Uneven development and transformation, Vision 2020 and beyond

Uneven development and transformation, Vision 2020 and beyond

By Jomo Kwame Sundaram (published in The Edge, 1346 the week of Nov 23-29, 2020 and re-produced here without permission for academic discourse purposes). All credits to the author.

Work in an Evolving Malaysia - by Hawati Hamid, Siti Aiysyah Tumin and Nur Thuraya Sazali - is the second Khazanah Research Institute (KRI) report in a month to revisit the period associated with Vision 2020, announced in early 1991, after the era typically associated with the New Economic Policy (NEP) of 1971 to 1990.

Vision 2020 sought to create a psychologically liberated, mature, ethical, tolerant, liberal, democratic, scientific, industrialised, prosperous, progressive, caring, economically just and united Malaysian nation.

Arguably, Vision 2020 was killed by the 1997/98 Asian financial crisis followed by the Mahathir-Anwar political fallout and the 2008 global financial crisis. Two decades before, the NEP was introduced to create the conditions for national unity after the traumatic racial riots of May 1969 by eradicating poverty and restructuring society to eliminate the association of race with economic function.

It is a pity that the country has not had a fuller debate over what happened to this progressive national vision, which sought to go beyond the ethnically divisive dominant interpretation and implementation of the NEP, repudiating its intent to forge national unity.

Capturing public policy, ruling party politicians and their business partners ensured the NEP undermined such prospects by invoking ethno-populist victimhood to secure "ketuanan Melayu" privilege.

Curiously, former prime minister Tun Dr Mahathir Mohamed hardly referred to Vision 2020 that he launched during his recent political comeback, although many consider it to be his finest moment, rising - albeit briefly - above the divisive legacy of NEP implementation, privatisation and the mid-1980s' split in UMNO.

It is no secret that Vision 2020's modernist unifying vision was first drafted by three now-departed Malay intellectuals at the Institute of Strategic and International Studies (ISIS), namely its director-general Noordin Sopiee, fiscal economist Ismail salleh and political sociologist Rustam Sani.

Rustam - son of progressive nationalist politician Ahmad Boestmam, who helped draft the 1947 PUTERA-AMJCA People's Constitution (Perlembagaan Rakyat), which envisaged a bangsa Melayu (Malay nation defined by patriotism and not ethnic genealogy or religion and long-concerned with nation-building) - was key to envisaging Vision 2020's bangsa Malaysia (Malaysian nation).

Sadly, the main reference to Vision 2020 often made in Malaysia these days is to Datuk Seri Najib Razak's caricatured equation of developing the nation with achieving high-income country  (HIC) status, a World Bank category. Najib's regime claimed that Malaysia was on the cusp of HIC status by statistically ignoring foreign labour, especially the undocumented foreign workers.

This remains a major problem, inetr alia, in Malaysian economic statistics as we pretend they do not contribute significantly to economic output despite being poorly treated. For example, discriminating against them adversely affects Malaysian workers working in similar jobs and puts the malaysian public at risk by refusing to test them for Covid-19 as if the virus discriminates on the basis of citizenship.

Official data acknowledges over 32 million citizens and over 15 million in the labour force, including 2.2 million non-citizens. Half a decade ago, the then human resources minister announced that an estimated 6.7 million foreign workers in the country used data from telcos. In other words, about 4.5 million were undocumented, and hence not recognized as part of the labour force.

This implies that about a third of the labour force in Malaysia of closer to 20 million is foreign and of whom two-thirds were not acknowledged. By ignoring their contribution and meausring productivity and income without them, we only delude ourselves that we have nearly achieved high-income status despite lacklustre investment and development for well over two decades.

Uneven structural change and employment

With such caveats in mind, we can learn a great deal from the KRI report's review of Malaysia's labour trends from 1989 to 2019, almost coinciding with the period since 2020 was proclaimed. Work influences incomes, consumption and well-being, covered in last month's report, especially as labour incomes accounted for more than four-fifths of household income in 2019.

Household incomes are linked to spatially varying employment conditions in the country. Using available official data, it offers a spatial perspective, reviewing workforce characteristics in different states to identify some challenges and opportunities.

Such uneven economic development resulted in varied employment conditions. More economically advanced states had higher labour force participation rates (especially for women), more skilled and educated workers as well as lower unemployment rates. Hence, better paid jobs were mainly in the central hub of Selangor, Kuala Lumpur and Putrajaya.

But differences in work conditions persist. Formal and secure employment is widespread, but vulnerable and precarious jobs are growing. In the more economically advanced states, almost four-fifths of workers had more secure employment terms. But decent work deficits have been increasing, even in richer states.

Transformations

As Malaysia's economy has grown, the distribution of economic activities among states has evolved. Agriculture's share of employment declined from 31% in 1982 to 10% in 2019 but remained important in most rural areas and, relatively more significantly, in the poorer north and east coast states of Peninsular Malaysia, Sabah and Sarawak.

Thus, agriculture still accounted for 24% to 26% of employment in Sabah, Sarawak and the federal territory of Labuan, and 14% in the other poor Peninsular Malaysia states in 2019 (highest in Pahang at 21%). Decent work deficits - for example, in occupational health and safety and non-standard jobs lacking formal social protection - are strongly  associated with agriculture.

Manufacturing employment shares grew in all states in the decade before the 1997/98 Asian financial crisis, with the national share peaking at 24% in 2000 before falling to 18% in 2019. West coast states in Peninsular Malaysia have industrialised more. More export-oriented high-technology manufacturing, with more skilled workers, is also concentrated in the advanced states.

Penang and Johor still have higher shares, at 37% and 25% resepctively. Manufacturing accounted for 21% of employment in Selangor-Kuala Lumpur-Putrajaya in 1982, declining slightly by 2019 despite its huge population increase and high concentration of modern services. Meanwhile, the 2019 manufacturing employment shares were only 7% in Sabah and Sarawak and 12% in the other poorer states. 

