Monday, October 15, 2012
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/)
Sunday, May 6, 2012
Nov 24, 2011
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.
Jan 26, 2011
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.
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.
Oct 20, 2011
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.
Oct 13, 2011
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%.
Oct 6, 2011
Singapore's former Prime Minister Lee Kuan Yew believed so much in the concept of growth and the power of market self-correction, that he spurned any notion of the welfare state within his microstate's borders. Indeed, he once said that a country must first focus on growth, and everything else will somehow fall into place.
Let us break down LKY's thought process into bite-size pieces. The first question we should ask is: what growth, and at whose expense? People tend to forget that an investment or an input always carries a cost, and is in fact considered a cost at the beginning of the business cycle. Unfortunately, the cost is not borne equally; some risk-takers are more equal than others, or in other words, a set of actors can move and package risk around to avoid being financially liable, even though these actors are responsible for decisions that carry those risks in the first place. For example, the annual bonuses of fund managers depend on the amount of their business profits, meaning that the higher the growth of their business the higher their bonuses. This is all well and dandy, until you ask whether they bear the cost and risk when their investments suffer loss. Of course, the answer is negative. Even if the fund managers are sacked due to poor investment returns, many enjoy huge severance payments, euphemistically called "golden parachutes" as is often agreed upon in their employment contract beforehand. It is thus no wonder why Wall Street shenanigans like the top management of Lehman Brothers could take unreasonable risks for the sake of growth and more growth, as those most responsible for poor "growth-at-all-costs" decision-making were not personally liable for their actions! Economists have since coined a euphemism, "moral hazard" to describe this behaviour.
The second question we should ask is, what has happened to the pet theory of neo-liberal Chicago Boys' (i.e. University of Chicago economists whose group included Milton Friedman) advocating market self-correction since the 2008-2009 "Great Recession", and how has this sea-change in economic thinking affected economic policy-making? For as long as anybody can remember, the fundamental assumption of economics is that people are self-interested rational actors, and will only make decisions that can increase their utility and achieve personal well-being. Unfortunately, in reality people are not always rational (married people, you should know), and furthermore optimal decisions can only be made when every single information is made available to the decision-maker, which of course is not possible in reality. Thus, this rational-choice theory which has been the foundation of the thinking that the market can constantly correct its inefficiencies because all market actors are rationally self-interested, is flawed. In the process of promoting a narrow band of political ideology and economic thinking, the Chicago Boys have simply ignored the great strides behavioural economics stemming from something as simple as Herbert Simon's concept of "satisficing", and so have the Chicago Boys' fanboys in Wall Street. Nowadays, economists have sneered at this mode of thinking, and some behavioural economists have even partnered with neuroscientists and clinical psychologists to see how people think and make decisions.
The debt crises in the Euro-zone and the US are chiefly, in my opinion, a problem of pushing the "growth-at-all-costs" agenda. Back in the early 2000's, the US was just emerging from a tech bubble-created recession, and policy-makers had to do something. Americans were getting agitated at low growth and high-employment, and people needed to feel good again after their country was humiliated and its psyche utterly crushed in the 9/11 terrorist attacks. Naturally, the government followed classic Keynesian thinking - spend more to create growth! At the same time, the Federal Reserve wanted to encourage private spending by pursuing a rigorous regime of lowering interest rates and making available cheap credit not seen in decades. In the Euro-zone, policy-makers and businesses simply ignored the gross fiscal and monetary mismanagement and low productivity in the PIIGS (Portugal, Italy, Ireland, Greece, Spain) countries, and cashed in on the party of the century of booming property prices and construction, and other non-productive economic activities fuelled by cheap credit. Bankers in the UK, France and Germany took no notice, assuming that the market will eventually correct itself, and more importantly, their bonuses will keep on increasing with high credit and GDP growth.
Eventually, all this debt-induced growth will eat into private and public assets, and it is not wrong to think of this episode as cannibalising oneself to grow bigger. We must remember that high growth often always comes with high borrowing, and such unsustainable growth leads to misplaced confidence, or in other words, a bubble. After the bubble crashed following the Greek debt crisis and fiscal disarray in the US, people started to remember that nothing beats growth like that done though sheer hard work and living within ones' means.
The Malaysian government has just recently passed a "people-friendly" budget, yet another euphemism for more debt and encouragement of cheap credit to pay for government expenditure. I certainly hope that all this induced growth in this country will not bankrupt us eventually.
Nov 3, 2011
The recent massive floods in Thailand have been shocking from the perspective of economic-impact. The floods, caused by nearly three months of heavy monsoon rains upcountry have inundated nearly a third of the country, especially in the low-lying fertile floodplain in the center of the country that produces most of the rice in the world’s No. 1 rice-exporting country.
Naturally, agriculture has taken a serious hit from the natural disaster, but Thailand is also among the world’s top manufacturers in semiconductors, cars and other assembled goods and industrial components where manufacturing forms 6.1% of its GDP. Key industrial estates are concentrated around Bangkok, and also neighboring areas such as Thani, Samut Prakan, Ayutthaya, and Rayong. All of them have been flooded for several weeks now. According to Dr. Chodechai Suwanaporn in his article in The Nation (November 3, 2011), Japanese manufacturers form the majority of operators in these industrial estates and mostly specialize in electronics and automobile components. Thus, the industrial shutdown has also affected global supply chains that traverse the globe.
But what struck me about the disaster was not slowdown of all important sectors of the Thai economy such as tourism, agriculture and industry, nor the fact that its pre-flood forecasted GDP growth for 2011 will be reduced by 1%-1.5%, nor even the fact that inflation will shoot up to 5% by the end of 2011 due to shortages of goods and hoarding.
Rather, I was struck by how determined and unrelenting the Thai government was in protecting Bangkok (or at least the city center) from inundation at all costs, even at the expense of neighboring provinces and districts. The higher the dykes are raised around Bangkok, the longer outlying areas will be flooded. This is already causing some unrest among citizens outside of Bangkok as it is perceived double-standard, and there have been cases of dyke-breaking and even violence against the police.
The justification was that Bangkok is literally, the heart and soul of Thailand. It is the center of government, industry, finance and culture, and contributes 41% of Thailand’s GDP. Bangkok is where the King of resides, and where the greatest architectural treasures such as the Palace and the Temple of Dawn could be found.
However, as mentioned earlier, outlying provinces like Ayuthaya also produce a very large chunk of the GDP. Further, the majority of Thai people live outside of Bangkok.
In any case, how justifiable is it to sacrifice one segment of the population to save another segment of the population, especially if the sacrificed group is in the majority? Even when such sacrifice makes sense because something as large and valuable as the city of Bangkok is at stake, is it reasonable to adopt such measures when real human lives are at stake? Further, how sustainable can Bangkok’s economic growth be when its hinterland is allowed to be severely damaged from the floods, even though the floodwaters could have been allowed to flow more quickly to the sea through limited and short-term inundation of some parts of Bangkok?
Please note that I am not in any way casting aspersion on the Thai government’s public policies, but rather I am merely inquiring about the necessity of saving one’s economy at the expense of another economy, when ultimately the economy of the entire country is at stake. Ayuthaya affects the national GDP too, and there can be a contagion effect from outlying areas to Bangkok due to the hinterland-metropolis relationship.
Malaysia has received warnings about impending storms and even floods in many parts of the country. I hope we do not have to be stuck between the devil and the deep blue sea like what our northern neighbors had to experience.