-maintenance culture and general apathy (or what call the tidak apa attitude in Malay) towards technology and many other things in life is a major hindrance in achieving higher productivity and therefore, high income-nation status.

First, let us look at what constitutes national productivity, which is measured in terms of Total Factor Productivity (TFP). According to the growth accounting method, three elements, namely labour, capital and technology contribute to the production of goods and services. The former two elements are what we call “factors of production”, tangible factors which can added in more quantity to increase productivity growth. The last element, technology is an intangible factor which enhances production, namely to produce more goods and services with the same amount of labour and capital. That being said, we also know about the law of diminishing returns, where increased input necessarily leads to lower marginal growth and thus lower returns on investments, if there is no increased development of enhancers like technology and labour productivity.

Sten Malmquist, a Swedish economist had created the Malmquist Index which compares the production technology of two economies at any time. The index decomposes TFP into two elements: technological change and technical efficiency change.

Unfortunately, according to Idris Jajri (2007), empirical results suggest that Malaysia’s economic growth has stagnated in recent years due to negative returns from negative efficiency. Our growth has obviously zig-zagged through the years: our annual GDP growth averaged 6% in the 1960’s, 7.3% in the 1970-1975 period, 8.6% in the 1975-1980 period, then to a slower growth rate of 5.1% in the 1981-1985 period, improving to 6.7% in the 1985-1990 period, and later accelerating to 8.7% in the 1990-1995 period. Then, the East Asian Financial Crisis struck, reducing our growth rate to 4.6% in the 1996-2000 period, and our anaemic growth rate has not improved much until now.

Technological change and technical efficiency involve mainly human capital development. You need a lot of capital investment in research and development (R&D), a good technical education, and a meritocratic environment for the best scientific and technical minds to thrive, among others. The point is to encourage synergy between good scientific minds to improve technological productivity, which can only happen when a country retains a mass of scientists to its shores, which can only happen when you have an excellent and conducive system for scientific talent to develop in the first place.

I take the KTM Komuter train everyday to PwC, and I would always be reminded how haphazard and lackadaisical our national human capital development policy has been. KTM Komuter trains are often badly maintained, and the drivers and technicians have low technical competency, leading to frequent train breakdowns and delays. When waiting for yet another delayed train, I often ponder upon many interrelated factors leading to the current state of KTM Komuter: poor technical education, lack of drive in the workplace, lack of technical expertise to maintain the trains and the tracks, lack of budget to buy and maintain new trains regularly, KTM’s lack of growth strategy, economic inefficiency due to its status as a privatised monopoly, and so on.

As is everything in economics, one thing necessarily leads to another thing, or to many other things. KTM’s technological and technical failure leads to public transport bottlenecks and subsequent induced traffic congestion, as potential and current KTM users get fed up and drive to work instead. Traffic congestion leads to loss work hours and increased stress on mental health, which lowers productivity and efficiency at work. Lower productivity leads to lower growth, both in terms of GDP and also in terms of real income and purchasing power. This pure armchair logic will tell us that it is of no surprise that Malaysia is still stuck in low growth and the middle-income trap for more than a decade now, and the KTM example is just one of the many technological and technical failures our country faces everyday!

Our government has done some good things in the past few years to promote productivity and economic growth. Like technology, administrative and legal reforms are intangible enhancers to production. Thus, the establishment of the government performance improvement unit PEMANDU (where some PwC Advisory people have been seconded to) and its myriad  transform processes and targets has achieved some results, like Malaysia’s increase in the World Bank Doing Business Index ranking (an index that measures the ease of doing business by quantifying how many regulatory steps one must take to establish a legal business in a country) from 21 to 18, and World Economic Forum’s Global Competitiveness Index ranking from 26 to 21.

We have no choice but to keep initiatives like that going. It would be pointless for our government to keep on pouring money and assets into the economy (such as happened in the latest budget) without fundamentally changing the way we function in life, an important part being technology. As government-related activity already comprises more half of our GDP, we have no choice but to look inward, at how we live our lives and perform at work and life, in order for our country to develop further.

Paul Krugman once said that, “productivity isn’t everything, but in the long term it is almost everything.” Let me add another pithy saying: if we only keep on waiting for durian runtuh (fallen durians in Malay, meaning a windfall) from the government and other institutions without learning about and improving on the method of picking durians, we will only get to enjoy durians when they runtuh on our heads. 