Traditional services growing most

Employment in services continued to grow faster throughout the country, especially between 1999 and 2019, amid lacklustre growth in other economic activities. With 63% of national employment in 2019, its job share in Sabah and Sarawak also rose from 30% in 2009 to 37% in 2019.

While the sector has provided many jobs, traditional services - including wholesale and retail, food and beverage and accomodation - have grown more, offering lower pay and more irregular employment compared with modern services such as finance, information and communication, and professional services.

Between 2009 and 2019, traditional services rose from 35% to 40% for all jobs as the job share of modern services shrank from 8.0% to 6.8%. Modern services, typically involving more skills and better pay, were more common, with 15% in more urbanised Selangor-Kuala Lumpur-Putrajaya, which is more than triple the average elsewhere.

Meanwhile, employment in social services like education, health and public administration contracted from 17.2% in 2009 to 15.8% in 2019. Such services not only improve social well-being but also employ more skilled workers, providing stable jobs and better pay.

Jobs, gender, skills, pay

The more economically advanced states have seen increasingly higher labour force participation rates (LFPR). In Selangor-Kuala Lumpur-Putrajaya, close to three quarters of the working age population (15 to 64 years old) were in paid employment, while other states had rates below 70%.

Women's participation drives the oevrall LFPR, rising from 45% in 1982 to 56% in 2019. Women's LFPR rose fastest in Selangor-Kuala Lumpur-Putrajaya from half to over two-thirds while other states grew less, from 45% to 51%. Flexible work arrangements, support for care work and other policies enabling women's participation could further raise women's LFPR.

Over the past two decades, the share of skilled employees has risen faster in these states, as low-skilled employees became more significant elsewhere while semi-skilled jobs' share declined everywhere. Of semi-skilled jobs, services and sales workers grew most in recent years, but with low wage growth.

Between 2011 and 2019, such workers grew from 20% to 23% of total employment, without stemming the overall decline of semi-skilled jobs, with sluggish wage growth (3.4% annually), relatively lower wages (RM2,060) and great risk of job displacement by automation.

Jobs needing more education and skills are now more concentrated in the economically advanced states. More skilled and educated employment, including in modern services, have raised wage levels and household incomes, but also living costs in Selangor-Kuala Lumpur-Putrajaya above other states.

Employment and vulnerability

The more economically developed states have lower unemployment rates. In 2019, close to four-fifths of working people in these states were paid employees, mostly in standard employment relations. Shares in paid employment were 71% in Sabah and Sarawak and 68% in the poorer states of Peninsular Malaysia, which include Kelantan, Perlis, Kedah, Pahang and Perak, but not Terengganu.

Between 1982 and 2019, unemployment in the more advanced states averaged under 3%, and slightly more in the less-developed states. Unemployment rates for women, rural areas, the less educated and younger people and in Sabah and Sarawak were also generally higher. Less-advanced states have more employed in small and medium enterprises (SMEs), which typically have more decent work deficits.

Thus, precarious employment, including own account and unpaid family workers constiuting vulnerable employment, has been rising with more sluggish growth since the turn of the century. Although employment conditions appeared stable after the pandemic, increasing numbers in the economically advanced states were experiencing decent work deficits. 

Investments, technology and the pandemic

Industrialisation grew rapidly with investments in the early and mid-1990s; but slowed as services, mainly traditional, became more important. As investments slowed, the country deindustrialised, becoming more service-oriented.

Capital accumulation, averaging 16% annually from 1989 to 1997, fell to around 6% yearly from 1999 to 2019. Reduced investments slowed long-term growth as investments in modern services declined with high-technology manufacturing. Less R&D also lowered demand for highly-educated employees.

Traditional services' jobs grew as modern and social services employment relatively declined in the past decade. Sales and services work, accounting for about a quarter of total employment in Malaysia, is at greater risk due to increased automation.

Half of existing jobs, mostly those considered semi-skilled, are considered to be at greater risk of being automated, with the pandemic probably accelerating this trend. Moreover, Covid-19 may accelerate the automation of some jobs that cannot be done from home during the pandemic.

However, timely and appropriate policy interventions can ensure that workers are upskilled or reskilled to anticipate, rather than be displaced by, technological advances. Flexibility and openness to innovation and willing ness to adopt new technologies would also ease such transitions.

Melayu Baru

One early reaction to Vision 2020 was the notion of Melayu Baru, which sought to assert a new self-confident Malay in bangsa Malaysia but get rid of the supremacist racist pretensions of "ketuanan Melayu".

The notion of "ketuanan Melayu" was first advanced in 1986, after Mahathir announced economic, educational and cultural liberalisation following the economic downturn and political challenges of the mid-1980s.

Mahathir successfully courted Pakatan Harapan leaders to take over PH leadership before its victory in the May 2018 general election. While as PM7, he worked with others within and outside PH to use ethno-populism to keep his other PH partners in check, perhaps hoping to eventually lead a government of national unity as the seemingly indispensable leader.

Today, UMNO and PAS have successfully hijacked the new discourse of Malay-Muslim unity, with the DAP designated "bogey-man", a caricature some culturally insensitive DAP leaders seemed all too ready to confirm, inadvertently undermining the popular legitimacy of PH, especially its Malay leadership.

Beyond 2020

Can the nation's future be saved or at least salvaged from the debris of the decades? Or is Malaysia condemned to continue replaying newer versions of the same old ethno-populist tunes, for a farcical tragedy with new casts and sets, while smug in our culture of self-congratulation and self-delusion?

Malaysian politics since February this year is slowly but surely exposing the emptiness of all ethno-populisms. But tragically, unlike in 1971 or 1991, there is no shared alternative national project ready to fill the vacuum left by the expiry of Vision 2020 and the earlier post-May 1969 quest for national unity with the Rukun Negara and the NEP.

Although the Vision 2020 alternative was wounded and abandoned, its envisioning and ensuing efforts in its name, however brief and compromised, remind us that all is not lost. For all patriots of goodwill, it is imperative to strive yet again despite the odds.

The Vision 2020 commitment is to establish a modern, industrialised, developed and united Malaysian nation. The potentially progressive nationalism of the Rukun Negara plus NEP and, later, Vision 2020 is still urgently relevant. Today, not only does the nation remain divided but the major political tendencies strive to split it further, albeit in the name of rival ethno-populism. 

And while most post-colonial societies struggle to overcome colonial legacies and to cope with contemporary hegemonic rivalries, ethno-populist jingoism invokes nationalistic rhetoric to serve narrow reactionary agendas. To make things worse, internal divisions have not only compromised national resolve but also allowed hegemonic foreign interests and ideologies greater influence.

Undoubtedly, today's Covid-19 pandemic as well as containment, relief and recovery meaures are not only disruptive but also costly. But its dangers and threats also offer new opportunities to move forward, albeit to a less certain future, which certainly cannot be either a throwback to business as usual or an unchanging new normal.

We can only emerge stronger as a nation if we pull together, instead of working at cross-purposes for political advantage and economic gain. Covid-19 underscores the need for an all-government approach, unifying the whole of society, acknowledging the inevitable while striving to make the most of the new circumstances in the near, medium and long term. 

1MDB - no more the elephant in the room (article extracted and re-reproduced from TheEdge Malaysia, Dec 22, 2014)

1MDB - no more the elephant in the room (pages 27 & 30, TheEdge Malaysia, Dec 22, 2014)

By Ben Shane Lim

For most Malaysians, 1Malaysia Development Bhd (1MDB) has been a complex engima - just one of the many plots and subplots that form the political background noise to everyday life. But the troubling story of the state-owned fund that is Prime Minister Datuk Seri Najib's brainchild finally came to the fore in 2014, with potentially far-reaching implications for the nation's finance and politics.

Opposition politicians and former prime minister Tun Dr Mahathir Mohamad may have their own agendas for criticising 1MDB, but the man in the street has many reasons to be worried as well - about 42 billion and counting.

Even one of Najib's own from Umno broke ranks earlier this month, with Batu Kawan deputy cheif Datuk Seri Khairuddin Abu Hassan lodging a police report against 1MDB, whose advisory board is chaired by Najib himself. Penang Umno members were quick to step in and pacify the party president, stressing that Khairuddin had been acting alone.

Political motives aside, there are justifiable reasons for Malaysians to be concerned as well.

In a nutshell, 1MDB appears to have borrowed a huge amount of money at too high a price to purchase overpriced assets that cannot cover the debts. Why this has happened is open to speculation.

The net effect is that 1MDB has been relying on massive land revaluation gains to book accounting profits, but auffers from negative cashflows as whatever cash it has is used to service the debts. In the financial year ended March 31, 2014 (FY2014), it suffered a negative cash flow of RM2.25 billion.

Ultimately, this business model doesn't appear sustainable, a fact that became more apparent when 1MDB posted a loss of RM665.3 million for FY2014, weighed down by RM2.4 billion in financing costs.

This isn't particularly surpirsing, since 1MDB had relied on over RM2.74 billion in land revaluation to turn a profit in FY2013. But the losses have been a wake-up call for Najib's administration.

There are two linchpins that are supposed to turn 1MDB around - the development of the 70-acre Tun Razak Exchange (TRX) land in the heart of KL and the listing of 1MDB's power assets.

While the development of TRX saw little progress this year, it has been an eventful year for 1MDB's energy unit that aims to list next year and raise over RM9 billion.  The listing is crucial to raise money for 1MDB to pay off some of its debts, evidenced by the fact (that) 1MDB is willing to retain 20% stake in the listed company.

So what happended?

1MDB started the year on a sour note, having to change auditors for a second time in four years to Deloitte from KPMG. This in part resulted in 1MDB delaying the lodging of its FY2013 financial results with the Companies Commission of Malaysia (CCM) by over six months.

The 2013 financials revealed that 1MDB had channelled over RM7.18 billion to the Cayman islands. 1MDB claims that the funds were professionally managed by Hong Kong-based Bridge Partners, but little is known about the obscure firm and 1MDB largely kept mum about the funds.

The financials also showed that 1MDB overpaid for the acquisition of its power assets by some RM3.3 billion in the form of goodwill. Recall that 1MDB acquired Genting Sanyen power assets from the Genting group for RM2.3 billion, and the Tanjong Power assets from tycoon Ananda Krishnan for RM8.5 billion.

By March 2013, slightly over a year after the acquisitions, 1MDB would write off RM1.9 billion of that goodwill.

While this was a poor start to 1MDB's planned listing of its power assets, the group has had a wi ndfall year when it comes to securing new projects.

It began when it was awarded Project 3B, a 2,000MW coal-fired power plant project worth RM11 billion, after a close fight with a consortium consisting of YTL Power International Bhd and the Sultan of Johor's SIPP Energy Sdn Bhd.

1MDB would go on to win two more projects on a direct-award basis - a 50MW solar project as well as a 2,000MW combined cycle gas turbine plant in Melaka due in 2021.

Including a few more undisclosed hydroelectric projects in and outside the country as well as a joint venture with Tenaga Nasional Bhd to undertake new projects in Bangladesh, 1MDB went ahead with its plans for list its power assets, aiming to go public in the first quarter next year.

However, this would prove to be extremely challenging for the group, which came under yet another round of scrutiny when its FY2014 financials were filed, revealing losses and negative cahs flow amounting to RM2.25 billion. At this point, the fund's borrowings also expanded to RM42 billion.

1MDB would come under even more pressure when documents revealed that it had paid very expensive fees, around 10%, for US$4.75 billion (RM15.2 billion) worth of borrowings it had raised via Goldman Sachs. This is on top of expensive coupon rates as high as 5.99%, compared with government guaranteed bonds which are typically issued at less than 4%.

Goldman Sachs came out to defend the deal, pointing out that the fees reflected the risk that it had undertaken in raising the money for 1MDB.

Unsurprisingly, opposition politicians took the opportunity to grill Najib about 1MDB in Parliament. After all, he is the minister of finance and his ministry owns 1MDB.