Inequality Also Destroys the Top 1%


Oct 13, 2011
Raymond Woo 

In the midst of a busy week primarily occupied with professional training courses and backlogged work, I am struck by the social phenomenon of ordinary people from different socio-economic backgrounds gathering en masse to protest against perceived inequality. However, since inequality is fundamentally an economic concept that is relative to a particular time and place, it would have been difficult to identify a singular target for protest, a tactic has been staple fodder for revolutions since time immemorial (think about the French ancien regime, Chiang Kai-shek, Sukarno and more recently, Hosni Mubarak).

Yet, we are seeing mass groups of people Occupying Wall Street. While they are protesting against the nebulous concept of “inequality”, the Wall Street Occupiers are targeting a clear social group: what the protestors themselves call “the top 1%”, the richest 1% (or more) of the country. To sweeten the deal, the protestors, despite being composed of a multitude of different groups such heartland moms-and-pops, environmentalists and blue-collar workers, self-identified as “the 99%” which has been a rallying cry for the past several weeks across more than 70 cities in the US. And what do we make of this? An emerging consciousness of unity in (relative) dispossession, a la “workers of the world, unite”?

More sinisterly, we witnessed the disenchanted youth-led violent riots in England a few months back, where the rioters seemed to have come from nowhere and yet, united in the action of “violent consumerism” as the New York Times had put it. Despite having some rich and spoilt kids among the rioters, most of those who damaged property and committed theft then were definitely dissatisfied people with problems of poverty in a land of plenty, and high youth unemployment.

Did I say relative again? Indeed, studies have shown that excessive inequality in wealth and income destroys productivity, economic growth and eventually, the well-being of even the Top 1%. Among many economists, Aghion, Caroli and Garcia-Penalosa (1999) proposed that when capital markets are imperfect, equity is not necessarily traded off with equality, and they showed empirically that inequality negatively impacts upon economic growth, while redistribution positively impacts upon economic growth. Also, Marriner C. Eccles, the Chairman of the Federal Reserve under President Franklyn D. Roosevelt believed that such inequality was the principal cause of the Great Depression.

Abject poverty is no longer a major problem facing us; relative poverty is. While there are less people around the world surviving on USD 1 per day (a global benchmark for absolute poverty as originally formulated by the United Nations Development Programme), surviving on a minimum wage of USD 8 (RM24) per hour in the US is also demeaning, both physically and emotionally. I remember being aghast when I read a few years ago that the difference in salary between the lowest-paid and highest-paid in Germany was less than 50 times, while that in the US was more than 500 times!

 Until recently, the economic boom in emerging markets of Asia, Latin America and Africa has created a booming middle class. However, weak institutional capacity in developing countries, and deregulation and industrial hollowing-out in the developed ones have increased inequality in general, as we can see from worsening Gini Coefficients (an index measuring the above-mentioned inequality, with zero indicating the perfect equality and one indicating perfect inequality) in most countries. These factors have limited the inherent redistributive function a state has, which developed from the growth of “bureaucratic states” in 19th-century Europe that meant to stem gross human rights abuses and suffering that faced the weaker sections of society then, such as orphans and industrial workers. Easy examples would be tax policy and social welfare; redistribution policies should never encourage a culture of dependence, but improve the allocation of resources so that idle resources (such as capital) can go to those who need it most and can provide better returns on capital. In the US, we see corporations either saving money or using cash to deleverage or pay back their debts, hindering capital and other resources from being used in productive pursuits such as job creation. Thus, we can possibly see a downward spiral of money sitting in isolated places and not generating good rates of returns, making the danger of Japanese-style deflation, or more relevant to the current situation, a double-whammy of high unemployment and high inflation, or stagflation real worries indeed.

At the same time, technological changes leveled the global allocation of human capital, enabling production to move more easily to where human resources lie, and vice-versa. Since the redistributive function of modern states have been markedly reduced, this massive global change would theoretically enable only those who already have some form of social or economic capital, thus worsening inequality.

Inequality can be a nebulous concept, but it has real consequences for people. Historically, real or perceived inequality has been a primary motivator for social instability, and we are seeing the consequences of extreme inequality today. It is time relevant stakeholders in society to play a role in enhancing the well-being of as many people as possible, so that the bottom 99% will not always be at loggerheads with the top 1%.