Questions were raised in the media as well as in Parliament over the exposure of the government should 1MDB fail to meet its debt obligations, which in FY2014 totalled a whopping RM2.5 billion. After an initial denial to Parliament, Deputy Finance Minister Datuk Ahmad Maslan would backtrack and finally admit that the government issued a letter of support for 1MDB's debts of around RM5.8 billion.

Of more concern was the fact that 1MDB has had to extend and restructure some RM5 billion worth of borrowings in the form of a bridging loan with Malayan Banking Bhd.

On a more positive note, 1MDB claims that it would be redeeming RM4.26 billion of its funds invested in the Cayman Islands.

The negative publicity was enough to draw out 1MDB's chairman, Tan Sri Lodin Wok Kamaruddin, to address the questions. However, only select media organisations that were controlled by the government were invited to the "press conference" in mid-November.

With all the negative news flow, it isn't surpirsing that 1MDB's soon-to-be-listed energy unit has distanced itself from its parent, changing its name to Edra Global Energy Bhd from 1MDB Energy Group Bhd.

Edra Global has already lodged its draft prospectus with the Securities Commission Malaysia, but it is taking longer than usual for the SC to expose the prospectus as it is constantly being tweaked.

That said, it will still be an uphill battle for Edra Global, which is expected to offer yields of between 2.5% and 3.5% - which are hardly attractive. On top of that, given the size of the issuance in excess of RM9 billion, it may not be tenable to list in the first quarter of next year due to weak market sentiment.

Furthermore, the group even had to delay the issuance of RM8.4 billion worth of sukuk to finance the construction of Jimah East, which is also expected to be delayed.

Nonetheless, the fact remains that 1MDB sorely needs Edra Global to be listed as soon as possible to pare down the group's borrowings - and time is running out.

The recent depreciation in the Ringgit against the US dollar is putting more pressure on the fund, given that it has an estimated US7.4 billion in dollar-denominated debts. As at March 2014, that amounted to RM22.048 billion but has since increased to an estimated RM25.7 billion at the current exchange rate of 3.48 against the dollar.

It remains to be seen how 1MDB will support its ever-growing debts, but a default is certainly in nobody's interest, which would be catastrophic - not only for the many banks that are exposed but also the country's balance sheet and indirectly, every Malaysian's pocket.

Silent and ominous, 1MDB has been much more than a four-letter word that has defined 2014. It could well be the legacy that Najib is remembered for, perhaps not in a way he would have hoped for, unless something quick is done to fix its fundamental problem - debt and asset heavy but lacking in cash flow. 

(All rights proprietary and intellectual belong to the abovenamed author and to TheEdge Malaysia, this article was extracted from and re-produced by this blogger without prior written permission on the grounds of public interest and in the interests of academic discussion only and is not to be sold or used in any form or manner for commercial purpose whatsoever).  

MPHB throws down the gauntlet to Johor

MPHB throws down the gauntlet to Johor

By Kamarul Azhar

Is it right for the Johor government to forcibly acquire private land and then resell it for a hefty profit?

That is the crux of the suit MPHB Capital Bhd has brought against the state government as the first defendent and national oil company Petronas as the second defendent.

MPHB's subsidiary Kelana Megah Development Sdn Bhd (KMD) filed the suit as the landowner on May 9.

In essence, the Johor government and Petronas are being accused of conspiring to unfairly and forcibly acquire seven parcels totalling 1,150 ha (2,841 acres), which is an abuse of the Land Acquisition Act.

Here are the salient points of the suit according to affidavits filed in court by Kelana Megah:

- The Johor government used the Land Acquisition Act to buy the land at 93 sen psf without granting KMD sufficient time to appoint an independent valuer to value the land. KMD was notified on Aug 9, 2012, and at a land enquiry conducted by the state land administrator on Sept 3, 2012, that the administrator had fixed the acquisition price at 93 sen after refusing a KMD request to delay a decision pending submission of an independent valuation.

- The state government proceeded with the acquisition at 93 sen on Oct 8, 2012, while it already had an agreement to sell the same land to Petronas at RM8 psf, which the national oil company needed for its Refinery and Petrochemical Integrated Development (RAPID) project.

- KMD alleges that the RM8 psf price was agreed upon by the state government and Petronas in May 2012 - four months before the Sept 3 enquiry that decided that KMD was only to get 93 sen psf from the state.

- KMD further alleges that three of the seven parcels acquired were not on the original list of land that Petronas had asked for and needed for RAPID and so should not have been acquired by the state.

The  land administrator set the price at 93 sen psf despite KMD producing a receipt for the payment of stamp duty on one of the parcels, which had been valued at RM5.75 psf just a year before.

At RM5.75 psf, all seven parcels would have been valued at RM711.55 million, based on a back-of-the-envelope calculation by The Edge.

The price differential between the RM8 psf paid by Petronas to the state government and the 93 sen psf awarded by the land administrator to KMD means that the state government made a whopping profit of RM800 million.

"Why should the state get the difference between the RM8 and 93 sen?" sks a corporate executive. "If the acquisition was made in the name of national interest, surely, the state should not have made money at the expense of the private landowner?"

Landowners are watching the outcome of the court case with great interest, although this is not the first time one of them has taken both the federal and state governments to court (see accompanying story).

The RAPID project, announced by Prime Minister Datuk Seri Najib Razak in May 2011, is positioned to turn southern Johor into Southeast Asia's oil and gas and petrochemical hub.

Petronas plans to have the RAPID project commissioned by 2016. However, opposition to the project from the local residents and the complexity of acquiring individual parcels and relocating the affected people raised concerns that the project may not see the light of day.

Petronas then turned to the state government for assistance in acquiring 8,200 acres in Pengerang, including the seven parcels belonging to KMD.

According to KMD, it should have been given sufficient time to determine the valuation of its land since Petronas had said it would only make a decision on RAPID in 2013. In fact, it was only in April this year that a final investment decision was made by the national oil company on the project.

In its suit, KMD is seeking a declaration by the court that the acquisition of the land was illegal and of no effect and to order the state authority to take all necessary steps to revoke the acquisition.

It is also seeking an order that Petronas deliver vacant possession of the land within seven days, pay damages for trespassing on the land, general damages for cutting down trees and destroying its oil palm estate as well as interest at the rate of 5% per annum from the date of the acquisition.

(Re-produced without permission from the Edge Malaysia magazine, the week of May 26 to June 1, 2014. All rights belong to the author of this article and the Edge Malaysia magazine, i own no proprietary rights and am only re-producing it for the sole purpose of academic discussion)   

Populism Plague

by Radzuan Halim (published in The Edge Malaysia the week of August 20-August 26, 2012 under the writer's regular weekly column "Radzuan's Reasons" and reproduced here without permission)

Today must borrow nothing of tomorrow - German proverb

The noted New York Times columnist David Brooks recently lamented on the state of the democracies of the US and Europe. He said, "Leaders today do not believe their job is to restrain popular will. Their job is to flatter and satisfy it ... many voters have come to regard their desires as entitlements ... they command their politicians to give them benefits without asking them to pay. (As a result) governments have made promises they cannot afford to fulfil."

Brooks was referring to the rise of populist pressure from voters and the readiness of leaders to accede to their demands. The result has been chronic government deficits in the US, Europe, Japan, India and Malaysia too.

At a talk given by a retired senior Malaysian politician, I asked him for his views on the populism affecting our country, proof of which lay in our persistent government deficits, subsidised fuel and commodities, pressure to forgive National Higher Education Fund Corporation (PTPTN) loans and doing away with quit rent and assessment.

His reply was: "That is democracy; you make promises and the other party makes counter-promises. Let the voters decide."

At the time i was quite taken aback by his dismissive reply. But if Brooks is correct, then that is the way of all democracies - doomed to financial insolvency and disaster brought about by the worst in human nature (wanting goodies without paying for them) and the willingness and readiness of leaders to pander to the irresponsible wishes of voters.

We can all agree that national finances do vary from family finances in that for national finances, we do not have to maintain surpluses every year. When the economy is in recession, it is appropriate to have a small deficit so as to activate the economy by building some needed infrastructure. But when the economy is enjoying good growth, it is necessary to maintain surpluses so that debts can be reduced and the government's coffers replenished. 

Such alternating between surplus and deficit in government finances was what we had practised in the decades up to 1997, the last year in which we achieved a federal government surplus (of 2.5% of GDP). During the years of good commodity prices and steady inflow of foreign direct investment (FDI), we achieved surpluses. However, from 1998 onwards, it has been only deficits. Why is that?

The answer lies in what Brooks said. In the new millenium, we have had more competitive politics. There has been endless campaigning, particularly since 2008, and like all political campaigning, it invariably boils down to promises to tax less, waive charges, cancel proposed new taxes and spend, spend, spend. 

The much-considered Goods and Services Tax (GST), which was proposed at least 15 years ago, was resuscitated four years ago and is still under study. The GST is much needed to diversify our tax base, to provide a new source of revenue and to modernise financial record-keeping and transparency throughout the economy. However, due to populist pressure or the perceived view that it is too unpopular, this much-needed tax has been kept in abeyance once again and not even mentioned of late.

I can think of a long list of issues relating to the prudence versus populist divide. For these issues, the economic impact on government revenue and spending is clear - deficit improving or deficit worsening. Sad to say, many politicians invariably succumb to the populist strain.

PTPTN

On May 22, there was a celebrated debate between the shining political stars of the "new-generation" ruling coalition and the opporsition - Khairy Jamaluddin and Rafizi Ramli respectively. The debate brought up several important issues relating to PTPTN and raised some fresh perspectives.

In my view, however, the arguments and orientations of both debaters were imbued with populist sentiments. The public had been caught unawares that PTPTN disbursement up to now had reached RM44.2 billion and growing at a phenomenal rate. From a pruent taxpayer's perspective, I would venture the following questions in respect of the student loan fund.

First, how is it that the PTPTN loan fund was allowed to grow so big without public or parliamentary scrutiny? For such a huge allocation, there had to be strict evaluation and supervision of the agency's management and corporate practices.

Second, the loan fund had unwittingly emerged as a major souce of funding for many private sector educational institutions. In fact, many private institutions survive mainly on the funds disbursed by PTPTN. Such dependence is not healthy as it leads to possible corrupt relationships as well as insufficient supervision of the quality of education provided.

Third, it was revealed that a significant proportion of the PTPTN disbursement had been going towards students' living expenses. Surely, the living cost of PTPTN students should be the responsibility of their parents? And the living costs of very poor students should be taken care of by welfare bodies or scholarship schemes, not loan schemes. It seems that some families are utilising PTPTN loans to supplement their income.

Fourth, PTPTN seems to exercise a potentially unhealthy policy of forgiving loans once a borrower obtains first class honours or similar academic achievements. Such forgiveness now totals RM475 million. Of course therfe are worthy students deserving a better deal, but forgiving a loan would seem to be outside PTPTN's jurisdiction. Very good students should have access to scholarship schemes issued by other bodies, not PTPTN. Further more, there are many contentious issues to consider when determining what constuitutes "first class" - the quality of the institution issuing the degree, the quality of the faculty itself, whether the student took easier options and so on.

The point is that the public should not be overly dependent upon political arguments and considerations when evaluating programmes like PTPTN. It is indeed difficult to wean politicans off populist appeals. With the rise in populist tendencies, one must widen one's horizon to seek out non-partisan studies and perspectives.

GST

This "stuck" tax proposal had been referred to above. Wioll politicians from either side of the divide ever support it? If the nation is governed by political sentiment and the need to win votes, such a tax will never be passed. So what happens to national interests in tapping new revenue sources, diversifying the tax base and instilling international confidence in our financials? Obviously, the country needs a new form of consensus when it comes to taking bitter economic medicine like imposing a new tax. We just cannot depend upon traditional populist politicking to ensure financial prudence.

SUBSIDY 

Much has been written about fuel, food and water subsidies and i need not elaborate here. Subsidies are the converse of VAT. Due to the faulty design of the subsidy structure, the nation has inadvertently fallen into the trap of giving subsidies "to make up for world market price changes" instead of "fixed ringgit allocations approved by Parliament". Under the present system, as world prices of fuel or sugar increase, the subsidies or government allocations automatically increase. Quite apart from the legality of such a budgetary procurement practice, it is simply imprudent for the government to issue blank cheques to power producers, motorists and consumers. The proper practice is to allocate a fixed ringgit sum for whatever products to be subsidised. these allocations cannot be exceeded until and unless new allocations are passed by Parliament.

PENSION AND MEDICAL COMMITMENT LIABILITIES OF THE GOVERNMENT

I have yet to study this issue in detail. However, observations lead me to the conclusion that we have a major issue on our hands. There are some well-established facts to build upon. First, the number of public servants is large, very large in fact for a country and economy of our size. Consequently, the wage bill for the public sector is very high. So are the numbers enjoying and will be enjoying pensions.

Second, pension payments are indexed to current salaries, so as salaries increased, pension entitlements are also enhanced. 

Third, pension eligibility for elected federal and state representatives and the senate is only three years. Such a short eligibility period should not have been granted in the first place. 

Fourth, medical benefits are extended to virtually all retired civil servants, spouses and their young children. 

Fifth, medical costs have increased astronomically due to medical advancement and a change in the nature of ailments.

Sixth, both medical and pension burdens are liable to "explode" due to the longer life expectancies of retired civil servants and their spouses. Previously, it was unusual to find people living into their 80s. Now, many are reaching their 90s.

There are two financial issues related to pension-cum-medical liabilities. First, these liabilities are largely non-funded, meaning there is little by way of a sinking fund ear-amrked for the payment obligation as it falls due. Second, these liabilities are not fully accounted for in the statistics used in the calculation of government deficits and the all-important deficit-to-GDP ratio.

ACTIVITIES DESERVING OF HIGHER TAXATION 

In the old days, we used to have development tax, excess profit tax and estate duty tax. While Australia, tyhe UK, France, Japan, Indonesia and many other countries have been looking for new ways to increase their tax base, in Malaysia, we have been doing away with several taxes while taking many residents out of the existing tax net. In Indonesia, there is an exit tax of IRD150,000 (about RM50) on every person exiting the country. Australia has passed a higher mining tax (to take advantage of miners' record profits) and is imposing a new carbon tax. Both France and the UK have implemented or are introducing higher income and sales taxes.

It is high time that the country considered new taxes and increased the rates on existing ones. We need to introduce new and incerased taxes on selected sectors/activities and backed by good reasons. New/increased taxes can be considered for palm oil, banking, gaming and cigarettes. For palm oil, the government missed out on a potentially huge revenue source when crude oil prices increased from a low of RM2,000 per tonne in 2009 to RM3,400 recently.

As for the banks, we have seen them earn record profits largely due to the deposit rates being kept low by the authorities. The extra-high profits earned at the expense of depositors should have been suitably taxed. As for gaming, these are basically profits in the nature of bounty since only a few lucky permit holders are allowed to operate legally in an activity otherwise deemed unlawful under the general law. The government's offtake from gaming is much too low and an increase is warranted.

Take a look at what gaming operators pay to the revenue authorities of the UK, Singapore and Hong Kong. As for cigarettes, we need not introduce taxes that go as high as those in the UK or Australia, but a low tax does not provide sufficient deterrence  and does not take into account the high medical costs to employers and to the Health Ministry for all the ill-effects caused by smoking. In tandem with higher taxes on cigarettes, the government must find better ways to combat cigarette smuggling, which has reached crisis levels.

Well, all said and done, what do we do about the populist plague? The problem is so broad and intractable as to cause mayhem even in old democracies like the US, France and the UK. Furthermore, it is no use pleading to the opposition because those not in power are also fighting on a platform of lower fuel prices, forgiving PTPTN loans, subsidising water bills and wanting to reduce quit rent and assessment.

The situation is almost like the fairytale lesson of "belling the cat". We know the problem and what should be done, but who is to do it and how? I have three suggestions. First and foremost, the public must be clear in its mind that financial populism - trying to get benefits without paying for them, reducing taxes, avoiding taxes, stopping charges/fees - will destroy our economy and country. Our currency will be devalued, deposits will leave the banks, capital will flee the country and other untold horrors will unfold.

Second, the public should not seek freebies from the government or simply oppose new or higher taxes. At the same time, the public should demand greater accountability in the selection of projects, choice of suppliers and costing. We should not be impressed by off-the-cuff approvals of spending and waivers of charges since such impulsive approvals reflct lack of prudent decision-making.

Third, broad financial policies and targets for taxes, operational expenditure, subsidies and big ticket projects should be determined in a multi-partisan manner so as to minimise their appeal to populism. Such multi-partisan commissions can be ad hoc or institutionalised as a sort of privy council to advise the king. Such a body would lay out the limits to various deficit measures, examine government accounting practices and set out broad policies on taxation and spending targets.

The studies, conclusions and pronouncements of such a body would contribute to a reduction in the populism currently besetting the country. There will be less opportunity and less need for the ruling government to resort to populist appeal since braod deficit limits would have been laid out over the long term. In this way, citizenry need not worry about all those terrible prospects associated with sustained government deficits.

(Radzuan Halim, a former merchant banker, teaches MBA and law students)

My First Home Scheme

Right. The Government announced in the PM's Budget 2012 speech on 7th October, 2011 that, effective from 1st January 2012, the "My First Home Scheme" first launched in March this year to assist young people to buy and own their first homes would increase its present ceiling limit of RM220,000 to RM400,000 (the price of the home). So this means that if you're aged from 18-35, is/are employed in the private sector, is/are a confirmed employee with the same employer for at least 6 months and your combined household income does not exceed RM3,500-00 (i know, they reported it as RM3,000-00 but bankers informed me otherwise - so if you earn RM3,000 a month and your wife earns RM2,000 then as husband and wife jointly you do not qualify unless only one of you apply for the scheme), techinically you MIGHT be eligible for 100% financing in the purchase of your first home. You can buy landed or stratified (condos, apartments, flats) properties it doesn't matter. The government's national mortgage company Cagamas Bhd will guarantee your downpayment of 10% deposit so that the loan covers everything, including even an extra 5% financing to cover fire insurance/takaful. But that's not all. The term of the loan is 30 years' tenure but if  you're a graduate or a professional, the banks can, on a case-to-case basis, stretch your loan tenure to 40 years (elitism? you tell me). Other criteria filtering out loan applicants include the requirement that your savings' reserve be at least 3 times your loan instalment sum and your combined household income is at least 3 times your total monthly commitments (that means your housing loan plus car loan, student loan, etc) or, with the approval of Cagamas Bhd, your combined household income be at least 2 times your total monthly commitments. Contrary to rumours, you DO NOT enjoy 100% exemption off stamp duty (not for the transfer nor the loan) but since this is your first home, and provided that the price of your home is not more than RM350,000-00, you get a 50% discount off stamp duty like any other first-time house buyer. (Eligible buyers of the government's other scheme, the PR1MA in which developers build on land given to them by the govt get to enjoy 100% stamp duty exemption off their loan but not My First Home Scheme). There are no other restrictions, you can sell off your home like other property owners at any time (unlike PR1MA where there is a 10-year moratorium against selling your property) but subject of course to real property gains tax as usual. Details are a bit sketchy but under the old scheme, only husband and wife or siblings are eligible. Friends, business partners, relatives do not qualify. And if you already bought a house previously and sold it off and now you want to buy a new house, you do not qualify neither. Only first-time, VIRGIN house buyer is eligible, geddit?

The following 25 banks/financial institutions are participants in the My First Home Scheme:

1. Affin Bank Bhd
2. Affin Islamic Bank Bhd
3. Alliance Bank Malaysia Bhd
4. Alliance Islamic Bank Malaysia Bhd
5. AmBank Bhd
6. AmIslamic Bank Bhd
7. Bank Islam Malaysia Bhd
8. Bank Muamalat Malaysia Bhd
9. CIMB Bank Bhd
10. CIMB Islamic Bank Bhd
11. EON Bank Bhd
12. EONCAP Islamic Bank Bhd
13. Hong Leong Bank Bhd
14. Hong Leong Islamic Bank Bhd.
15. Maybank Bhd
16. Maybank Islamic Bank Bhd
17. OCBC Bank Malaysia Bhd
18. OCBC Al Amin Bhd
19. Public Bank Bhd
20. Public Islamic Bank Bhd
21. RHB Bank Bhd
22. RHB Islamic Bank Bhd
23. United Overseas Bank Malaysia Bhd
24. Standard Chartered Bank Malaysia Bhd
25. Standard Chartered Saadiq Bhd

Unfortunately, the interest rate for this scheme will cost more. I am informed by a source at the time of writing that, while the interest rate for housing loans is now BLR - 2.2%, under the My First Home Scheme the interest rate is BLR - 1.8%. So, stretch that over 30 or 40 years and this scheme isn't exactly going to save you money.

At the end of the day, you decide whether this scheme really helps young salary earners to buy their first home or it is just another elections gimmick with precious little to offer in substance.

Quantitative easing, anyone?

The US Federal Reserve prints money in QE2 (no, not the cruise ship, the second round of Quantitative Easing) as much as US$600 billion to buy up long term US treasury bills over the next 8 months. This is supposed to flush the US banking system with cash so that US Banks will lend out more money to US businesses which in turn create more jobs in the US and lower the US unemployment rate which is now hovering near 10%. That's in theory. But what happens in fact is that all this new money gets pumped OUT of the US into emerging markets in developing countries, so-called "hot money" snapping up properties, stocks, commodities, bonds in emerging economies and creating asset bubbles. Then i dread that as fast as this hot money comes in, foreign fund managers will take profit and spirit out their investments INCLUDING yours and mine hard-earned cash leaving markets in emerging economies crumbling in a tailspin.

15 cents

Chinaman, Chinaman, sitting on the fence
Trying to make a dollar out of fifteen cents
Along came a Choo Choo train
knocked him on the cuckoo brain
And that was the end
Of the Chinaman and his fifteen cents.

An Open letter to any kind-hearted and generous investors out there

PLEASE come and invest in our stock market, our industries, our economy. We haven't had a half-decent Initial Public Offering in years and the much touted IPOs that have passed are but teensy-weensy insignificant has-beens of companies stripped of their most valuable assets. Many good quality listed companies are being taken private by people not much interested in our stock market (and who can blame them)? Basically, what we have is a lemons market. And there is so much money going abroad and not coming back that we're basically almost broke. Or we would be but for the saving grace of our balance-of-payments and trade surplus. And oil. And so, without much further ado...HAYEEELP!!!!!!

Black Economy

Headlines in The Star today that Malaysia's black economy may be worth about RM10 billion (only?). I don't condone illegal activities any more than the next person in the street condones crime, but you have to ask yourself whether the government's less-than-transparent policies may have contributed to the growth in the underground economy in recent times. Let's face it, it is tough to get licenses from the government for the most profitable enterprises/businesses, most of which are jealously guarded and dished out to people with the right connections in politically sensitive places. Contracts are awarded not to people who can do the job but to people who are connected. land is sold not on open tender to the highest bidder but by "direct negotiations" like how most contracts are won. Race is besides the point. It is the connected who gain the lion's shares of licenses and contracts, not those who can get the job done best, cost-effectively and best quality-wise. If i cannot get a license and a government contract no matter how good i am, guess where i will turn my energies and talents to? I'd say RM10 billion is an understatement. The figure is likely to be several times more than that. Every next person i have ever met tries their level best to circumvent existing regulations and why not? They are oppressive regulations, they are unfair, they are a hindrance to good business. And yet they wonder WHY people resort to illegal businesses.

cut the red tape

The recent announcement to extend the deadline from 15 June to 1st July and waive the RM10 licence fee for an estimated 70,000 retailers nationwide to apply for a licence to sell sugar, cooking oil and flour was made in response to growing disenchantment among small retailers against the government's decision to impose a licence for selling these basic necessities. This is despite the above concessions and the promise by the government that they will issue the licence within a day. Fast and cheap, it seems, doesn't put a dent to small retailers' beef that yet another licence would add to their growing list of licences to apply for to do business. They have a legitimate grouse. The main problem here is the hoarding and smuggling of sugar. Now why is our sugar being hoarded locally and smuggled abroad to neighbouring countries? Because it is a price-controlled item and subsidised by the government hence making it relatively cheaper compared with the sugar in our neighbouring countries. I reckon the solution to this problem is to cut sugar (and other) subsidies gradually - not by introducing more red tape and more bureaucracy to our already considerable mass of red tape and obese-to-the-hilt bureaucracy. What is the point of having the Performance and Delivery Unit (Pemandu) and talents like Dato' Sri Idris Jala on board to advise the government on how to streamline the bureaucracy and cut red tape if we are going to increase bureaucracy and red tape at the end of the day? This isn't about issuing licences within a day or cutting the RM10 fee. It's about the hassle of having to apply for licences for everything from setting up your business to advertising your signboard and now to selling basic essentials like sugar, cooking oil and flour. Just cut out government subsidies. Cut it out gradually, for example, 20 sen this year, another 20 sen next year, etc. Whatever. When prices of our gasoline, sugar, cooking oil, flour and other items rise to their true free market prices, the smuggling and hoarding will cease automatically. It will save the government heaps of dough, and people will over time (crying shouting screaming and gnashing of teeth notwithstanding) get used to paying market prices for essential goods. Just don't add more regulations and choke out business. We do want to streamline the business of government, right? We want more efficiency and less cost, right? Ok, then stop imposing new licences/regulations, improve on the existing regulatory/enforcement framework, cut the subsidies. I suggest that on the latter point the government show more backbone/moral courage and go ahead with what was recommended by Dato' Sri Idris Jala. Go ahead and cut the damned subsidies. Stop spoiling the children.

spend spend spend or save save save

I've just had a double heap of mountainously teeming-over spoonfuls of vanilla Wall's ice-cream and it's almost time for Yours Truly to hit the sack. But having gorged on dinner's desserts and with my tummy taken care of, i got to thinking about what Paul Krugman, Economics Nobel Prize winner, had to say about the current ascendency of fiscal consolidation over quantitative easing in the minds of policymakers worldwide. Old Paul thinks that governments shouldn't rein in the horses not yet anyway, while growth is tentative and the recovery is still fragile. And he's about right on quite a few points there. To raise interest rates dramatically, slash govt spending on welfare would crimp the spenders for sure and lead to less business. But on the other hand, higher interest rates after a record zero interest rate regime in the USA for the longest time known - ever - wouldn't be such a bad thing either. People would, in the USA at least, be motivated to start saving for a change. There would be less foreclosures when people have a nest egg. The mortgage crises would see improvement. Sure, borrowing costs would go up. But reckless lending has been the bane of us all this recent while, no? So some control on lending, especially of the reckless kind, would be welcome surely. The truth lies somewhere in the middle. We can't continue to spend spend spend. And we can't all become Scrooge McDucks. Someone has to bring balance to the force.

Ohh oooo looks like shitty days once more

This morning i logged on and found the local bourse had dipped below 1,300 points in as many as several months now after Fed Reserve Chairman Ben Bernanke's triumphant declaration that the US economy is out of the woods. Well, the US economy may be out of the woods, but Europe sure ain't getting out of the briars not yet by a long shot. In February this year i wrote about the coming great bust of 2010. My prediction looks almost like coming true earlier than i had thought. What with the sovereign debt crises in Greece/Europe, China's recent tightening of credit to stem property speculation and our nascent/very wobbly recovery and raising of interest rates, the stockmarket unsurprisingly took a dive. But perhaps it's just going to be the stockmarket taking a battering/going into correction mode and NOT the economy as a whole. Singapore registered its strongest first quarter growth since the 70s and we're doing pretty well too. Bargain-hunting time? Little grasshopper, the tender green shoots of recovery may remain tender for some time yet. I was really hoping nay, praying even for "De-coupling" vis-a-vis the Developed countries such as USA & Europe versus the BRIIC countries (Brazil, Russia, India, Indonesia, China). But it looks like babylon (Europe) may yet bring us all down like a house of cards. Now is the time to see whether De-coupling has a place in our common vocabulary or it's just wishful thinking/pipedreams. As Suze Orman says and Yours Truly couldn't agree more with her: "Remember, people first then money then stuff". Suze my darling pumpernickel, you're the best.

the great bust of 2010 (coming soon to an economy near you)

I'm writing this with 6 days to Chinese New Year ("CNY") and counting and the Malaysian stockmarket is so down that the bottom is nowhere in sight. Gone is the usual pre-CNY rally or maybe there could be a feeble run-up in the dying days of the year of the Ox. Frankly, i'm not surprised. I am in agreement with some economists who take a very dim view of events of the past couple of years, to wit, the pump-priming of economies world-wide with cash that ain't there. You see, when you prop up a corpse with no matter how much stuffing/binding ala "Heart of Darkness" John Malkovich the ending scene, the corpse sits upright but it's STILL dead meat. The vitality of the American economy is - how shall i put it - a thing of the past. We can count ourselves lucky that China and India are on the up and up thanks to their enormous domestic economies and that picks up a little of the slack. But don't hope too much. The Chinese economy is still but a third of the USA and India is even smaller. So all that pump-priming is wasted effort in my humble opinion. Let the corpse fall to the ground and let the shit hit the fan. At least we'll all get that short sharp shock (hopefully) needed to correct whatever inefficiencies in the world economy so we'd be re-aligned truly and better afterwards. Throwing money when you have no money to throw around is always bad business, me thinks. It leads to governments getting heavily in debt and that would drive long-term bond rates up per se. So logically they HAVE to raise interest rates in the US from the zero now. They have to, no choice about that. Well, we (Malaysia) are going to soon anyway. Hmmm, at least now i can afford to buy an economy meal with my interest from my savings. I hope.